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General

Embedded Finance is Changing Banking for Firms and Customers

Embedded finance is streamlining banking and digital payments for consumers who need secure digital banking services. At the same time, it is facilitating growth and innovation for new brands and launching new products and services with ease. Almost a decade ago, challenger banks and neobanks gave birth to the FinTech revolution. As technology evolved, the role of FinTechs became more prominent in the industry.

Traditional banks took notice of the potential of FinTechs and how they can help in providing a seamless customer experience during onboarding, digital banking services, and payments. After the Covid-19 Pandemic, the digital banking revolution was pushed forward. Today, there are apps for almost every financial service customers can think of including insurance, investments, mortgages, pensions, and digital assets. The next step in building seamless digital banking services is Embedded finance.

So how embedded finance can help non-finance brands to offer financial services to customers and how it can help in making banking services seamless for consumers.

What Is Embedded Finance?

The simplest way to explain embedded finance is in-app payments whether a customer is using a taxi app “Lyft” or buying takeaway through a food application. Embedded finance involves integrating a financial service into a non-financial application. For users, it provides quick and seamless payments and an incredible customer experience. 

There’s no limit to the use cases of embedded finance and the primary function of embedded finance is providing seamless customer payments. But the use case of embedded finance is starting to go beyond just payments and more and more non-financial industries are entering the financial ecosystem to provide better digital banking services to the customers. By properly implementing embedded finance, all banking tasks can be achieved virtually, such as investments, borrowing and lending, insurance, credit card applications and so much more. 

Embedded Finance, FinTechs, and Non-Finance Companies

With the constant developments in the banking sector, it is possible that the current landscape of the financial industry will be completely different in the next 10 years. Unlike the digital transformation of the banking industry, embedded finance has had a slow start/ Over the last couple of years, the use of open banking APIs for customer onboarding, KYC verification, payments, and fraud prevention has become standard.

Open Banking APIs are essential for embedded finance to survive and grow as open banking APIs allow software systems of different companies to seamlessly communicate with one another. Open banking has also gained momentum all over the world as it opens the door to open finance. 

As embedded finance services rely on APIs and BaaS (Banking-as-a-Service) to integrate financial services into non-financial services, any brand or company or FinTech can now offer a plethora of financial services without actually having to convert into a bank. All this transformation in the industry offers customers more choices and a seamless digital baking experience. 

Businesses operating outside of the financial industry can use open banking APIs and embedded finance to deliver financial services and reach out to the unbanked and underbanked population. Tesla’s Insurance package is the prime example of non-finance businesses venturing into the financial industry. Embedded finance is a great opportunity for brands as they can build new products and services and reach out to a whole new segment of customers to increase their profits.

Benefits of Embedded Finance: Customers and Businesses

The benefits of embedded finance go beyond just opening up new revenue streams for businesses. Even a few years ago, the development and launch of a new financial product required significant investment in terms of both money and manpower. Businesses had to overcome several challenges just to put out a new service in the market. That has changed because of embedded finance, as FinTechs now handle the development, integration, and compliance factors, and brands can rent or buy the financial product and provide their customers with a new segment of financial services.

As for the customers, the benefit is in terms of convenience, security, and seamless payments from anywhere, anytime just by using smartphone apps. The reason why customers across the globe have come to love embedded finance is that they can conduct every activity with a familiar UI. This leads to elevated levels of positive customer experience, as customers don’t have to be redirected to some complex and difficult-to-use webpage to make payments. 

This doesn’t mean that traditional banks will cease to exist altogether, while open banking APIs and embedded finance are being utilized on a global scale, millions of customers still only trust banks to handle their money.

How Embedded Finance and FinTechs Enhance Banking Industry?

1. FinTech is a Growing Ecosystem

There are tons of technological ecosystems that are turning heads, such as InsureTech, PropertyTech, InvestTech, but FinTech is a culmination of all these ecosystems. Whatever the new technology, embedded finance will still provide the foundation for a new ecosystem. Account aggregation and online customer/ID verification can’t be possible without FinTech as a foundation.

2. Embedded Finance Eliminates Complexity

All the embedded financial products are ultimately all about removing complexity from financial activities. Companies use embedded financial components to remove complexity from the process and increase user experience. 

Instead of visiting another webpage, a consumer gets access to payments in the current ecosystem. This increases customer experience, strengthens security, and reduces the complexity of the process.

