How is embedded finance changing the financial services ecosystem?

As an industry, we talk a lot about the threat that financial institutions face at the hands of infrastructure challenges. The gap between the expectations around flexibility and speed from customers and business, and what banks’ legacy tech allows them to deliver is a hot topic, especially with FinTechs being better positioned to respond to these demands. But it’s not the only issue facing incumbent financial institutions. There is another type of competitor emerging – the non-financial competitor.

The emergence of embedded finance – the integration of financial services or tools within the products or services of a non-financial organisation – is creating a new competitive landscape in financial services.

The race to create ‘customer stickiness’

Banks, Payments businesses and FinTechs are all under pressure to make their operations as agile as possible, responding to rapidly-evolving market needs. In order to build the revenue opportunities from each customer, they are also competing to create the greatest ‘customer stickiness’ by widening the scope of what they offer.

This move is also motivated by the fact that non-financial companies have identified the opportunity to enhance their service offering by adding white-labelled embedded financial services.

These companies understand that they need the help of forward-thinking financial institutions to make this possible. But in order to take advantage of this opportunity, there needs to be a substantial shift in how the global financial industry operates.

Real-time payments continue to be a real problem

Archaic infrastructure is still an issue. Today’s banks typically operate on a traditional batch model and their technology is fragmented, with no central data source. In recent years there have been attempts to solve this problem, but essentially all that’s been achieved is to put wrappers around the same underlying old bank infrastructure. Payments might have become more user friendly but the ability to clear large amounts of payments instantaneously is a way off.

A financial institution that wants to extend the scope of its offering, therefore, either needs to obtain its own banking licence, or collaborate with a banking partner, to get access to the liquidity, licensing and regulatory services needed.

There are numerous advantages in a tech-agnostic platform being underpinned by an account infrastructure from which all services can be delivered. New solutions can be added quickly as there won’t be a need to establish a new service relationship each time. This of course helps these businesses to achieve that all important ‘first to market’ position.

What the future looks like

This new category of financial infrastructure providers is likely to mean that we’ll see a levelling out of the playing field for both established financial institutions and non-financial institutions that wish to build financial services into their proposition.

FinTechs can and are offering their customers services which traditionally would have only been offered by banks. In turn, banks can speed up the development of their services without being slowed down by legacy tech, and brands that want to build customer loyalty now have options to do so with embedded finance.

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