Banking is one of the pillars of any economy and has evolved along with the emerging requirements of businesses and consumers over the years. With the lines blurring between financial services and everyday activities in today's digital-first world, a revolutionary concept has emerged; Embedded Banking- one of the subsets of Embedded finance. This shift from the traditional banking model to embedded banking has a lot to do with convenience.
So, how can banks adapt and thrive in this new reality? Let’s explore.
What is Embedded Finance in Banking?
While embedded finance includes a wide range of financial services, such as embedded insurance, investments, and financial planning, embedded banking is the integration of financial services into non-financial platforms, enabling users to access banking features directly within the apps they use daily, such as shopping, ridesharing, or managing subscriptions. This transformation shifts traditional banking from standalone interactions to being an invisible but integral part of daily life.
Embedded banking integrates financial services directly into the platforms of non-financial businesses. These businesses could include banking solutions such as payments, loans, and insurance within their existing interfaces so that customers can access these services without leaving their website or app. For example, a customer buying a high-ticket item on an e-commerce platform could be offered financing options at the point of sale, processed entirely through the retailer's portal.
With the increased adoption of this form of integration, revenue in the embedded banking market is expected to grow from USD 20.3 billion in 2024 to USD 149.4 billion by 2034. Below, we will discuss what embedded banking is commonly used for, how it works, and its benefits and challenges for businesses. If you're a business looking into embedding banking features, here is what you need to know.
Use of Embedded Finance in Banking
Let us discuss below the ways in which business entities use embedded banking.
Embedded payments
Businesses integrate a payment gateway directly into their platforms in collaboration with a payment service provider. Customers input their payment details (for example, credit card, debit card, or digital wallet) in the business's app or website. The provider processes the transaction without redirecting customers to an external payment page, which can make the transaction easier to complete and improve conversion rates.
For instance, an online retailer embeds payments so that the purchase is completed directly on the site.
Embedded Lending
Businesses partner with a lending platform or financial institution to offer loans or credit products to their customers. The platform or institution often performs credit assessments using data already available within the business's platform (e.g., transaction history and customer profiles). Approved customers can then access loans or credit lines directly within the business's app or website. This arrangement provides businesses with an additional revenue stream and gives customers access to additional financing.
For instance, an accounting software platform offers small business loans and online checkouts, such as buy now and pay later options. At the same time, a POS system enables small businesses to apply for loans to finance inventory purchases. Approvals and disbursements occur directly within the POS software.
Embedded Banking Accounts
Businesses partner with a BaaS provider to offer customers essential banking services, such as current and savings accounts. Generally, this includes opening accounts on behalf of customers and facilitating services such as direct deposit, card payments, and money transfers within the business's platform. Embedded banking accounts provide users with a convenient way to manage finances and access their earnings.
For instance, a ride-sharing platform allows drivers to open a bank account right from the driver app. It enables them to receive their earnings promptly and manage their finances efficiently.
Embedded Insurance
Businesses collaborate with insurance firms to provide insurance products that are relevant to their service. This is usually achieved by embedding an insurance quote and buying process directly onto the business's platform. Embedded insurance streamlines insurance buying while making it more convenient for customers.
For instance, online travel agency travel insurance or rental car insurance can be offered as add-ons during the flight or hotel booking process.
Embedded Expense Management
Businesses will integrate expense tracking and management features, which are often connected to embedded banking accounts or corporate cards. This will enable employees to submit expenses, track spending, and generate reports all within the business's app or software. Embedded expense management will make reporting easier for employees and allow businesses to control their spending better.
A company integrates expense management into its accounting software so employees can upload receipts, categorise expenses, and submit expense reports for approval within the accounting platform.
Embedded Rewards and Loyalty Schemes
Businesses partner with the provider of a banking or loyalty schemes provider to create their own rewards and loyalty schemes, which they manage to operate. This involves distributing virtual or physical cards, rewards point tracking and providing avenues for redemption. Businesses can personalise schemes according to their audience types and improve the customer experience.
For example, a coffee shop chain develops a loyalty program inside its mobile application. With every purchase, customers can earn reward points and exchange them for free drinks or discounts.
Embedded Investment Products
Businesses partner with investment platforms or brokerage firms to offer their customers investment services. These include fractional share investing, robo-advisory services, or access to curated investment portfolios. Making all these features available within the business's platform opens new avenues for customer investment and expands businesses' lines of service.
Embedded Finance Benefitting the Banking Sector
As embedded banking becomes more readily available, it can introduce some of these upsides for businesses:
Customer Retention and Loyalty
Businesses can improve the customer experience by integrating financial services that are directly relevant to the customer's immediate needs (e.g., POS financing and rewards schemes). Customers are more likely to return to a platform that offers additional financial benefits and simplifies their finances.
Revenue
Embedded banking helps businesses diversify their revenue sources. For example, by offering lending, insurance, or investment, a company can generate income from financial service fees and commissions.
Operational Efficiency
Embedded banking offers several different types of operational efficiency. For example, embedded payment systems decrease manual processing, which could reduce errors and administrative costs. Similarly, embedded expense management minimises the workload of finance teams by automating approvals and reimbursements.
Customer Data
The analytics tools embedded in banking solutions provide businesses with valuable insight into customer behaviour and preferences. Such information forms the basis of business strategies and marketing efforts and determines product development.
