Surely there was a catch? But the idea of helping customers get what they want through a payment plan is nothing new. Many big department stores of yesteryear offered private-label credit cards through which shoppers could purchase and pay off – again often with very little to sometimes zero interest.
The benefit to both parties is obvious – a larger basket for the retailer and an affordable route for shoppers.
What is new and exciting about this form of finance is how it will play out with regards to the regulatory processes that will need to adapt to this new space and who will come out on top: the trusted bank, the digital natives or the fintechs and e-commerce providers. Here’s a snapshot of the current landscape, taken from our in-depth Partner Predictions Report.
What it is and why it matters
Celent defines embedded finance as ‘enabling access to financial services products at the point of need within the digital customer journey, curated by a nonbank or third party.’ While financial institutions are innovating by creating marketplaces and ecosystems for banking and non-banking products, non-bank digital platforms have now become a new distribution space for banking services. It’s technology that’s driving this evolution, which requires the connection of the back office core systems with front-facing customer engagement through a composable platform.
BaaS (back-end as a service) is rated the second-biggest product investment priority for the financial services industry, with embedded finance close on its heels at fourth place. This ranking supports the idea that for any bank wanting to invest in BaaS, embedded finance is a non-negotiable.
According to the World Retail Banking Report, over 70% of banking executives believe embedded finance can drive innovation, expand customer bases, and diversify revenue sources. By 2030, approximately 50% of loan originations and payments are expected to shift to non- financial service channels.
Gareth Wilson, Executive Vice President and Head of UK Banking & Capital Markets at Capgemini is on board with both areas; “by 2030, approximately 50% of loan originations and payments are expected to shift to non-financial service channels. This presents substantial revenue potential, forecasted to reach USD 588 billion by 2030.”
Making the changes to seize the opportunity
Traditional banks will need to make considerable changes to the technology in their core platforms if they are to engage in embedded finance and remain at the forefront of customer demand.
Nicholas Holt, Senior Director Solutions Engineering at Marqeta reasons, “most products or services in the world have a financial component required, and going forward, brands are likely to want the payment fees embedded into that experience, meaning almost every company is likely to become a financial services company. As a result, organisations will be looking to build out a range of embedded finance solutions to boost customer loyalty and elevate their customers’ experiences.”
The following are just a few of the potential issues banks may face without an innovative partner with modern core systems and platforms:
- It will be expensive and time consuming to make changes or create new products with a legacy platform
- Older technology will struggle to provide granular composability and won’t provide enough connectivity to other technologies through APIs
- Monolithic, batch-based systems of the past are unable to handle or support real-time data or support for payments
- The time to scale with traditional infrastructure is a major barrier
However, leveraging a modern core will deliver massive benefits to banks to overcome these issues, including
- Flexible product capabilities at the speed of fintech
- Agile product creation, which will allow institutions to go to market faster with products and third parties
- Core platforms that can handle events in real time and provide instant action to third-party channels
- Cloud-native cores allow for rapid/lean deployment and quicker time to value
- Modern cloud cores fully leverage microservices to deliver functionality and enable a more open and reusable set of components
Embedded finance and BaaS represent a game-changing opportunity, and institutions should begin to think about how they want to engage in the ecosystem. Success in this space will rely on strategic tech partnerships and collaboration, producing work that is compliant, adheres to data security and evolving privacy laws and engages actively in shaping regulatory frameworks.