3. Embedded Finance Will Offer Better Financial Control

In this newly growing financial landscape, customers need better control over their finances. With customers becoming more comfortable with technology, their outlook on their personal finances is also changing. It’s critical that embedded finance applications leverage as much customer data as possible. This provides customers with more control over their financial data.

4. Use Existing Resources

Most businesses shy away from embedded finance because of the expenses. But, the truth is that organizations don’t need to worry about the expenses and resources needed to acquire new customers and build high-end infrastructure. By including a financial angle to create new financially embedded products, you can easily modify the current system.

5. Improved Customer Experience

Embedded finance helps companies create a seamless journey for their customers. offering more services to the customers will eliminate their need to deal with third-party vendors for completing their transactions. This leads to higher profits, and the direct connection between customers and the company will improve the customer experience.

Future of the Banking Industry

Without a doubt, the constant technological development in the financial industry may act as a threat to traditional banks as tech-savvy customers will choose digital services over physical ones. The truth is that neither banks nor FinTechs can survive without the other one. FinTechs don’t have the expertise or resources like bank account verification software or online KYC verification software to keep up with KYC and AML compliance changes and handle millions of customers. Traditional banks on the other hand don’t have the expertise in developing strong and robust digital platforms for their customers.

In this situation, the ideal step to enhance the financial industry for both businesses and customers is to build strong Bank-FinTech partnerships that can take advantage of the best features. 

Categories
AML

New EU Anti-Money Laundering Directive

To make the European Union AML regulations and Countering the Financing of Terrorism (AML/CFT) stronger, the European Commission introduced a new EU AML proposal on July 20, 2021. The European Union AML directives consist of four legislative proposals. These proposals, more often known as AML Legislative Package, have been published to streamline compliance processes by creating a harmonious and consistent framework of AML/CFT rules throughout the EU. 

These changes in the EU AML proposal will help you tackle the issues related to the detection of suspicious activities and transactions, and it’ll also eliminate the existing loopholes that criminals exploit. As stated in the EU’s Security Union Strategy for 2020-2025, by enhancing the country’s AML/CFT framework, it is possible to provide Europeans with a chance to protect themselves against fraudulent activities.

Four New Legislative Proposals

1. A New EU AML Authority (AMLA)

The European Union came into the global spotlight after its members launched an investigation into Denmark’s largest bank, Danske Bank which supported suspicious transactions worth 200 billion euros through its small Estonian brand for 8 years. In the past, the EU had to rely on national authorities for the implementation of AML policies in such situations.

To fix this challenge, the formation of a new Anti-Money Laundering Authority (AMLA) has been made the focus of the new AML proposal. The main purpose of AML is to address the current weak points of the AML/CFT regulation within the EU. AMLA will act as the central authority that coordinates between national authorities to ensure that anti-money laundering regulations are applied throughout the country.

2. Single EU Rulebook for AML/CFT

The second proposal suggests the transfer of provisions from AMLD5 to a regulation that is applicable to all the EU Member States. This proposal is included in the process to address the European Commission’s concern while the AMLD4 has widespread application and the directive is currently fragmented. 

Having a single rulebook for AML/CFT will help in creating harmony. For example, it will provide elaborate rules on CDD (Customer Due Diligence), Beneficial Ownership verification, and authority tasks of financial supervisors and FIUs. It’ll help existing centralized bank account registers become interconnected and provide access to law enforcement agencies. This will enhance the fraud investigations and recovery of stolen assets, but will also create transparency in the AML frameworks.

3. Expanding Traceability Requirements on Crypto

When it comes to the crypto industry, AML/CFT rules in the EU are only applicable to specific types of service providers. The fragmentation allows criminals to exploit the loopholes to their advantage. The European Union’s report states:

“The lack of such rules leaves holders of crypto assets exposed to money laundering and financing of terrorism risks, as flows of illicit money can be done through transfers of crypto assets.”

The new European Union Anti Money Laundering proposal aims to bring the cryptocurrency sector under the scope of AML regulations. All the service providers are thus mandated to perform due diligence on their customers. Additionally, anonymous cryptocurrency will be prohibited. These suggestions have been added to ensure complete traceability of cryptocurrency transactions, allowing for timely prevention and detection of money laundering. Due to the initial anonymous nature of cryptocurrencies, they quickly became a hub for money laundering.

