Opportunities for banks in the commerce world through embedded finance
Embedded finance is simply the placement of financial services and products into non-financial customer experiences. This means a seamless experience for banked and non-banked customers, as well as added value to the overall economy due to the enablement of increased trade volumes.
The disintegration of financial services
Traditional banks have long been accustomed to operating primarily through brick-and-mortar branches. Even though they’ve expanded their presence into online channels, their services have typically been delivered in a conventional manner. Customers have been obliged to consume banking products on banking channels.
However, in the evolving landscape of finance, the delivery of a financial product can now be broken down into three main components that can be embraced by either a single stakeholder or multiple stakeholders throughout the journey (see Figure 1):
· Balance sheet and risk ownership, which entails owning a banking license, providing risk and compliance services, and offering access to banking products like lending and payments.
· Technological infrastructure, facilitated by platforms offering embedded finance solutions customizable to specific needs.
· Distribution channels, encompassing various platforms where customers engage with non-financial products and services, such as online marketplaces, retailers, and B2B solution providers.
In this new landscape, traditional banks will face the challenge of competing with many industries; marketplaces, original equipment manufacturer (OEM) providers, retailers, and technology companies. To thrive, banks must not only compete but also collaborate with these industries. In the context of embedded finance, primary goals are revenue increase and maintaining touchpoints with customers.
Along with the expanding competition, continuously changing regulations, outdated legacy banking infrastructures, and security concerns for providing financial offerings at non-bank channels remain as other challenges that banks should overcome.
Opportunities lying ahead
The valuations for incumbent banks are at their lowest levels of all times, due to pricing sectors’ low profitability and the risky future due to the latest trends in the financial services industry. The emergence of neo-banks boasting higher profit margins, open-banking initiatives aimed at democratizing data, and innovations within the fintech ecosystem catering to underserved customers are exerting pressure on incumbent banks. To maintain their positions, traditional banks must focus on delivering superior experiences and enhancing profitability.
The threats associated with embedded finance are similar to those that were once attributed to all emerging concepts mentioned above. Despite the challenges that need to be overcome, embedded finance creates new opportunities for banks.
1. Expanded Customer Reach: Through strategic partnerships with non-financial platforms, traditional banks can extend their reach to new customer segments that may have been previously inaccessible. By embedding financial services into popular digital platforms such as e-commerce websites, social media networks, or ride-sharing apps, banks can tap into a broader audience and acquire new customers.
2. Enhanced Customer Engagement: Embedded finance allows traditional banks to embed their services seamlessly into customers’ everyday activities, enhancing convenience and driving greater engagement. By integrating banking functionalities into digital platforms that customers use frequently, banks can increase touchpoints with customers, deepen relationships, and foster loyalty.
3. Diversified Revenue Streams: Collaborating with fintech firms and digital platforms enables traditional banks to diversify their revenue streams beyond traditional banking products and services. By offering complementary financial solutions such as digital wallets, lending products, or insurance services, banks can capture additional revenue opportunities and boost profitability.
4. Data Monetization and Insights: Commerce world generates vast amounts of data that traditional banks can leverage to gain insights into customer behavior, preferences, and trends. By analyzing this data and harnessing advanced analytics capabilities, banks can unlock valuable insights to inform product development, marketing strategies, and personalized customer experiences.
5. Global Expansion Opportunities: Through partnerships with digital platforms and fintech firms operating on a global scale, traditional banks can expand their footprint beyond domestic markets and access new international markets. By leveraging embedded finance to offer cross-border financial services, banks can capitalize on global opportunities for growth and diversification.
Embedded finance presents a myriad of opportunities for traditional banks to innovate, expand their customer base, diversify revenue streams, and strengthen their position in the market, creating a pivotal moment for them. To thrive in this dynamic landscape, banks must embrace collaboration, adapt to changing customer expectations, and strategically position themselves to capture growth opportunities. The future of finance lies in its seamless integration with everyday life, and traditional banks have a vital role to play in shaping that future.
M. Talha Arslan — LinkedIn
