The Role of Fintechs in Shaping the Future of Embedded Finance and Open Banking in the US

By Darina Cony

The emergence of fintechs has fundamentally altered the financial industry in recent years. The startups, which have taken advantage of advancements in technology and increased consumer demand for convenient and personalized financial services, have disrupted traditional financial services by offering innovative solutions that are faster, more accessible, and often less expensive than those offered by established financial institutions.

Fintechs have introduced a range of new products and services, including mobile payment apps, digital wallets, robo-advisors, and peer-to-peer lending platforms. These offerings have transformed how people manage and access their money, creating more flexible and convenient options for consumers.

“Financial services are a business built on trust. The combination of accelerating innovation and increasing collaboration is the fundamental equation for success in the financial market. In this context, FinTech can act as a catalyst, bringing together different players fostering inclusion, collaboration and idea sharing”, as mentioned by Paolo Gianturco for FinTech Talks Magazine by Deloitte.

One of the most significant developments in the fintech industry has been the rise of embedded finance and open banking. Embedded finance enables businesses to integrate financial services into their existing products and services, making it easier for consumers to access financial services directly within the context of their everyday activities. This can include everything from shopping online and paying bills to managing savings and investments.

Open banking, on the other hand, involves the secure sharing of financial data between different financial institutions through the use of APIs. This allows consumers to share their financial data with third-party providers, who can then offer personalized financial services and products based on the data they receive.

Together, embedded finance and open banking have the potential to revolutionize the financial landscape and create new opportunities for consumers and businesses alike. For businesses, embedded finance can help drive customer engagement and loyalty by offering a more comprehensive and convenient suite of services. Open banking, meanwhile, can enable businesses to offer more personalized and innovative products and services by leveraging customer financial data.

For consumers, embedded finance and open banking can offer more convenient and accessible financial services that are tailored to their individual needs and preferences. By integrating financial services into their everyday activities, consumers can access financial products and services in a way that feels more natural and intuitive. Moreover, the secure sharing of financial data through open banking can help consumers obtain better rates and deals on financial products and services, as well as access personalized financial advice and guidance.

The rise of fintechs, embedded finance, and open banking are all part of a broader trend toward increased digitalization and innovation in the financial industry. As these trends continue to shape the financial landscape, consumers and businesses alike can expect to see more personalized, convenient, and accessible financial services that are tailored to their needs and preferences.

Key Embedded Finance Segments

The concept of embedded finance is not new, but it has gained significant traction in recent years due to the rise of fintechs. These companies have developed innovative solutions that enable businesses to embed financial services into their products or services more easily and cost-effectively. Embedded finance, as stated by Bain & Company, enables customers to have a new type of relationship with financial providers by providing them access to services as a byproduct of the software they use and the goods they purchase. While some businesses will hesitate and possibly lose out on the opportunities, others will take the initiative and determine how to capitalize on them.

Here are some of the key embedded finance segments to watch in 2023:

Banking-as-a-Service (BaaS)

Banking-as-a-Service (BaaS) is a segment of embedded finance that allows non-financial companies to offer financial services through partnerships with banks. This enables companies to provide banking services without the need for a banking license or infrastructure. BaaS solutions are becoming increasingly popular, as they allow companies to offer seamless and personalized financial services to their customers.

Payments

Payments are a key segment of embedded finance, as they are the most commonly integrated financial service. Companies can integrate payment services into their applications to offer a streamlined checkout experience for their customers. Additionally, payment services can be used for peer-to-peer transactions, e-commerce purchases, and in-app purchases.

Lending

Lending is another segment of embedded finance that is becoming increasingly popular. Companies can offer loan services through their applications, enabling customers to access funds quickly and easily. This segment is particularly attractive to small businesses, as it allows them to access credit without the need for traditional lending institutions.

Insurance

Insurance is a growing segment of embedded finance, as companies look to offer insurance products through their applications. Insurance services can be integrated into a variety of applications, including ride-hailing and travel booking apps. This provides customers with a more comprehensive suite of services, while also generating additional revenue streams for companies.

Wealth Management

Wealth management is a segment of embedded finance that is focused on providing investment advice and portfolio management services through non-financial applications. This enables customers to access personalized investment advice and portfolio management services, without the need for a traditional financial advisor.

Embedded finance is a rapidly growing trend that is transforming the way we interact with financial services. By integrating financial services into non-financial applications, companies are providing more accessible and personalized services to their customers. As this trend continues to evolve, we can expect to see more innovative solutions emerge in each of these key segments.

The Potential of Open Banking to Transform the Financial Industry

Open banking is a financial innovation that has revolutionized the way financial institutions share data and interact with each other. By allowing the secure sharing of financial data between different financial institutions through the use of application programming interfaces (APIs), open banking has the potential to transform the financial landscape, creating a more competitive and innovative industry.

