Embedded finance: a game-changing opportunity for banks
Embedded finance is an exciting opportunity for banking, promising wins for stakeholders, great returns to institutions and enough room for various providers to excel
Embedded finance is an exciting opportunity for banking, promising wins for stakeholders, great returns to institutions and enough room for various providers to excel
Most consumers are a user of embedded finance even if they are not aware of the term. Digitalisation has progressed rapidly due to the pandemic, but even before that, banking transactions changed to move from in-person branch visits to self-service applications.
Embedded finance refers to the shift from time-consuming bank transfers to the use of financial services or tools by a non-financial provider.
Services may include lending or insurance and should create more simplicity and convenience by embedding the financial journey into a customer’s normal non-financial journey. It is not an industry to ignore. McKinsey noted the industry in the US grew to $20 billion in 2021, and they predict it will be worth to be $7 trillion in the next decade.
In November 2022, The Global Treasurer hosted a group of finance professionals to discuss how embedded finance is a game-changer for banks in a workshop moderated by Yusuf Özdalga Partner, head of Europe at QED Investors and joined by speakers Miles Paschini, CEO at FV Bank and Manish Patni, lead product manager at Infosys Finacle.
The panel discussed why embedded finance is such a hot topic, how APIs go hand in hand with using embedded finance, and the best ways to prepare for embedded finance. The session was conducted under Chatham House Rules, so we have anonymised all participants but have included key discussion points and takeaways.
More and more transactions are happening through digital channels. One participant said that almost 90% of transactions happen through digital channels.
Another noted that “the market, in general, is moving towards digital channels. A digital channel used to be a bank’s mobile app, but now it could be social media, a website or a super app, so there are many different touchpoints where consumers previously had no opportunity to interact with the financial application, but today they’re embedded.”
During the session, The Global Treasurer conducted polls to gain further insights into what organisations are doing regarding embedded finance.
When asked, ‘Does your organisation plan to offer embedded finance to its customers?’, 56% said they were unsure, 23% said they had already offered it to their customers, and 14% said they planned to do so in the next 12 months.
Next, participants were asked, ‘What might drive a faster rollout of embedded finance services for your organisation?’. 33% said the need to improve customer experience, and 26% said increasing customer demand for financial services. An additional 22% said it is part of their planned business model and the need to accelerate new revenue streams for growth was 17%.
Lastly, only 2% said they would do it faster because a competitor was launching an embedded finance proposition.
Using APIs goes hand in hand with using embedded finance, but do you need APIs, or are there other paths, and what are the risks? One participant believed that there is a need for an integration layer however you approach it.
“You have to have some form of integration layer, whether it is APIs, widgets or something that you have developed and those can either be developed directly by the bank or through a third-party service provider who specialises in that space,” they said.
Participants went on to stress the need to consider a businesses’ potential partners and distribution channels. Then, ensure that marketing strategies align with the bank’s overall risk appetite and check with your sales, marketing and risk departments to ensure that the product is aligned with the strategy.
There is also the issue of risk data as although customers may be comfortable moving from a non-banking website. One of the participants said, “This transmission of data still has to be taken care of. It has to be controlled, and it cannot be something which hasn’t been installed.”
The customer experience is hugely affected by embedded finance as the old-style branch experience has often been replaced. Now, it is more about tailoring the experience to the customer as they are unlikely to be interacting with the financial institutions’ staff but with its website or mobile app, branded by a different company.
Customers interact with financial institutions on their terms, and the process should be as straightforward and seamless as possible.
“In many ways, it’s not about the experience with the bank; it’s about the experience with the journey in the particular application. If embedded finance is done correctly, other than disclosures and terms of service and things like that that are required, the customer doesn’t even realise they’re interacting with a particular financial institution,” said one of the participants.
Another speaker agreed with this idea, adding that it is “not about going to a branch or doing a particular transaction at a particular time. It’s more about focusing on the customer journey than the financial services product. It’s more about transparency, clarity, and speed for the transaction.”
Another area of discussion was about the best ways to prepare for embedded finance if a financial institution is yet to take advantage of the opportunities on offer. The speakers said banks must first adapt and find ways to appeal to customers quickly.
They noted consumers are still aware of the need for strong data security with regard to embedded finance, so banks need to invest in it and create a secure environment which consumers trust.
There is also the need for technology investment, as the number of transactions and general payment volumes continue to increase. Preparing to scale in this way can be a challenge for financial institutions.
One speaker said, “You can almost back yourself into a negative effect on customer experience if you have a lot of people applying for a product because you have reached a new dynamic distribution channel, but that channel breaks down because the scale of the enrolments outpaces your ability to manage them then you get a reverse effect because customers will have a bad experience.”
The participants noted fintech developments had helped with the growth of embedded finance over the past decade, but a separation between banks and larger tech companies remained. In some instances, financial institutions are investing more internally that they are morphing into tech companies themselves.
One speaker said their business was building vertically integrated solutions, looking at the foundation (the regulatory position as a financial institution), integrated compliance, and building their own tech stack. They’ve built a core to control the technical integration.
One thing we can be confident of is that embedded finance is not going anywhere. Recent research found that by 2026, buy now, pay later (BNPL) service revenue will make up just over 50% of the embedded finance market.
One speaker said that we might see financial applications embedded into social media channels like Twitter, as we have already seen with WeChat and similar applications. Participants added that we could also see an expansion in embedding a more functional account into an experience where a customer can add services to that account. It’ is already evident: for example, eCommerce merchants embedding lending at checkout can increase conversion by 20% to 30%, increase average order value and increase repeat purchases.
Initially, the primary process was on the consumer segment, but now there is movement in the SME market, and we will also see a move into microfinance and receivable factoring.
For more information visit, finacle.com.
To watch the webinar in full, please click here.
