Over the last year, banks have become increasingly enamoured with Embedded Finance. And the growth of Embedded Finance as a delivery channel is inevitable. The embedded market has been growing for the last twenty years and has the potential for explosive growth in the financial sector. Participants need real-time, scalable, digital services as well as partner servicing capabilities to succeed. It’s the organisations that are first to market now that will set themselves up for success in the future.
Embedded Finance is the method of delivering financial services to users, embedded within non-financial apps, websites, and digital touchpoints. For example, when you’re shopping for clothes on a retailer’s website, you’re likely to encounter Buy Now Pay Later (BNPL) offers during the checkout process. That BNPL proposition has been embedded by a financial services company within the retailer’s website. By delivering services in the places and at the times they need it most, banks can drive customer acquisition and improve product sales.
The idea of embedding one company’s user experience within another company’s UX to drive revenue is neither new nor novel. For example, eBay was embedding context-based auction advertisements in affiliate websites over twenty years ago. But embedding has become especially interesting now because the up-front technology barriers and the costs associated with digital integration have been reduced dramatically. This has led to increased integration opportunities and rising consumer expectations for integrated experiences.
Embedding a finance service is possible because partners and banks can communicate in real-time using Application Programming Interface technology (or APIs). In the early 2000s, APIs were an innovative concept that banks were experimenting with. Today, APIs are pervasive within both financial and non-financial ecosystems and form a connective tissue of networked organisations. That foundational API infrastructure has paved the way for rapid partnerships and lower-cost integration. Embedded Finance is a logical next step for banks that have already invested in building APIs.
Most incumbent banks are already considering or have released an embedded finance proposition. These ambitions are not confined to retail banking use cases, and we’ve observed interest from across the large corporate, SME, wealth, trade, and custodial bank sectors.
Regardless of the proposition space, incumbents face two immediate challenges they must solve. The first is that legacy core systems have become an innovation drag, preventing banks from launching embeddable services. The second challenge is that banks lack the operating structure and capabilities to manage and service embedded partnerships at scale.
APIs enable frictionless integration between companies by making it easier for them to pass digital messages back and forth. But, in large incumbent banks, there is a behemoth of legacy technology lying beneath these modern APIs. That legacy inhibits the performance, scalability, and agility of the system. Running an Embedded Finance operation on top of a legacy core system is a bit like dropping the engine of a Reliant Robin into the body of a Ferrari. It may look great, but it won’t do well on the road.
Aside from the technology requirement, embedded finance requires a new type of partner servicing capability to support the partners they will embed with. Many incumbents struggle to provide a partner experience that will both drive the adoption of service and operate cost-effectively and efficiently. Self-service onboarding, management, and integration are key capabilities to build upon.
The Embedded Finance market is still maturing, and uncertainty remains regarding its profitability and the optimal operating model for banks and fintechs. This may lead some executives to adopt a “fast follower” approach and proceed with caution.
However, we believe that early leaders in the Embedded Finance market will be rewarded with enduring market share. As more entrants enter the EF market space, the challenge of creating valuable partnerships and acquiring the best screen “real estate” will increase dramatically.
In addition, a flood of new embedded suppliers will create a ‘signal to noise’ problem in which partners or customers will need to select the best provider. Entering the market early will help banks to establish a strong reputation, capability, and partner network, allowing them to create a differentiating brand.
If being first is good, the problem that banks must resolve is how to get to market now so they are ready for the future. The challenge of replacing a legacy core is non-trivial. In fact, some incumbent banks are embarking on multi-decade programmes to modernise their legacy stack. Similarly, establishing a partner capability is a large endeavour that can take some banks up to three years to achieve successfully.
I would advise adopting a neobanking mindset and implementing a single proposition venture on a new platform. Taking advantage of the rich ecosystem of fintech providers and bank-specific platforms is key to this approach. While mature embedded finance players will benefit from comprehensive functionality, getting into the market as quickly as possible with a single proposition is more important at the outset.
The premise of delivering a financial service into a customer’s ‘screen’ when and where they need it feels logically sound. But the best practices for profitability and success in the embedded finance market are still to be determined. Ultimately, firms investing in platforms designed for embeddability and agility now will be the winners of the market in the future.
Ronnie Mitra is the Sr. Director of Technology at digital business transformation consultancy Publicis Sapient where he leads Publicis Sapient’s composable business and API practices. Most recently, Ronnie has been enabling retail and commercial banks develop capabilities for banking as a service, embedded finance and coreless platforms. With 25+ years’ experience enabling businesses with web and integration technologies, Ronnie’s area of expertise incorporates technology strategy with a focus on API enabled composability - this includes structured, domain-driven design, product and service development, technology architecture and developer experience improvement. Ronnie is an internationally recognized thought leader, speaker and co-author of four O’Reilly books including Microservices Up & Running and Continuous API Management.
Publicis Sapient is a digital business transformation company. We partner with global organizations to help them create and sustain competitive advantage in a world that is increasingly digital. We operate through our expert SPEED capabilities: Strategy and Consulting, Product, Experience, Engineering and Data, which combined with our culture of curiosity and deep industry knowledge, enables us to deliver meaningful impact to our clients’ businesses through reimagining the products and experiences their customers truly value. Our agile, data-driven approach equips our clients’ businesses for change, making digital the core of how they think and what they do. Publicis Sapient is the digital business transformation hub of Publicis Groupe with 20,000 people and over 50 offices worldwide. For more information, visit publicissapient.com.
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