Through the use of open banking APIs, consumers and businesses can securely share their financial data with third-party providers, such as fintechs and other financial institutions. This allows these providers to access data on consumers’ financial behavior, such as their spending habits and credit history, and offer personalized financial services and products based on that data.

Open banking has the potential to create a more competitive and innovative financial landscape by enabling new entrants to enter the market and offer innovative products and services. By sharing data through open banking APIs, third-party providers can create new products and services that are tailored to the needs and preferences of individual consumers and businesses. This can lead to more diverse and innovative financial offerings, creating new opportunities for growth and competition in the industry.

Moreover, open banking also enables consumers to easily switch between providers and obtain the best possible deals. By sharing data on their financial behavior, consumers can receive personalized recommendations and offers from different financial providers, allowing them to make informed decisions about which provider to use for different financial services. This can lead to greater competition among financial institutions, resulting in better products and services at lower costs for consumers.

However, open banking also raises concerns about privacy and security. To ensure the protection of consumers’ financial data, regulatory bodies have implemented strict rules and regulations governing the use and sharing of financial data. These regulations aim to ensure that consumers’ financial data is used only for the intended purposes and is stored securely, protecting consumers from potential data breaches or misuse of their financial data.

Open banking is a significant development that has the potential to transform the financial industry by enabling more competition, innovation, and personalized services. By allowing the secure sharing of financial data through APIs, open banking creates new opportunities for businesses to create value for their customers, and for consumers to obtain the best possible financial products and services.

Top Open Banking Trends

Let’s examine the leading open banking trends that are fueling industry transformation and reshaping how consumers interact with financial services.

1. API-driven Ecosystem

Open banking is contributing to the development of a more collaborative financial ecosystem in which banks and FinTech companies use APIs (Application Programming Interfaces) to share information, resulting in a more seamless user experience.

2. The Future of Financial Transactions

Alternative payment methods and technologies, such as real-time payments, immediate transfers, and peer-to-peer transactions, are becoming more prevalent as a result of Open Banking.

3. Expanding Partnerships

Open banking will increase the number of partnerships between banks and FinTech firms, with banks extending their services with the help of new and innovative technologies created by these firms.

4. Individualized Finance

Customers will have access to more personalized financial products and services, based on their individual preferences and financial behaviors, as a result of open banking’s data-sharing capabilities.

5. Enhancement of Customer Experience

Open banking will result in a more customer-centric banking industry, resulting in improved user experiences through more intuitive and user-friendly interfaces and more effective financial management tools.

6. Increased Financial Participation

Open banking has the potential to reduce banking system entry barriers and reach underbanked or unbanked populations, thereby increasing access to financial services.

7. Enhanced Data Security

Enhanced Data Security Open banking will necessitate robust identification and authentication processes, resulting in enhanced data security and privacy measures to safeguard users’ financial data.

8. Account Consolidation Services

Open banking is driving the development of account aggregation services, which enable users to view all of their financial accounts from various financial institutions in a single location, thereby simplifying financial management.

9. The importance of Artificial Intelligence (AI) and Machine Learning

These technologies will play an increasingly important role in open banking, enabling the intelligent analysis of consumer data to enhance services, streamline processes, and detect fraud more effectively.

10. Customer Data Ownership

Open banking trends also emphasize the importance of the customer as the owner of their financial data, empowering users to share their data with various service providers and easily transfer service providers if desired.

11. Economic Health and Education

Open banking will inspire new tools and platforms to assist consumers in understanding their financial health, making informed financial decisions, and gaining access to financial education materials.

12. The Rise of Neobanks and Upstart Banks

Open banking is facilitating the development of digital-native banks, which provide innovative and technology-driven solutions to compete with traditional banks and are frequently focused on niche market segments.

The Synergy Between Embedded Finance and Open Banking

Embedded finance and open banking are two interrelated concepts that have the potential to create significant synergies in the financial industry. By integrating financial services into non-financial products or services and securely sharing financial data through APIs, businesses can leverage the data to create more personalized and innovative financial products and services.

One of the main benefits of embedded finance is that it allows businesses to gather more financial data on their customers. By offering financial services within the context of their existing products or services, businesses can obtain a wealth of data on their customers’ financial behavior and preferences. This data can then be used to better understand their customers and offer more personalized financial services and products.

Open banking complements embedded finance by enabling secure sharing of this financial data with third-party providers, such as fintechs and other financial institutions. By sharing this data through APIs, third-party providers can use it to offer more personalized financial services and products that are tailored to the needs and preferences of individual customers.

For example, a retailer that offers a credit card to its customers can securely share data on the customer’s spending habits with third-party providers. These providers can then use this data to offer personalized financial services such as investment advice, savings accounts, and insurance products. By leveraging the data obtained through embedded finance, third-party providers can create more targeted and customized financial services and products that better meet the needs of individual customers.

