What the Embedded-Finance and Banking-As-A-Service Trends Mean For Financial Services
Many financial services are increasingly being offered by non-bank organizations, such as bank accounts or wallets (payments), as well as loans. Embedded finance—non-bank financial services that mimic the features of traditional banks—is being used by firms to keep their client base and boost their “lifetime values.” “Fintech” has been the mantra of venture capitalists, and they’ve been encouraging their firms to think about embedding finance and Flexcube implementation into their business model. Embedded financial services are being considered and prepared by organizations of various sorts and degrees of maturity, including merchants, telecoms, huge tech and software companies, vehicle manufacturers, insurance providers, and logistics corporations. It’s easy for customers to establish a bank account via their accounting software or for a consumer to pay through the merchant, so they like the convenience factor.
Banking as a service (BaaS) bundles services that non-banks may use to serve their consumers to address the growing need for embedded finance. These services are commonly white-labeled or cobranded. New technologies and skills are needed to make it work since BaaS is often provided through APIs and requires robust risk and compliance management of the embedded financial partner. Finance-related fintechs are also emerging. Banks will also need new business models, such as pay-for-use monetization, B2B2C, and B2B2B distribution capabilities, and careful consideration of branding.
The BaaS imperative
However, if end users begin to use embedded finance in considerable numbers, banks may be force to develop BaaS business lines due to their concerns that distribution via partners could jeopardize their customer relationships.- Banking product distribution via partners may be a low-cost, high-volume industry for banks. As a result of their reliance on outdated technology and manual procedures, banks are typically plagued by high operating costs. Many banks have already undergone digital revolutions to provide BaaS. According to my research with existing banks, over two-thirds have gone through the digital transformation and modernization essential to compete in the BaaS industry.
To make any predictions about the market’s future development would be premature. If API banking and BAS become as common as online or mobile banking, every bank will invest in Flexcube and manage its channel. To remain competitive in such an environment, it will be difficult for banks to differentiate themselves using BaaS for the long run. Additionally, the market may be susceptible to returns to scale like cloud computing. These insurmountable advantages in technology, analytics, and cost structure will likely be forme by a few BaaS providers ahead of the pack if this winner-take-all dynamic continues.
Six trends to watch
For embedded finance and banking as a service, we’ve seen six trends. Understanding and tracking these patterns is essential to assist banks and anyone. Who wishes to engage with embedded finance in uncovering possibilities and protecting themselves from hazards.
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Customer demand for integrated experiences
More and more people are looking for direct and seamless experiences across all aspects of their lives. Customers are gravitating to these multi-product customer experiences, known as ecosystems, according to our study. An integrated financial solution is a natural match for ecosystem orchestrators since they always want to provide as much integration as possible.
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Demand from new fintechs and beyond
Fintechs require banking partners to give access to bank accounts, payments, and loans. Big technology firms and other non-banking entities may construct and sell financial services when it comes to banking. Still, they can’t become banks themselves in the United States and many other countries due to rigorous regulatory standards. To provide clients with embedded financing, fintechs must use banking as a service. To meet the needs of their large client bases, these companies need end-to-end BaaS infrastructure solutions. As well as regulatory assistance and balance sheet or other finance sources.
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Rise of openness
Banking APIs and universal access are being encourage by regulatory developments such as PSD2 and Open Banking. Some banks are considering new or expanded BaaS business models to recuperate expenses. And make use of new technology to comply with these new standards. Plaid and other aggregators are redefining consumer expectations for data and account information portability, driving IT modernization and BaaS initiatives.
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Search for new revenue models
Banking income and profitability are expect to fall in the future. Thus, financial institutions are constantly looking for new sources of revenue and product development. Sources with scalable business strategies and fixed IT expenditures are particularly beneficial (e.g., distribution models).
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Adoption of technology capabilities
It’s becoming easier for banks to grow BaaS because of advances in automation. And APIs, allowing more enterprises to embrace embedded finance. Meanwhile, organizations that want to include financial services into their digital experiences increasingly see their digital experiences. As a collection of modules produced by others. In many cases. This is because they regard payments, loans, or deposit. And checking accounts as simply another product capacity to enhance the customer experience.
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Changing trust levels in financial services
According to our research, incumbent banks in the United States have lost the trust edge over financial technology firms. Financial services may be provided by numerous different brands that have greater levels of consumer trust. Cobranded or white label financial services may benefit from consumers’ growing confidence in other brands to financial market goods. White-labeling across all goods and regions will not be necessary for banks; instead, they may choose areas or product lines where the rising confidence in non-banks may be strategically leverage.
Conclusion:
Using BaaS may be a land grab, according to some experts. This means that banks must build a BaaS strategy now, with an accurate assessment of their current costs and a clear vision of where they want to go in terms of digital transformation using Oracle Flexcube. They should also be aware of the effect that significant growth in client demand for integrated banking experiences would have on their operations.
