34 MARCH / APRIL 2023 OPERATIONS / TECHNOLOGY Embedded Fintech or Embedded Finance? Essential strategies to future-proof your financial institution Virginia Heyburn Director – Research, Insights & Advocacy Engage fi Virginia.Heyburn @Engagefi.com As financial institutions move into a new technology era, they realize that their existing innovation cultures are broken. New fintech competitors are gaining market share. They are gaining deposits when traditional financial institutions are, on balance, losing deposits. There’s a lot of discussion within the financial institution industry about embedded finance and embedded fintech as a technology strategy, but not enough understanding and urgency to appreciate it as a future-proof business strategy. One thing is clear, however: the need to act quickly is essential as new competitors gain ground on traditional financial institutions’ customer base. The focus has historically been placed around the innovation of products, then products became commoditized. Focus again shifted to innovate around service, then service became commoditized, too. Now, once again, financial institutions must innovate around products AND service where the two are at the center of the overall strategy and no longer on the periphery. As a result, they now face existential challenges. The consumption of banking services is increasingly unbundled from the traditional financial services industry. New niche players in mortgage, student lending, small business and payments have long exposed the slowness of traditional financial institutions to respond to rapidly changing customer expectations – at a monumental cost to those established financial institutions. The race for relevancy is on. Financial institutions that act quickly and are open to exploring new strategies will put themselves in a better position for longterm success. Two of the most talked about strategies are embedded finance and embedded fintech. They are distinctly different business strategies that offer financial institutions exciting possibilities to reach new market segments and offer consumers more of what they want and need – at a faster pace than ever. What is Embedded Finance? Embedded finance changes when, where and how people interact with financial services. It has created many opportunities for financial and non-financial businesses and is something that we all know and love. Take Uber, for example. You can easily get to your destination with just a click of a button and, as a bonus, you don’t have to pay the driver when you get to your destination. Payments are embedded behind the scenes for an easy experience. Another example that may not be as obvious is insurance. You book your latest vacation with the airlines, and you can add travel insurance within the flight reservation options. Embedded finance is emerging across all consumer markets from Instacart to Amazon, and the list goes on. Embedded finance is more than using trendy apps for convenience. It’s also a traditional community bank partnering with a retailer or consumer service provider to be the back-end deposit account. For example, a student lending company could provide financial advice for young people. Maybe the provider would like to offer them a debit card. In this case, the provider wouldn’t need a bank charter; they could partner with a financial institution to consummate the transaction. The consumer benefits from the retail purchasing experience of using an embedded banking service without stepping outside their traditional buying experience to do so. It’s faster, easier and frictionless, which is exactly what today’s consumer wants. In this case, financial institutions capture additional opportunities with new markets that would otherwise
RkJQdWJsaXNoZXIy MTg3NDExNQ==