Embedded finance has been a hot topic across the guarded chambers of traditional banking for some time. Although the concept is not entirely new, modern advances and innovations in its underlying technology has the potential for significant catalyzing a fundamental change in how banks operate.
For instance, most traditional banks till date package all their financial offerings, such as savings and checking accounts, credit cards and loans together, such that they have complete control over the entire operation. With the arrival of embedded finance, banks are now being forced to separate services which were traditionally grouped together and market them individually to meet changing consumer demands.
The above is one example of many changes traditional institutions are being motivated to implement, and in today’s blog post, we will explore the factors promoting this change and how it will contribute to a brighter future for global banking.
What Is Embedded Finance?
Embedded finance as a concept can simply be understood as the use of financial services in a traditionally non-financial environment. Since the last decade, this offering has become commonplace among various consumers, for example, at automobile dealerships which offer spot financing and insurance to any customer purchasing a vehicle.
Another example of this can be found at large retailers who offer cobranded bank credit cards to increase brand awareness and customer loyalty. What has changed now is the shift of embedded finance offerings from a strictly offline setup to an omnichannel presence. Today, thanks to digitization, customers can experience the benefits of embedded finance across both offline and online setups, for example, while buying a car online from Tesla or ordering groceries from Walmart.
Although it is now proven that this integration appeals to both consumers and businesses, there is still a great deal of resistance from traditional banks. For example, as of date, only Standard Chartered has partnered with an Indonesian shopping app to offer a seamless financing experience.
Moving Away from a Channel Mindset
To accurately understand the approaches which need to be changed, it is first crucial to understand how most traditional financial institutions operate today.
Today, most banks club all their financial services under strict product categories. For example, banks link their credit cards with their savings accounts, meaning a customer mandatorily needs to have a savings account with the bank to become eligible for their credit card. While this arrangement is beneficial for the banks, it is limiting to customers who, for example, are looking for a good credit card but do not want to open another savings account to become eligible for the same.
The emergence of embedded finance has turned this arrangement on its head.
To become successful in this new era of global banking, banks need to steadily move away from their pre-existing channel mindset. Instead of grouping financial products together, banks need to separate and market them as individual solutions which solve specific customer problems without depending on each other. By leveraging large-scale componentization and holistic API (Application Program Interface) infrastructure, banks need to ensure that each of their products can operate independently both in their native environment as well as a third-party setup involving multiple stakeholders.
A good example of this can be found in POS BNPL setups.
Earlier, if customers wanted to apply for a consumer durable loan, they would typically need to complete a separate application, submit their documentation, and wait for approval on the same. Modern POS machines have integrated both these processes, thus facilitating a seamless financing experience for the customer.
Today, customers can simply swipe their pre-existing debit or credit cards during the purchase, and the POS machine will automatically offer a suitable tenure and credit line if certain pre-existing conditions are met. All the customer needs to do is digitally provide their consent and authenticate the transaction via an OTP, and the transaction is complete. This whole experience benefits both the stakeholders, as the businesses get to close an additional sale and earn extra revenue while the customer is delighted with a seamless financing experience at checkout.
The Defining Moment
As the underlying technology supporting embedded finance advances in capabilities, more innovations will appear to enrich the customer experience. For example, as open banking infrastructure matures, there soon might be a time when an individual’s insurance policies can be used as collateral for a loan or their premium paying frequency is considered during the credit underwriting process.
Although this process is technically possible today, one major limitation is that insurance companies and banks do not share customer information with each other, even if they are owned and operated by the same entity. A future where information can flow seamlessly between these entities will not only increase the accuracy of credit scoring algorithms but also empower last-mile consumers with credit access.
Conclusion – What Needs to Change
However, one crucial aspect that needs to change to facilitate all the advances described in this article is a mindset shift. Traditional banks need to accept that the needs and demands of modern consumers, both businesses and end customers, have changed.
Today businesses no longer want to wait 2 to 3 business weeks to apply for a working capital loan being unsure of their exact eligibility. They demand instant credit checks and a seamless application process which empowers them with affordable access to capital when they require it the most.
Similarly, today’s end customers want banks to expand their credit scoring algorithms and analyze metrics which holistically assess an individual’s creditworthiness and are not restricted by traditional data points. Once traditional financial institutions accept and embrace this shift in demand, they will be able to experience the complete potential of embedded finance and the benefits of a truly connected experience it promises.
CrediLinq.Ai is pioneering embedded finance solutions for Southeast Asia and beyond. If you are looking to offer an embedded finance experience to your business customers, get in touch with us today.
