By Publicis Sapient Chief Growth Officer Aman Sud
Gone were the days where user experience is something as simple as having a customer visiting a brick and mortar shop. As the digital age advances, more and more channels of interactions are cropping up, and this also involves finance.
With that said, the term embedded finance is becoming more and more prominent. It represents the integration of financial services and products into non-financial platforms or businesses, seamlessly blending them with the user experience.
Not only that, embedded finance incorporates financial capabilities, such as payments, lending, insurance, or savings, directly within the digital infrastructure or offerings of other industries or businesses.
One clear advantage of embedded finance is the ability to create simple, linear journeys that can be completed without the user opening a banking app or website, or inputting card details.
“Seamless journeys like this offer consumers and professionals an important value-add in terms of user experience and efficiency,” said Publicis Sapient Chief Growth Officer Aman Sud, adding that embedded finance also enables personalised and contextually relevant financial offerings, as companies can leverage customer data from their non-financial platforms to tailor their financial services.
It also expands access to financial services by reaching customers who may not have traditionally interacted with banks directly. Aman sees embedded banking as less of a threat, and more of a significant opportunity for banks, enabling such institutions to expand their businesses, reach untapped customer segments, and drive revenue growth.
On the flip side, however, embedded financing also poses a potential threat to banking institutions if they fail to adapt. Successful offerings of embedded financial services by non-banking entities, such as e-commerce platforms or fintech startups, can disrupt the traditional banking sector and gain a substantial market share.
Banks have the choice to embrace embedded financing, capitalising on their established infrastructure, expertise, and customer confidence. They can form partnerships with embedded finance platforms or non-financial entities or provide services directly. This enables banks to stay
relevant in the evolving financial landscape and extend their market presence.
Aman said that within the embedded finance stack, banks can assume any one of a diverse set of roles:
Distributor / Partner
They can serve as foundational financial infrastructure providers, collaborating with non-financial entities to facilitate the delivery of financial services via APIs or other integrations.
Banking Infrastructure Provider
They can directly offer their embedded financial products and services to customers by establishing partnerships with non-banking platforms.
Regulated Entity or Balance Sheet Provider
They can contribute their regulatory expertise, risk management practices, compliance frameworks, and security measures, ensuring a robust and secure embedded finance ecosystem.
Financial Product Manufacturers
They can create and refine products that cater to blended customer propositions. When considering embedded finance, banks have numerous potential commercial strategies to explore.
Nonetheless, for their embedded finance plans to succeed, banks require suitable technology, partnerships, regulatory compliance, and customer adoption for successful embedded finance implementation.
This entails leveraging APIs, data analytics, securing collaborations, meeting regulatory requirements, and ensuring customer awareness and perceived value. On a separate note, Aman believes embedded financing also plays a vital role in serving the underserved.
“Let us take a step back and look at the Southeast Asia region, in terms of the population, and the opportunities at play. To start, over 70% of the adult population in the region is either underbanked or unbanked. At the same time, 78% of the total population is already connected to the internet, with 98% having mobile access. The median age of this population is young – 29 years – and at the same time, 65% of the total population will be in the middle-income class by 2030,” he said.
“Simply put, we have a young and mobile-savvy population who are underserved when it comes to banking, with unmet financial needs.
By embedding financial services into platforms that cater to specific demographics or communities, companies can provide access to banking services to underserved populations such as the unbanked, or underbanked individuals who may have limited access to traditional brick-and-mortar banks,” said Aman.
For example, a mobile money service that is embedded in a messaging app can make it easier for people in rural areas to access financial services. Moreover, embedded finance can utilise alternative data sources to evaluate the creditworthiness of individuals with limited or no credit history. This enables greater access to financial services for such individuals.
“Some examples that I can highlight include Maybank’s partnership with Apple to introduce Apple Pay to their users nationwide, enabling contactless payments via iPhone or Apple Watch not just in Malaysia, but across the border in nearby Singapore,” said Aman.
Singapore’s DBS bank is another great case study of banks tapping on partnerships to build digital marketplaces and communities for customers to help manage their end-to-end journeys.
Their DBS Property marketplace, for example, involved partnering with Averspace to help discover properties on the platform, to apply for loans for purchase, and even for moving in and managing the property.
The DBS Travel Marketplace partnered with Singapore Airlines, Expedia, and Chubb Insurance Singapore help customers with comparing and booking both flights and hotels as a one-stop solution for travel.
In these examples above, banks allowed third-party providers to integrate their services into the bank’s platform, thus expanding service offerings available to their customers through partnerships.
Aman said the early leaders in embedded finance tend to be digital-native challengers such as fintech, many of which have historically faced less regulatory scrutiny than banks, with areas like payments and BNPL being where they have achieved the greatest scale.
That said, ensuring compliance with financial regulations can be intricate and time-consuming for both banks and non-financial entities offering embedded financial services.
Safeguarding customer data privacy and security is crucial for maintaining trust, necessitating robust measures from banks and non-financial companies engaged in embedded finance.
Just as important, licensing and oversight requirements may exist in certain jurisdictions, mandating banks and non-financial companies offering embedded financial services to obtain licences or be subject to regulatory supervision.
Addressing the aspect of compliance with financial regulations, Aman said there are a few layers that need to be considered. In addition to staying informed about relevant regulations, banks must regularly engage in constructive discussion with regulatory bodies and be supported by legal guidance in navigating the intricate regulatory landscape.
“At the same time, banks should implement adequate security measures to protect customer data privacy and security. This includes measures such as encryption, access controls, and monitoring,” he said.
To safeguard themselves and their customers, banks must lay down transparent and comprehensive terms and conditions. This includes disclosing how customer data will be utilised and outlining measures taken to ensure its protection.
With regards to the future, Aman said embedded finance appears to be promising. He envisioned it becoming an integral part of many banks’ plans, driven by their need to revitalise growth by rethinking the way they engage customers.
To succeed, banks need to be hyper-efficient, utilise customer data much more effectively and be more innovative and flexible in their product development and delivery. This means their senior executives must have an intimate understanding of the platform model and a strong commitment to speed up the transformation.
This can enable banks to scale embedded financing offerings more effectively promptly and efficiently, and by extension, will allow them to reach new customers, grow their businesses, and better compete with non-financial companies.
