Blogs > What is embedded finance, and how can it change the future of banking?
26 setembro –

What is embedded finance, and how can it change the future of banking?

Embedded finance is emerging as an innovative way to streamline customers’ financial journeys. But how does it work?

Alexander Hamilton
4 min

The acceleration of digital financial services in the past few years has created innovative new ways to interact with the end consumer. Users now demand a seamless experience in all steps of their journey online, from product selection to payment authentication. Pop-ups and new windows, once tolerated, are now an irritant.

Step up to the plate, embedded finance. An emerging method for providing straightforward and seamless financial options for customers, it’s making waves in the industry.

What is embedded finance?

Embedded finance allows non-financial companies access the wider fintech and banking ecosystem. Using APIs, they gain access to specialised tools by piggybacking on regulated providers. These tools can build financial products without needing compliance or development costs.

A perfect embedded finance marketplace means every brand and app can provide a form of financial service to users. Taxi companies can create credit cards for their drivers, or retailers can offer customers insurance at the point of sale – all without applications, long onboarding processes, or stacks of forms to fill in.

The services available aren’t limited to retail consumers and payments. An embedded finance product can also include lending, wealth management and investments. Invoice financing, another possibility, allows businesses to cover gaps in cash flows and remove the need for a potentially costly bank loan.

Embedded finance provides users with uninterrupted customer journeys from product selection to sale. The demand for these services is already high and increasing. More than 50% of European business leaders want to launch embedded finance schemes. 67% of UK adults want financial options provided seamlessly.

Embedded finance vs banking-as-a-service

Both embedded finance and banking-as-a-service (BaaS) allow third parties to provide financial services. However, there are some key differences between the two, and each has its own specific role to play in the fintech ecosystem.

Embedded finance focuses on consumer-facing businesses. It allows the provision of financial products at the point of service – as a customer makes a purchase or decision. It keeps a consumer attached to a provider, preventing them from going elsewhere for a supplementary product. Typically the provider of embedded finance will be a separate brand from the merchant.

BaaS enables new digital banks or non-bank institutions to provide financial services. BaaS enables a firm to provide a bank account or credit card, white-labelled by a traditional partner. It is a back-end functionality and foundation on which firms can build traditional financial products. The client controls the brand and often displays the services as their own.

Despite these differences, the two are interconnected. BaaS enables embedded finance, while embedded finance builds on BaaS to create integrated financing.

Embedded finance opportunities for banks

Traditional financial institutions recognise the potential for embedded finance. 82% of banks earmark it as an important revenue stream for the future. The market is expected to be worth US$ 138 billion by 2026.

Some argue that embedded finance eliminates the need for banks. Yet traditional lenders remain crucial to integrated financial services. Banks will remain the critical foundation of embedded finance for years to come. So how can they take advantage?

Providing effective embedded finance requires retooling existing business models. Instead of building and pushing products, it involves providing core functions at the point of acquisition. It is a servicing of high-volume, low-cost interactions.

Banks must capitalise on their ability to create relationships with consumers and businesses. They must assess their own technology and decide whether it has the capability, flexibility, and scalability to grab the opportunity presented to them. An API-driven service requires an API-native banking system, ready and able to connect to myriad services and provide services that future customers demand.

Want to know how Pismo can help you build fantastic fintech products? Read our explainer to find out.

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