For a long time, banks ran every part of their services. Then, once the world became more digitalised, most wrote and ran their own core banking software. Each bank’s core banking was entirely bespoke. Then companies like Avaloq emerged and standardised core banking software. Then, in the 2010s, firms like Mambu or Thought Machine arrived. Core banking was suddenly broken up into its individual components, an API for every financial service. Bespoke and standard at the same time.
What I am saying is that what’s going on in embedded finance and banking-as-a-service (BaaS) has been slowly happening since banking first digitalised. This is natural progress. It only feels so seismic because the possibilities are so vast and it’s happening much faster with the advancement of technology.
This next stage is going to transform financial services in the same way the original core banking software did, perhaps even more so. Now integrators, such as AAZZUR, can pull all those standardised APIs into one ecosystem of financial products, so financial service providers – and I don’t just mean banks or fintechs by the way – can create a truly tailored offering. How financial service providers adopt this next stage will be key to how they scale and survive. Here’s why.
A future of embedded finance
Andreessen Horowitz’s Angela Strange was right when she said, “every company will be a fintech company.” Embedded finance allows any digital business to offer services like loans, investment advice and insurance at the point of sale or need. Offering financial services is now simply a case of plug and play. This is a huge value-add for digital businesses and many are already getting involved – just think about the last time you didn’t see Klarna at checkout. This might sound like a big threat to financial service providers – but really it’s a huge opportunity. The market just got a lot bigger, and someone has to provide those services. For those who look to integrate and offer their services via APIs to retail businesses or other fintechs, scalability and profit beckons.
For those who look to integrate and offer their services via APIs to retail businesses or other fintechs, scalability and profit beckons
Despite there being around 250 challenger banks in the world, only five percent have broken even. Embedded finance is changing this. Now challenger banks can make commission from embedding financial services from fellow fintechs into their systems – or by embedding theirs elsewhere. They have the infrastructure to easily integrate them and the data to create triggers to cross sell useful products right at the point of need.
For example, if a customer purchases a flight or a hotel, they can then be offered travel insurance or foreign exchange. I foresee a tough time for single-focus fintechs. The profit potential of BaaS and embedded finance is only going to shift momentum towards those built to integrate.
As we go about our lives using our debit and credit cards, we’re leaving a footprint, creating a digital persona just like we do on Google or Netflix. With this data, fintechs, challenger banks and digital businesses can create hyper-personalised customer experiences that offer financial add-ons customers genuinely need, when they need them.
From the most specific insurance types to wealth management, from travel money to carbon offsetting, they are all triggered by specific transactions and spending patterns. Hyper-personalisation in banking is getting a lot of coverage right now, with a recent Deloitte report suggesting banks that “deliver true end-to-end hyper-personalised products and services will create a significant advantage over their competitors.” Financial service providers that want to take advantage of this just need to ask one question: ‘do we build or integrate?’
A collaborative endeavour
Like I’ve said, APIs now allow providers to integrate their services into other systems and vice versa. Finding ways for these services to work with each other is what I find so exciting about being in embedded finance. Think of a car that pays its own parking tickets. A digital ski-pass merchant that offers its own short-term extreme sport insurance. Airlines and hotels that offer travel money or budgeting tools. Wealth management services triggered by high value purchases.
Those are just a few of the possibilities. Some estimate that embedded finance could be worth €6.3trn over the next 10 years and the savvier fintechs have realised that’s a big enough market to share. However, those thinking about collaborating should act fast – everyone’s generosity has limits.