Philipp Buschmann, Co-Founder and CEO, AAZZUR
Technology has impacted pretty much every part of our lives, and with this change we as consumers have now come to expect a digital layer across everything we interact with. It comes then as no surprise that we now expect our banks to offer a seamless and engaging experience with everything we need at our fingertips.
But for many of the traditional banks digital transformation has been a slow process and consumers are now looking elsewhere for better banking solutions. Embedded finance, challenger banking and open banking has helped drive this consumer demand and looking ahead it’s going to completely disrupt the traditional banking system.
Technology has impacted finance in such a big way that it is now possible for nonbank organisations such as large retailers, to offer financial products to customers. This seamless integration of financial services adopted by non-financial companies is revolutionising the way we interact with money and business.
So what is embedded finance exactly and how will it benefit the end customer?
In its simplest form, it means offering financial and banking products into traditionally non-banking spaces. i.e. retail and e-commerce businesses, at the point of need. An example of this would be short term buy now pay later loans from brands such as Klarna.
What embedded finance can achieve at its peak, is offering an ecosystem of personalised services based on spending data. Insurance. Loans. Investment. Wealth management. All offered exactly when a customer needs them, maximising uptake and engaging consumers.
What this means for banks, is that those that do not embrace embedded finance, will be left playing catch up as consumer demands continue to change, and those that do will need to keep developing and improving the services to keep up with the non-banks and challenger banks that can offer a more specialised range of products for their customers.
It poses the question, what does it actually mean to be a bank nowadays?
Traditional banks are being challenged to reinvent themselves, after years of market domination and archaic tech systems. During 2010, the rise of challenger banks like Starling, Monzo and Revolut, had banks desperately trying to play catch up in a bid to hold onto their customers.
Now we have reached the 2020s and we can see the world’s biggest banks spending a lot of money to compete with more agile challengers. Customer-friendly, innovative and tech-first banking has become the norm, and banks must thrive in this space in order to compete.
The majority of banks have now implemented strategies to compete with the challengers, their infrastructure is being developed. Mobile and online banking is front and centre and the features available put the customer first.
However, the 2020s have been a game-changer once again as fintech started evolving and integrating systems with each other, which has led to a much bigger ecosystem of products available to the end customer.
One example of this is Starling offering the services of fellow fintech Pensionbee to their users. This partnership means the customer gets access to the best products in one place, and the companies can share audiences and broaden their appeal, all while simultaneously offering out their own services and payment rails.
Additionally, these organisations are offering those services to non-banking businesses such as e-commerce and retail companies.
One report has revealed that 52% of financial relationships for all consumers were with non-bank providers. For Gen- Z, this rises to 69%.
Ultimately, this is not good news for traditional banks. They obviously want these relationships for themselves but on top of that, embedded finance enables those challenger banks to make some money, which can mean a loss for traditional banks. With so many customers switching to more convenient platforms to manage their money, the banks must position the customer at the centre of everything. In reality, the customer cares about convenience and services, not where their accounts or services come from.
Personalisation is now the focus in banking
The first fintech revolution was to improve banking operations for the average customer. Now the focus is on making it personal. Not only when the customer is using their bank, but also whenever they are using their cards.
To understand this, first think about how Google monetises searches and social media platforms monetise relationships. Financial service providers can now do the same thing but with spending data. This is all thanks to Open Banking and the ecosystem of services and products that embedded finance can offer customers.
While previous cross-selling initiatives have failed due to a slow selling process, this hyper-personalised service when needed is more likely to be adopted. Take our partner bsurance for example. They build specialised insurance into banking and retail travel. With spending and geolocation data, you’ll get a very impressive 10% closing rate in your cross-selling policy.
Offering other travel products to customers after they have booked a holiday is just one of the options. Think of a card that pays for its own parking tickets. A digital ski pass vendor that offers its own short-term insurance for extreme sports. Wealth management services triggered by high-value purchases. This is what hyper-personalisation is. Providing solutions at the point of need.
Salesforce conducted a survey among consumers and found over 51% expect banks to now anticipate their needs and make relevant suggestions before even making contact. Because of this, banks are now competing but also collaborating in building these huge ecosystems of services.
The entire banking supply chain is now racing to add these services.
The shift in the banking supply chain
Prior to the fintech revolution over the last decade, banks traditionally managed almost every step in the supply chain. They had their own payment rails, monitored their own customer spending, and provided their own accounts and services.
Banking-as-a-Service and embedded finance have completely disrupted that traditional system. Today, most financial services rely on huge infrastructure providers such as Railsbank to provide payment rails, provide data to data service providers (DSPs), and provide additional services to companies such as Tinq and Solarisbank.
But this is also changing. Banks are building networks that can compete with infrastructure providers such as Railsbank as they seek to take advantage of the opportunities offered by embedded finance. The vast amount of data collected by these ecosystems sets it to truly challenge existing DPSs.
The race is on for innovation and reinventing the wheel
However, even with this huge impact embedded finance is evidently having on banking, there are many in retail and even banking itself still ignoring it. This will prove to be a huge mistake.
The projected embedded finance market size is estimated to be worth €230bn revenue by 2025 and with over 50% of customers choosing non-banks, the race is already underway.
