Why Niche Financial Services May Be Next Trend in Embedded Finance
In today’s rapidly evolving digital economy, companies are continually seeking innovative ways to meet the changing needs of consumers and businesses in the financial services landscape, writes Santiago Vinoth Jeyaseelan for Forbes. One disruptive trend that has gained significant momentum is embedded finance, which enables financial and non-financial companies to offer financial products and services through technology, unlocking new revenue streams and transforming the paradigm of financial services.
Embedded finance offers vast possibilities, ranging from embedded payments in e-commerce platforms to embedded fraction-share trading in fintech apps. According to Bain & Company, financial services embedded into e-commerce and other software platforms are expected to exceed $7 trillion by 2026. This surge in demand is driven by the promise of improved customer experiences and enhanced financial access through the «better together» proposition.
The integration of financial capabilities into existing applications through technology allows businesses to provide users with a more convenient and seamless experience. This trend is fueled by the growing demand for personalized and integrated financial solutions, as consumers and businesses seek efficient ways to manage and grow their finances. Apple’s recent introduction of a high-yield savings account is a prime example of the rapid rise of embedded finance.
At the core of embedded finance lies API-based technology, which forms the foundation for integrating financial products and services. These platforms, designed to be API-first and cloud-native, offer a wide range of capabilities that empower businesses to build and launch embedded finance solutions with speed and agility.
Numerous real-world examples demonstrate the disruptive potential of embedded finance and the transformative impact of API-based platforms. One notable case is Square, a mobile payment and financial services company that provides embedded financial services through its APIs. These services include payment processing, point-of-sale solutions, and small business loans, enabling millions of small businesses to expand their customer base, increase sales, and drive revenue growth.
Looking ahead, the next wave of embedded finance is likely to focus on integrating niche financial products. Annuities, for instance, are insurance contracts issued and distributed by financial institutions to provide a fixed income stream in the future. These products offer a balanced approach to managing investment risks while safeguarding savings from market fluctuations and providing tax-deferred growth. Integrating niche financial products like annuities requires careful evaluation of API platform partners to ensure clear roles and responsibilities and expedite the product launch process.
To successfully implement embedded finance, companies must conduct a thorough technical evaluation of API platforms to ensure adherence to industry best practices for technology architecture, security, and compliance. This evaluation encompasses factors such as tenancy architectures, data segregation methods, authentication, authorization, and encryption mechanisms to protect data and prevent unauthorized access.
Companies seeking partners for embedded finance should prioritize simplicity and scalability in API design. RESTful design principles, standard HTTP methods, clear documentation, and developer-friendly examples facilitate seamless integration. Scalability and performance considerations, including request volume, latency, uptime, and optimization techniques, also play a crucial role in enabling effective decision-making.
Despite the significant opportunities presented by an API-first approach in embedding financial products, companies must be prepared to address certain challenges. Complying with regulations is paramount, particularly for niche financial products that are heavily regulated. Data security and privacy concerns should also be addressed to protect against potential vulnerabilities and maintain customer trust. Additionally, achieving abstraction and standardization across different investment products’ data structures is vital for seamless integration across various platforms.
Embedded finance, powered by API-based platforms, is reshaping the financial services landscape, offering consumer finance companies the opportunity to deliver seamless, personalized, and convenient financial services. Embracing API-based platforms can be a strategic move for fintechs and other businesses to stay ahead of the competition and meet the evolving needs of consumers and businesses. By leveraging an API-first approach and carefully understanding the challenges involved, businesses can build compelling financial product offerings that drive revenue growth, enhance customer engagement, and create differentiation in the market.
However, it’s important to acknowledge that there are hurdles to overcome. One such challenge is the need to comply with regulations, particularly for niche financial products that have specific design requirements and regulatory implications. Additionally, data security and privacy should be a top priority, ensuring that the APIs being integrated are secure and protect sensitive data. Companies must mitigate the risk of data commingling on the provider side, which could damage their brand reputation and erode customer trust.
Another obstacle lies in achieving abstraction and standardization across different investment products’ data structures. This harmonization is crucial to enable seamless integration across multiple platforms. It’s worth noting that integrating non-standard protocols and APIs can be an expensive endeavor, both in terms of initial development and ongoing maintenance.
Nevertheless, the potential benefits of embedded finance and API-based platforms are significant. They offer opportunities for financial institutions to expand their product offerings, reach new customer segments, and provide tailored solutions. The ability to deliver personalized financial experiences through seamless integration has the potential to revolutionize the industry.
In this ever-evolving landscape, embracing the API-first approach and cultivating a deep understanding of the challenges at hand can empower businesses to thrive. By leveraging the power of embedded finance, companies can position themselves at the forefront of innovation, drive customer satisfaction, and adapt to the changing needs of the market. As the financial services industry continues to evolve, those who embrace embedded finance are well-positioned to shape the future of finance and unlock new possibilities for both businesses and consumers.