The future of banking is embedded, says Vilve Vene, CEO and co-founder of Modularbank
Banking, and the way in which we spend and access our money, is changing dramatically. Traditionally, banks have relied on selling products and services straight to customers. If you wanted a loan, you’d go to your bank. If you wanted to make a payment, you’d go to your bank. However, with the emergence of embedded finance, driven by technological advances as well as heightened consumer expectations, the ‘monopoly’ of banks is being tested as companies outside of the traditional realm of banking have started adding financial products and services to their offerings.
Recent technological innovations, such as cloud computing and APIs, alongside positive developments in financial regulation and the emergence of open banking have completely transformed the financial landscape. According to the World Economic Forum, the shift from traditional banking to modern and distributed banking will represent an increase in revenues from $3.6tn to $7.2tn. Companies seeking to capitalise on embedded finance must begin positioning themselves now, or risk being bypassed by consumers drawn towards a more seamless experience.
An Easy Win-Win for Non-Financial Companies and their Customers
The scale of the opportunity here is vast, as the possibilities for non-financial companies to embed financial services are endless. Estate agents, travel agents, construction firms, retailers and utility providers are just some examples of traditionally non-financial companies which can benefit from integrating financial services, such as flexible payment options or credit facilities, directly into their customer offerings.
With businesses across all sectors facing fierce competition and tight margins, they’re actively looking for new ways of attracting and retaining customers. Embedding financial services enables them to offer more appealing, more convenient and more tailored services. It also opens up entirely new revenue streams and opportunities for up-selling and cross-selling. Embedded finance really does offer a win-win situation both for them and their customers.
What is more, the technology needed to offer financial services no longer involves huge, upfront investment or long timescales. Thanks to open APIs and cloud-based modular systems, businesses can easily connect with technology providers to seamlessly integrate the right plug and play modules into their own infrastructure, to quickly roll out the specific services that fit with their customers’ needs and aspirations.
Where does Embedded Finance leave Incumbent Banks?
Given the scale of opportunity and the ease of implementation for non-traditional players, embedded finance could be said to present a threat to incumbent banks; that’s far from the case. Banks are in a unique position to play a leading role: only they have the deep industry expertise, the reach, the credibility, the hefty balance sheets and direct access to cost-efficient capital.
You may be wondering, how can incumbent banks benefit from this?
To take a real-life example: imagine a small business owner, doing their invoicing and accounting on a third-party platform, who realises he needs a temporary bridging loan to enable him to pay his staff while he waits for his invoices to be paid. If that platform offered an integrated means of obtaining additional financing (secured against the value of the invoices due in) from a trusted bank at literally the touch of a button, it would allow that bank to offer a compelling service to a new customer.
Put simply, embedded finance allows banks to offer banking services to people via third party platforms as and when they need them. Instead of waiting for customers to go to a bank, banks can now insert themselves at the point of purchase, reaching new customers and driving additional revenue.
A Gradual, Sustainable Approach will Deliver Results
Banks must accept that their industry is evolving, consumer expectations have changed, and non-financials now have the ability to compete in the financial market. Carrying on as if nothing has happened would be a road to ruin. There are certainly challenges ahead for them in addressing this new future – legacy systems and processes being the most obvious - but there is still a vital and very profitable role for those banks willing to adapt their offerings towards embedded finance.
While there are many things to consider, the point is to start - to get going. The changes we will see in the financial industry over the next 5-10-15 years will be dramatic, but they won’t happen overnight. Banks need to see this as a gradual change, and partner with technology providers who can support their innovation in an agile and modular way, in order to deliver impact quickly and sustainably.
Over a relatively short period of time, embedded finance will change the face of financial services. With the entry of non-financials into the market and the changing role and position of incumbent banks, the overall ecosystem is undergoing a substantial shift. As consumers naturally gravitate towards frictionless access to finance, those who fail to offer it risk losing their competitive edge.
Vilve Vene is CEO and co-founder of Modularbank. The views and opinions expressed are not necessarily those of AltFi.