We’ve seen companies like Airbnb and DoorDash go public, which begs the question: What do they have in common besides high valuations? The answer: Both companies have optimized subtle, “embedded finance” features into their platforms.
Today’s consumers are looking for seamless, frictionless experiences wherever they are. Embedded banking services are an efficient way to provide a significantly improved customer experience.
In this digital era, consumers aspire to be more empowered and independent while making decisions. For example, no one wants to go to an ATM to take out money, and people do not want to fish through their pocketbooks for their wallet or credit card — customers want convenience.
Think seamless. The easier the customer experience, including the financial parts, the more consumers will gravitate towards those who provide it.
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Embedded finance will promote customer stickiness and increase brand awareness because it transfers power into consumers’ hands. It enables them to make financial decisions at a time, place or channel that works for them. This concept will revolutionize industries in the next few years. It can be argued that financial institutions that develop and grow new revenue streams through embedded finance will realize greater value than those trying to go it alone, relying on the consumer to make the connections.
Embedded finance is driving a reimagining of what finance looks like across many industries. For example, let’s look at Apple’s collaboration with Goldman Sachs to produce the Apple Card, which leads to the seamless use of Apple Pay.
The partnership gave Apple, one of the most iconic and successful brands of our age, an essential financial tool embedded within its owned ecosystem. We can also look at retail, non-financial, but heavily utilized, Shopify. Shopify was among the first e-commerce companies to allow merchants the ability to accept card network payments directly through the platform rather than through a third-party payment portal.
Brands are increasingly challenged by legacy technology infrastructure, which prevents them from truly delivering personalized experiences. One way to solve this issue would be to utilize “banking as a service” or “BaaS,” which in some forms leverages cloud technology and unique communication gateways called APIs (application programming interfaces).
We have seen rapid growth in the BaaS space, which is a growing threat to incumbent banks because it gives non-financial companies the ability to offer similar banking products and services right in their own ecosystem. This is an area to watch as, within the next decade, the BaaS market is expected to reach $5 trillion.
Digital merchants are gaining direct access to financial functions through APIs, allowing them to efficiently integrate financial services into their user experiences. The integration helps to create seamless services and experiences that enhance consumer convenience. Embedded finance is paving the way for people to perform various financial tasks from one app without accessing other services individually.
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Why Institutions Should Consider Embedded Finance Strategies
Increasingly consumers expect a friction-free banking experience, where the traditional rigmarole of personal banking blend into the background of everyday digital life.
Other than for transactional needs, consumers generally think about banks and credit unions only when focusing on larger goals. For example, a person looking to buy a home will be focused on the facilitation of that process, not necessarily the mortgage itself.
In other words, the mortgage becomes a means to an end, and the lender who is on the spot will get the business. We will likely soon see real estate agents providing customers with interfaced mortgage offerings to quickly enable purchases, eliminating the need to liaise separately with mortgage lenders in traditional ways. This pattern will be repeated in other areas where credit is essential to obtaining major goods and services.
The possibilities multiply as more and more services are delivered via the web. Take the Acorns investment website. It has found a niche in attracting novice investors looking to enter the stock market without putting up a large sum of money by offering incentives to marketers via advertising placement. For example, a user on the app sees an ad for Nike shoes, clicks the ad, and Nike puts $15 into their account when they buy the shoes. These are small, effective ways for these new entrants in the finance space because they satisfy needs across multiple parts of their lives within one arena.
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Consumers Like Everything To Be All In One Place
The banking model of the future puts the consumer at the center of everything. People expect all their brands to be interconnected in a seamless way, where their interactions with brands are personalized, transparent, and simple. Survival depends on the ability to transform business models, leveraging emerging technology like cloud services and artificial intelligence — even, in time, augmented reality.
Embedded finance will change the business paradigm due to its customizable nature and interconnectedness. Additionally, it will unlock new opportunities and narrow the gap between different industries and interactions amongst them.
Big tech companies will play a crucial role in improving the financial services landscape by playing a role in development of marketplaces, ecosystems and platforms where finance and commerce blend.