The embedded finance market is currently going from strength to strength. Thanks to companies like PayPal and Klarna, many non-financial institutions are integrating financial services into their platforms. As the sector continues to expand, how can traditional banks compete?
Embedded finance uses APIs and banking-as-a-service to enable any brand – regardless of sector – to launch a financial services product if there is a demand for it. This means the market has incredibly high growth potential. Andreessen Horowitz partner Andrea Strange once claimed that ‘every company will be a FinTech company’ and embedded finance is making that an ever-growing possibility.
Earlier in 2021, a study by market researcher Juniper Research found that the value of the embedded finance market will exceed $138bn in 2026, rising staggeringly from the $43bn value in 2021. In addition, another recent study by Lightyear Capital stated that the embedded finance sector will create a value of $3.6trn by 2030. How can banks deal with this coming wave?
According to Currencycloud chief growth officer Todd Latham, the rise of embedded finance provides an opportunity for banks, but only if they are willing to grasp it.
He said, “Banks have got to make a decision as to whether they’re going to be a channel for other players, or they’re going to use these embedded finance opportunities as channels to market and relinquish some of the control of the customer experience. Or are they going to see it as competitive and they’re going to decide not to play together?
“There are two ways that can go. The enlightened banks will see this as an opportunity to get to markets that they could never have got to on their own. Whereas I think the unenlightened banks will see this as a threat to their business and they’ll be right.”
Kevin von Neuschatz – CEO of Stanhope Financial – shares a similar sentiment, and believes that embedded finance holds a lot of potential for banks, but they must guard against being overly cautious.
He said, “Banks need to wake up and realise that the rise of embedded finance offers a golden opportunity for growth and customer acquisition. For too long, many large-scale financial institutions have had little or no presence in vital emerging markets, due to a lack of resources and an overly cautious approach to risk following the 2008 crash.
“This vacuum is quickly being filled by a host of innovative FinTech providers, offering payments, crypto investment services and access to funding to ambitious businesses who feel ignored by the big banks.
“Rather than fighting against this trend, banks need to realise that their critical services can still be delivered, but in partnership with more nimble providers, who offer on-the-ground local expertise and support. Embedded finance is not a threat to the banking industry, it’s a route to growth and expansion and will drive through necessary modernisation, which has been long overdue.”
The growth of the embedded finance market may represent a challenge for banks but can be an indisputable boon for consumers. TechEU claimed last year that ‘many experts’ see embedded finance as the main trend that will shape the future of the financial industry over the next decade.
The rise of embedded finance has undoubtedly shaken up the financial market. With more companies from outside the financial services industry now housing financial services in their applications, the market is changing – and banks are being required to change with it.
OneSpan chief technology evangelist Benoit Grangé believes that banks have been under increasing pressure since the introduction of PSD2 and the accelerated adoption of open finance technologies, with many banks seeing their market share fall as non-banking players such as FinTechs and payment providers offer embedded finance capabilities.
Grangé added, “Banks can maintain their position in the market by delivering trust and high-quality services. In general, people still have confidence in their banks, if they meet changing customer demands and adapt to more innovative technologies. If they offer the same level of experience as neobanks and technology providers, banks can emerge strongest with their extensive expertise.
“Embedded finance opens up a lot of possibilities, but let’s not forget about an important aspect – security. Without a doubt, the attack surface has increased along, with the number of transactions that are being executed and the sophistication of attacks. It is therefore critical to use a security solution that combines and leverages the latest technologies such as machine learning, authentication, and biometric capabilities to detect and stop potential attacks in real-time.”
When comparing size, it would be easy enough to say that banks undoubtedly have the upper hand on most FinTech companies, even when it comes to embedded finance. Many banks are globally recognised, have a customer reach that dwarfs the majority of FinTechs and are able to scale much more rapidly.
Nium CRO Frederick Crosby commented, “Embedded finance has taken the world by storm, with enterprises embracing the mantra that, “every company is a FinTech company.” Embedding financial services alongside core business offerings promises to unlock new revenue opportunities and reduce operational costs.
“A simple, flexible and cost-efficient platform integration can enable customers to implement global payments solutions into their own business model by leveraging a global network of licences, payment corridors and banking partnerships.”
While banks have the ability and the firepower to fight back against the embedded finance wave, this doesn’t mean beating the embedded finance market will be an easy task.
The power of banks is not expected to wean anytime soon. But with a growing embedded finance and FinTech market, the challenges to banks’ market domination may face a rocky challenge going forward – and how they deal with that may determine the future of the financial services market.
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