Banks Must Try the Flip Side of Embedded Finance: Embedded Fintech
Banking institutions strive to build their services into nonbanks' ecommerce streams and more, but embedding fintech into their own apps and other products can improve their appeal.
By Miguel Armaza Gilgamesh Ventures
Many retail banks are currently interested in embedded finance in the form of a one-way distribution play, pushing banking services out to businesses and consumers through nonbank companies’ platforms.
However, to continue thriving it’s critical the banks shift from embedded banking alone to also adopt another principle: embedded fintech. This creates a two-way street of partnerships with tech companies to customize core banking services and bring other services like payroll, identity verification, tax management and insurance together to deliver the one-stop-shop many customers now want.
With a one-way-street perspective on embedded finance, the idea is that if payment volume is moving to tech companies then banks should power the back end of the tech experience. This is a good start but the threat from fintech companies to retail banks will only continue to deepen in the future. Customer adoption is higher than ever for some fintechs like Chime and Nubank, for example.
A better approach would be for banks to use embedded fintech to improve customer experience by upgrading banks’ tech offerings to retain customers and grow within their customer base. Embedded fintech can help these organizations stay competitive technologically.
Products outside of core banking make the most sense for this approach: fintech companies do most of the heavy lifting and banks can distribute their services, frequently as a white label offering. Not only can embedded fintech help banks better serve existing customers, but it can also help them attract new clients looking for advanced services.
Embedded payroll is one way banks are adopting embedded fintech. Embedded accounts receivable and accounts payable workflows are another. Embedded tax prep services are already a reality. Embedded general ledger accounting could be on the horizon.
Payroll Services as a Business Payments Embedded Fintech Use Case
There are many opportunities for innovation with embedded payroll. Banks are uniquely positioned to offer tailored payroll solutions that map to what small businesses today want. Payroll is complex and needs to be compliant to avoid hefty penalties. Embedded payroll lets banks offload costs, burdens and risks associated with payroll.
Banks can offer faster payroll with less risk when they hold the accounts for employers and payees. They can also give business customers a fuller picture of their cash flow, offering them peace of mind. It also presents financial institutions with cross-selling opportunities like working capital loans to meet the next payroll cycle. Banks have greater visibility into the end-to-end cash flow of their SMB customers, which they could use to offer more tailored solutions and custom insight.
For example, Chase Payment Solutions has already adopted embedded payroll in a deal with Gusto. This has allowed Chase to give their small business customers all-in-one solutions that simplify workflows and back-office overhead. This frees entrepreneurs’ time and budgets to support their employees and their business.
ID Verification as an Embedded Fintech Use Case
Identity verification is another big area of potential benefit for financial institutions embracing embedded fintech. Partnering with Know Your Customer (KYC) and Know Your Business (KYB) fintech providers ensures regulatory compliance, enhances security, improves customer onboarding, gives banks access to specialized expertise, and reduces overhead.
For example, UBS partners with iProov to quickly and securely onboard their new customers while in the U.S. M&T Bank works with Alloy for identity verification. Regional banks and credit unions are also exploring this area with financial institutions like Mountain America Credit Union using Alloy and Community Bank & Trust partnering with ValidiFL.
KYB is a more nascent category, and some consider it a subset of KYC. However, there are pioneers domestically in the U.S. like Baselayer and internationally like Niva, that are already getting traction in the space. (Disclosure: My firm, Gilgamesh Ventures, is an investor in both.)
Read more: How to Turn Identity Fraud Prevention into a Competitive Advantage
New Embedded Fintech Applications Continue to Surface
Banks by nature have to be intentional about their innovation, who they partner with for these solutions, and how they bring these solutions to the market. To stay competitive in this market and better serve their customers, traditional financial institutions need to create a two-way relationship with innovative tech companies, adopting embedded solutions while building them as well.
Competitors from the fintech field itself are learning the lesson about embedded finance.
Case in point: embedded tax preparation services. This is another category financial institutions must watch closely. Take April, founded in 2021, which is already leading in embedded tax services.
Among the companies integrating April into their products is Chime. Beginning this year this aggressive fintech used April to offer its account holders free tax prep service right through their app. Millions had the opportunity to use it. Next tax season, will your institution’s customers have that benefit available?
About the Author:
Miguel Armaza is general partner at Gilgamesh Ventures and host of the Fintech Leaders podcast.
