By: Harish Prasad, Head, Banking Solutions – India, FIS
Embedded Finance’s Watershed Year
With COVID-19 continuing to impact every aspect of society throughout 2021 and now into 2022, traditional banking models have traversed through a wave of transformation. Banks have been accelerating programs to redesign their business and operating models, incorporating technologies and services which are seen as essential for customers in the pandemic-swept world. One of these is Embedded Finance, which is fast becoming the model of how banking products and services will be delivered.
Embedded Finance essentially refers to the seamless joining of a service provided by a traditional financial services provider, such as payment acceptance, with services offered by a non-financial services provider, such as an Online Merchant or an Education Services company. It allows organizations from any sector to layer in complementary financial and payments capabilities into their offerings and enhance their customer propositions.
Just as customer expectations of the digital payments experience continue to grow, expectations around embedded finance covering other financial products are fast changing. Fintechs, merchants, card networks, and financial institutions will all need to work together, embracing technology to embed products and services to provide the most seamless experience to end-consumers.
How does Embedded Finance work
Embedded finance is not necessarily a new concept, but its adoption has seen huge acceleration over the last couple of years. There are a growing number of use-cases now in the market, with Payments acceptance and Buy-now-pay-later (BNPL), which has become very prominent today. When a shopper chooses a Pay-later option instead of using their credit or debit card, they seamlessly take a loan to fund their purchase, and there is no need for direct engagement with the lender at that point in time.
Another example of everyday use is ride-sharing apps like Uber. When a customer pays for a ride-share at the end of the ride, they pay directly from within the ride-share company’s app and there is no need to switch apps to complete the payment. QR code purchases, which allow users to scan a QR code to pay for a product or service automatically is another great example of a value-added embedded finance offering.
What Embedded Finance Brings
All of these innovations allow businesses to enrich the services they offer to their customers, making financial services an integral part of their user journey. Seamlessly integrating payments into a customer’s checkout process, or by incorporating access to instant credit at the time of payment it increases the probability of a purchase being made, by greatly reducing friction.
Beyond the obvious benefits which embedded finance models offer, there are numerous other opportunities being seen. For instance, we see product bundling for products such as cars, electronics, and consumer durables via embedded insurance, and ones such as seamless embedded investing by wealth management apps offering to automatically invest spare funds based on established rules and patterns.
But it is not just customers who are benefiting from embedded finance. Businesses too are seeing that creating a streamlined and frictionless process can boost revenue streams. By embedding complementary 3rd party add-on products, businesses that own end-consumer relationships can become one-stop shops and own a larger share of the wallet of their customers – something they could not have done before unless they offered these additional products themselves. It also allows businesses to gain more insights from their consumer’s financial data. This means businesses can understand how to better serve their customers better and recommend tailored products to them as they have more visibility into their transactions.
Banks Evolving Role
Banks, as providers of financial products and services, have long formed the foundation of their customers’ finances. The shift from the physical world to the digital world has meant banks are having to update their technology infrastructure to align to the new normal. Mainstream banks are feeling the heat from nimble Fintechs who are often stealing a march over them. With consumers now able to perform a variety of financial tasks without using a bank, there have been concerns that banks could be left behind, but that is not necessarily the case.
Banks will always be around as they hold crucial licenses and the Banking franchise within highly regulated environments. But they have had to evolve their business models and are now building embeddable services for payments, savings, investments, and loans to enable partners in providing seamless banking experiences for their customers. Banks need to become comfortable with being increasingly disintermediated from owning customer relationships.
A key element of banks’ businesses will soon be about establishing banking as a Service (BaaS) infrastructure as a robust indirect channel and offering their full range of products and services for non-banks to embed into their own offerings.
SMBs Will Gain
Very often, traditional banking isn’t optimized to serve the unique needs of small businesses. While larger organizations have been able to adapt and sustain in the face of the challenges over the past 2 years, many SMBs have been left behind, struggling with a slew of underlying problems on both the demand and supply side and a rapidly changing marketplace with fin-tech and big-tech dramatically disrupting traditional distribution and servicing models.
Alternative financing, which holds the key to funding expansion for many SMBs, has helped SMBs bridge part of the gap. While many are still unable to access financing from traditional lenders, a slew of alternative options led by Fin-techs and Big-techs working in BaaS arrangements with banks and lenders at the back-end offer SMBs much-needed finance to sustain and grow their businesses.
Embedded finance-driven solutions for SMBs are becoming an increasingly competitive space with a large number of players focusing on this opportunity, and we have a more efficient market emerging which can offer flexible finance on terms comparable to what banks have been able to offer traditionally. SMBs can hopefully worry less about hunting for credit in these problematic times and instead focus their time on transforming their businesses, creating demand, and optimizing their supply-side operations.
Banks are now seeing the potential of SMBs as a segment that can drive growth, and with governmental support via credit guarantees for SMBs, can put renewed emphasis on targeting their captive SMB customers. SMBs will hopefully be better served in all of this and the results will be interesting to see over the coming years.
Embedded Finance is the Future
Embedded finance looks set to revolutionize the industry in the next 12 months. It is now time for banks and financial institutions to act and invest in the technology to deliver embedded banking and payment services. As they do so, new offerings which leverage these embedded capabilities will emerge, and these services will drive the growth of the underlying institutions, a great cycle of positive reinforcement! Embedded finance has the potential to change how financial services are consumed. How well this is productized and how transparent the offerings are to end-consumers is going to be critical to ensure that this has the support of the regulators. It is safe to say that 2022 will be a watershed year for Embedded Finance, and there are very exciting times ahead of us.
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