Innovative technology has been transforming the banking sector for decades. From humble beginnings in online banking to AI-enabled fraud detection and app-based banking; technology’s role as a driving force for transformation in financial services is unparalleled.
Now, embedded finance promises to build on these advances to offer a truly revolutionary shift in the industry across spending, saving, borrowing and beyond. Embedded finance allows companies that are not traditionally in the financial services sector to integrate a range of banking services into their product, technology or service.
“Embedded finance is an important area of growth whereby a non-bank player such as a ride-sharing operator, or online retailer can embed financial services, such as payments, directly into their service so that customers no longer need to navigate away from an app to pay.
Other examples include embedded lending and embedded insurance. Lending could involve buy-now pay-later finance for retail transactions or embedded mortgage provision through real-estate agents”
Eli Rosner, Chief Product and Technology Officer, Finastra.
In recent years there has been a proliferation of major brands looking to introduce embedded finance into their operations. For example, ecommerce giant Amazon partnered with Goldman Sachs last year to provide lines of credit of up to $1 million for Amazon sellers.
Deals like this are seemingly a win-win for all parties, with Goldman Sachs profiting from relatively high interest rates, Amazon gaining a new revenue source from their share of fees and sellers having access to an easy-to-use line of credit when needed.
“The promise of embedded finance is valuable to brands because when they can offer a wide catalogue of services at the touch of a button – it creates a ‘stickiness’ within their own ecosystem and fosters more customer loyalty,
A modern cloud native and API-driven technology combined with a robust regulatory and compliance framework are key to delivering embedded finance with speed and scale. The future lies in close collaboration between brands who want to pursue deeper relationships with their customers and banks to ensure the highest element of trust and security is delivered end-to-end.”
Tom Bentley, Chief Commercial Officer, Vodeno
Many banks will clearly be resistant to becoming an undervalued and unseen part of the back-end pipeline of another company’s product, with there being good reasons for this apprehension. The continuing shift to embedded finance will mean a changing role for banks and financial institutions. But both challenger and incumbent banks alike can capitalise on this revelation, if they engage fully.
All third-parties, from Amazon to much smaller players, will need the banking infrastructure provided by financial services firms. The expertise built-up by banks will also be vital to those non-financial enterprises who want to explore embedded finance, creating the perfect opportunity for solid partnerships.
“Embedded finance offers a great opportunity for financial services to develop new business models and capture distribution across multiple sectors (such as retail, healthcare, education etc.) by leveraging their expertise across risk management and their balance sheet. In order to capture this, banks need to develop modern, flexible API first platforms which enable easy integration across multiple customer journeys,
Kunal Galav, Regional Director, EMEA Advisory Services, Mambu.
With the right partnerships in place, lenders can gain huge new customer bases through embedded finance and significantly reduce the cost of new client acquisition. The data that banks can access from these relationships about potential customers allows them to effectively match the right product with the right customer, as well as ensuring future offers are deeply personalised.
However, while banks stand to gain a lot from embedded finance, there are several issues they need to consider before jumping in headfirst. It’s no secret that many banks have found modernising legacy IT systems to be a major challenge and leading the way on embedded finance will require cutting-edge technology. Bringing old systems up-to-date can be a laborious process but is necessary to enter the future of embedded finance.
“A platform-based open approach that facilitates collaboration through APIs, also allows banks to tap into the growing Bank-as-a-Service (BaaS) marketplace. This involves banks exposing specific back-end services via APIs to non-banks or other banks, enabling them to offer such services to their customers. A BaaS approach can allow banks to reach new audiences and achieve scale”
Eli Rosner, Chief Product and Technology Officer, Finastra.
Despite some challenges, those firms that don’t embrace embedded finance may be left behind and see competitors increase their market share, as Matt Harris, Managing Director at Bain Capital Ventures, estimated that by 2030, 20% of all lending will be embedded lending. Perhaps most importantly of all, it’s customers who are demanding these integrated experiences and the banks that understand this need will take the initiative in offering customers exactly what they need, when they need it.
To hear more on this discussion, join us on September 1st for our virtual experience – FTT Embedded Finance North America.
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Written by Finbarr Toesland, Editorial Contributor.