Podcasts > Episode 7: Simon Torrance | Embedded Finance, From 101 to $1 Trillion

Episode 7: Simon Torrance | Embedded Finance, From 101 to $1 Trillion


Our guest on this podcast is Simon Torrance. Simon is a globally recognized expert in the field of embedded finance, and he currently serves as a member of the World Economic Forum’s Digital Platforms & Ecosystems working group. Simon and Todd talk about the basic principles of embedded finance, why this market is a trillion-dollar opportunity, and the key challenges that companies face in capturing that opportunity.


Read the full transcript below.


Episode 7: Simon Torrance | Embedded Finance, From 101 to $1 Trillion

Our guest on this podcast is Simon Torrance. Simon is a globally recognized expert in the field of embedded finance, and he currently serves as a member of the World Economic Forum’s Digital Platforms & Ecosystems working group. Simon and Todd talk about the basic principles of embedded finance, why this market is a trillion-dollar opportunity, and the key challenges that companies face in capturing that opportunity.



Todd Ablowitz (00:09):

Welcome to It Pays to Know, the Infinicept podcast where we dive deeply into unexplored areas of payments, embedded finance, and more. My name is Todd Ablowitz. I’m co-founder and co-CEO of Infinicept. Today my guest is the incomparable Simon Torrance. Simon is a globally recognized expert in the field of embedded finance, and he currently serves as a member of the World Economic Forum’s Digital Platforms & Ecosystems working group. All that, and he’s also just a great guy. Today, Simon and I talk about the basic principles of embedded finance, why this market is a trillion-dollar opportunity, and the key challenges that companies face in capturing that opportunity. Without further ado, please enjoy my conversation with Simon Torrance.


Hi, everybody. Today I have Simon Torrance on the call. I am so excited to have Simon on this podcast. The embedded finance research you’ve done, Simon, has been tremendous, and we’re just so excited. Can we start out with a little bit of an introduction? Can you tell the listeners a little bit about yourself?

Simon Torrance (01:15):

Absolutely. I’m an independent advisor to companies on business model transformation: fundamentally, the way that a company creates and captures value. I’ve been doing that for the last 20 years, particularly looking at how traditional companies can adopt and adapt the digital business models that have worked so well for Silicon Valley and some of the Chinese companies over the last 10 or 20 years. I got into embedded finance about two years ago. I was doing some work for a big financial institution on business model development and new growth strategy. It just struck me that there is this enormous gulf between what people need from financial services and what they’re getting at the moment. And I thought, “Well, digital technology and digital business models could really address this.” I felt, given how important financial services is to everybody’s life, that this is a really noble topic to focus on. So for the last two years, I’ve been really heavily focused on embedded finance, and trying to bring the latest thinking to the world and making it practical and understandable, and making some change happen.

Todd Ablowitz (02:28):

That’s great, Simon. I think there are a number of people, maybe everybody, at Infinicept that are really your biggest fans. I think I told you this, we used a lot of your work for our board strategy around embedded finance, so it’s really exciting to have you here today. Let’s kick it off with the basics. Could you tell us a little bit about what is embedded finance?

Simon Torrance (02:53):

Yeah. So I’ll give you a technical description, and then I’ll give you, if you like, the purpose of it and the vision for it. But technically what’s happened is that financial technology has become so powerful now that all those capabilities that were trapped within financial institutions, or have been trapped within them for hundreds of years now, essentially have been abstracted into software, such that any developer at any company can take advantage of them. A bit like Lego bricks that were trapped in other organizations. They now can take advantage of financial service capabilities and combine them with their own propositions and customer experiences. And that’s been enabled by the accelerating capabilities of financial technology.


I’ll give you a very simple example, it’s always the easiest one. When you get out of an Uber cab, you don’t have to get your wallet out and pay for the journey because a developer at Uber has embedded payments into their customer experience, and it makes it seamless and easy for me as a rider. But now, not only payment capabilities, but lending and insurance and investment management, the same thing’s happening. So brands that want to create new types of positive experiences for their customers can take advantage of these developments and embed different types of financial capabilities into their own experiences, and do it cheaply and quickly and test and iterate fast. And that’s really dramatically developed over the last five years, I’d say, that possibility of doing it.


