Development of Embedded Finance

According to an article titled «The evolution of embedded finance» by Raluca Ochiana, published on May 9, 2023, Ronnie Mitra, Senior Director of Technology at Publicis Sapient, emphasizes the importance of banks adopting a neobanking mindset and leveraging fintech providers and bank-specific platforms for a single proposition venture. Mitra suggests that speed is crucial in the initial stages. The article discusses the growth of Embedded Finance as a delivery channel, highlighting its potential for explosive growth in the financial sector.

Embedded Finance refers to the method of delivering financial services to users within non-financial apps, websites, and digital touchpoints. It allows banks to embed their services seamlessly into various platforms. For example, when shopping on a retailer’s website, customers may encounter Buy Now Pay Later (BNPL) offers provided by a financial services company. By delivering services in the places and at the times customers need them most, banks can drive customer acquisition and improve product sales.

The article explains that the reduced technology barriers and costs associated with digital integration have made embedding services especially interesting now. The widespread use of Application Programming Interfaces (APIs) enables real-time communication between partners and banks, facilitating seamless integration. Banks that have already invested in building APIs can take advantage of the foundational API infrastructure to move toward Embedded Finance.

Incumbent banks are already considering or launching embedded finance propositions across various banking sectors, including retail banking, large corporate banking, SME banking, wealth management, trade finance, and custodial banking. However, they face two immediate challenges. Firstly, legacy core systems act as an innovation drag, hindering the launch of embeddable services. Secondly, banks lack the necessary operating structure and capabilities to manage and service embedded partnerships at scale.

To succeed in the Embedded Finance market, banks need to address these challenges and build a new type of partner servicing capability. This includes providing self-service onboarding, management, and integration capabilities to support partners effectively. The article suggests that being first to market can provide banks with enduring market share and a strong reputation, capability, and partner network. It also emphasizes the need to adopt a neobanking mindset and implement a single proposition venture on a new platform to expedite entry into the market.

While the profitability and optimal operating model for Embedded Finance are still evolving, firms investing in platforms designed for embeddability and agility now are expected to be the winners of the market in the future.

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