Embedded Finance: What It Takes to Prosper in the New Value Chain Bain & Company

The next most commonly cited factors, ease of use and low cost (selected by 58 and 46 percent, respectively) also distanced themselves from the pack relative to past surveys. Regarding cost, nearly three in five respondents indicate that the economic uncertainty of the past year has influenced how they select financial services providers, noting lower financing fees and higher rates on deposits as motivators. Compared to other age groups, the 18-to-24 cohort seems particularly motivated by in-app savings features such as store coupons and retailer deals or offers.

This may not happen overnight, but banks can start by building dedicated teams that consist of both existing resources from internal teams and seasoned professionals recruited from the technology sector. Further, such teams can serve as champions for the bank’s digital transformation journey and provide testing grounds for banks to learn how to deploy agile culture to other parts of the business. Inclusivity lies at the core of the new financial landscape, driven by the innovations of embedded finance. Embedded finance reaches underserved populations by forging partnerships with technology and e-commerce platforms, fostering financial inclusion. This collaboration transcends geographic and economic constraints, offering financial solutions without traditional discrimination.

Tech-brand partnerships are revolutionizing value chains with embedded finance

But from the customer’s perspective, banks are less visible than the Internet platform facilitating user acquisition and credit assessment. In this case, the question for banks is whether they can be accountable for such loans on the balance sheet without fully owning the customer relationship and risk management process. Embedded finance has the power to transform our industry, putting financial products directly at the forefront of transaction flows exactly when and where consumers need them.

However, their success can also be attributed, at least to some extent, to the sizeable unserved or underserved market demand for credit in China. One way to understand this impact is to look at credit registry coverage as a proxy for existing credit service penetration by banks, which rely on credit registry data for underwriting. Credit registry coverage reports the number of individuals and firms listed in public/private credit registry with current information on repayment history, unpaid debts or outstanding credit.

The Rise Of Embedded Finance: Exploring The Next Wave Of Digital Banking

It is imperative that companies employing embedded finance and their banking partners put cybersecurity and safety education at the forefront of their services so this trend can be defeated. The embedded-finance product portfolio is likely to expand further as customer-onboarding and product-servicing processes are gradually digitized and real-time risk analytics and services grow more sophisticated. As with many fintech technologies, embedded finance aims to meet the client where they are and provide them with the technology they need when they need it.

It’s about giving customers the financial help they need when needed, whether it’s a loan, insurance, or something else. The key is that embedded finance brings these services to people at the right moment without them having to go to a brick-and-mortar location. They will look to balance sheet and technology providers for advice on how best to deploy embedded finance and orchestrate the expertise and tools needed to deliver it in a compliant way.

How to use these technologies to achieve your CEO’s and CIO’s goals for 2024 and beyond

There are several reasons why some banks are not pursuing embedded finance to the extent they should be. Traditionally, banks’ corporate cultures have prioritized stability and risk aversion rather than innovation and risk-taking. This lack of technology expertise, coupled with a generally siloed approach to innovation, can impede the development of cohesive embedded finance solutions. Bain Capital is one of the world’s leading private investment firms with approximately $160 billion in assets under management. We pioneered the value-added approach to investing and have invested at the forefront of the technology industry in more than 370 companies since our founding in 1984. Embedded finance will play a fundamental role in shifting how consumers interact with their finances.

→ Using Plaid IDV and Transfer, embedded finance startups can safely and securely gain access to the financial and identification data they need to onboard new customers and fund accounts. Another example is Shopify Balance, which allows Shopify store owners to ‘skip the bank’ by getting paid faster and eliminating the need to open a separate business bank account. It also offers a debit card with exclusive rewards for purchases made towards growing a Shopify business.

Ecosystem Expansion

Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or easy way to make a payment. A 2022 Verint study on the state of banking warns that the average Net Promoter Score (NPS), a key indicator of business growth, customer experience or loyalty, for 20 major banks has dropped an average 10-plus points since the start of the pandemic. The study additionally reports that around half of customers who had to resolve an issue with their account or online access said it was harder than originally anticipated.

Embedded finance will continue to gain momentum in 2023, but for organizations to make the most of the opportunity, customer experience must not be ignored. Financial institutions should find the pain points within their customers’ journeys, reevaluate their infrastructure and look for technological solutions to manage the customer integration in order to see the most success from embedded finance. Embedded finance necessarily requires an ecosystem of best-in-class partnerships to deliver innovation, but moving business customers between these different stakeholders can be difficult.

Gartner Top 10 Strategic Technology Trends for 2024

Embedded finance will become integrated into the financial services ecosystem and over time will be beneficial for all those involved. Traditional financial institutions, such as banks, will be able to serve their existing clients efficiently and effectively, thereby increasing their share of wallet and reducing costs. Over time, this will also allow them to acquire new clients and enter new markets which will in turn drive new revenue streams. Fintechs can achieve global scale and accelerate their time to market by embedded payments trends partnering with well-known global Software as a Service (SaaS) vendors to embed their propositions and deliver a frictionless experience. Further, micro, small and medium enterprises (MSMEs) will be able to grow their business profitably with ease of access to capital and have the ability to manage their cash flow during uncertain economic times. Embedded finance refers to non-financial companies offering financial products and services, like an online store providing insurance or a retail app for easy payments.

This shift is driven by the convenience of embedded finance, which enables effortless access to services, attracting a wider audience and fostering financial inclusion. The finance landscape transforms as embedded finance gains momentum and physical banking diminishes. This evolution underscores the democratization of the financial domain, allowing any company to function as a bank. Notably, this shift toward embedded finance signifies a consumer-centric approach, putting consumers in control of their financial choices. Gen Z, millennials, and Gen X are at the forefront of this change, propelling the industry toward a new era defined by individualized financial services and heightened consumer empowerment.

Embedded Lending

Banks and financial institutions have been handling the backend experience, while the branding belongs to the established entities. If you’re unable to serve up compelling financial products, then you’re just building software for the sake of building software, which is ok, but a different business and vision. Instead, aim to bring software and financing together, while keeping the former the secret sauce.

• Despite their heightened requirement for financial services, traditional banks’ offerings are more limited, and these services often come with higher costs.
• This includes the rise of niche neobanks, like tribal neobanks, and neobanking for employees, which allows businesses to offer banking to their employees to increase retention.
• Many of those interested have reported positive experiences with gen AI in nonfinancial settings and trust the technology to provide sound financial advice and/or believe it can provide better returns than traditional advisors.
• Using ACH for payments saves merchants on fees because ACH fees are usually less than credit cards.
• This approach not only enhances customer convenience but also opens up new revenue streams for businesses and financial institutions.