So, if you like, the technical definition of it, and I will come on to why that’s exciting and so on later on. But the vision for it, coming back to why I got involved, is that ultimately, I think that if brands who have much more regular interactions with consumers, like Uber, when you’re in a cab with them, but many other brands like retailers or banks or others that have daily interactions often with consumers and customers, if we can help them to embed financial service at the moment in the context where it’s most needed, rather than the consumer having to go somewhere else, going to a bank for a loan, going to an insurance company for coverage, and so on, if we can seamlessly embed it in those experiences, then I think the exciting vision for it is that we could, if we get this right, enable financial wellness. Financial wellness is the aim to be baked into the everyday lives of everyone, not just people who can afford financial services. But financial wellness as a concept baked into the everyday lives of everyone.


And so that’s the vision or the purpose that I tend to talk about about why this is so important, and then technically it’s enabled by the developments that I mentioned just now.

Todd Ablowitz (06:06):

It’s funny you describe it that way, because that really aligns with Infinicept’s vision to enable financial availability everywhere. So let’s talk about the problems this solves. So what kinds of problems does it solve, and for whom?

Simon Torrance (06:22):

Fundamentally, you’ve got this supply and demand problem. Let’s just start on the demand side, that’s customers or individuals, people like you and me as citizens. What’s happening is that protection gaps are getting bigger and bigger. Financial services allow us to go about our life and makes it easy to do that. But as populations grow, as the world becomes more complex, there are more risks around, and so on and so forth. We’ve got this real gap between what people need and what they’re being offered.


I’ll give you a few examples to bring this to life. We’re all going to live, for good or ill, much longer than our parents did. But, we don’t have enough money to retire on, and the government doesn’t have enough money to pay us as well. The retirement savings gap, which is the gap between the amount of money people need to live comfortably when they retire and what they actually have, in the US today is $40 trillion. So when those people, or when we retire, the vast majority of people will not be able to retire comfortably, and someone’s got to pick up that tab. The government can’t do it. Therefore, we need a financial system that is encouraging and enabling people to save effectively for their retirement. So if you’ve got a $40 trillion gap today, which is growing 5% per annum, that’s a major, major problem for society.


So I’ll come on to technically how embedded finance helps to address that. But that’s one problem, if you like, for society in general. The other problem, if you’re a small business, of course, you know how difficult it is to get a loan from a bank. It takes weeks. You desperately need working capital, you can’t get it, and you could get turned down just because of some type of credit scoring, which means you can’t get the credit that you need. And small businesses are the backbone of the economy. We saw in the COVID crisis that the digital lenders and digital payment companies were able to circumvent all that traditional friction and get the credit to people very, very quickly.


And so again, embedded finance is a technical solution, and we’ve seen people, when there’s a real requirement, make it happen. And on the demand side, we are seeing that the technology enables us to match that demand better than it has in the past. So on the demand side, there are these gaps that exist today that are getting wider. Technology plays a role in trying to close those gaps. But on the supply side, if you like, the financial institutions, it’s not good for them either. The majority of financial institutions in the world, surprising maybe, but they make zero or negative economic profit. So most banks or insurance companies do not make a profit after the cost of capital. That’s different from accounting profit, but it’s a much purer description of their ability to generate a return on their investments.


And so you’ve got the supply side, the banks and insurance companies and the lenders, who are not, on average, the majority of them, not managing to make a profit as the sector digitizes and customer expectations go up and competitors start to come into the market. So you’ve got a problem on the supply side as well. What embedded finance says is, “Why don’t we work with brands that have got these much closer relationships with end users, and make it easy for them to create the right type of affordable, relevant, personalized, and accessible solutions that fit the needs of their customers?” Enable them to do that, give them the tools to do that, rather than having this vast gap between what people need and the financial institutions that are a long way away trying to double guess what people might need.


