By Dr Hassaan Khan, Head of Digital Finance at Arden University
In the ever-evolving landscape of finance, traditional banks find themselves at a crossroads, grappling with the transformative forces of embedded finance and banking-as-a-service. Dr. Hassaan Khan, Head of Digital Finance at Arden University, delves into this paradigm shift, exploring its impact on consumer behaviour and the challenges traditional banks face in keeping pace.
The shift in financial services
Technology has propelled the financial services industry towards a consumer-centric approach, offering unprecedented control and choice to today’s consumers. 86% of UK adults now use a form of online banking, which is approximately 46 million individuals. A driving factor that contributes to this incline of digital banking comes from the impact of bank branch closures. In fact, a third of those aged 78 and older advised this influenced their decision to take a financial digital leap.
From card-linked rewards to buy-now-pay-later solutions, technological advancements have led to a new era of personalised finance experiences. At the forefront of this revolution is embedded finance and banking-as-a-service, restructuring the landscape of the financial services sector.
The fintech market, valued at $227 billion in 2023, is projected to surpass $917 billion by 2032, driven by evolving consumer demands and technological innovations. Similarly, the market size of embedded finance services is anticipated to surge from $22 billion in 2020 to a staggering $588 billion by 2030. Banking-as-a-service is not far behind, valued to reach $7 trillion by 2030, according to Forbes. These rapid growth trajectories underscore the significance of these disruptive trends in reshaping the financial system.
The rise of embedded finance
Consumer demands have been pivotal in driving the shift in financial services. The appeal of ‘buy now, pay later’ schemes, same-day delivery options, autofill in internet browsers and biometric authentication reflects a fundamental shift in consumer preferences towards immediate accessibility and control over personal finances. Particularly, the tech-savvy, younger generation continuously pursues technology-driven solutions that empower them to streamline tasks and modernise financial decisions.
The integration of financial services into non-financial platforms represents a game-changer for both traditional financial institutions and emerging players. This enables companies to expand their service offerings, enhance market competitiveness and foster customer loyalty – especially amongst those aged 25-34, as half of this generation prefer financial products from their favourite brands over traditional banks, advising tailored offerings and accessibility as key drivers. Further insight supports this, with 84% of UK banking executives agreeing on a definition of embedded finance, with the understanding that the end customer’s UX falls under the non-financial brand, rather than the brand of the bank.
However, despite its benefits, research has uncovered that 75% of UK banking executives say their business lacks an action plan on embedded finance.
Strengths and weakness of traditional banks
Amongst the rapid evolution of financial services, traditional banks face remarkable challenges in meeting consumer expectations while safeguarding security and trust. While consumers still express trust in traditional banks, the increase of third-party partnerships in banking-as-a-service poses potential risks to data privacy and security.
UK Finance found that in the first six months of 2023, £500 million was lost through fraud – £57.2 million was via fake investment scams, £43.5 million lost by impersonation scams and £18.5 million via romance scams. As digital banking tools and systems, such as embedded finance, are increasingly used, both traditional banks and organisations that adopt banking-as-a-service hold responsibility for keeping their customers safe from financial theft.
Additionally, as consumer dissatisfaction rises, traditional banks face the reality of navigating a versatile regulatory environment while also establishing strategic partnerships to maintain their relevance in a gradually competitive market. Deloitte’s research reveals that 30% of customers are contemplating switching banks, while 42% have embraced Buy Now, Pay Later services. However, within the framework of open banking, banking-as-a-platform emerges as a more appealing option for retail banks compared to banking-as-a-service. This model involves third-party services encompassing both financial and non-financial products.
The future of traditional finance hinges on its ability to adapt and innovate in response to shifting consumer preferences and technological advancements. An example of banks evolving is through greater engagement with consumers. Social media emerges as a critical platform in shaping the bond between financial institutions and consumers, offering an avenue to adopt connectivity and relevance. Leveraging social media presents an opportunity for banks to cultivate stronger relationships and sustain their relevance in an increasingly dynamic marketplace.
As consumers demand greater independence and faster financial experiences, traditional banks must embrace change and forge strategic partnerships to thrive in the era of embedded finance and banking-as-a-service. While challenges lie ahead, traditional banks retain the opportunity to diversify their offerings and redefine their role in the evolving financial ecosystem.
Traditional banking is undergoing a great transformation, and its ability to evolve and embrace innovation will determine its relevance in the digital age. Institutions must follow this call to remain resilient and responsive to the needs of modern consumers.
