Embedded Finance. Scarlett Sieber

time-tested models challenging and expensive. That fact combined with the utter scale that banks had built on the mindset that banks had a monopoly on financial services for consumers. As the world has shifted to external factors, some within the financial industry have tried to get on board by collaborating with startups through acquisitions, investments, innovation labs, and accelerators, but the harsh reality is that large percentages have not. Finding the winning formula can be challenging. In addition to technological challenges, banks are often large organizations with multiple decision-making levels, numerous stakeholders with differing priorities, and departments that often compete for customers. These large ships are difficult to turn, even when the iceberg is clearly visible ahead, but it is possible, as we will see further in the book.

      Because of the aforementioned reasons, banks were slow to react to the moment, so when consumers went looking for financial solutions, it was other companies that met their needs.

THE BIRTH OF INSURTECH

According to an article by Jennifer Rudden in Statista,⁷ insurance is defined as a contract, represented by a policy, in which an individual or a business entity receives financial protection or reimbursement against possible future losses. Insurance is a concept that most, if not all of us, are familiar with in some aspect of our lives. Whether it be for our homes, our cars, our life, or for specific products, it is a class that we all are used to dealing with and it is one that is in great need of disruption. Today, most insurance policies are sold through existing distribution networks, i.e. the brokers. This means that most insurance policies are still sold offline through a brick-and-mortar office. Florian Graillot, founding partner of the Insurtech investment fund Astorya.vc, believes these numbers to be close to 80% for mortgages and 60% for auto insurance in Europe.

      The same way that fintech entered the traditional banking space, insurtech, or insurance technology, entered the insurance space. Insurtech has been around since the early 2010s and the initial cohort of companies in the space focused on B2C, or business-to-consumer opportunities. From the early days in the space, discussions were started around the ability for on-demand or just-in-time insurance. These technologies focused on digitizing the incumbents, the traditional insurance companies, by enabling them to distribute insurance products more quickly. The goal was right but, as we have seen across all industries, the movement to digital can take time and there are a lot of bumps on the road. Close to a decade later, there hasn't been much traction to date as companies discovered that the cycles are incredibly long and the technology stacks of the incumbents were outdated, making it very difficult to plug into the systems. These challenges are very similar to those on the banking side as well. Even if a connection is successfully made to an existing system, the work has just begun. As a result, there are only a handful of players that have managed to truly crack the code.

Of course, as with most rules, there is an exception. One such exception is a company known as Wakam. Formally known as La Parisienne Assurances, Wakam is an example of an incumbent that has seen success in digitizing its services. According to its LinkedIn page,⁸ Wakam “is a digital-first insurance company that creates white-label, tailor-made and embedded insurance solutions for its distributor partners and clients via its high-tech Plug & Play platform.” Wakam has been in the market for a handful of years and now is one of the most advanced in terms of digitization and its ability to plug into external players. In some cases, Wakam is faster at doing this than the insurtechs that are known to compete with them. What makes Wakam different from the other incumbents who have pursued this path with somewhat limited success? Wakam was able to switch all of its technology infrastructure to API-first, which is game-changing and allows them to do a lot more with third parties faster, in a shorter period of time. As Florian Graillot states, “An insurance company, which is running close to 100% of its activity on the state-of-the-art IT system is quite unique, and I believe that this is the reason why there is an ability to gain market share.” As of 2020, according to LinkedIn,⁹ Wakam was among one of the top 20 P&C insurers in France.

      From those early entrants into insurtech, a few companies are successful, but most are struggling. Because of the struggle, there is a real play for embedded insurance, where we can expect to see adjacent players to the early vision start to push insurance products in the customer journey in a natural way, making it easier for the end customer to understand the value proposition. As Graillot puts it:

      The core value of embedded insurance is education. When it comes to insurance, for most customers, it's a requirement to have insurance policies for your home, your car, and in many countries, your health. Otherwise, it's not really clear why people should pay for an insurance product. By embedding this kind of product in the same journey they are already engaging with makes it obvious, and the value proposition is really clear, which will result in a higher conversion rate.

      As we will share many times throughout this book, the focus on an incredible customer experience is absolutely crucial. This may sound like fluff or something easy to do, but it's quite hard to do well. The same issues that arose in banking with the emergence of neobanks and others applies to the insurance space as well. Graillot discussed the importance of the user experience, saying:

We were running a due diligence on a health insurance startup, and we were having a look at the mobile apps for insurance, and it was quite surprising because almost all of them, both on iOS and Android, were below three stars out of five. It may appear very easy to achieve a great customer experience but the reality is that it's really tough. We increasingly believe that there is something around the product itself, the user experience that insurtech can deliver at scale and better than the insurance company themselves.

FINTECH RISING

      As mentioned earlier, one of the important consequences of the 2008 financial crisis was setting up the conditions for fintech to flourish. Technology companies could now offer services previously only available from regulated financial services entities. The growing use of e-commerce, accelerated by the adoption of mobile internet, increased the need for financial services available literally at consumers’ fingertips.

      The two areas where new companies first made inroads into banking were payments and lending. PayPal, arguably the first big “fintech” that the world became accustomed to, founded in 1999, was already invading banks’ territory by enabling payments online. While there were many other payments startups that have had an impact post-PayPal, the next big shift happened in the mid-2000s with the several new lending startups. Prosper (founded 2005) and Lending Club (2006) were well positioned to take over unsecured personal loans as nearly every bank pulled back from this endeavor that brought much risk and little profit. Banks held back on lending even as economic activity increased post-recession and the demand for loans grew from both small businesses and consumers. Regulations greatly increased on banks, making lending to these customers more complex and technically challenging. Continued low interest rates also made lending less enticing to banks (and saving less enticing to consumers).

      Lending Club

      Founded: 2006

      Market cap: $3 billion

      Number of employees: 1,500

      Early Approach

      Lending Club was founded as a peer-to-peer lending service. Investors would fund loans from borrowers, and Lending Club managed the underwriting and risk. When the credit market collapsed in 2008, Lending Club found itself in demand for personal loans that would otherwise be difficult to obtain as banks were turning away consumers who didn't match their credit profiles. By December 2019, Lending Club had loaned $53.5 billion and was the largest provider of personal loans in the US.

      Over time, Lending Club's investor mix moved to institutions rather than individuals, with banks taking the largest role. The company fared poorly after going public,