If I have to sum it up from a consumer and a society point of view, that’s the problem on the demand side. And on the supply side, the problem it’s addressing is the fact that most financial institutions are not making economic profit today under their existing business model.

Todd Ablowitz (10:39):

That completely boggles my mind, and I can’t believe I just heard it. I’ve never heard of this before. Can you explain what’s going into the fact that you just said, “Financial institutions aren’t making money. They’re not making profit”?

Simon Torrance (10:55):

Yeah, well, absolutely. This is the majority of them, so that’s more than 50%. So there are…

Todd Ablowitz (11:00):


Simon Torrance (11:01):

… some of the very big ones, they’ve got a lot of power and they do quite well. But the majority of the supply base is making zero or negative economic profit. That’s just a fact, and McKinsey tracked this and published plenty of papers demonstrating this. But even JPMorgan, which is, I think, the most valuable financial institution on the planet at the moment, even they are worried about the impact of digitalization on their business model. Jamie Dimon, the CEO, said he was “scared shitless” to his executives last year, that digitization is doing a number of things and they need to prepare for it.


The things are that digitization tends to increase the expectations that customers have, because they’re used to certain ways of accessing services, particularly younger people, millennials and Gen Z and so on. They’re not going to put up with going to a branch, or of getting a check in the post, and all this sort of stuff. He’s really worried that customer expectations rise, that the competitors to him start to address those expectations, creating an arms race. So we’ve got to also make it really easy for people to access our products. You have new regulations coming in, like in Europe. We have open banking, and that’s coming to the US as well. That essentially is allowing any business to access the data from people’s accounts. You have companies like Plaid and others who work a way around that in the US as well. That, then, is releasing all that value of transaction data that is trapped within banks in the past. Now, other people can take advantage of that. So that’s reducing some of the power that the financial institutions have had in the past.


Technology is moving so fast that it’s difficult for a traditional organization to keep up with that. And so then you have new entrants coming along. Banks like Chime in the US; players like Klarna, the buy now, pay later company as well. Indeed, Stripe and Square you can add to that list. And these companies are now becoming, in a short period of time, more valuable than some of the financial institutions that have been around for hundreds of years.


So there’s a real problem on the supply side, and that’s why even the most valuable bank in the world is very worried about this situation.

Todd Ablowitz (13:21):

We’ve certainly seen that banks have trouble in the sector we’ve played in, which is payments, embedded payments, and ultimately embedded finance. We’ve seen that in payments, banks have had trouble competing for the last 30-plus years in small business payment acceptance. They still compete there, and in some cases they’ve done okay. But they’ve had more trouble. And the smaller the merchant, the harder it’s been for the banks to compete.


Really focusing the continued conversation around the ecosystem of business, as opposed to the ecosystem of individuals or consumers, what companies… You mentioned a bunch of companies, I heard you say Stripe and Square. They’re certainly in the direct ecosystem of what our customers and partners think about. What would you say are the companies that are at the forefront of embedded finance around businesses?

Simon Torrance (14:19):

Let’s take small businesses. Let’s focus on them, because as we said, they’re the backbone of the economy. A good example of this is the software companies that serve those businesses. So you’ve got the accounting software packages, like Intuit and QuickBooks, that many small businesses rely on. And then increasingly you’ve got what VCs call vertical B2B SaaS businesses. These are software businesses that help restaurants or hairdressers or car dealerships run their business. They’re very bespoke and focused software designed for certain SMB small business sectors. And those small businesses, of course, are investing more and more in technology to enable them to be more efficient in how they operate. They’re increasingly signing up to these vertical SaaS businesses, and they’ll also work with Intuit or Xero or other of the accounting packages.