Moreover, embedded finance and open banking can also help businesses to generate additional revenue streams. By offering financial services within their existing products or services, businesses can create new opportunities to monetize their customer base. This can include everything from offering loans and credit to providing investment and insurance products.

Overall, the complementary nature of embedded finance and open banking has the potential to create significant synergies that can transform the financial industry. By leveraging financial data obtained through embedded finance and securely sharing it through APIs, businesses can create more personalized and innovative financial products and services that better meet the needs and preferences of individual customers. This can lead to increased customer loyalty, greater revenue streams, and a more competitive and innovative financial landscape.

The Role of Fintechs in Driving the Adoption of Embedded Finance and Open Banking

Fintechs have played a critical role in driving the adoption of embedded finance and open banking. These companies have been at the forefront of developing innovative solutions that make it easier for businesses to integrate financial services into their products or services and securely share financial data with third-party providers.

Apart from APIs, fintechs have also developed other innovative solutions that make it easier for businesses to embed financial services into their products or services. For example, they have developed white-label solutions that enable businesses to offer financial services under their own brand name without having to develop their own infrastructure or obtain a banking license. This has lowered the barriers to entry for businesses wanting to offer financial services and has helped to drive the adoption of embedded finance and open banking.

Fintechs have also been quick to respond to changing consumer and business needs, which has enabled them to remain agile and flexible in the face of disruption. This has allowed them to develop customized solutions that meet the unique needs and preferences of individual businesses and consumers.

The Advantages of Embedded Finance and Open Banking for Consumers and Businesses

Embedded finance and open banking offer various advantages for both consumers and businesses. By integrating financial services into non-financial products or services and securely sharing financial data through APIs, embedded finance and open banking can:

Provide more convenience and accessibility for consumers to access financial services, such as loans and credit, directly within the context of their everyday activities.
Offer more personalized financial services and products, based on the data obtained through the embedded finance model and shared through open banking APIs.
Increase competition in the financial market, leading to more choices and potentially lower costs for consumers and businesses.
Enable more efficient and accurate decision-making in areas such as risk assessment and fraud detection.

How Embedded Finance and Open Banking Will Influence the Future of Banking

The combination of embedded finance and open banking is set to transform the banking industry in several ways. Firstly, it is expected to lead to greater competition in the industry. With more players entering the market, customers will have more options to choose from, leading to better products and services at lower costs.

Secondly, embedded finance and open banking are expected to drive innovation in the industry. With the availability of data, third-party providers can develop new and innovative financial products and services that are more tailored to the needs of customers. This is likely to lead to the development of new business models and revenue streams for banks.

Finally, embedded finance and open banking are expected to lead to greater financial inclusion. By providing financial services to customers who previously had limited access to them, banks and other financial institutions can help to reduce poverty and improve financial stability.

As stated in one of the CB Insights Reports, as open banking ushers in a new era of financial services, financial institutions — banks in particular — must be proactive in addressing and catering to their consumers. In addition to traditional consumer and business customers, banks will increasingly need to cater to a new category of developer customers.

There will be many changes in the banking sector as a result of embedded finance and open banking. Banks will need to make rapid adjustments to stay competitive in the face of rising levels of competition, technological innovation, and demand for greater financial inclusion. Customers, on the other hand, will win out in the long run thanks to improvements in quality, variety, and accessibility that will result from this shift.

Conclusion

The future of embedded finance and open banking in the US appears bright, with an increasing number of companies and consumers showing interest in these concepts. The growth of fintechs, along with the acceleration of digitalization caused by the COVID-19 pandemic, has created an environment that favors embedded finance and open banking adoption.

As more businesses adopt embedded finance models and more data is shared through open banking APIs, new opportunities for innovation and collaboration are likely to emerge. For example, businesses could use data obtained from embedded finance to identify new market segments or tailor products and services to better meet customer needs.

Regulators also have a role to play in shaping the future of embedded finance and open banking. In the US, regulators have been taking steps to encourage innovation and competition in the financial industry while ensuring consumer protection and privacy. As such, the regulatory framework for embedded finance and open banking is expected to evolve in the coming years, providing further clarity and guidance to businesses and consumers alike.

FAQs

What is Embedded Finance?

Embedded finance is a relatively new concept that is rapidly gaining popularity across different industries. By integrating financial services into non-financial products or services, businesses can create new revenue streams and improve customer experience without investing in expensive infrastructure or obtaining a banking license.

What is BaaS?

BaaS — Banking as a Service is a financial services model where third-party providers offer banking infrastructure and services to other companies, enabling them to offer banking solutions to their customers without having to build and manage their own banking systems.

What is Open Banking?

What is API?

API stands for Application Programming Interface, which is a set of protocols, tools, and standards that allow different software applications to communicate and exchange data with each other. APIs specify how software components should interact, making it easier for developers to integrate different systems and services into their own applications.

January 27, 2023