Named a “game-changing opportunity for banks” by The Global Treasurer, embedded finance has become a disruptive force in the financial services industry. Yet, its lesser-known counterpart, embedded fintech, presents just as many, if not more opportunities for financial institutions focused on transforming their businesses.
Together, embedded finance and embedded fintech have led to a new era of financial innovation where traditional industries can integrate financial services seamlessly into their products and services. While the phenomenon has opened doors for banks and credit unions, embedding products does not come without challenges.
Learn how businesses can leverage the evolving landscape to revolutionize the future of financial services.
What is Embedded Finance?
Embedded finance refers to the integration of financial services into non-financial products or services, such as websites, mobile apps, and business processes. While some consider embedded finance a threat to banks and credit unions, it presents them with a considerable opportunity because financial services still need to be provided by licensed financial institutions.
By leveraging APIs and partnerships with fintech providers, banks and credit unions can seamlessly offer financial services such as payments, lending, compliance, and more to their partners’ customer bases at a much lower acquisition rate. It is estimated that by 2026, embedded finance transactions will reach $7 trillion in value and account for 10% of all financial transactions in the U.S.
Who’s Using Embedded Finance?
Many consumers have already embraced embedded financial products and services from their favorite brands and are looking forward to future capabilities. Gamers are interested in in-game accounts, while home fitness fans are interested in getting health insurance based on their activity habits, and home DIYers are interested in savings accounts that automatically set aside money for large projects.
According to our report with Cornerstone advisors,
Among consumers who already get a financial product from a non-financial brand, a third said the product caused them to spend more money with the brand, three in 10 said they now choose the brand over its competitors more often, and a little more than a quarter feel more loyal to the brand.John Doe, LineThemes
To that end, brands can financially benefit beyond the initial launch of embedded products or services.
What is Embedded Fintech?
Essentially the opposite of embedded finance, embedded fintech is all about distributing products and services from non-financial institutions, such as fintech, through traditional financial institutions. Embedded fintech is known as the integration of fintech products and services into a financial institution’s product sets, websites, mobile apps, and business processes.
The integration is made possible through APIs that allow different systems to communicate and exchange data securely. By embedding financial services such as payments, lending, insurance, and wealth management into their offerings, businesses can give customers an elevated experience.
Embedded fintech has allowed consumers to better manage their finances. 47% of Gen Z and 44% of Millennials have subscribed and pay for fintech services each month. Annually, fintech spend has risen to more than $13 billion (about $40 per person in the US).
Embedding Fintech into Financial Products
While many consumers are getting embedded fintech products directly from fintech providers, they have expressed significant interest in obtaining services directly from their trusted bank or credit union. Here are a few services they would like to bundle with existing accounts:
- Identity theft protection
- Data breach protection
- Cell phone damage protection
- Purchase protection
- Extended warranties
- Bill negotiation service
- Subscription-cancelling service
- Personal/family data storage
- Child identity theft protection
Teaming up with a tech provider to embed fintech solutions into existing products can expand financial institutions’ revenue sources. A great way to accelerate the launch, servicing, and expansion of financial solutions is by using a fintech enablement platform.
Fintech Enablement: The Holy Grail for Banks
A fintech enablement platform comes with the infrastructure, tools, and APIs needed to seamlessly connect businesses and financial service providers. This includes prebuilt and customizable product definitions, data models, customer journeys, SaaS ecosystem connectors, and non-technical tools used to simplify the innovation process.
A fintech enablement platform also empowers businesses to offer a wide range of financial services without the need for extensive in-house development. This type of platform is designed with the understanding that banks and credit unions need to innovate and modernize, simultaneously.
Lastly, these platforms can improve customer journeys by implementing point-of-sale lending capabilities, end-to-end digital account onboarding processes, SME lending models based on captured data, and more.
Capitalizing on Embedded Fintech Opportunities
When it comes time to build, develop, and deploy new products or services – using a fintech enablement platform or not – there are three areas all banks and credit unions should focus on: working around core systems, product development, and skills and organizational structures
Stubborn, inflexible core systems are the last thing financial institutions want to pour money into. Especially when there are exciting new products to develop and introduce to customers.
Thankfully, with the shift towards the cloud and open APIs, more vendors are putting together low-code/no-code software platforms – such as FintechOS’s fintech enablement platform – to reduce dependency on the core and instead shift investments to product deployment or upskilling/reskilling the internal workforce.
While the opportunities associated with embedded finance and embedded fintech are vast, financial and non-financial institutions alike must navigate the challenges associated with this evolving landscape.
- Regulatory Environment – As embedded finance blurs the lines between different industries, regulatory frameworks must adapt. Compliance becomes more difficult as financial regulations and data privacy requirements to mitigate legal risks evolve.
- Security and Trust – With the integration of financial services, businesses must prioritize security measures to protect sensitive user information and transactions. Establishing robust cybersecurity protocols and leveraging trusted partners are critical to maintaining trust with customers.
- Technology Integration – Integrating financial services into existing platforms requires technical expertise and seamless integration. APIs can ensure smooth user experience.
Partnering with a trusted fintech provider can make navigating these challenges a lot easier for banks and credit unions.
The Future of Embedded Opportunities
Embedded fintech is not a passing trend, but a fundamental shift shaping the future of financial services with opportunities for businesses across industries. Financial institutions armed with a customer-centric mindset and willingness to adapt and collaborate will see the most success in today’s evolving landscape.
To learn more about capitalizing on embedded opportunities and how fintech enablement can reduce dependency on legacy systems, download our recent report with Cornerstone Advisors.