What’s really interesting is that those software companies on which small businesses rely and run, they are proving to be the golden channel to small businesses for embedded finance. And so what they can see in real time is how the small business is doing. So they can see if the business has taken on more employees, they can see how much revenue it’s generating, whether it’s expanded geographically. It can also look at the assets, and actually look at the bank accounts in real time as well. It gives it almost a godlike view into a small business or many small businesses.


What they are realizing is that they have a golden opportunity to embed financial services for a number of purposes. One, they can see before the small business can see when they might need credit or insurance, for example. They can also help the small business, for example, use payments in clever ways. And I know this is your expertise here, but to own the payment experience, rather than send people off to another company to pay for things, and maybe retain some of the interchange value that is given away to credit card companies and so on.


So these software companies that are enabling small businesses are spotting opportunities to add greater value than they already do using financial services. And because they have that real-time information, they’re able to make offers that are much more appealing and attractive and relevant and timely than the small business, the SMB, going to a bank or a payments company and so on separately. They can integrate them into their software as well.


So the small business, suddenly through these platforms, gets access to financial services that it could never do before. We see Shopify, and as you know, they make about 50% of their revenue by selling financial services and merchant services to small businesses as well, which are tailored to their requirements and taking advantage of their data, rather than being very blunt financial instruments that are offered by traditional suppliers.


So at one level, the small businesses are getting better solutions. The software businesses that run their operations are generating new revenue. This is increasing their total addressable market by a very considerable amount by being able to offer high-margin financial services. And then, those who are enabling them to do that are finding new markets, of course. It’s often less the incumbents that are doing this and alternative players that are jumping into this market.


So I’d say that’s a really good example of how small businesses are starting to be served by, I’d call it, a new breed of infrastructure that is enabling those brands that are closest to the small businesses to offer and embed financial services into their propositions. Infinicept would be a great example of that. You are enabling brands to help their customers be more successful with financial services as well.

Todd Ablowitz (18:40):

Well, you basically just described our entire customer base. I think all three vertical examples you gave, we have examples with Infinicept. So that was fascinating listening to you describe it. Tell me about the order of the products. We have a theory on the order that software companies will add individual embedded finance products. I’d love to hear from you what you think – the order you’ve seen or the order you’re seeing in terms of what they’re offering first, what they’re offering as an add-on financial services product, et cetera.

Simon Torrance (19:14):

That’s a really good question. Well, payments is the starting point, because you’ve got to get into the payment flow. That’s really, really valuable. You can get into the payment flow by proxy using open banking protocols increasingly. But really, if you are one of these software brands and you are able to provide a payment solution which supports the experience that small business wants to create with its customers, then you are in a very powerful position.


So payments tends to be the starting point, and it’s less regulated of course. It’s technically a little bit easier than some of the other types of financial services. Although I’m sure, Todd, you’d tell me, “It’s very complicated,” of course, as well, which is correct. But payments is the sort of entry point. And then what we’re seeing is companies are starting looking at credit, so making lending propositions. But again, that’s a little bit more complicated, it’s more regulated. Then we’re starting to see companies move into insurance as well, which is really, really valuable. Again, there’s a bit more complication there as well. But it tends to be that wave, I’d say, starting with payments.

Todd Ablowitz (20:20):

It’s funny, you’re describing exactly what we think about and talk about every day. It’s pretty incredible. So Simon, when you think about the size of this opportunity, we have some thoughts on what we think the market size is. Can you talk about your research and what you’ve talked about with the size of the markets?

Simon Torrance (20:38):

Absolutely. So if you look at trends so far, if you look at those different categories, so there’s payments, there’s credit, there’s insurance, those are the big buckets. There’s also banking services, and there are also investment management services as well. But those big buckets around payments, credit, and insurance, and if you look at the adoption of embedded payments today, and you look at the trends of where that’s going, you could see that you could get to about 20% of total payments are distributed in this way, are digitally embedded through third-party brands. And let’s say that takes 10 years to come to fruition. Might take a little bit longer, might take a little bit less, but some VCs that I’ve been speaking to would say that in the US, we’re looking at about 20% by 2030.


