Banks Must Adopt Embedded Finance to Stay Relevant in Digital Era

Nicholas Braiden, an early adopter of blockchain technology and a strong advocate for leveraging financial technology to reshape digital payment and lending systems, joins us for an insightful interview. With extensive experience advising startups in the FinTech industry, Nicholas has a wealth of knowledge to share about the transformative potential of embedded finance in the banking sector.

Can you explain what embedded finance is in simple terms?

Embedded finance involves integrating financial services, like lending, payments, insurance, or investing directly into non-financial platforms. It enables users to access financial products while engaging with other services, such as buying insurance on an e-commerce site or securing a loan through accounting software, making the experience seamless and convenient.

How is embedded finance different from traditional banking?

Traditional banking typically expects customers to visit physical branches or the bank’s digital platforms to access services. Embedded finance flips this model by integrating banking services within the digital platforms customers already use daily, making financial services more accessible and convenient.

What are the main competitive pressures driving banks to adopt embedded finance?

Key pressures include changing consumer behaviors, where instant, contextual, and invisible financial services are expected; the dominance of digital platforms like Shopify and Salesforce; and the rise of fintechs offering bank-like services. Additionally, regulatory modernization in regions like the US, UK, and Europe facilitates the easier offering of services via APIs and partnerships.

How has changing consumer behavior influenced this shift?

Consumers now prefer seamless, integrated experiences and expect financial services to be part of their daily digital interactions. They don’t want to switch between numerous platforms for different tasks. This expectation for a more cohesive experience drives banks to embed their services within platforms consumers frequently use.

According to recent reports, how big is the embedded finance market expected to grow by 2030?

The embedded finance market is projected to reach $7 trillion by 2030, reflecting its vast potential and the growing importance of integrating financial services into various digital platforms.

Why do you think embedded finance is seen as a growth opportunity rather than a risk?

Embedded finance reframes technology as a growth avenue instead of a risk. It opens new distribution channels, provides real-time data access, and enables banks to leverage partnerships with fintechs. These factors collectively transform embedded finance into a significant revenue-generating strategy.

How can embedded finance create new distribution channels for banks?

By embedding services into digital platforms, banks can reach a broader audience with minimal additional infrastructure. This approach allows banks to interact with customers through the platforms they already use, expanding their reach without the need for additional branches or costly marketing campaigns.

What kind of data advantages do banks gain from embedded finance?

Banks gain valuable, real-time data on user behavior, transaction histories, and contextual insights through embedded finance. This data can be used to tailor services, anticipate customer needs, and enhance personalized offerings, thereby improving customer engagement and satisfaction.

Can you elaborate on how partnerships with fintechs can benefit banks?

Collaborating with fintechs allows banks to combine their strengths, such as trust and compliance, with the innovative solutions provided by fintechs. This synergy can create modular financial services, enhance customer experiences, and open new revenue streams, benefiting both parties.

Can you give an example of a successful embedded finance partnership, such as the Goldman Sachs and Apple collaboration?

Goldman Sachs’ partnership with Apple for the Apple Card and Apple Savings is a notable example. By embedding its financial products into Apple’s ecosystem, Goldman Sachs accesses Apple’s extensive user base and integrates banking services seamlessly into their daily routines.

What makes the BBVA and Solaris partnership a good case study in embedded finance?

The BBVA and Solaris partnership exemplifies the power of embedding banking-as-a-service. By leveraging Solaris’s infrastructure, BBVA can deliver comprehensive banking services across Europe, demonstrating how traditional banks can modernize and expand through strategic embedding.

What steps should banks take to start with embedded finance?

Banks should begin by choosing a high-impact use case, such as small business lending or B2B payments. Next, they must decide whether to build the necessary infrastructure in-house or partner with an embedded finance enabler. Finally, creating a cross-functional team is crucial for coordinated and successful implementation.

Should banks build their own infrastructure or partner with embedded finance enablers?

Both options have merit. Building infrastructure in-house offers control but can be resource-intensive. Partnering with established enablers can quickly bring new services to market with lower initial investment. The choice depends on a bank’s resources, expertise, and strategic goals.

Why is it important to have a cross-functional team for embedded finance initiatives?

Embedded finance spans various functions, including product, compliance, legal, technology, and partnerships. A cross-functional team ensures cohesive and coordinated efforts, addressing all critical aspects and fostering successful project execution.

How is embedded finance transforming the identity of banks from service providers to infrastructure providers?

Embedded finance encourages banks to shift from merely providing services to enabling other platforms to offer financial functionalities. This transformation allows banks to serve as the backbone of various digital ecosystems, driving indirect but substantial value creation.

Why might banks that fail to adopt embedded finance risk becoming invisible?

Banks that don’t embrace embedded finance may see their visibility wane. As consumers and businesses increasingly expect financial services to be seamlessly integrated into their existing platforms, banks that cling to traditional models might find it harder to engage and retain customers.

In your view, what does the future of banking look like with the rise of embedded finance?

The future of banking is likely to be more integrated, seamless, and context-aware. Financial services will become ubiquitous, embedded within various digital platforms, making them invisible yet ever-present. Banks will serve as essential infrastructure providers, supporting diverse ecosystems while continuing to innovate and expand their capabilities.

What is your forecast for the future of embedded finance?

The future of embedded finance appears exceptionally promising. As digital ecosystems continue to evolve, embedded finance will be crucial in delivering convenient, contextual, and integrated financial services. Banks that adapt quickly will lead the industry, while those that don’t may struggle to remain relevant.

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