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How Financial Institutions Can Stay Relevant Despite the Threat of Embedded Banking

By | Blog, Digital Communications, Video Banking

Embedded finance and Banking as a Service (BaaS) are rapidly reshaping the financial services industry—and have the potential to reshape other industries as well. Banks and credit unions face the increasing threat of financial services being offered by non-banking companies. The Financial Brand writes that “telcos, big techs and software companies, car manufacturers, insurance providers, and logistics firms” are all preparing to launch financial services to serve both businesses and consumers.

This changing landscape threatens banks and credit unions because it holds the potential to eat away at their market share. When non-financial companies are offering services like digital wallets, payments, lending, and bank accounts, legacy financial institutions (FIs) are put at risk of losing crucial business. But what can banks and credit unions do to stop it? How can they maintain their business despite the trend? In this blog, we’ll discuss the growing embedded finance and BaaS movements, and what FIs can do to maintain their market share.

The Developing Trend

Similar to movements like open banking, embedded finance—or embedded banking—is a relatively recent development. With the growth of e-commerce in recent years, people are adapting to new, digitized buying practices. In some cases, financial products, like financing, payments, digital wallets, and more are being built into other products and services and sold to businesses and consumers by non-financial companies.

Researchers looking into embedded finance consistently report that it’s expected to grow substantially in coming years. According to Dealroom.co, the total embedded finance market value is projected to hit $7.2 trillion by 2030. “Embedded finance and BaaS startups have already attracted huge funding in the last year,” the article says.

Companies venturing into embedded finance often have the goal of creating a more comprehensive customer experience. In their own research on the topic, McKinsey wrote that “Companies’ embrace of embedded finance…aims to retain customers and increase their so-called lifetime value.” By becoming a bigger part of their customers’ lives, these brands aim to increase the value of the products and services they provide. “For customers, the appeal is ease of use: a small business can get a bank account from its accounting software, or a consumer can pay via the retailer,” McKinsey wrote. 

How FI’s Fight Back

As The Financial Brand points out, most banks and credit unions are not prepared to compete in this new world of embedded finance. To survive, many financial institutions are partnering with fintechs to remain competitive. But banks and credit unions can still stay in the fight by making sure they have the ability to complete revenue-generating services outside the branch. 

The essential aspect of embedded banking that gives it an edge over legacy financial institutions is that it offers simplicity and comes built in to existing products and services. If financial institutions worked to make the delivery of their products more convenient, they might face less competition from embedded banking. Fewer people might be interested in applying for a loan with a non-financial company if they could just as conveniently apply for that loan at the financial institution they’ve entrusted with their money for the last ten years.

With the right technology, processes like opening and funding accounts, applying for loans, and other revenue-generating services can be easily completed digitally. It’s for reasons like these that so many POPi/o engagements end in document signing events. 

If you’re interested in learning more about how you can implement a Digital Communications Platform capable of delivering all your most important services outside the branch, Let’s Talk!