As can be clearly seen by the growth of the S&P Index which tracks the performance of our nation’s 500 largest corporations, our biggest businesses have grown substantially bigger over the past 10 years. In my opinion, they are poised for even larger growth over the coming decade.
One of the ways in which this will likely occur is through a technological process called embedded finance. Until this past week, when I attended an educational seminar on the topic, I had never heard of this term, but I have a feeling that the monumental changes this technology could be bringing will very soon make it a commonplace term. Much like cryptocurrency has become one over the past couple of years.
Simply put, embedded finance is the blending of financial services and products into services and products that generally are not financially related. For example, Car manufacture Tesla, has recently begun offering their own brand of car insurance directly to their customers. These insurance premiums can be simply added to the purchase price of the car and paid monthly as part of the total car payment. This service offering allows Tesla to offer lower prices and more specific coverage, while at the same time, obtaining revenue streams that in the past would be going to separate insurance companies
This strategy is similar to ones used by robber barons of the past century, like Standard Oil founder John D. Rockefeller and Andrew Carnegie of US Steel. They discovered they could create exponentially higher profits by controlling all aspects of production including manufacturing, transportation and distribution of their goods. Today’s corporate giants are recognizing that by controlling the financial mechanism in which their product or service is purchased they too can increase their profits.
Currently, the way our financial system works, companies that sell goods and service, rely on outside financial institutions to serve as the conduit of getting your money transferred to them. But imagine a world where instead of buying an item from Walmart and using either a debit card or credit card to trigger a bank transaction that sends the funds to the vendor, your money was already connected to them in a kind of digital account and simply debited from your balance there.
This change might not only revolutionize the way in which items are bought and sold, but could also have a major impact in how lending is done. I can easily see a world where you shop for a home over Facebook, when you find one you like you buy it directly from them, with all loans, inspections, and fees being taken care of by them in-house. No outside lenders, no real estate brokers, no title companies. In other words, by cutting out the financial middlemen they could better provide a totally painless and virtually instantaneous transaction from start to finish, and increase profits at the same time.
Going even farther down the rabbit hole I foresee a company like Amazon getting into the investment space and saying not only can we house your checking account in our digital space we can hold your investment accounts too. In this way, much like you might use them to buy a computer, you might also use them to buy shares in the company that makes it.
Given the power a few tech companies already have over our lives, granting them even more is concerning to me. I’m not alone in these concerns. A recent Gallop Poll from July shows a substantial decrease in the overall confidence people have in big tech from just a year earlier. However, as this technology shows itself to be very convenient and efficient, I believe people will be willing to grant more and more of power to fewer and fewer institutions, whether it’s a good idea or not.