Unlocking the true potential of embedded banking

The wider integration and use of embedded banking can be seen in embedded payments offered by the likes of Uber, wearables, and Open Banking-assisted consumer loan applications. This integration has been moulded by increasingly popular offerings, such as embedded lending, non-bank money transfer platforms such as CashApp, as well as debit and credit cards that are not offered directly by banks.

Banking-as-a-Service (BaaS) providers have been key enablers for these popularised services, with many fintechs and financial institutions offering BaaS to other players in the finance space and consumer retailers alike.

However, this rise of embedded banking has not been without its challenges. Nonetheless, the projected rewards arguably outweigh these challenges, and have created the possibility of a more embedded, all-connected, digital-first future.

In this blog, I’ll discuss the key challenges and benefits of embedded banking, as well as exploring what its future could look like.

What are the key challenges?

Conforming to regulation

Handling finances and data comes with stringent regulation. Compliance must be a key consideration at every level, to gain trust from a variety of stakeholders, including end-users, partners and the regulators themselves.

Despite the importance for providers to follow regulation, the responsibility does not simply lie with them alone. There is a clear need for collaboration and transparency between financial institutions and regulators, to allow providers to meet regulatory requirements to the nth degree.

Earning trust from end-users

Data and information sharing are at the core of embedded banking. For those consumers whose information is being shared, protection and security of that data are paramount.

Providers can build trust from end-users by fostering an approach of transparency around regulatory adherence, fair borrowing rates and considered partnerships with trusted, reputable and regulated embedded banking hosts.

Poor understanding

Nimble fintechs are able to build out APIs quickly, allowing embedded banking to sit underneath a range of front-end interfaces. These services can significantly benefit online retailers, however, there is a lack of understanding around the integration and application of API technologies, which can act as a block to allowing new entrants to the market.

To combat this, embedded banking providers can own the responsibility of education around the implementation and use of their product. Businesses who are utilising these services can then look to their specialist providers for education around implementing and making the most of API technology.

What are the key benefits?

For embedded banking adopters

Offer a broader range of services

The key benefit for those who adopt embedded banking services into their offerings is the ability to offer more services and opportunities in one place, allowing for upselling. As a result, customers benefit from the convenience of accessing all the services they need in one place, efficiently and all from one familiar digital environment. The data collected in this process can help to inform the development of new products and services, fuelled by data on customer needs and behaviour.

Open up new revenue streams

The broader selection of services can create new, additional revenue streams, with merchant adopters having the ability to tap into affiliate revenue from customers who access third-party services through their platform.

Enhance product stickiness

The wider range of services will increase product ‘stickiness’, too. For example, by removing the need for a travel customer to go to another provider to find credit to fund their trip, by offering embedded banking-enabled credit within their application or website, the travel company heightens convenience and speed. In turn, making its offering more ‘sticky’ and encouraging customer loyalty.

For end-users

End-users are set to benefit from increased convenience and a simpler purchasing experience. A process that is easier to use, saves time and energy, will - according to consumer psychology - encourage greater spending, as the perceived value of usability is greater than the need to reduce costs.

The future of embedded banking

We’re set to see a number of changes in the embedded banking space in the coming years.

Emergence of new regulation

Initiatives such as the FCA’s ‘always on’ regulatory sandbox and standards such as ISO27001 lay the foundations for compliance around embedded banking. However, there is a clear need for specific guidance and regulation.

As more non-financial institutions enter the space, it’s likely that we will see pressures increasing and new regulation emerging.

Increasingly intuitive design

For embedded payments in particular, we’re likely to see more intuitive, geo-targeting. This could see consumers being prompted to make or authorise regular payments, when visiting familiar sites such as train stations on their daily commute, or restaurants they visit each month, for instance.

Embedded banking ecosystems

BaaS and embedded banking ecosystems will begin to develop, with various providers filling in the gaps in their own offerings through partnerships. This collaboration will see more non-financial brands placing products beside embedded banking offerings. For example, a suggestion to purchase stationary being offered to new business bank account customers.

Embedded banking is steadily becoming a part of consumer-facing products, and BaaS providers are key in helping it to become part of our everyday lives. Despite its challenges, providers, adopters and end-users alike are well-positioned to overcome these challenges and reap the benefits of embedded banking.

Hayley Viner

Head of Product, ClearBank