The New Norm and the Bouncing Back Stronger through Embedded Finance
By Hasan Nawaz, CEO HUBUC
The last few years have been revolutionary for the banking sector – with change happening at a pace and scale unseen before. Developments in technology have significantly shaken the industry and changed the way people bank and interact with financial services.
It’s been a testing time for many of the older, traditional and more established banks that previously didn’t need to worry about competition the way they do today. But rather than fear it, change can be a good thing for the sector to embrace, while increased competition can be healthy in keeping it on its toes and providing new and better experiences for the customer.
Over the past three years in particular we have seen the arrival of a new kind of challenger bank that has transformed the consumer banking landscape. Now we’re seeing traditionally non-financial brands seamlessly offering financial services to their customers. Embedded financial services have become such a norm for consumers that they have often come to expect to be able to purchase products or make payments directly from the company they are interacting with – be it their favourite shop’s Instagram or a service they’re using on-demand, such as Uber.
This year is expected to be the year embedded finance truly makes a name for itself in terms of shaping the future of financial services and transforming the ways both individuals and businesses alike access them.
Already, a number of the world’s leading brands have started to take notice and realise how embedding financial services can enhance their core product or service. Take for example, Apple launching Apple Card and Apple Pay, and Grab launching a buy-now-pay-later option. It’s likely that many consumers engage with embedded financial services so frequently it goes by relatively unremarked.
One undeniable factor that has accelerated the pace of change is the COVID-19 pandemic. Lockdown measures have forced businesses to adapt and pivot almost overnight. In a bid to survive, many businesses have had to innovate to stay active and reach customers and meet their needs in new ways – ones which are likely to remain for the long term. To continue to trade while having to close the doors physically to customers has left many companies – banks included – needing to create new touchpoints with customers – and new ways of ensuring a revenue stream. Embedded finance enables businesses to offer new and exciting financial services – providing a lifeline of new revenue in these times.
At the same time, consumer behaviour has been forced to change – with take up of online services and digital literacy increasing faster than we’d expect it to under normal circumstances. As familiarity has grown, so too has trust in online and digital banking. As a result, it’s likely many consumers will retain these habits and continue to benefit from the choice, ease and convenience afforded by online banking and shopping once restrictions are lifted. Consumers will have an expectation of banks and financial services centred around convenience, on-demand, out of sight and simple to use.
So where does embedded finance come into it? While it’s true that businesses can build their own financial services capabilities, this is often costly, risky and time-consuming, especially for companies who are not traditional financial services providers. Creating their own capabilities requires recruiting, and investing in the right talent, getting to grips with industry regulations, risk management and compliance. All of which takes significant amounts of time, money and commitment.
As businesses recover, they’ll be looking to streamline operations, build new sources of revenue and reduce costs. Embedded finance enables them to do all three. It enables companies to offer the financial services capabilities that suit their unique requirements without the level of investment needed to build in-house services from scratch. It also saves the costs of hiring specialists to not only build capabilities but to continually ensure they are compliant with regulations and managing risk – and enables them to bring services to market faster than a self-built product.
The implications for both businesses and financial services are huge. Any brand can embed financial services into its product or service, picking and choosing those which suit their needs – from branded card issuance and on-boarding to payments and FX. While for the financial services industry it’s a wake up call that the expectations of both business and retail customers have changed, and they need to innovate and consider new partnerships to keep up. Financial services is shifting from being transactional to something more personal.
So where does this leave the incumbent banks? With estimates from 11:FS that the embedded finance opportunity will be worth $3.6 trillion by 2030 it’s unlikely to be an opportunity they want to miss out on. As alluded to in the beginning, it’s a signal to them up their game. Rather than directly competing on digitisation and user experience, they can take their place in the ecosystem by becoming enablers for new market entrants. It may lead to more partnerships and collaborative working between fintechs, BaaS and traditional banks as the financial services industry becomes more democratised.
As we begin to emerge from the pandemic, we’ve yet to see what a ‘new norm’ will look like, but amongst the lessons to be learned, hopefully there will be opportunities to build back better. Embedded finance has the potential to revolutionise the financial services industry and provide an exciting opportunity for businesses to resurface stronger. For banks it may present opportunities to find new, innovative ways to work with fintech partners to deliver better products and services for customers.
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