Non-banking financial services, such as bank accounts or wallets, payments, and lending, are already pioneering innovation within the banking and finance industry.
The companies’ adoption of embedded finance—banking-like services provided by nonbanks—is intended to keep consumers and boost their “lifetime value.”
Businesses of different sizes and stages of development are exploring and preparing to introduce embedded financial services to serve business and consumer groups, including retailers, telecoms, huge tech and software companies, vehicle manufacturers, insurance providers, and logistics firms.
Customers like the convenience: a small business can get a bank account through its accounting software, and a client can pay through the merchant.
To fulfill the growing need for embedded finance, financial institutions are increasingly offering banking-as-a-service (BaaS), which consists of packaged products, frequently white-labeled or co-branded services that nonbanks can utilize to serve their consumers.
Because BaaS is typically provided to customers via APIs and requires robust risk and compliance monitoring on the part of the integrated financial partner, it will necessitate new technologies and skills to make it work.
There are other Fintechs that offer to facilitate BaaS relationships; examples are Treasury Prime, Synctera, Unit, and Bond.
New business models, such as pay-for-use monetization, B2B2C and B2B2B distribution capabilities, and careful branding consideration will be required by banks.
The BaaS imperative
Numerous banks are concerned that delivering their products through partners may jeopardize their customer relationships.
However, if end users begin to adopt embedded finance in large numbers, banks may have little alternative but to develop BaaS business lines.
The good news is that allowing partners to market banking products can be a high-volume, low-margin business for banks.
Banks commonly struggle with their cost structures, which are often built on old technology and supported by human processes and operations.
Banks must undertake digital revolutions in order to provide BaaS, but many have already done so.
It’s too soon to say how the market will develop.
One potential is that banking as a service and API banking become as common as online and mobile banking, which each bank must develop and maintain.
Long-term differentiation with BaaS will be tough in that environment, thus banks will continue to differentiate themselves based on products, rates, reach, and other factors.
Another potential is that the market will be susceptible to returns to scale, similar to how cloud computing is dominated by large corporations.
If this winner-take-all scenario holds true, a few BaaS providers who are ahead of the curve in terms of technology, analytics, and cost structure will certainly gain overwhelming market share.
Challenges and opportunities for nonbanks and banks
Is it possible to include banking as part of the customer experience or journey we provide?
Is this merely an experiment without a strong brand or a compelling experience hook?
Do we have a claim to victory over competitors who offer banking, lending, or payment services?
Will embedded-financial solutions eventually generate enough volume to justify the investment?
Do you have the technical and operational resources to collaborate with a bank to enhance their banking-as-a-service offering?
These questions need clarity in order to embrace innovation and deliver a robust customer or business experience.
The coronavirus outbreak forced businesses to reassess and accelerate their digitization efforts in unprecedented ways between 2020 and 2021.
Digitization initiatives that had been planned for years were accomplished in a matter of months. These changes are here to stay as we move forward into 2021.
Embedded finance is gaining traction, and with a market cap of over $138 billion by 2026, it’s evident that it’s not simply a passing trend, but the way of the future.
Embedded Finance 101
For those unfamiliar with the concept, it can be difficult to grasp what this term signifies, as it is with any new concept.
Simply described, embedded finance is the use of financial instruments or services by a non-financial supplier, such as lending or payment processing.
An electrical store, for example, could provide point-of-service insurance for in-store purchases.
Consumers benefit from embedded finance because it streamlines financial procedures, making it easier for them to get the services they need when they need them.
Consumers may have had to go to a physical bank branch to apply for credit in the past to make a large purchase.
They can now buy something and acquire credit all in one place, at the point of service, thanks to embedded finance.
Amazon’s EMI lending choices, Klarna, and Afterpay are some of the most well-known examples of integrated finance.
One of the key advantages of embedded finance is its ease of use for customers. Customers may be more likely to finish a purchase and enjoy customer pleasure, which is critical in creating brand loyalty, if pain points such as the need to seek credit elsewhere are removed.
Consumers are more inclined to purchase an item or service and return to do so again and again, which can lead to increased profit opportunities for firms.
Embedded finance, on the other hand, isn’t only about convenience. It’s also a way to learn more about customers, their spending habits, and their needs. This information can then be used to guide future business growth.
Benefits of Embedded Finance
So, how can you include financial instruments into your company?
Let’s take a look at five of the most common applications of embedded finance.
• Buy now, pay later
Buy now, pay later platforms are giving modern shoppers a new line of credit.
Consumers are empowered to shop differently when they have access to a wider selection of things that can be purchased over time, whether it’s for a higher-quality piece of home technology or a transport system for a newborn.
• Integrated lending
Businesses looking to fund larger or more substantial purchases can use these financial options.
As a result, they frequently want additional information, such as creditworthiness data, in order to lend responsibly.
