Financial institutions facing challenges in the current phase of embedded finance growth need the capabilities described herein.
In the last two years, ‘embedded finance’ has been gaining mainstream attention in the financial services industry.
Embedded finance refers to the integration of financial services and products into non-financial platforms or applications, allowing customers to access financial services seamlessly within the context of their everyday activities. Simply put, this means bringing banking and financial services to where customers already are, instead of having them go through traditional financial institutions.
As such, traditional financial institutions and challengers now have the power to provide consumers with a frictionless financial future. Visa estimates that embedded finance will unlock US$242bn in revenue opportunity across Asia Pacific by 2025 across small- and medium-sized enterprise and consumer segments. As such, embedded finance in the Asia Pacific region — and specifically the South-east Asia (SEA) markets — holds promise given their young populations, rapid digital growth and pools of unbanked/underbanked people.
Embedded finance in Asia
Currently, embedded finance use cases predominantly revolve around unsecured lending, with Buy Now, Pay Later (BNPL) services as a great example.
Alternative lending technologies in the coming years will focus closely on leveraging data insights to develop a better understanding of consumers’ financial health, which will help get loans approved faster, for example. However, although alternative lending use cases are gaining traction, larger ecosystem plays are still in the early stages of development.
Fintechs and banks are facing challenges in scaling with partners and ensuring the viability of their offerings. Scaling to meet market demand in a partnership-driven model has proven to be more complex than anticipated, leading to a re-evaluation of strategies.
To stay competitive, there is an opportunity for incumbents to:
- expand their presence through organic and inorganic capability building, exploring new digital platform models, building partnerships to open distribution channels, and embracing non-traditional revenue streams.
- introduce new product and service offerings (like digital wallets), retain and increase customer loyalty, gain access to a new customer base, and increase revenue through additional financial services, such as lending and insurance.
Three capabilities needed
To fully capitalize on the opportunities offered by embedded finance in its next phase of growth, financial institutions can focus on developing three key capabilities:
- Collaborate: To move beyond a traditional financial product mindset, banks need to collaborate closely with partners to create blended propositions — ones that combine financial services with non-financial offerings. This customer-centric approach will unlock new value propositions and enhance the user experience.
- Build the right people and operating model: Strengthening partner management and internal coordination capabilities is critical for surfacing banking capabilities effectively. By establishing a clear path to integrate Banking-as-a-Service (BaaS) capabilities into the existing infrastructure, seamless coordination between embedded finance and core banking functions can be made possible.
- Have the right technology capabilities: To ensure readiness for BaaS integration and future scalability, incumbents should transition toward decoupled, modern architecture that can scale with the needs of the business. This architecture should be flexible, interoperable, and aligned with broader technology modernization efforts within the financial institution. This will empower the latter to adapt to evolving customer expectations while efficiently supporting a network of BaaS partners viably.
Embedded finance represents a powerful trend whose early adopters (those that stand ready to adapt to changing market conditions) will have a better chance of succeeding as the landscape grows and matures.
