Embedded Finance – inevitable, invisible, irresistible force in Fintech
Two decades ago, 50 percent of bank transactions occurred on physical channels. In the course of time, 70 to 90 percent of transactions migrated to online, self-service modes. Now, with trends such as Embedded Finance taking hold, banks are seeing a sizeable proportion of their transactions – payments, in particular – migrating to third-party channels.
While the idea of embedded finance – basically, inserting banking products and services into the consumption journeys of primary products – has been around for years, digital technology has given it wings, by expanding scale, scope, and impact, while lowering the cost of integration. Open Banking has created partner ecosystems with unlimited use cases for embedding financial service offerings. Last but not least, as a secondary service that underlies virtually every transaction, banking is inherently suited for embedding. Hence embedded finance is one of the most exciting opportunities today, with market size expected to grow threefold by 2030.
Next-gen businesses like big-tech and e-commerce platforms have exploited their natural advantages, namely, digitization, innovative-ness, customer relationships, and deep engagement, to embed financial offerings within their customer journeys and eliminate friction from customer experiences. With other players, from retailers to hospitality companies to ride sharing apps, also doing the same, it is inevitable that banking will become increasingly invisible to end-users.
Banking versus Embedded Finance
Incumbent banks can view embedded finance as a threat, or see it as a rare opportunity that creates wins all round – for customers who gain seamless consumption experiences; for merchants, who can grow their business by offering services, such as Buy Now Pay Later (BNPL), and earn commission on financial product sales; and for their own organizations, in terms of business expansion and reach.
This piece discusses four things that will help licensed banks make a successful foray into the world of embedded finance.
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Modernize the Technology Infrastructure
The gains of embedded finance increase with the number of integrations. In order to expose their services and data across a wide partner ecosystem, banks must have adequate API (Application Programming Interface) infrastructure. As far as possible, the APIs should follow a standards-based format – such as that recommended by BIAN – for easy integration. Other requirements include an API management platform, and a sandbox along with documentation for making sure only approved partners and developers use the APIs for approved purposes, in a secure and seamless manner. Finally, there needs to be a sufficiently mature underlying digital stack to support embedded finance transactions at massive scale, without compromising system performance or reliability.
See APIs as Products
Enterprises with a good understanding of embedded finance apply a product mindset to their APIs, viewing them as products for taking their services to a large number of third parties. They back it up by dedicating a product management team in charge of prioritizing, developing, deploying, upgrading, and finally, retiring APIs. The team may also work with clients and industry players to co-create use cases. There are also support teams offering services to clients, partners, and developers.
Build Digital Sales and Fintech Teams
To tap its revenue potential, banks should develop embedded finance like any other line of business. That means building the right infrastructure, and dedicating teams to push API-based banking and create partnerships and use cases with corporate/SME clients, fintech firms, digital giants, and others. Banks must also promote API-based banking by way of relationship-based pricing, discounting models, and other incentives.
Grow the Data and Analytics Practice
If APIs are the foundation of embedded finance, data is its engine.
After getting the business off the ground, how can banks differentiate their commoditized services in a crowded market? The answer is by leveraging the massive customer data from embedded finance to add unique value.
For instance, when banks embed payments, they can process the data from billions of monthly transactions into spending insights that they can deploy into improving products and experiences, managing risks, or advising product managers, partners, customers, and merchants.
What next in Embedded Finance
As one of the most exciting opportunities in its space, embedded finance is attracting the interest of several providers, from Banking as a Service players to various non-bank intermediaries. Incumbent banks should capitalize on their strengths, such as licensed status and deep operational experience, to get into the business, serve a much larger user base, and earn additional revenues.