• Integrated insurance services
When buying a new product or service, clients may want to make sure that their money will not be squandered if the worst happens. That’s where comprehensive insurance comes in. Businesses are better positioned to supply insurance fast by using insurance finance options.
• Investing and trading
Embedded finance capabilities in investment apps enable users to connect with their physical bank to invest in a way that suits their current financial condition and spending patterns.
This is an example of a financial services provider of a different sort using embedded finance.
Financial technology-as-a-Service capabilities are increasingly being incorporated into company services, ranging from invoicing to client acquisition and all in between.
Engaging Embedded Finance In A Meaningful Way
Companies might begin by developing an embedded finance strategy that meets their specific requirements.
This entails assessing your digital requirements and determining which tools to implement. The first step is to figure out what your company’s embedded finance project goals are.
These could include things like improving customer service, expanding an existing customer base, or starting a new business to cater to a certain target population or demand.
If you want to improve customer service and satisfaction, for example, an embedded payment could be a good option.
Embedded insurance may make it easier for businesses to become a one-stop shop.
Understanding the function your organization would play in the ecosystem is another difficulty. Service providers, for example, provide access to the tech stack, whereas license holders, such as banks or e-money institutions, help with regulatory compliance by conducting financial transactions and overseeing the basic infrastructure.
There are a number of approaches to incorporating finance and banking programmes into non-financial businesses and services.
The first is to include a new digital service into the brand’s platform.
Offering financing services or establishing embedded bank accounts for businesses are examples of this.
The second option is to become a connector in the embedded finance movement, acting as a link between financial service providers and non-financial enterprises.
This could resemble a data transfer network used by companies that want to sell financial goods.
The third option is to join an ecosystem by collaborating with a company that focuses on integrating financial infrastructure into its product or service.
The expansion of platform ecosystems, like the growth of the broader embedded finance idea, is fueled by a growing need for easy financial services and an increasing number of online transactions.
Six Influential Fintech Trends
In the embedded finance and banking-as-a-service space, we identify six tendencies. Understanding and tracking these patterns can aid banks and those interested in working with them on embedded finance in spotting opportunities and avoiding dangers.
Integrated customer experiences are in high demand. Customers are increasingly seeking simple, holistic, embedded, and direct experiences, which is the most crucial trend.
Ecosystem orchestrators, by definition, strive for maximum integration, therefore an embedded integrated financial solution fits the concept nicely.
Consider Walmart’s recent news that it is partnering with financial-technology investor Ribbit to develop a financial-services offering, or Ikea’s recent revelation that it is buying 49 percent of its banking partner.
New fintechs and beyond are driving demand. Each year, a large number of fintechs emerge that require banking partners to give access to bank accounts, payments, and financing.
In the United States and many other places where the regulatory hurdle for doing so is high, big technology companies and other non banking entities can construct and supply financial services but are unable to “become” banks themselves.
As a result, fintechs can only provide customers with embedded finance through banking as a service.
To serve their vast customer bases, these companies need end-to-end BaaS infrastructure solutions, as well as regulatory backing and balance sheet or other finance sources.
Openness is on the rise. PSD2 and open banking are two regulatory trends that are encouraging the development of banking APIs and universal access.
To recuperate expenditures and take advantage of tech upgrades, several banks are considering extended or new BaaS business models to meet with these new requirements—often through IT modernisation.
Plaid and other aggregators are shifting customer expectations for data and account information portability, which is leading to an increase in IT modernization and BaaS projects.
Look for additional revenue streams. Financial institutions are actively investigating other sources of revenue and product growth, given the predicted decreases in banking revenue and profitability.
Sources with scalable business models and fixed IT expenditures are particularly beneficial (e.g., distribution models).
Technology capabilities are being adopted. With the advancement of digitization, including automation and APIs, banks can scale BaaS more quickly, making integrated finance more accessible to more businesses.
Simultaneously, businesses looking to integrate financial services increasingly see their digital experiences as a collection of modules created by others.
This is typically because they regard payments, lending, deposit, and checking accounts as just another product capacity to add to the customer experience, rather than as a fundamental competency.
Financial services’ levels of trust are fluctuating. Numerous other brands, on the other hand, have higher levels of trust, which they can use to offer financial services.
Banks that allow partners to provide white-label or co-branded financial services can capitalize on the growing trust in other brands to promote their products.
Banks won’t have to white-label everything across all products and locations; instead, they’ll look for markets or products where they can use the growing trust in nonbanks tactically.
Kilowott leverages its expertise and leadership in design, digital technologies and business process automation for a complete end-to-end business experience transformation (BxT) within the banking and fintech industry.
We prioritize purpose, innovation, and deliver a holistic business experience to drive accelerated growth in customers, giving them exactly what they desire without trading sustainability and profitability?
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