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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 can embedded finance help non-finance brands to offer financial services to customers and how can it 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 the 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 expenses and resources. The 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.

Key Components of Embedded Finance

  1. APIs (Application Programming Interfaces): At the core of embedded finance are APIs, serving as the technological backbone that facilitates seamless communication between different systems. These APIs enable the exchange of data and functionalities, allowing non-financial platforms to effortlessly embed financial services.
  2. Digital Payments: Embedded finance has revolutionized payment methods, from one-click transactions to digital wallets. Users can complete transactions without leaving the platform they are using, streamlining the payment process.
  3. Lending and Credit: The integration of lending services into e-commerce platforms has become commonplace. Embedded lending allows users to access credit seamlessly during the checkout process, enhancing the overall user experience.
  4. Insurance Integration: Platforms can now offer embedded insurance solutions, providing users with relevant coverage based on their activities or purchases. This integration simplifies the process of obtaining insurance within the platform.

Common Challenges in Embedded Finance

  1. Regulatory Compliance: The financial industry is subject to rigorous regulations, and ensuring compliance with diverse laws across jurisdictions poses a significant challenge. Navigating this complex regulatory landscape demands a nuanced understanding of financial laws and diligent adherence to compliance requirements.
  2. Security Concerns: With the integration of financial data into non-financial platforms, the risk of data breaches and cyber-attacks intensifies. Maintaining robust security measures to safeguard sensitive financial information is paramount to building user trust and ensuring data integrity.
  3. User Trust: Establishing and preserving user trust is critical in the financial sector. Embedding financial services within non-financial applications necessitates transparent communication about data usage, security protocols, and the overall user experience to foster confidence among users.
  4. Interoperability: Achieving seamless interaction between embedded finance solutions and various systems and platforms requires addressing the challenge of interoperability. Standardized protocols and effective collaboration among different stakeholders are essential to overcome this technical hurdle.
  5. Technology Infrastructure: Implementing embedded finance necessitates a robust and scalable technology infrastructure. Ensuring that the systems can handle the integration of financial services without compromising performance is a crucial consideration.

Future of the Banking Industry

The constant technological development in the financial industry may act as a threat to traditional banks. This is because 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.