Embedded Finance: The Next Big Thing in Financial Services & Why You Need to Pay Attention

This is what is referred to as embedded finance and it can be broken down into three broad categories:

Banking as a service – this is where the bank embeds and white labels its services and places them into a non-banking domain

Open banking and API – When a bank opens up its technology stack and makes it available to a third party non-financial brand

Ecosystem or platform banking – The reverse of traditional embedded finance, such as where a financial brand sells the product the finance is used to purchase, like a car, house, etc.

In 2022, as the financial industry continues to diversify, companies in every industry and at all levels of maturity are increasingly considering and preparing to launch embedded financial services to allow them to offer greater levels of flexibility to customers.

Why Embedded Finance is the Next Big Thing

60 per cent of Southeast Asians are currently underbanked or completely unbanked. In areas such as the US, Europe and Japan, a credit card is the simplest way to pay online, but in Southeast Asia where the market operates much differently, only 3 in 100 people own a credit card. A lack of awareness and trust in traditional banking institutions is to blame for this pattern, but whatever the cause, it presents an enormous gap in the financial market which banks are simply unable to fill.

What customers expect from the companies they do business with is compounding this trend and driving more interest in embedded finance as part of a larger portfolio of offerings.

Chief among these is the way customers now expect more integrated experiences when they interact with a brand. According to research by McKinsey, customers are flocking to companies which can meet all their needs in one place. Think about booking a flight for example – giving customers the ability to purchase additional products such as travel insurance at the same time can boost their experience and provide the airline with an additional revenue stream.

Image Source: https://www.cnbc.com/2022/01/26/walmart-backed-start-up-is-acquiring-two-fintech-companies-even-and-one.html

Also consider the news that Walmart is building a financial-services offering with financial-technology investor Ribbit or Ikea’s recent announcement that it is purchasing 49% of its banking partner.

It’s too soon to tell exactly how this market will evolve, but it’ll likely come down to two possibilities:

• Banking as a service and API banking will become as ubiquitous as online or mobile banking and be a channel every bank must build and maintain

• The market will be prone to returns to scale, much as cloud computing is dominated by big players

The former will require banks to distinguish themselves based on products, rates, reach, etc. much like they presently do and add embedded functionality to their existing model. However, the second will create a winner takes all environment where a select few BaaS providers will gain an almost insurmountable advantage due to being ahead in factors such as technology, analytics, and cost structure.

Whichever possibility takes root, one thing is for sure – embedded finance is here to stay and will likely proliferate even further as customer expectations align with those brands which are able to offer them.

Why should banks embrace fintech partnerships?

The increasing number of fintechs being established every year means they are searching for banking partners to help gain access to bank accounts, payments, and lending services.

Tech companies and other brands in the space have access to amazing ideas and technology which can offer customers unique and transformative experiences but are unable to become banks themselves in markets where the regulatory environment is high. However, with BaaS infrastructure solutions, regulatory support, and funding sources from registered banking brands, they can overcome these barriers and bring their massive customer bases into the market.

Singapore based and artificial intelligence powered automotive marketplace, Carro has used embedded finance to transform from a simple used car dealer to a multi service brand offering a range of products including financing, insurance, and roadside assistance. In 2017, 70% of Carro’s revenue came from its embedded finance services and the company was assigned unicorn status in 2021.

Image Source: https://techcoffeehouse.com/2021/02/27/carro-develops-seas-first-ai-driven-customer-service-voicebot/

Singlife’s 2020 acquisition of and merger with insurance brand Aviva Singapore has empowered it to offer its customers a comprehensive suite of financial products, such as Life, Health, and General insurance and is one of the APAC’s largest providers of Employee Benefits insurance. Alongside these insurance products, Singlife also offers investment solutions, including mutual funds and unit trusts, through its dollarDEX and Navigator platforms.

Uber might not be having a great time in the news right now, but Singapore-headquartered ride hailing and delivery competitor, Grab has been seeing great results by expanding its offering to include embedded finance experiences such as allowing its drivers to pay as little as ten cents a trip to buy critical illness coverage under a new micro-insurance plan. With each trip, drivers can accumulate up to $200,000 in coverage over a 360-day period.

These are just three examples of how fintech brands are seeing impressive results with embedded finance and should stand as testimony why banks in 2022 should be seeking to embrace partnership opportunities.

To find out how banks can make the most of the possibilities offered by embedded finance and fintech collaboration,