A few years ago, the automotive industry underwent a transformation. Automobiles are no longer just sedans, hatchbacks or estates, they have evolved into new multi-purpose, cross-segment and highly customized vehicles. Similarly, the financial services industry is changing.
Non-banking companies are increasingly offering financial services such as digital wallets, accounts, payment methods and funding options, most of them becoming fintechs. The ultimate goal is to retain customers and increase their lifetime value.
Today, companies in every industry are looking to launch embedded financial services. A new study from Juniper Research predicts that the embedded financial market will grow from $43 billion in 2021 to more than $138 billion in 2026.
In response to demand, banks and financial institutions are increasingly offering banking as a service. It is a bundle of technology and services that allows other companies to offer their banking solutions under their own brand.
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What is BaaS?
Banking as a service is a term that describes technologies and services that enable other companies to offer banking solutions under their own brand.
BaaS providers provide application programming interfaces that allow third-party developers to access bank functionality and build financial products and services on top of existing platforms. This allows companies to quickly launch new financial products without having to build everything from scratch.
See: Adoption Kit: Backend Developer (TechRepublic Premium)
This white label platform allows companies to focus on their core competencies while providing valuable financial services to their customers. Banks and financial institutions are benefiting from BaaS by expanding their customer base and increasing revenue without incurring the costs of developing and marketing new products.
BaaS is rapidly becoming a profitable solution for fintechs and traditional banks to adapt to the changing financial landscape. Businesses no longer need to own banks or financial services companies to provide financial services.
BaaS has many common use cases, including:
- Enable businesses to offer branded payment cards to their customers
- Providing financing options for companies
- Loyalty Programs and Rewards Offers
- Embed payments into your website or mobile app using our API
What is Embedded Finance?
Embedded finance is a term that describes the integration of financial products and services with other non-financial products and services. For example, a customer may be able to sign up for a subscription service and pay with monthly payments that include mortgages, car loans, and other liabilities. Embedded finance is designed to make financial products and services more accessible and convenient for customers.
Common use cases for embedded finance include:
- In-app payment
- Pay bills with chatbots
- International money transfers through social media platforms
- Buy Now, Pay Later at Retailers
- Automatic discounts or cashbacks on transactions
Trends impacting financial services
Understanding and monitoring developments in the embedded finance and BaaS space helps banks and non-banks identify opportunities and make strategic decisions regarding product development, partnerships and go-to-market plans.
Increased openness
The rise of openness in the financial services industry is driven by several factors.
- Customers are demanding greater transparency and control over their data and financials.
- New technologies such as artificial intelligence and mobile banking have made it easier for consumers to compare products and services from different providers.
- Regulatory changes such as the European Union’s revised Payment Services Directive (PSD2) are putting pressure on banks to expose their data to third-party providers.
In response to these trends, banks are increasingly adopting open banking technologies such as open APIs. Open APIs allow third-party developers to build applications that interact with the bank’s core systems, giving consumers more choice and flexibility when managing their money.
Reference: Open Banking — Redesigning Financial Services (PDF) (TechRepublic)
Open banking presents some challenges for banks, such as increased competition and the need to invest more in security, but it also presents many opportunities. For example, banks can offer new and innovative products and services to attract new customers and drive growth.
Rise of challenger banks
The rise of challenger banks is one of the most important trends impacting financial services in recent years. Challenger Bank is a digital-only bank with rapid growth in Europe but less aggressive adoption in the US.
However, due to the COVID-19 pandemic, Challenger Banks are being used to pay for the COVID-19 stimulus package and are rapidly gaining popularity in the United States. As a result, seven of his top 20 Challenger Banks are now US companies.
These challenger banks are impacting financial services by offering alternatives to the traditional banking system. They are typically more agile, customer-centric, and resonate with consumers who want more personalized service.
Additionally, they often offer features not found in traditional banks, such as free international withdrawals and fee-free overdrafts. They also offer better rates and fees than traditional banks, making them a more attractive option for many consumers.
As challenger banks continue to grow in popularity, they are likely to have an increasingly significant impact on the financial services landscape.
Demand for an integrated experience
The demand for integrated experiences is growing in the financial services industry. It is driven by consumers who want a more seamless and convenient way to manage their money.
In response, banks and other financial service providers are increasingly offering products that are integrated with each other and with other non-financial products and services. For example, Walmart recently announced it would launch a fintech startup with partner his Ribbit Capital to provide customers with the latest innovative and affordable financial solutions.
IKEA recently acquired a 49% stake in banking partner Ikano Bank. Ikano was part of the original company before spinning off and becoming an independent company in 1988. This shows that IKEA sees value in providing integrated financial services with its core product offering.
Ecosystem orchestrators that offer their customers as much integration as possible will be best positioned for future success.
Changing trust levels in financial services
One of the most interesting trends in financial services is the changing level of trust between traditional banks and fintechs. For years, banks were more reliable than fintechs, but no longer.
In fact, many non-bank brands are now more trustworthy than banks and can be leveraged to offer financial products. This provides an opportunity for banks to white label or co-brand their products with partners with a high level of trust. In doing so, banks can take advantage of the growing trust in other brands and distribute their products more effectively.
Of course, banks don’t necessarily have to white label every product or service. Rather, it may identify markets and products where leveraging non-bank trust is most profitable. Either way, it will be interesting to see how this trend plays out in the months and years to come.
Opportunities for banks and non-bank companies
Embedded finance has many opportunities for both banks and non-banks.
Non-banks are asking whether adding banks makes sense within the user experience and journey they offer, whether embedded financial services reach the volume needed to justify the cost, and the technology to work with banks. You should consider whether you have the strategic and operational capabilities.
Banks, on the other hand, are asking whether they can realistically transform to offer banking-as-a-service, what products and regions will offer BaaS, and the number of integrated users that are likely to emerge from retailers and big tech companies. You should consider what the benefits are for your experience. .
Embedded finance is a growing area with great potential for both banks and non-banks. By considering these questions, both groups can make the most of the opportunities that this new environment presents.