Challenges of Embedded Banking and How to Overcome Them
Payments, banking functionalities, and financial information all carry some risks and challenges. Here are some of the difficulties with embedded banking and strategies to mitigate these.
Security and Data Privacy
Financial data is quite delicate, and a breach or loss of security can significantly erode customers' trust and lead to heavy losses. You can mitigate this with state-of-the-art security measures like encryption, multifactor authentication, and also regular security audits. Even the choice of such fintech services that focus much on security and have track records to prove their case can fortify your defenses.
Integration
Integrating new services with your existing systems might disrupt the user experience or existing functionalities. Formulate a comprehensive IT strategy and hire skilled developers experienced in both finance and your specific technology stack. Choosing fintech partners with flexible, well-documented APIs can also make integration easier.
User Experience
New services do not add value initially, but complicate the user interface, which might negatively affect the user experience. This situation can be solved by concentrating on the design and testing of usability. Make the user experience as simple as possible and allow new features to be intuitive.
Financial Risk and Liability
Providing credit, insurance, or investment facilities poses financial dangers of default, fraud, and market volatility for your business. Mitigate these risks by formulating an integrated risk assessment and management strategy. Utilise advanced analytics to analyse customer creditworthiness and have strong fraud detection measures in place.
Quality at Scale
As the user base grows, embedding banking services can become complicated, undermining service quality and reliability. To handle growth effectively, this must be anticipated, and infrastructure investments must be planned. Monitor key performance metrics and customer feedback to address issues that arise quickly.
Partnerships
Dependence on third-party service providers can lead to service disruptions, conflicting business directions, or changes in regulatory status. To mitigate this dependency, partner with strong alliances aligned with mutual goals and operations, offer flexible terms that cover your interests and have robust contingency plans in place to strengthen your operations further.
How to Get Started with Embedded Banking
Identify Your Needs and Goals
It all begins with understanding your specific needs and goals in embedding banking solutions. Assess your core products and services, target audience, and key operational challenges. Find the areas where embedded banking features can enhance your offerings, close gaps, and create value for your customers. What you want to achieve—new sources of revenue, better customer experience, improved operational efficiency, or more profound insights from financial data—is what will shape your choices. Clear objectives will help your decision-making process and make sure that all efforts are on target with your business strategy. Second, use the same type of market research and customer feedback to identify better what kind of financial service is of the most value to your customers so that you can adjust your offerings better.
Finally, choose the proper integrated banking feature. The secret to success begins with deciding which types of features should be included initially with, in general, foundational functionalities: from such a straightforward feature as having an embedded payment or, say, an embedded account directly. Prioritise features that align with your business objectives and potential for significant benefits to customers as well as your bottom line. Consider the scalability and adaptability of the chosen features, making sure they grow with you as market trends and customer expectations change. Selecting flexible features with a strategic approach maximises long-term value.
Select the Right Technology Partner
Choosing the right technology partner can make or break your embedded banking initiative. Conduct thorough research and compare providers based on their offerings, pricing, integration options, customer support, and reputation in the industry. Look for a partner that provides flexible APIs and seamless integration with your existing technology stack, enabling smooth implementation. It is also crucial to opt for a provider who has a good understanding of compliance and security requirements. This helps mitigate risks and maintain the trust of your customers. A good partner will accompany you in this process, helping you build a robust embedded banking solution.
Prepare a Thorough Launch Plan
A carefully structured launch plan is vital to ensure that the implementation of the embedded banking features is smooth and successful. First of all, the implementation of features must be clearly defined, and timeliness must be set for each part of the project. One should identify all crucial milestones in the project in order to follow its progress and take into account technical, marketing, and customer support resources to control the roll-out smoothly. Communication is essential; develop a strategy on how to communicate the new features to your customers, educating them about the benefits of these features and security aspects. A detailed launch plan minimises risks and ensures the alignment and readiness of all interested parties.
Launch and Promote Your New Features
Before introducing embedded banking features to the marketplace, test them in a thoroughly sandboxed environment to identify, address, and correct various issues. Once the features have been ready, create a prosperous marketing campaign to promote such features and their benefits to end customers. To further incentivise adoption and generate excitement around the launch, offer incentives in the form of discounts or rewards. Ensure your customer support team is appropriately prepared to answer any questions or concerns users might have, which promotes a smooth user experience. A successful launch can lay the groundwork for customer delight and longevity.
Track, Assess, and Refine
Launch is just the starting point—continual assessment and refinement are crucial to perfecting your embedded banking strategy. Track KPIs such as customer adoption, usage rates, revenue generation, and satisfaction levels to measure the effectiveness of your features. Collect customer feedback regularly to understand their experience and what can be improved. Based on data insights and customer feedback, refine your strategy and make necessary adjustments. This continuous improvement process will enable your embedded banking solutions always to be relevant, effective, and aligned with your business goals.
The future of banking consists of embedding financial services in the everyday digital experience. This trend is undoubtedly bound to redefine how consumers manage their finances as it picks up pace. Rising APIs, AI, and data analytics give embedded finance the ability to deliver highly personalised, secure, and available financial solutions across diverse industries. For banks, this change is a mixture of risks and an opportunity to innovate, collaborate, and remain relevant. The future balance to be struck will be between innovation and stringent regulation that brings forth trust and inclusivity. Embedded finance is coming into our lives, thus the beginning of the age of seamless, integrated, and democratised financial ecosystems.