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Cultural & technical barriers hold back embedded finance

Younger generations are more receptive to the trend of embedded finance while there is a greater reluctance among older generations, writes Rivo Uibo, co-founder & Chief Business Officer of Tuum.

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Embedded finance has seen a steady rise in interest in both the financial and non-financial sectors, as businesses compete to offer their digitally-sophisticated customers the most seamless experience possible.

This trend is now reaching the masses, as evidenced by Tuum’s recent report The Changing Face of Banking’. The report shows a surge in consumer interest for embedded financial services, led, perhaps unsurprisingly, by Gen Z and millennials.

Although there is wide interest on both the supply and demand side, uptake of embedded finance is still somewhat hampered as cultural and technical barriers to adoption remain. Thus, work must now be done to iron out the creases. Those that can successfully address these adoption barriers stand to take the biggest share of this budding market.

Consumer Interest in Embedded Finance is Surging

There is a sizable number of consumers who are willing to take out financial products at the point of checkout, and seamless financial services are always in high demand. Naturally, younger generations are more receptive to the trend of embedded finance and many are already partaking in this trend via, for example, buy-now-pay-later (BNPL) schemes.

For older generations, there is a greater reluctance to engage with embedded financial services.

However, these consumers are more likely to engage with financial services (i.e. take out loans, insurance) in general. If the trust of these consumers can be won, this represents a potentially lucrative market. Banks will be able to lower their cost of acquisition for this high-value customer segment, whilst the third parties (retailers, telcos, etc.) will improve their customers’ experience and thus stickiness.

Banks Recognise the Value

There was once a school of thought which theorised that banks would be reluctant to open up their capabilities to third parties to enable embedded finance use cases; this has proven to be incorrect. Of the banks surveyed in the report, an overwhelming majority (82 per cent) recognised the importance of this trend.

The willingness is certainly there, but banks have traditionally been slow adopters, and many still operate on outdated legacy systems. These must be brought up to modern standards before a comprehensive embedded finance strategy can be pursued. A significant amount of banks (64 per cent) have or are currently upgrading their systems, with a further 35 per cent having plans in place. However, we know from experience that these digital evolution processes can end up hamstrung with a lack of commitment.

Barriers to Adoption Remain

The evidence shows that there is all-round enthusiasm for embedded financial services, but there are still certain factors holding back its complete uptake.

On the demand side, consumers across all age groups have signalled that they would be willing to take out, for example, an insurance product at checkout. However, when these financial products and services are offered by a non-financial institution, almost half of consumers say they would not consider the source to be trustworthy enough. Additionally, of those who had chosen not to take out such a product, 22 per cent identified complicated checkout processes as being the reason for their decision.

On the supply side, banks are certainly aware of the revenue potential that embedded finance represents. However, as is often the case with financial institutions, adoption can still be slow and stated intentions can take years to realise. In addition, a fully fleshed out embedded finance strategy requires open architectures, and this is simply not possible for banks still operating on legacy systems (of which there are many).

Overcoming the Final Hurdles

Clearly, the market for embedded financial services is ripe and initial use cases have seen significant success; Uber’s driver payment system, BNPL, etc. Naturally, the next steps involve wider adoption across various industry sectors, but first cultural and technical barriers must be overcome.

On the demand side, there are still issues around trustworthiness, as many consumers only feel comfortable engaging in financial transactions with a recognisable financial institution. 

The issue here is a lack of education leading to a lack of trust on the part of consumers. Therefore, a greater push needs to be made to show consumers that taking out financial services with a non-financial company is perfectly safe and still backed by a regulated institution. This will be particularly important in tapping into the wealthier, but generally more conservative, older generations.

On the supply side, a tale as old as time; the intention is there, but banks are slow adopters. Those that have already upgraded their legacy technology to modern core banking systems can begin exploring embedded finance use cases but, for the many which are still lacking in their technological capabilities, work must first be done to modernise the tech stack.

With a projected market value of $7.2trn, embedded finance will undoubtedly be a valuable revenue stream for financial institutions; but only those that can get it right.

For more insights into the services consumers are demanding from their banks, download Tuum’s 2022 report ‘The Changing Face of Banking’ here.

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Rivo Uibo

Co-founder and Chief Business Officer


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