The Big Opportunity in Embedded Finance with Mike Sigal


Mike Sigal is an entrepreneur, startup investor, and strategic advisor who channels his expertise in innovation and business development across the financial services industry. Mike Sigal, now the Founder and CEO of 20022 Labs joins Clayton on this week’s episode of the If I Ran the Bank podcast to discuss B2B payment rails and infrastructure, and embedded banking as a service for corporates.

Don’t miss this episode with Mike Sigal, listen below.


I was introduced to the world of payments and FinTech back in 2009, where I did some work helping SWIFT to create a program and platform designed to introduce their member banks to emerging FinTech companies, which was called the Innotribe. From there, I became a venture capitalist focused on early-stage FinTech. Between 2016 and 2018, my partner and I did about 80-85 investments in early-stage companies around the world. Around the same time, we got in the habit of helping banks and insurers think about innovation and investment, engaging with the early-stage ecosystem, and helping them to improve their operational excellence around bringing new products to market.

I was doing work for Payments Canada, one of the national payments rails, and they knew that large investments needed to go into the transformation to adopt real-time rail and ISO 20022, but their observation, which I think was pretty forward-thinking was that, outside of the banks and the payment rail, the corporate users (the end-users of payments and banking) needed to understand why this new technology was interesting. They helped see 20022 Labs as a way of creating a market-driven or a demand-driven approach to understanding why someone needed a new payment rail.

How do people's lives get better once this exists?

For an end corporate, one of the easiest ways to think about the value that this creates is automating reconciliation. If you think about it, B2B payments today are still mostly checks, which means there's paper involved that has to be reconciled to that other piece of paper: the invoice or the bill. With a rail that will carry not just the payment data, but the data about the payment (the invoice number, the bill), now you can automate the systems that move these payments around. 

As business has progressed, the amount of information about the payment has exploded, whereas the payment infrastructure has remained in many ways the same as it's been for the last 40 or 50 years.

What are some of the other types of communication or some of the things that are really unique to these modern 20022 payment systems that we might not have thought of a payments network being able to do historically?

  1. When you think about all the kinds of payments out there (ACH, checks, credit card payments, wires), for the most part they all have different formats. The first thing that 20022 does is harmonizes, it can be used across any of those payment methods so that you have a single format; a physical structure to rule them all.

  2. In most of those formats, a lot of the data about the payee or the payor, as well as the context, is largely unstructured. 20022 is an XML-based format that pulls apart all the data in those messages and creates a structure around them. It's not just a jumble of characters. It's well-structured like modern computer code. This means it's primed to do things like disambiguating when you're considering AML, KYC, these things.

  3. It is extensible in a standard format. I'm going to initiate a payment to point X. I can send a message along the network, which is a request for payment so that the context is there before the payment. It's a way to do electronic bill presentations and payments. 

Harmonize the structure of payments across different rails, structure the payment information itself, add rich, structured context. And finally, you can now use that capability not just to send a payment for clearing and settlement, but you can send messages related to the payment along the same rail. We're trying to help the world understand that data-rich payments are a platform for innovation and growth. It turns payments into a packet network.

Are we talking trillions of dollars of enterprise value that you think could be created by entrepreneurs and incumbents innovating on top of this platform?

Absolutely. You got to think about it in a couple of ways. The first one is to recognize that the payments network and the payments industry have existed almost entirely apart from the corporate business process facilitation industry (ERP, treasury management tools, etc). You've got these two massive industries that this capability brings together. 

Goldman Sachs did some research in 2019 and their estimation was that the efficiencies technology creates is a trillion-dollar opportunity across payment processing, working capital, and AP and AR software and services. And that doesn't begin to approach the corporate efficiencies that will be created through those tools, which they estimated about 1.5 trillion a year in productivity savings just for small businesses. That is a massive, untouched opportunity. 

We have this context for a world where increasingly the payment infrastructure and the bank and tools that interface with the payment structure all speak this kind of open uniform language, it's built-in by default. 

Increasingly, the applications that serve businesses directly are hopefully going to speak this language and more natively build use cases that can support taking advantage of this deep end-to-end context between two counterparties. In that world, as we start to play it out, you spend a lot of time thinking about, "If I'm the bank in this world, what do I do to really thrive, take advantage of this, and build the future for my clients and profit?"

The big opportunity for banks or new entrants is embedded finance for corporates. The idea that I, as a bank, can provide API-based access to my services for my corporate clients or my small business clients, is a level one. When I say level one, I mean on the corporate side. You're getting a bunch of benefits of integration, greater control, greater visibility on your financial services. For the bank, the opportunity is now my systems are tightly integrated with my customer's business process, which means it's really hard to shake them out. That's very cool.

The second order of opportunity is that banks are these natural nodes for all kinds of interesting industry information trends that sometimes corporates (unless they're Walmart) don't have on their own. The idea is that a bank not only can give physical world council to how our markets evolve for their customers, but also data and overlay services to help their businesses find new opportunities, innovate faster, and find new products and services. 

What types of businesses do you see being engaged in this innovation?

There are leaders and laggards in every industry. The pace of innovation and financial services, let alone the pace of innovation in customer experience outside of financial services, gives any potential banking customer a desire to have a more efficient relationship - a more digital relationship. That being said, it still requires significant investments on both sides. 

We've seen greater interest in folks who make a lot of payments (ie. the insurance industry, tax authorities, etc), who recognize that just a very minor improvement in efficiency will have a major impact. But even at the small business end, I've got a good friend who's a very busy consultant and she'll often complain about the need to issue invoices via QuickBooks and then deal with payments in her bank. Her question is, "Well, why can't they just be in one place? Why do I need multiple places? I don't make any money by doing the administration of invoicing. Can't I just issue an invoice directly from my bank?"

These large corporations have the scale that the kind of investment that's necessary when there is no common infrastructure like ISO 20022. They're the ones that can get a payback on investing and all that automation. 

As there is more and more standardization, it will be easier to get the exact customer experience you want anywhere. Those customers are going to want to work with financial services partners that can deliver on that dream. That's why I think banking as a service for corporations is just a giant opportunity. 

How would you start building towards a world where your institution was in the best position to excel in this highly contextual, data full, highly integrated future world of financial services?

If you're in an incumbent institution, going after this stuff is not easy. It's not because the technology or the concepts are hard, but you do have a lot of legacy technology. You got to live the legacy business model; you've got a lot embedded in your brand. It’s hard to think about how this kind of change might impact you. 

One of my favourite places to start when I work with banks is to show them what's actually going on in FinTech, in embedded banking, and in banking as a service. Going out and looking at the investment research on how much money is pouring into these FinTechs that are doing things differently. Start with getting a sense of what the innovators are doing, because they're the ones who are thinking what's possible if you were starting with a blank page. 

Also, do some reading about how some of the giant internet incumbents are thinking about this (ie. Facebook, Amazon, Apple, Google). All of them are somewhere involved in financial services. They're not doing it because they want to be banks, it’s because they know that financial services are the grease to make the rest of their business model work. As far as they're concerned, if they can't get the financial services that support their business model, they'll build it themselves.

Another thing banks should remember is that their customers are kind of nervous about what companies like Amazon will do to their business. So, how do you make your customers who may have to compete with companies like Amazon more competitive? Great banking as a service is your responsibility as a bank.

Those are the two places to start with: what's the venture community investing in and what are the digital leaders doing? That's really going to open your eyes to what's possible - not what's probable, but what's possible.


Listen to Mike on the full episode of the If I Ran the Bank podcast on Apple Podcasts, Spotify, Google Podcasts, Amazon Podcasts or by visiting the If I Ran the Bank website.

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