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Frederrick Hamann

Embedded finance: how traditional banks can respond to this new trend

In recent years, embedded finance has been on the rise. This could pose a challenge for traditional banks. Here are the ways banks can deal with these changes.

A popular example of embedded finance in action would be paying for a ride with Uber. When you get to the end of your journey, the integrated systems within the Uber app are already set in place. These systems provide a seamless experience without the need to pull out your credit card. It also gives the driver the correct paid amount for the ride after completing the route.

According to Business Insider, embedded finance will reach just under $230 billion in revenue by 2025. This is a noticeable contrast from $22.5 billion in 2020, with a significant increase of about 922%. So far, we’ve seen Platforms like Plaid, Stripe, Square, and Apple Pay gain much success. Now, as a result, fintech companies are pouring more investment efforts into this growing market.

What is embedded finance?

Embedded Finance refers to the provision and the seamless implanting of financial services into non-financial platforms. An example would be the merging between a non-financial service provider, a retailer for instance, and a financial service. Examples of these financial services could include lending, payment processing, investment, or even insurance services.

In other words, embedded finance is when a non-financial company or ecosystem integrates a financial service. This allows you to do things like, pay for a sale online without entering your banking details on the spot. It also allows things like taking out a consumer loan within the platform, among other financial service options.

Factors causing the rise of embedded finance

Essentially, one word that sums up the reason for this rise is simplicity. Now more than ever, people are gravitating towards a more convenient option when it comes to their user experiences. Consumers now want a more seamless digital experience that does not require them to leave their favourite platform. As a result, they’d rather stick to a platform that better understands their needs and preferences.

In addition, more companies are becoming increasingly aware of the benefits of technology to provide Banking as a service (BaaS). And now they are automating and streamlining their services accordingly. In order to stay at the forefront of this growing digitisation wave.

Everyday examples of embedded finance

Another notable example of embedded finance would be the use of BNPL (Buy Now, Pay Later) platforms like Klarna. This company focuses on providing a more convenient sales process. They achieve this by facilitating affordable payment plans. This gives customers the option to pay for their products after they’ve received them.

Other everyday examples include payment options provided by Amazon within their e-commerce app. And also the AirBnB apps that provide embedded banking for their customers to rent vacation homes when needed.

Future trends to watch

We are beginning to see the impact and trajectory of embedded finance in many ways which include:

  1. The increase in demand for more digital ecosystems: This will be a growing trend as consumers are seeking more direct and simplistic experiences.
  2. The increase in openness: The development of banking APIs and universal access are on the rise. Regulatory trends like PSD2 and open banking play a big part in making that happen.
  3. Increasing trust in financial technology companies: Many brands that have garnered higher trust levels, leverage them into offering more financial services.

Examples of embedded finance use cases

Here are some major embedded finance use cases as embedded finance continues to transform our daily user experience:

  • Embedded Lending: Examples of embedded lending use cases include companies like AfterPay and Klarna. These companies allow consumers to split online payments into smaller monthly payments.
  • Embedded Payments: Companies like Starbucks use embedded payment processes to allow customers order and pay from their phone app.
  • Embedded Investments: Embedded finance also plays a major part in the investment sector. Companies like Acorns provide people with the chance to invest their spare change by rounding up purchases.
  • Embedded Insurance: In the automotive industry, companies like Tesla offer almost instant insurance programs. These programs allow their customers to buy the right amount of insurance coverage directly from the company.

Ways banks can rise up to the challenge

Banks can still play the technology long-game too. They can provide their primary offerings using a strategy known as embedded fintech. This will help banks bring in more revenue with the use of fintech products and services.

Unlike embedded finance that enables non-financial platforms to provide financial services. Embedded fintech enables traditional financial institutions to continue providing more customer-centric banking services. This is achieved by delivering integrated fintech products and services that are relevant to consumer needs by the banks. All of this is done, with the end goal of staying up to the challenge of this new trend, and to ultimately keep up with the competition.

Although embedded finance may be viewed as threatening the stability of traditional financial institutions. Embedded fintech, however, does the opposite. Embedded fintech provides the traditional banks with many more opportunities. These opportunities may include cryptocurrency investing, wealth transfer management, bill negotiation services, data breach & identity protection.

Other fintech opportunities also include providing reliable suites of products based on detecting and analysing recurring payments. Solutions like subscription management, creditworthiness assessment, and personalised selling drive revenue for banks and increase customers’ digital engagement.

In summary

Nowadays, consumers are requiring more and more convenient digital experiences. And now more than ever, it is becoming a reality as embedded finance continues to shape the world markets. These trends seem to threaten the future of traditional banks. But not without the implementation of embedded fintech systems. This allows fintech companies to provide the necessary tools needed to equip the banking industry. This will, in turn, enhance the banking experience for their customers.

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