Consumer Duty calls: Building trust in embedded finance

As of July 31, 2023, firms were bound by the FCA’s Consumer Duty (the Duty) to proactively ‘do the right thing’ for retail customers. The Duty introduced a regulatory obligation to ensure that the financial products and services businesses market and sell drive quality outcomes for consumers.

At its core, it’s not a novel concept—or at least shouldn’t have been—but codifying this principle into enforceable regulatory standards raised expectations for all players in the ecosystem.

This change comes at a time when embedded finance is starting to become more mainstream in the UK. Yet despite its enormous potential, recent high-profile events have undermined market confidence in its ability to deliver good customer outcomes.

As Consumer Duty sets new benchmarks, could it improve confidence in embedded finance and chart a path for further growth?

Winning over customers by playing fair

Consumer Duty applies to any firm that offers financial services (FS) products to customers or clients, whether or not they are themselves regulated by the FCA. For the first time, non-financial brands find themselves under the same umbrella as regulated financial entities.

However, even brands with no financial services regulation experience will find the principles of the Duty familiar. The Duty reflects many of the same principles brands strive for when building their own customer experiences—fair value, consumer confidence, and good treatment. It addresses previous substandard practices such as presenting information in misleading or confusing ways, selling products or services that are not right for consumers, and providing poor service and support.

That approach doesn’t change when incorporating embedded finance into non-FS experiences. Institutions should be able to compete for market share and consumer attention while maintaining high standards for customer experience.

Who is truly responsible for the end consumer?

One of the most promising aspects of Consumer Duty lies in achieving a truly collaborative process. For end customers to be happy—and the embedded finance partnership to succeed—all parties must collaborate to meet commercial and regulatory goals. Therefore, it goes beyond simple vendor/supplier transactions.

On one side of the partnership is the financial institution with a banking license—the preferred option for any brand should be an established licensed institution with the advantage of mature and extensive compliance functions. On the other, the brand with in-depth customer insights and commercial know-how. The goal of the former is to ensure that the overall experience for consumers aligns with well-established best practices under the Duty.

Ultimately, brands will face the brunt of a bad customer experience. This is why brands need to pick their embedded finance partner carefully. However, the responsibility for the end consumer goes both ways because even the best banking partner needs its client’s brand experience to be top-notch.

Rewriting the rules of trust

The ultimate goal is to protect and support the customer. Fortunately, brands’ customer experience goals extend this.

With a foundation for good practice and no ‘easy way out,’ the Duty also lays the foundations for responsible innovation. Brands can now be certain about regulatory expectations, through which they are expected to deliver products that meet customers’ needs, help customers achieve their financial objectives, and most importantly, protect them from harm.

As a result, we will see the emergence of new products as brands innovate to gain market share. Recent examples include ‘Save Now, Buy Later’ which not only open up new revenue streams, but also help customers build healthier financial habits.

Working together, brands and their embedded finance partners can translate Consumer Duty into positive and measurable outcomes for customers. It is in the interest of both providers and non-FS brands to encourage innovation and integrity simultaneously. Millions of consumers are yet to fully embrace embedded finance services, with embedded finance predicted to be a $320B market by 2030 (BCG). Compliance with Consumer Duty could be what gets it to the promised land.

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Andrew (Andy) Ellis is the CEO of NatWest Boxed, a UK Banking-as-a-Service business. Previously, as Head of Ventures at NatWest, he oversaw innovative digital businesses like Mettle, Rapid Cash, and Tyl. Earlier in his career, he worked in technology and consulting with Accenture. Committed to diversity, Andy launched initiatives such as the RBS Comeback programme for female returners and a digital apprenticeship programme promoting social mobility.

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