Embedded Finance: Redefining Banking's Landscape and Its Future

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The rapid evolution of embedded digital finance has ignited discussions about the future of physical banking institutions. Embedded finance's convenience allows customers to access services effortlessly, attracting a broader base, including those previously hindered by traditional banking barriers.

Until now, the leading services in this sector were payments and lending. According to a report from Bain Capital, the next areas of embedded finance are poised to insurance, tax, and accounting.

Embedded finance fosters fiscal inclusion by reaching the unbanked through partnerships with tech and e-commerce. Despite its benefits, embedded finance raises concerns for traditional banks as digital adoption could lead to branch closures and job redefinition. Cybersecurity becomes paramount as interconnected financial data heightens the risk of breaches, so prioritizing robust security measures is imperative.

Embedded finance: Breaking down the walls

Previously, traditional financial institutions were the only companies delivering banking and broader financial services—a competitive advantage many believed would last forever. Since a significant part of the population is considered unbanked or underbanked, a segment was left without access to these services. Fintech companies are reshaping financial accessibility through embedded digital finance services. This allows other businesses to level the playing field in the financial arena and take on millions of new customers previously underserved by legacy banking. A great example is Robinhood, which opened the doors of investing to retail investors. They currently boast over 22 million monthly active users. 

Embedded finance refers to non-financial companies offering financial products and services, like an online store providing insurance or a retail app for easy payments. It's about giving customers the financial help they need when needed, whether it's a loan, insurance, or something else. The key is that embedded finance brings these services to people at the right moment without them having to go to a brick-and-mortar location. 

Some types of embedded finance have been around for years, like credit cards for airlines or payment plans, but now, online shops offer banking services directly on their websites. One example is Amazon, which has embraced embedded finance by offering several payment options, including zero percent interest on certain purchases over varying time frames. Additionally, Apple recently launched its high-interest savings account, shaking up the banking world. In the past, the user would need to go to a physical bank or at least log in to a banking app to accomplish the same actions they can now do without leaving the Amazon app or website. Amazon implements this service through an API that does the work for the customer; in other words, a behind-the-scenes software application facilitates vital data exchange between different applications, websites, or service providers. 

What does this digital transformation look like?

This enhanced accessibility, once confined within brick-and-mortar institutions, has evolved into a digital landscape where customers can seamlessly interact with financial services. Traditional banking norms are being rendered obsolete by fintech advancements as the paradigm shifts from the physical confines of a bank branch to the boundless realm of digital transactions. Services that once necessitated a visit to a bank can now be executed easily through digital interfaces, revolutionizing how people transact and access financial services.

Inclusivity lies at the core of the new financial landscape, driven by the innovations of embedded finance. Embedded finance reaches underserved populations by forging partnerships with technology and e-commerce platforms, fostering financial inclusion. This collaboration transcends geographic and economic constraints, offering financial solutions without traditional discrimination. The impact is palpable as individuals, once excluded from the banking system, gain access to essential financial services, bridging socio-economic gaps and promoting financial stability. In the United States, after Robinhood brought retail investors into the stock market with zero-fee trades, companies including Fidelity, Schwab, and Vanguard finally offered similar services to more users. In part due to fintech startup Robinhood democratizing investing, there are now approximately 100 million retail investors in the United States.

The dynamics of digital transformation serve as the driving force behind the ascent of embedded finance. Inter-organizational banking propels transactions into a realm of seamlessness and efficiency, revolutionizing the way financial operations are conducted. The traditional approach of visiting a physical bank is becoming archaic, now replaced by a landscape where financial services transcend physical limitations. This boundless accessibility brings financial services to anyone, anywhere, enabling individuals to interact with their finances at their convenience, regardless of location or time zone.

Emerging as a beacon of change is a customer-centric approach redefining modern banking. The generational shift led by Gen Z and millennials is driving a transformation toward digital banking, fostering a redefinition of customer-centricity in the financial realm. Over 50 percent of the American population lives paycheck to paycheck. Despite their heightened requirement for financial services, traditional banks' offerings are more limited, and these services often come with higher costs. By partnering with other companies that have considerable customer bases, such as Apple or fintechs like Robinhood, banks can efficiently collaborate to reach a much larger audience. They can also stay competitive in the rapidly evolving financial landscape. 

Embedded finance empowers individuals, dismantling traditional banking roles and placing consumers at the epicenter of their financial decisions. The consumer power derived from choice steers the industry toward a new era underpinned by individualized financial services and heightened consumer autonomy.

Opportunities, however, come with risks. One sector that banks and fintechs need to monitor and proactively address is cybersecurity. With more access to financial services, the odds increase for scammers as they seek to victimize embedded finance users. One prediction model estimates financial scams will soon grow to $10 trillion using artificial intelligence (AI) and deepfakes. It is imperative that companies employing embedded finance and their banking partners put cybersecurity and safety education at the forefront of their services so this trend can be defeated.

Looking ahead

According to research from Bain Capital, embedded finance was responsible for $2.6 trillion, equivalent to almost five percent of the complete financial transactions within the United States in 2021. The study predicts that by 2026, this figure will surge beyond $7 trillion, representing over 10 percent of the total value of transactions in the United States. The rapid evolution of embedded digital finance has ignited discussions about the future of physical banking institutions. 

This shift is driven by the convenience of embedded finance, which enables effortless access to services, attracting a wider audience and fostering financial inclusion. The finance landscape transforms as embedded finance gains momentum and physical banking diminishes. This evolution underscores the democratization of the financial domain, allowing any company to function as a bank. Notably, this shift toward embedded finance signifies a consumer-centric approach, putting consumers in control of their financial choices. Gen Z, millennials, and Gen X are at the forefront of this change, propelling the industry toward a new era defined by individualized financial services and heightened consumer empowerment.

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