Why neobrokers should embrace embedded finance – how to get started

eToro. Bitpanda. Coinbase.

Of all the digital-first challengers that have burst onto the financial services scene over the past fifteen years, it's arguable that neobrokers have had the biggest impact.

With their simple eligibility requirements — including low minimum investments — user-friendly interfaces, and a focus on education, neobrokers have made wealth management accessible to millions of consumers for whom investing was previously out of reach.

In Germany alone, penetration — the percentage of neobrokers' addressable market that have opened accounts — will reach 9.4% by the end of 2024. With almost 7 million individuals making their own investment decisions, there are more independent investors in Germany than ever before.

Globally, 55 million people have accounts with neobrokers, and revenue is expected to hit $1,074 billion by 2028.

With numbers like these, it's safe to say the neobroking sector's future is looking bright. But that doesn't mean neobrokers can afford to ease their foot off the gas pedal.

As more players enter the space in an effort to capitalize on the opportunity, it will become harder to stand out. And the growing trend towards "super apps" — apps that, instead of specializing in one thing, offer a one-stop shop — means the landscape, and, with it, consumers' expectations, are shifting, too.

So how can neobrokers build on their success, consolidate their market position, and future-proof their business?

Enter embedded finance.

Why neobrokers should add complementary embedded finance products to their lineups

In our white paper, Opportunity knocks for embedded finance in the wealth industry, an in-depth look at the changing face of wealth management, we identified two compelling reasons for neobrokers to get on board with embedded finance.

First, the neobroker market is increasingly crowded, which is making it more challenging for firms to attract and retain customers.

Research firm Mordor Intelligence estimates that the German neobroker market will reach saturation point in the next five years, after which it will be dominated by a handful of players. In such a landscape, firms need to be finely attuned to customers' needs and expectations if they're to have a chance to stand out.

Second, and closely linked to the first, the more crowded the market becomes, the more important personalization will be. And embedded finance enables firms to target individuals' needs with pinpoint accuracy, while boosting customer stickiness and adding new revenue streams.

Standing out and staying ahead: How embedded finance boosts customer stickiness by helping neobrokers better address individuals' needs

The single biggest change neobrokers have brought to wealth management is that the customer base is no longer dominated by wealthy, older men. Today, the typical wealth management consumer is more likely to be under 50 and a woman.

More to the point, neobrokers' appeal is that they have lower barriers to entry and are more affordable than traditional wealth management firms. As a result, they've attracted large numbers of consumers on average salaries.

To this new breed of consumer, wealth management isn't about preserving and growing existing wealth. It's about setting enough money aside to buy a house, or pay for their children's education.

Or, at the other end of the spectrum, it's about getting a handle on student loans or other debt, and managing their money more effectively.

Customers won't necessarily reach these goals through saving and investing alone.

Products like cards and bank accounts are better-suited to budgeting and money management. And, products like loans could help consumers struggling with debt, for example by enabling them to consolidate several debts into a single payment with a lower interest rate and more flexible terms.

To personalize effectively at scale, data is critical

Of all financial services verticals, wealth management has arguably always been the most personalized.

The nature of the business, where the ultra-rich entrust advisers with their wealth, means success is highly dependent on trust and personal service. Wealth managers know this: in a Citigroup survey, 71% said the client experience is their top priority.

This is unlikely to change any time soon. What has changed is the scale and scope of personalization.

Where, traditionally, wealth management customers were an elite and fairly homogenous consumer segment, it's now an increasingly large and diverse market.

Different consumers likely have preferences, expectations, and goals that are not only different to those of other consumers on neobrokers' books, but may even be completely at odds with them.

To deal with so many different demands in a personalized manner, and to do so at scale, neobrokers need access to as much data as possible.

By deepening the relationship with the consumer, embedded finance products can give neobrokers access to insights — such as where they like to shop, what they spend money on, and what their spending patterns are like — they can use to build a more comprehensive and accurate picture of their lifestyle and, in turn, to better-tailor their services to the consumer's needs.

Getting started with embedded finance: How to pick your moment (and which embedded finance products to offer)

"The beauty of embedded finance," observes Solaris' Chief Growth Officer Riccardo Colnaghi, "is that your banking-as-a-service partner takes care of compliance and other technicalities, while you focus on the customer-facing side of the product."

