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Can Embedded Payments Push Banks Ahead of FinTechs in 2024?

By Carl Robinson, Chief Revenue Officer, Dragonfly Financial Technologies

The competition between traditional banks and FinTech companies is dynamic and influenced by various factors, including regulations, technological advancements, customer preferences and market trends. But embedded payments is refusing to sit on the sidelines any longer and is looking to play a significant role in shaping where and how banks do business.

In the simplest of terms, embedded banking refers to the integration of banking services (payments, lending, cash forecasting, balance reporting, etc.) directly into non-banking platforms or applications. In the context of FinTechs, it involves embedding financial services, typically provided by traditional banks, into the products or platforms of other businesses, such as e-commerce websites, Enterprise Resource Planning (ERP), mobile apps, or software platforms.

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FinTechs vs. Traditional Banks

Historically, FinTechs have been nimbler, faster and more aggressive and entrepreneurial in getting these services to businesses than traditional financial institutions. They also can compete more effectively with banks by either adding more value or competing on price. For corporates and their customers, the key to adding value is by automating and streamlining the client experience (workflow and services) to make it easier, faster and less time consuming to do business. It is here where FinTechs have traditionally had the edge with added value by embedding capabilities directly into the corporates’ products. As a result, FinTechs are giving organizations the ability to take payments, disperse funds, take credit card payments and be able to accept more types of payments from the consumer that helps to move money across borders.

While FinTechs seem to have the upper edge on many banks right now, embedded banking and payments is empowering banks to compete on a level playing field and its doing this in a several ways. One example is in customer experience. Embedded payments can enhance the overall customer experience by making transactions seamless and integrated within various client platforms. Banks that effectively integrate their payment services into popular non-banking platforms may gain a competitive edge in terms of sophistication, convenience and accessibility.

Embedded payments also open the doors for banks to partner with FinTech companies and other businesses to offer embedded banking and payment solutions. By leveraging these partnerships, banks can extend their reach and offer their payment services to a wider audience, potentially outpacing standalone FinTech companies. That said, regulatory frameworks can significantly impact the ability of banks and FinTech companies to innovate and offer embedded payment solutions, but banks often have established regulatory compliance frameworks in place, which give them an advantage in navigating regulatory challenges compared to smaller FinTech startups.

The ability to build and maintain robust technological infrastructure is also crucial for offering embedded banking and payment solutions. Banks typically have substantial resources to invest in technology infrastructure, which may enable them to develop more sophisticated and scalable embedded payment platforms compared to fintech startups. Additionally, established banks often have strong customer brand recognition and fiduciary trust, which can be advantageous when introducing new payment solutions. People feel more confident in established brands as compared to new companies; particularly when it comes to a client’s money.

While embedded banking and payments can certainly be a competitive advantage for banks, it’s essential to recognize that FinTech companies are also innovating rapidly in this space. FinTech startups are often more agile and adaptable to changing market demands, allowing them to introduce innovative payment solutions quickly. Therefore, the competition between banks and FinTechs in the embedded payments space is likely to remain intense, with both sides continuously striving to deliver superior customer experiences and innovative payment solutions.

For example, FinTech companies or other businesses integrate banking services into their platforms using APIs (Application Programming Interfaces) provided by banking partners or by becoming licensed financial institutions themselves. This is where composable banking becomes critical for banks to remain competitive, and technically relevant. According to research from EY, it is estimated that the market size of global embedded finance across the entire value chain will grow from US$264b in 2021 to US$606b in 2025.

By embedding banking services, non-banking platforms can expand their offerings and provide more value to their customers, that can lead to increased user engagement. Embedded banking also enables businesses to customize financial services to better fit the needs of their users.  Furthermore, when you empower a bank with composable banking technology there’s an opportunity to provide an improved client experience and an overall better value proposition – retain margins, increased lending and higher deposits, etc.

But there remains a challenge: it’s a different delivery model for traditional banks, a different way to engage and problem solve with customers.  So, to successfully compete with FinTechs, it’s going to require the banks to have a very different approach to traditional banking, to be creative and bring in new embedded products and models.

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