The once complicated and costly practice associated with payment processing has seen exponential change within the past decade. While many of these changes are most notable on the consumer front end (referencing things like tap to pay, buy now pay later, and person-to-person payments), the business landscape has also experienced notable shifts.
Conversations revolving around embedded finance play a crucial role in the innovation in financial services. Embedded banking, embedded payments, embedded insurance, and embedded lending have all demanded the attention of bank and business leaders around the world as these topics directly impact the industry-agnostic goal of improving the customer payment experience. But what is an embedded ecosystem, and what does it mean for the industry?
Our panel of experts recently discussed how banks can turn embedded finance trends into a market differentiator in a live Finextra webinar.
What does embedded finance mean?
First, let’s unpack the embedded experience. For those unfamiliar with the concept, we at OpenText define embedded finance as the seamless integration of financial solutions into non-financial workflows. By highlighting examples seen in banking, payments, lending, and insurance, we can see how this definition comes to life.
Banking
- Embedded banking allows non-financial institutions to offer the same banking services traditionally only provided by financial institutions.
- Examples of embedded banking include digital wallets provided from technology companies like Apple, Google, and Samsung.
Payments
- Embedded payments allow users to make payments at the click of a button, eliminating the need to search their pockets for cash or cards.
- Examples of embedded payments could include any type of non-financial organization that allows users to complete a transaction directly in their own application. This could be something like Amazon, Uber, or Starbucks, all providing a check out experience directly within their mobile app.
Lending
- Embedded lending allows users to access lending services through a non-financial organization, providing the ability to both apply for and receive a loan on a digital platform directly with the merchant.
- Examples of embedded lending could include any Buy Now Pay Later solution that enables the loan process directly at the point of sale.
Insurance
- Embedded insurance allows users to access insurance services in real-time at the point of checkout.
- Examples of embedded insurance could include a car dealership providing an insurance policy or a merchant providing an extended warranty during checkout.
What does this mean for banks?
While the concept of embedded finance in transaction banking continues to evolve, there are specific use cases that banks seem to be gravitating towards. One instance centered around ERP integration is becoming increasingly popular in the transaction banking space. In this specific example, banks providing embedded financial solutions allow their corporate customers to witness a wide range of benefits, from increased operational efficiency to automating accounts payables and receivables functions, all by directly integrating banking solutions with customers’ ERP systems.
Corporate customers are looking for solutions that incorporate their needs for a user-centric platform with faster financing and seamless integration of various systems in their business workflows. The embedded financial ecosystem allows banks the opportunity to address these needs directly. Corporate treasury teams who are still spending a significant amount of time manually navigating from portal to portal to make a payment are looking to their banks to provide some type of solution. With embedded financial solutions, banks can bring the payment workflow where the invoice resides, eliminating time and resource consuming efforts. Solutions like this create a seamless experience for clients and allow banks to build deeper, more meaningful relationships for the future.
No matter what use cases may arise in the future, this new buzzword is forcing banks to go back to the drawing board to turn the ever so familiar topic of customer integration into a competitive advantage. Developing a secure integration layer is critical for banks looking to capitalize on embedded trends. Understanding how challenging it is to seamlessly interact with a large, varied, and often inconsistent collection of APIs, banks have turned to technology partners to act as enablers. These technology providers aim to establish a critical integration layer between banks and their clients. While partnerships are not the only way to develop a holistic embedded ecosystem, it is one of the most common methods seen in the landscape today.
As banks continue their quest to establish meaningful connections with their corporate clients, the use cases for embedded finance will only continue to grow. Banks and financial institutions must take lessons learned from retail embedded finance use cases and overcome issues related to bolstering their role within the ecosystem by leveraging APIs to ensure their value in the marketplace is readily established.
