International Finance
Leadership Magazine

The role of embedded finance in 21st century banking

Embedded finance
Embedded finance refers to the integration of financial services into non-financial products and services

Technology has evolved at a breakneck pace in the last few years. Banks have had to adapt and evolve to stay competitive, and in step with the evolving consumer. They are using innovation to reach customers at the most opportune time for transactions. One such opportunity that banks have capitalised on is embedded finance.

Accenture’s 2022 global survey analysis has predicted that embedded finance offerings to businesses could potentially increase global bank revenues by up to $92 billion by 2025. This presents banks with an opportunity to serve customers where they are purchasing goods and services, instead of having to acquire them in the first place. Providing a profitable shortcut to a paying customer. A Bain & Company report believes that by 2026, the value of embedded finance will exceed $7 trillion – in the US alone.

As this market continues to grow, success will depend on accurate risk assessment and brand strategy, diverse integration approaches, and strategically choosing areas of involvement.

What is embedded finance?
Embedded finance refers to the integration of financial services into non-financial products and services. Examples could be “buy-now, pay-later” schemes, apps offering debit cards to partners, and more complex offerings such as loans and investments.

It benefits individual customers by making access to financial services easier as they can access it when they need it and where they need it. No need for a bank or an app. For industry, it helps boost sales and customer loyalty. Adding financial services to their offerings, enterprises help customers buy products and services easily, besides helping them collect payments faster and with more efficiency.

Thus, embedded finance is mutually beneficial to both non-traditional financial service providers as well as banks, because the latter perform the customer-facing interface to distribute products and services. In contrast, banks function as the engine room. By leveraging this additional channel, banks efficiently deliver financial services on scale at reduced cost. This allows banks to optimally utilise their infrastructure without worrying about marketing products via their distribution networks.

The impact of embedded finance on banking
The embedded finance business is also a threat to conventional banking due to growing competition from non-financial companies offering these services. Banks must carefully consider and define their roles within the embedded finance value chain. Here’s how:

Banks have various strategies to navigate the digital landscape. One approach involves serving as an ecosystem curator, where they integrate financial services within a unified digital ecosystem, enhancing customer control but potentially limiting outreach to new clientele. Alternatively, banks can act as back-end capability providers, collaborating with digital platforms to offer foundational capabilities, thus extending customer reach while ceding control over the customer experience. Additionally, banks can opt to be pass-through partners, joining forces with digital platforms to incorporate branded products, enabling them to leverage their technology and maintain a degree of brand connection with customers.

A three-stage approach to unlock the benefits of embedded finance could lead banks onto the path of peaceful co-existence. They should define their strategy after assessing the existing and prospective capabilities, understanding customer requirements, evaluating opportunities for value creation, and establishing clear milestones and objectives. Then follows a go-to-market strategy that involves choosing their roles within the value chain, their product offerings, target markets, customer segments, and strategic partnerships. Finally, they prepare for implementation by assembling dedicated product teams, crafting sustainable business models, determining necessary technological resources, and finalising detailed rollout plans.

The future of embedded finance
Without a doubt, embedded finance will have a profound impact on the financial sector as banks adapt to a new landscape by developing their own set of embedded finance models in tandem with non-finance companies. The focus will be on small and medium businesses (SMBs), that are emerging as prime customers. This is another significant shift in the banking business model where non-traditional finance providers act as intermediaries to integrate their services onto a platform, leading to a more contextual and user-friendly experience for enterprise customers and driving market share growth.

Banks now face the imperative to adapt and capitalise on this emerging trend by positioning themselves as platforms, allowing third-party companies to tap into their APIs and offer value-added services. Failure to do so may lead to a potential loss of up to 8% of their revenue streams from the SME segment, highlighting the urgency to respond to change.

Embedded finance also helps improve financial inclusion via innovation, making products and solutions available to underserved populations. Through partnerships with non-financial companies, banks can develop new and innovative financial products and services.

Embedded finance is a trend that can transform the banking industry. For this to happen, banks must adapt to the changing landscape by integrating their embedded finance capabilities with non-finance entities. This would result in a better customer experience for both individuals and enterprises and provide a growth fillip to the banks.

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