Banking is no longer about having a sprawling network of branches and core banking systems. Today, anyone can be a banker, if they have the right code. The rise of fintech and changing consumer preferences have caused global non-banking entities like Amazon, Walmart, Mercedes, and IKEA to integrate financial offerings (banking, credit, insurance) on their customer-facing platforms. This has, in turn, empowered them to cut out the traditional financial middleman and plugging in software from tech start-ups. For traditional banks and financial institutions, however, this trend threatens further alienation of their customers. This point-of-view paper explores what led to the rise of this trend and what a new financial ecosystem born of this disruption could look like.
Towards the end of H1’18, the finance and retail sectors were abuzz with speculations around Amazon’s “early talks” with JPMorgan Chase and what it meant for the retail and banking industries. The objective of the talks was to offer checking account-like products targeted at young customers, typically those with no other banking accounts. This was a futuristic idea that came at a time when Amazon’s intentions to step beyond the e-commerce and into the realm of banking and financial services had already been cemented. In the months preceding the discussions, the retail behemoth had had its first taste of finserv and fintech success with products like Amazon Pay, Amazon Lending, and Amazon Protect, among a few others.
Amazon’s efforts to integrate financial offerings within its e-commerce platform was not an isolated move. Around the same time, and in the months followed, several non-banking entities had begun focusing their efforts on breaking into the financial service space. This included companies like GE, IKEA, and Walmart. And all of this had been made possible by embedded finance – a concept that would change the financial services ecosystem forever. And the reason they are expanding into the space is because of multiple advantages
- Improved customer experience with the brands
- Banks benefit by incorporating cutting-edge fintech products on their own platforms, opening up opportunities in subscription management, identity protection, wealth management, and cryptocurrency
- Banks can keep up with emergent financial disruptors – like neo-banks and BNPL providers
- Helps in pushing the banks closer to a direct customer interaction
- Banks get into the front-end of the finance value chain and, subsequently, avail mountains of valuable user data, which can further be mined.
The Embedded Finance Disruption
The advent of embedded finance changed the way consumers interact with brands to the extent that it has become a necessity. According to a report by ResearchAndMarkets.com, the embedded finance industry in Europe is forecasted to grow by a CAGR of 21.4% during 2022-2029. From the perspective of non-banking entities embracing embedded finance makes strategic sense. Incorporating banking software directly into websites or mobile apps eliminates the need to redirect users (and revenue) to third-party platforms and improves CX (ease-of use).
Embedded finance or embedded banking is the seamless integration of financial services into a traditionally non-financial platform. It enables customers to access financial services within the app and in context.
As it currently stands, only a handful of non-financial entities offer embedded finance facilities to consumers. There is, however, a potential for exponential growth. Oracle estimates the global addressable market opportunity for embedded finance could exceed US$ 7 trillion in the next decade; that’s twice the combined value of the world’s top 30 banks. At the same time, the addition of the transaction interface also pushes the bank further away from direct customer interaction – away from an exponentially growing data reservoir.
At a large enough scale, traditional banks face a serious threat of losing out on the front-end of the finance value chain and, subsequently, mountains of valuable user data. But behind the hype, there is a new financial ecosystem brewing that could see banks innovate to meet the rising demand for embedded finance. But to understand how such a future would come to pass, it is necessary to reflect on the factors that led to the rise of embedded finance.
The Regulation and The Demand: An Infallible Duo
Traditional banks have always relied on a centralized hierarchy, business models, and information systems. But the sudden and rapid rise of digital channels and apps led to a shift in consumer preferences pushing banks to explore and offer multi-channel customer journeys. But the shift wasn’t happening fast enough.
In 2019, policymakers in the EU established a set of regulations that required banks to securely open their data to third parties. The objective of this was to accelerate the development of innovative financial products for consumers. The initiative was pushed out in the EU through the Payment Service Directive 2 (PSD2).The PSD2 regulations marked the beginning of a new era: the era of open banking. The regulations led to the rise of two new regulated, API-enabled entities and stablished the foundations of embedded finance
Payment Initiation Service Providers (PISP)
Allowing third-party companies to initiate payment on behalf of a consumer without them having to visit their online bank’s portal.
Account Information Service Providers (AISP)
Allowing third-party companies to access a consumer’s bank, as well as display information relating to their account.
For consumers, this meant access to an easy-to-use multi-channel ecosystem that simplified transactions and account related queries. For banks, this meant providing application programming interfaces (APIs) to third-party providers for a seamless consumer experience. Today, several trends have emerged out of this sea of events that suggest embedded financing could indeed be here to stay. Take the instance of growing customer demand for integrated – simple, holistic, embedded, direct – experiences. Research suggests that an ever-growing segment of consumers prefer a multiproduct consumer experience. Other factors include the demand for new technologies to augment financial services, the search for new revenue models, and the changing trust levels in financial services
BaaS: The Rise of a New Ecosystem
Banks can longer ignore the embedded finance imperative. All evidence suggests a future where embedded finance dominates the financial front-end. The fear of alienation from the consumer prompts many banks to shy away from distributing their products through a third-party partner. However, consumer adoption will eventually hit a critical limit beyond which banks will no longer be able to sustain a competitive stance. On the other hand, to meet the rising demand for embedded finance, banks are pivoting towards a new kind of offering: banking-as-a- service (BaaS).
The BaaS model provides non-banks with bundled offerings as white-labeled or co-branded services for the end consumer. And the global market for BaaS is expected to reach nearly US$ 2.3 trillion by 2028. According to Dealroom, embedded finance and BaaS have attracted over US $6.1 billion (US $3.1 billion and US $3 billion, respectively) in funding and grew 300% in the last year alone.
To offer BaaS, banks need a digital makeover. But the pursuit to keep up with emergent financial disruptors – like neo-banks and BNPL providers – had already prompted banks to undergo that digital transformation and modernization. As a result, a majority of banks are digitally mature enough to compete in the BaaS market. In addition to this, banks can also incorporate cutting-edge fintech products on their own platforms. This could open up opportunities in subscription management, identity protection, wealth management, and cryptocurrency investment.
By itself, BaaS is a low-yield, high-volumes game. And while the market is still nascent, the rapid growth of BaaS and API banking could become ubiquitous, making long-term differentiation a little difficult to achieve. In such a scenario, banks will need to continue distinguishing themselves through products, rates, and reach, among other such dimensions.
Xebia: Bridging the Gap Between the Now and the Next
Xebia’s holistic suite of financial solutions enables banks to provide a personalized, digital banking experience. Built on a modern, data-rich technology core, Xebia’s embedded finance and BaaS enabling solutions help banks develop the technological capability to distribute services effectively through APIs.
Want to know more about how Xebia can help you take advantage of the booming embedded finance and BaaS
landscape? Reach out to us at: https://xebia.com/apac/about-us/contact/
Amazon in talks with JPMorgan to offer bank accounts:
Europe Embedded Finance Market Report 2022:
Why embedded finance is the future of lending and how businesses can capitalize on it:
Payment services (PSD 2) - Directive (EU) 2015/2366:
Ecosystem 2.0: Climbing to the next level:
Banking-as-a-Service (BaaS) Market Size And Forecast:
Dealroom Talks: the rise of embedded finance: