Four Ways Embedded Finance Accelerates FSI Digital Transformation

TIBCO Connected Intelligence
Reading Time: 4 minutes

The COVID-19 pandemic caused businesses to rethink their digitization strategies and accelerate transformation. Over the last two years, digitization projects planned well in advance have been completed in record time. Moreover, many consumers have embraced modern communication, shopping, and banking channels.

The financial services industry has made rapid advancements in digital adoption. Today, businesses are engaging in banking on an advanced level by integrating digital finance into their overall business plan. Embedded finance has taken hold with its market value predicted to grow from $43 billion in 2021 to over $138 billion in 2026; it is set to become a key focus in the coming years.

Defining Embedded Finance

Embedded finance refers to the inclusion of financial services—such as payment processing, lending, insurance, and investments—in products offered by non-financial providers. For example, a retail outlet could provide installment loans to consumers shopping at its outlets, or a car dealership could offer point-of-service insurance for vehicles sold in-store.

Embedding financial services in non-banking products enables businesses to offer customers a more streamlined shopping experience by removing some of the bottlenecks introduced by financial processes. For instance, in previous years, customers making substantial purchases usually had to contact or visit a bank to apply for credit. Now, with embedded finance, they can get credit and buy at the point of service.

According to OpenPayd, “Embedded finance enables any brand to seamlessly integrate financial services into their core product at their customers’ point of need.”

How Does Embedded Finance Transform Financial Services?

Embedded finance is not only changing the customer experience but also traditional banking strategies and the relationships between legacy banking, fintech, and nonbank companies. Below are four noteworthy ways embedded finance is transforming the financial services sector.

Customers Are Choosing Embedded Finance Over Traditional, Bank-driven Finance

More and more nonbank companies are offering financial services (such as bank accounts, payments, and lending) to retain customers and increase their lifetime value. According to a recent survey, over 70 percent of brands plan to deploy embedded financial services in 2022 and 2023.

Customers are responding positively to this trend. Embedded finance provides a considerable bump in usability and convenience. Rather than going through traditional institutions for payments and credit, shoppers can deal with retailers directly, resulting in faster purchase completion and a better customer experience.

Furthermore, embedded finance allows customers to manage their finances, make purchases, and apply for credit through a single platform instead of moving from one website or app to another.

Embedded finance will become even more entrenched in customers’ everyday lives. Therefore, traditional banks must prioritize turning this into a promising opportunity.

Banks Are Shifting Their Focus to Banking-as-a-Service

Embedded finance is disrupting traditional banking models. Banks that enjoyed sitting between nonbank companies and their customers are now feeling the chill as more and more nonbanks enter the financial services market.

However, the rise of nonbanks’ participation in financial services provides an unprecedented upside for traditional banks. While non-banking players like retailers and big tech firms can develop financial products, they cannot function entirely like banks due to the sector’s stringent regulations. Consequently, nonbanks must collaborate with banking institutions, in one way or the other, to offer comprehensive financial services.

Realizing this gap, traditional institutions have begun prioritizing banking-as-a-service (BaaS), which entails providing nonbanks with bundled financial services, which they can deploy to improve their customers’ experience.

According to Oliver Wyman, “BaaS will bring together digital technology platforms and finance to change the shape of economies and most sectors for years to come.” 

Although it is still too early to predict how the BaaS market will evolve, one likely eventuality is embedded finance and API banking will become as prevalent as mobile banking in the coming years. As more options enter the market, banks will need to innovate continuously to distinguish themselves based on quality, rates, and reach, among other dimensions.

Banks Are Using Nonbank Brands to Regain Market Trust

A McKinsey & Company survey demonstrates that traditional banking institutions are steadily losing the trust advantage they hold over fintech firms. Customers are increasingly choosing fintech players over legacy banks as they perceive them as more innovative and transparent.

Embedded financial services are an opportunity for banks to win back their customers’ trust by partnering with established nonbank brands. Agile banking organizations are already using embedded finance to build on the loyalty of other brands and boost their own reputation.

Banks do not necessarily need to cobrand with partners across all products and geographies. Instead, they only need to study the market and identify the segments where they can strategically take advantage of the growing trust in nonbanks.

Data and Analytics Are Bolstering the Value of Embedded Finance

Embedded finance is more than just convenience. When deployed effectively, it can be an essential tool for understanding customer habits and needs.

Banks are creating new embedded financial products around customers’ ever-evolving digital footprints, including online behavior, social media patterns, and buying behavior. These data points help institutions along the value chain improve their embedded finance offerings by identifying which product features are most attractive for certain consumers.

The ability to engage with customers across channels is also essential for the success of embedded finance. Expanding adoption requires embedded products to be available in the right place at the right time. With effective analytics and visualization tools, banks, fintech firms, and nonbanks can better understand product-market fit and provide their customers with more effective trade-offs between price, convenience, and quality.

TIBCO Can Reinforce Your Embedded Finance Strategy

Embedded finance will become a land grab soon. Therefore, as a player in the banking sector, you must act quickly to develop a strategy that incorporates an optimized cost structure and a well-defined path to transformation.

Data and analytics are the keys to building embedded finance products that meet changing customer preferences amid increasing competition. By capturing, unifying, and operationalizing your data, TIBCO Connected Intelligence solutions for Banking can help you draw timely and accurate insights, refine your strategy, and make embedded finance a win-win experience for you and your customers.

Read this ebook to learn how you can get ahead of the curve, and start your journey with TIBCO to accelerate your digital transformation today.