Now, if you say 20% of digital transactions are through embedded channels, or that embedded is taking that 20% proportion, then you look globally at the market and you look at credit and you say, “Well, credit’s a bit further behind, and insurance is a bit further behind.” But when you get into those other sectors, you tend to get to about 20% in 10 years’ time. And then if you add all that up, you get to some very significant revenues. I’ll give you this sort of global figure, and we can pare it down for the US. But if you add all that up, we get to about over a trillion dollars of revenues that are distributed in this way across those three categories in 10, or let’s say 15 years’ time. What’s really interesting is that the companies that are facilitating that are companies like yours. You are digital companies that are creating what I call “new types of infrastructure” to enable brands and platforms to do embedded finance. If you are enabling that level of distribution, even if we just give you a valuation multiple of five times the volume that you’re enabling, I know it’s often a lot higher than that, then you’re getting to a potential of about over $7 trillion of new market value being created. This is the value of the companies that are enabling embedded finance in 10 or 15 years’ time.


And just to put that in perspective, the value of the top 30 financial institutions last year when I did the calculation was about half of that. It’s about $3.6 trillion. The 30 biggest financial institutions today worldwide are about $3.6 trillion. The big software companies, the platform businesses like Microsoft and Amazon and Apple and some of the others, they’re about $5 trillion. So in theory, with a good wind and all the energetic entrepreneurialism from companies like yours and others, we could be creating businesses worth double the value of the financial institutions today in 10 or 15 years’ time. That’s why VCs are very excited by this space. Let’s call it the “embedded finance infrastructure space,” enabling others to do what we’ve been talking about today.

Todd Ablowitz (23:47):

Wow, that’s an incredible set of figures. We count the part that addresses small businesses through embedded payments and embedded finance. We count that as being about a $585 billion market to the business world based on a bunch of research. Okay, sounds great, but with big markets often come big challenges. So what are the biggest challenges to realizing this?

Simon Torrance (24:14):

So I guess there’s different stakeholders, and we could think about them as follows. Let’s say there’s non-digital brands, and then there’s digital brands. And these are the companies that have these daily or regular interactions with end users, whether they’re small businesses or consumers or others. The challenge for the non-digital brands is that they really don’t appreciate the art of the possible today, because things are moving so fast. I’m sure you speak to a lot of brands that have lots of small business customers, and what you are saying is quite new to them as well, I can imagine. That’s the case across the world today.


So I think the knowledge and understanding of what is even possible today is very limited. The more digital platforms, the neobanks, the neoinsurers, and some of the big digital platforms like Amazon and PayPal and the others. I mean, they’re much more savvy, of course, and they’re thinking about creating their own capabilities in-house. But the many smaller digital platforms and digital brands which are proliferating in every sector, again, this is relatively new for them. They might have just started thinking about how they could own the payments journey, create experiences themselves, generate revenue for themselves by embedding payments, rather than just giving all that value away to others. That tends to be where they’re starting to think. And then they’re also thinking, as I’ve mentioned before, “Well, we could get into lending and insurance.” And that’s, again, a bit more complicated for them to get their heads around.


So I think for all of those organizations that have these close relationships with the end customer, it’s really an education exercise or challenge at the moment, and an understanding and awareness. I think that’s the major challenge. I’m sure, Todd, when you speak to companies, when you show them what you can actually do, they get very excited, and they sort of say, “Wow, I didn’t even know we could do this. We tried before, and it was going to take a year and a half with a traditional bank or insurance company, and now we can do it in a few months.” So I think that tends to be where we are with most of those organizations.


I suppose for tech players like yourselves, like the people who are trying to enable this, then the challenges… It’s an awareness and education one as well. You are trying to engage customers and make it really easy for them to be able to do what I said right at the top of this call, which is to use financial services like Lego bricks and combine them with their own propositions. And so for you and others in this space, trying to make it really easy for non-technical people, as well as developers, to take advantage of embedded finance as well, and add those capabilities on to your proposition. So I’d say that would be a challenge for some of the enablers in this space.


