The financial services industry has seen significant transformations in recent years, redefining how consumers interact with financial services, and fostering even more collaboration amongst banks, fintech companies, and non-financial businesses.
One of the most notable transformations has been the rise of embedded finance. Nowadays, travellers can buy insurance while booking a flight, pay for a ride without leaving the taxi hailing app, or pay for groceries within the food delivery app.
This is the power of embedded finance – the API-driven model, built on one of multiple components of Banking-as-a-Service (BaaS), which offers numerous benefits to banks, financial institutions, non-financial businesses, as well as to consumers, by enabling uniquely designed embedded financial experiences, seamlessly integrated within existing offerings.
In this blog, we will explore the growing popularity of embedded finance, the importance of APIs for embedded connectivity, the components of Banking-as-a-Service enabling embedded finance, and the emerging trends in this space.
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The growing popularity of embedded finance
The popularity of embedded finance in Europe has skyrocketed during the past few years. The growth is mainly owed to the widespread digital adoption of financial services and a booming fintech ecosystem, which has seen key players forging alliances with banks and established financial institutions. The rise of consumer demand for convenient and accessible financial services, seamlessly integrated into day-to-day digital interactions, has further propelled the evolution of embedded finance.
According to an EY survey, 70% of global tech leaders believe more than half of financial services will be offered via non-financial platforms in the near future. The prediction is even more clear, as 74% of European businesses plan to launch integrated financial solutions.
APIs are the core of the acceleration of embedded finance innovation, enabling the seamless integration of financial services into digital offerings across multiple industries. They are the “silent giants” of the fintech world, working behind the scenes to facilitate real-time transactions, personalise financial products, and ensure that financial operations are conducted efficiently and securely.
APIs: Powering embedded connectivity for embedded financial experiences
Application Programming Interfaces (APIs) are the backbone of embedded finance. In simple words, APIs are a method of communication between financial institutions, BaaS providers (more on this later in this blog), and non-financial businesses, enabling these businesses to offer financial services to their customers without having to acquire a banking license.
By using APIs provided by licensed entities, businesses can conveniently integrate services into their digital ecosystem, while remaining loyal to their branding and values. These integrations facilitate a cohesive user experience, allowing consumers to access financial services from the app they are utilising, without the need to directly interact with traditional financial institutions. The result is a frictionless and intuitive experience that meets the consumers where they are and at point of need.
Common uses cases of embedded finance, enabled by APIs, can look like online payment options at point of sale (embedded payments), direct provision of card services (embedded cards), and flexible payment methods, such as Buy-Now-Pay-Later offerings (embedded lending).
With their native ability to connect and enable communication between multiple financial and non-financial entities, APIs are fostering a new wave of embedded connectivity, which is crucial for the financial industry's digital transformation.
Recent research by McKinsey highlighted that the deployment of APIs has shifted from simplifying IT operations to sparking innovation and driving revenue growth.
Ultimately, APIs are enabling businesses across sectors to drive operational efficiency, propel innovation, and improve customer experiences.
The benefits of embedded finance
Undoubtedly, embedded finance offers enhanced convenience to consumers.
However, it also provides unparalleled growth opportunities and new avenues for innovation to banks, fintechs, and non-financial businesses, enabling them to expand into unexplored markets and tap into new customer segments. As a result, businesses can generate new revenue streams and gain a greater competitive advantage in a fiercely dynamic market.
Read more about the benefits of embedded finance.
Embedded finance and Banking-as-a-Service: Are they the same?
To recap, embedded finance is the seamless integration of financial services into offerings by non-financial businesses.
While Banking-as-a-Service is the tech model that allows regulated financial institutions to offer their services to non-banking businesses through APIs. BaaS consists of several critical components: core banking services, cloud infrastructure, APIs, and user interfaces. Core banking services can include account management, deposits, payments, loans, and transaction processing. The cloud infrastructure provides secure and scalable data storage, while user interfaces allow customers to access the services via mobile apps and websites.
Embedded finance and BaaS are closely linked, but it’s important to distinguish the two concepts. Put simply, Banking-as-a-Service is the infrastructure that enables the embedded finance experience for users.
To deliver embedded financial experiences, businesses can work with different BaaS players. These can range from providers, who offer their licenses and technology, to distributor-aggregators, who distribute enhanced services by aggregating the offering of multiple providers. The choice for businesses looking to integrate financial services, usually, relies on their growth plans and users’ demand.
Regardless of how businesses decide to deliver embedded financial experiences, the concepts of embedded finance and BaaS thrive in a symbiotic relationship, directly influencing each other growth and innovation in parallel.
Emerging trends in embedded finance
In 2024 and beyond, leaders across financial institutions and fintechs expect increased collaboration amongst the key players of the market, global widespread adoption of embedded finance, and even more polished user experiences.
As the BaaS infrastructure evolves and innovates embedded financial experiences, there’re even more trends worth of exploring. Let’s take a deep dive:
Embedded finance in the B2B market
Embedded finance has already transformed the customer experience, but it holds great potential to improve B2B transactions, which are notorious for relying on slow and traditional payment methods. With embedded accounts and cards, embedded finance is predicted to offer a simpler and more convenient way for companies, suppliers, and vendors to transact.
Modern technologies deployed for embedded finance
With the rise of Artificial Intelligence (AI), Machine Learning (ML), and advancements in biometrics, these technologies are bound to penetrate the embedded finance space. The emerging tech is expected to bring forth a world of benefits, which could range from easier fraud detection, with the automated analysis of vast amounts of data, to the hyper-personalisation of product offerings thanks to the insights provided into users’ behaviour.
Open banking pushing the boundaries of embedded finance
The growth of the open banking ecosystem is predicted to foster greater collaboration between financial institutions and non-financial businesses. This will promote a more interconnected financial world, which could provide further opportunities to improve financial inclusion.
In conclusion
Embedded finance has been deemed as one of the most prominent evolutions of the financial services industry. Relying on the infrastructure of BaaS providers and traditional banking institutions, it’s transforming the market by offering scalable and customisable financial services.
As the industry continues to expand, the future of embedded finance promises further advancements in security, product personalisation, global connectivity, and innovation within the B2B space. Finally, delivering embedded financial experiences will become increasingly common, thanks to the ease with which financial elements can be integrated via APIs, ultimately making the financial world more interconnected than ever.
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