4. AMLD6 Revokes AMLD4

The last proposal of AML regulation suggested that the 6th Anti-Money Laundering Directive will annul the current AMLD4. This directive will contain new guidelines that will be transported into the national law, such as the AML rules on national supervisors and FIUs in the member states. 

To put it simply, the new Directive will update the relevant provisions of AMLD4, and add some other amendments to it. The AMLD6 also includes the clarifications on the powers and tasks of FIUs and financial supervisors, entities that manage UBO information, the introduction of new tools to streamline risk-based supervision, and cross-border interconnection of bank account registers, and so on. All these amendments are considered vital for European Commission to tackle money laundering and terrorism funding.

Future of AML Regulations

The new EU AML proposal will be discussed by the European Parliament and council. The consultation period is set to end on 7th October 2021. 

Once the directive has been finalized, and the new AML framework has been approved, the AMLA is expected to become functional in 2024.  

Categories
Bank

Open Banking Recurring Payments and Innovation

Compare the current financial service market to the one a decade ago and you’ll see enormous changes. It’s all because of technology. When the concept of open banking was introduced in 2019, it opened the floodgates for innovation in the industry. The financial data of consumers were now open to be accessed by any authorized financial service provider and consumers themselves had more control over their data. As banks in the UK were required to let consumers share their transaction data with authorized third-party providers, the era of innovation began. For the first time, consumers were able to explore a range of alternative financial services and payment options from technologically forward FinTechs and financial institutions. 

Open banking has become fairly mainstream in the financial services industry today as more and more customers are becoming technologically demanding. It’s fair for customers to demand instant, intuitive, and convenient digital solutions that can meet their demands, both for personal and professional use. 

FinTech-based open banking innovations have changed the way customers and businesses send and receive payments. They’ve changed the way payments happen, be it one-time or recurring payments. 

The open banking recurring payment is the next step toward simplifying the online payments initiative. This provides an innovative and seamless method of the transaction on a regular basis.

History of Recurring Payments

For years, the only way to collect regular payments such as mortgages, rent, and utility bills were “Standing Orders and Direct Debits.” These two methods were the leaders of the industry but they came with their fair share of limitations. Both the methods are prone to errors as customers have to manually enter their bank data. There’s also a high rate of drop-off or abandonment during the payment process because the customers have to leave the ecosystem to set up the instructions. 

All thanks to the rise of subscription-based services, banks and eCommerce companies save a customer’s payment credentials on a file, combined with other necessary information to authorize a recurring payment. While this process seems better than Standing Orders and Direct Debits, it also leads to a poor and error-prone customer experience during set-up as customers have to manually enter the debit or credit card details.

For businesses on the receiving end, debit and credit card payments aren’t ideal. They’re expensive as businesses have to pay a percentage of the value on each transaction. With millions of payments, this can end up being a huge loss in revenue for businesses. Businesses also need to keep reminding customers to update their debit and credit card information in case of expiry. Payments can take up to 3 business days to reflect into the recipient’s account and that’s why it is essential to have a seamless recurring payments method.

Open Banking Recurring Payments: A New Era

Fortunately, open banking recurring payments are opening up new avenues for recurring payment services. It has allowed for a new method of online payments using “Open Banking APIs.” payment initiation or open banking payments are an instant, cost-effective alternative to accepting card payments and bank transfers. 

Operating separately from traditional banking card payments, payment initiations enable businesses to redirect end-users directly to their bank or building society so they can make payments seamlessly.

With open banking payment initiations, customers only have 3 steps to follow:

  • Customers have to choose their bank on the merchant’s page
  • Customers are then redirected to their banking app and authorize the payment
  • They’re then directed back to the merchant’s payment completion page. 

Customers don’t have to go through the hassle of finding their cards or manually entering debit or credit card details or account numbers. Open Banking Payments offer a customer more control over their finances compared to direct debits, enabling the transfer of money to a third-party account.

Power to Innovate

For businesses that work on a recurring or subscription-based model, and need better solutions, this exciting iteration of open banking payment initiation promises to accelerate innovation in payment experiences and promotes the creation of new types of financial products and services for the customers. 

With their wide applicability, Open Banking Recurring Payments will help businesses from all sectors streamline their long-term relationships all the while providing customers with innovative experiences.