Over the course of the past few years, a broad variety of non-bank service providers have been embedding financial services within a range of software and apps that they support.
This development, which has gained widespread attention under the name of embedded finance, is rapidly becoming one of the most disruptive trends in payments, banking, and technology at the present time.
The traditional model for the delivery of financial services is being transformed, by offering new opportunities for technology companies, financial and non-financial organizations, and a fresh perspective on the purchasing experience.
The highlight of customer centricity
Whether they are aware of it or not, many individuals use embedded financial systems in their day-to-day activities.
The act of purchasing something, be it a mode of transportation, a cup of coffee, presents, or even trips, today typically entails a little more than the touch of a button. In order to provide the best possible customer experience, frictionless checkout and seamless payments have become the norm.
These early signs imply that banking in the future would be completely transparent and frictionless, and embedded finance would outline the highlight of a customer centricity strategy that many businesses have sought for decades.
Customers would not have to go to a bank office to obtain financing; rather, they could do it instantlyat the location where they are making their purchase, without having to stand in line or deal with any other inconveniences.
Why embedded finance matters
In their latest “Banking-as-a-Service Outlook 2022” report, Finastra estimated that the Banking as a Service (BaaS) market value will reach 7 trillion USD by 2030. During a market research focused on embedded finance, held in 2021, OpenPayd found out that in 83% of business are looking to launch embedded financial service within next 5 years.
When asked about the top three reasons for driving integrated finance adoption, firms cited customer demand (70%), new income streams (67%), and improved customer experience (63%).
2 out of 3 customers are seeking a way to utilize an alternative payment method when buying, or would most likely take advantage of a financial service supplied by the merchant at the moment of sale if they perceive value in it.
In view of the above it is no surprise that embedded finance will play a pivotal role in the future of finance.
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Open Banking and Banking-as-a-Service are the fundamental components of embedded finance
To acquire a better understanding of embedded (or contextual) finance, we may look into terms like Open Banking and Banking-as-a-Service and identify the primary stakeholders.
Despite its widespread use as a catchphrase, Open Banking is not a business strategy in and of itself. Rather, it's a technological framework that makes it possible for new business models to emerge in a market driven by demand and supply, where customers, businesses, and financial institutions all benefit from offering financial services in the way that is most convenient for them.
In contrast, Banking as a Service (BaaS) is the offering of retail or wholesale banking products as a service, employing readily accessible licensees, a regulated and robust infrastructure, and a plethora of risk and business management expertise.
As a result of the shift in banks' roles in our everyday lives from service providers to industry facilitators, open banking and BaaS pave the way for the smooth and safe delivery of financial services through new channels.
There are a lot of things happening in the background to make payments and financing easier and more flexible for the consumer while also generating new revenue streams for organizations through innovative business models.
Who are the main stakeholders in the embedded finance value chain?
Consumers - End users of the financial product delivered through an embedded financial service.
Distributors (also referred to as Embedders) - Organizations that integrate banking services directly into their existing retail or business client journeys. Consider client-facing services or platforms that, by including financial services, aim to improve customer interaction and provide more appealing and comprehensive product offers.
Retail firms that have started offering value-added services, such as e-money accounts, FX services, loans, and others, are now the key drivers of the embedded finance revolution. A prominent example would be eCommerce businesses that have embedded Buy-now-pay-later (BNPL), which are seeing a significant boost as BNPL has gained momentum across numerous regions.
Enablers - Typically Fintech companies that, by their agility and adaptive open API solutions, enable financial institutions to offer services as BaaS, and distributors to incorporate these financial services into their customer journeys. Enablers synergy and efficiency, reduce friction, and ultimately create value for all parties in the value chain.
Providers - Financial institutions with a banking or insurance license that provide regulated and compliant financial services as BaaS. Such services could be lending, deposits, bank accounts, payments, etc.
On a first thought, it may appear that banks are losing the game by unwillfully surrendering consumer engagement to middlemen. But instead, banks are presented with an additional distribution channel and the opportunity to rethink their job and focus on what they do best, such as designing compliant products, performing risk monitoring, underwriting, treasury, and maintaining trust in the system.
Embedded finance may well be the start of a total reimagination of the payment value chain and the tipping point to a brighter financial future. While it will continue to be a prominent topic, in future articles we intend to throw more light on who is who in embedded finance and what are the best practices for succeeding with the model. Stay tuned!
Sources:
Finastra - Banking-as-a-Service Outlook 2022 report
OpenPayd - Embedded payments and the reinvention of customer experiences report Dec 2021
Finder.com - Buy now pay later (BNPL) statistics
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