There's no need to go through the long and expensive process of obtaining a banking or e-money license, hiring specialized staff, and putting additional infrastructure in place. Which means you can launch new financial services products and begin gathering data that will help you improve personalization fairly quickly, with fewer resources.

But how do you know your firm is ready to expand its product lineup with embedded finance? And, crucially, which embedded finance products hold the most promise for neobrokers.

According to Riccardo Colnaghi, the best time for neobrokers to explore embedded finance's potential is when they're at a point where they've reached stability.

"If you've built a large enough customer base to sustain revenue targets and continued growth," he explains "it's worth exploring how you could add value through complementary embedded finance products."

The most natural starting point, he continues, is embedded KYC.

Fast onboarding is table stakes in the wealth management space, especially among younger, digitally savvy consumers. But it remains a significant friction point, with two in three consumers abandoning financial services applications either because they take too long or because they require too much personal information, according to the latest The Battle To Onboard report.

Alongside embedded KYC, our research also identified banking products as an opportunity. Cards, bank accounts, and lending are especially promising.

Beyond saving and investing: why neobrokers should also offer banking products

While it might seem counterintuitive for a neobroker to issue debit and credit cards — why encourage consumers to spend their money, instead of keeping it invested? — they have three compelling benefits.

First, they increase the number of consumer touchpoints.

When the consumer has a card, they no longer interact with the brand only when they're opening an account or reviewing their investments' performance. The brand is also front of mind in other, completely unrelated situations: at the café near their work, for example, or on a night out or while shopping online.

Interacting with a brand more frequently increases familiarity. And familiarity boosts loyalty and trust: consumers are more likely to buy from (and will buy more) from a brand they know well.

Second, cards not only make it easier to withdraw and spend the money invested – but, when linked to an embedded bank account, they also make it easier to transfer funds to other accounts or make transfers to family and friends.

According to our research, they also encourage consumers to reinvest or invest more. Neobrokers could incentivise this by enabling consumers to earn loyalty points or rewards both when they spend, and when they reinvest what they've spent.

Third, and most important: consumers tend to use cards issued by wealth management firms as "top of wallet" cards. That is, they use them as their main cards, with which they pay for essentials and day to day purchases.

"This makes payment cards a source of precious insights neobrokers can use to fine-tune their products," says Riccardo Colnaghi. "The data can also help them understand which services, rewards, or financial advice the individual will find most valuable."

From service provider to financial home

Co-branded payment cards are the ideal first step into embedded banking because they provide neobrokers with a wealth of information about individual customers' spending habits, while being a relatively easy sell. There were over 150 million payment cards in circulation in Germany in 2023, and 70 million people over 18. Which means the average German adult owned at least three cards.

But co-branded cards can be even more powerful if offered in conjunction with other products such as bank accounts and loans, because they create a much deeper relationship with the consumer.

If the consumer uses the co-branded bank account as their primary account, where they pay in their salary and pay out utilities, subscriptions, and other necessary expenses, neobrokers can gain greater visibility into the consumer's lifestyle, enabling them to adapt their core offering further and offer relevant products and services at the point of need.

This lowers acquisition costs significantly because, instead of having to persuade consumers to try a product, neobrokers can use data to select which customers would benefit most from it, and choose the moment when to offer it to them.

Bank accounts and other long-term products like loans also increase customer stickiness and help neobrokers build healthy additional revenue streams alongside their core offering, whether from interest on credit or paid premium features.

Better products, greater satisfaction, more loyalty: embedded finance as a competitive differentiator

"Over the next five years, customers will increasingly see wealth management apps as the new normal, in the same way they've become accustomed to digital-first banks," predicts Riccardo Colnaghi.

"The growth of the neobroker sector makes that inevitable, because it means investing and saving no longer have to be intermediated by financial institutions. They're as simple as a few swipes on your phone."

That's a good thing for consumers, for whom it will be easier to access products that help them build wealth and secure their future, and a good thing for neobrokers, who will see their addressable market grow.

But only those who keep their ear to the ground and are able to adapt quickly to customer's shifting expectations, will make the most of the opportunity.

From this perspective, embedded finance will be a powerful asset to those neobrokers who embrace it wholeheartedly.

"It's the best of all possible worlds," concludes Riccardo Colnaghi. "Neobrokers can continue focusing on what they do best — trading — but they'll also be able to be more agile, responding to market shifts by modularly adding highly relevant and valuable new products."

Want a more in-depth look at how embedded finance could transform wealth management, and the opportunities it could create for neobrokers?