Finally, for investors, of course they need to understand this market and work out who’s best to put their funding behind, and who’s most likely to win in this market. And then finally I’d say regulators, because when we start to move in other types of embedded finance, then some of the regulations are sort of unnecessarily restrictive. Not because they’re deliberately so, but they were just made in a previous era which is no longer relevant. So I’d say those are some of the challenges for the different constituents that are involved in this market.

Todd Ablowitz (27:33):

Certainly market education is something we talk about on an everyday basis at Infinicept, and you’ve done your part and you continue to do your part to help companies understand this. If you’re a company listening, and you’re trying to decide what is the best thing for you to do as your first step, what would you recommend that they do immediately?

Simon Torrance (27:56):

So I think there are two things. At a high level, I’d say, create a strategy for it. So don’t ignore it. “Create a strategy” sounds very glib and simple, but what I mean by that is, whatever role or position you play in the market, whether you’re an incumbent bank or you are a tech company or a digital platform or a brand or whatever, or a trade association or so on, this is, as we’ve talked about, a really exciting space, and it’s not going away. It’s just getting more and more sophisticated. I think you need to create a strategy, and that means working out, what is your ambition in this space? There are many different roles that companies can play. Define that and get alignment on that.


Then, of course, you need to work out where do you play exactly, and how do you win? These are classic strategy questions. What sort of niche could you create that you could dominate? Again, important questions for any company. You’ll then need to look at what type of capabilities you need, because many of the capabilities we’re talking about do not reside within traditional companies. Even the biggest companies in the world with big, big customer bases, they’re not used to what we’re talking about, and it requires new skills.


Typically, what I tend to say for the bigger companies, is that you probably need to create a separate organization to really focus on this, because the core business may not have the skills to really take advantage of this opportunity.


I’d say, decide this is important and create a proper strategy, and answer those key strategic questions. But in parallel with that, find out about the art of the possible. Speak to companies like yours and others about what’s working, what case studies exist, what use cases can be enabled, and educate yourself on this topic. So I’d say those two things.

Todd Ablowitz (29:44):

So what I’ve heard today is embedded finance is real, it’s happening. It’s needed on both sides. There’s a demand for it from small businesses and other markets. And, there’s a need for it from the supply, because the companies responsible for financial services aren’t making money. Too many of them aren’t making money. And it’s huge, that’s what I heard you say. It starts with payments, and there’s actions that a company can take right away.


Simon, thank you so much for spending the time with me today on the topic. Can you please let the audience know how they can contact you if they want to find out more?

Simon Torrance (30:23):

Absolutely. So do follow me on LinkedIn. I do post a lot on LinkedIn, and I enjoy that way of interacting with people. So that’s one thing to do. You can find me. There are not many people with my name on LinkedIn, so you’ll find me quite easily. And then secondly, I have a website called, as you’d expect, embedded-finance.io. And again, there’s plenty of material there, as well, that you can look at.

Todd Ablowitz (30:47):

I know we’ll be continuing to contact you. I know we have some things on the docket for later this year. So very, very excited about that, Simon. Appreciate your work. I’m a big fan. I’m really inspired by the work you’ve been doing, and look forward to chatting with you in person coming up.

Simon Torrance (31:05):

Wonderful. Well, thanks, Todd. I really enjoyed it. Thank you for your time today.

Todd Ablowitz (31:08):

Take care.


Thank you so much to Simon Torrance for joining us today. These conversations absolutely fascinate me, and I hope they did for you, too. Many thanks to our awesome listeners for tuning in to the It Pays to Know podcast once again. We hope you enjoyed it as much as we did. To hear more from us, go to infinicept.com, where you’ll also be able to learn more about our PayOps platform and how we get payments going your way. For Infinicept, this is Todd Ablowitz. Thanks again for tuning in, and we’ll pay you another visit next time.