Embedded Finance: Fintech’s Next Generation Is Finally Here
The excitement factor in tech is short-lived. Trends and hype come and go faster than London rain and you’re always left wondering: what’s next?
In the case of financial technology, the list of sectors and technologies that have claimed the title of “the next big thing” has been extensive:
- RegTech (regulatory technology)
- InsurTech (insurance technology)
- Personal finance
- Payment processing
- Machine learning
- Artificial intelligence
Whilst all of the above has at one point in time been at the forefront of the financial technology discussion, it’s time to take a look at the new kid on the block: embedded finance.
What is Embedded Finance?
Embedded finance is the gradual embedment of financial services across all industries, even ones classified as “non-financial.”
Traditionally, fintech consisted of solutions that worked in isolation – one company, one industry one solution.
An example would be payment processing. A company would work on automating the rerouting of declined payments to different payment gateways so that acceptance rates would rise and the overall customer experience would become smoother.
What makes embedded finance different is that it is more of an all-encompassing idea rather than an individual solution. It is an-industry wide ideology that aims to change the way businesses understand and use financial technology.
This idea is explored by Michael Wasyl, managing partner at NYC-based corporate strategy firm DeerCreek., in a recent interview with Finance Magnates. Wasyl explained the evolution of the fintech mindset: “in the past, fintech companies were only focused on building their own products and finding the best distribution channels to sell these products into.”
Now things are changing and it’s not hard to see the change. As explained in a recent white paper published by Anthemis, a global venture investment firm specializing in fintech, embedded finance is described as the future state of the financial services industry.
Anthemis “…see this future state of financial services as embedded, augmented and ubiquitous. Rather than finance being discrete, we see it becoming an intimate part of the products and services that drive our economies—an often invisible but critical societal infrastructure, similar to today’s communications or energy infrastructures. We imagine a world where finance is embedded deep inside the workings of our businesses and economies, powering the lives and progress of citizens and businesses rather than being a service consumed independently.
Instead of financial services being yet another sector that becomes internet-enabled, it will allow all sectors to become “finance enabled.” The result is not just finance on the internet, but rather the “Internet of Finance.”
In a recent report titled: “The Future of Fintech Cooperation – A Report from Kapronasia & Ant Financial” we are granted access and insights into the example of China, a long-time advocate and champion of embedded finance.
China has been ripping the benefits of collaboration between traditional institutions and fintech companies. When we say China, we are referring to the end-user, the customer.
The whole idea and principle of embedded finance, allows people to have access to financial services and total control over their entire financial profile at any point in time.
What Does The Future Hold For Embedded Finance?
Embedded finance is still in the early stages of both its inception and its adaptation. This comes as no surprise as banking and finance are legacy industries, carrying years of tradition, established structures and ideologies with them.
In order for embedded finance to infiltrate more and more industries, there needs to be a shift in mindset. Fintech companies and financial institutions need to embrace and welcome a future of collaboration and work together to achieve that.
The faster banks and fintech companies realize they are friends and not foes, the faster this change will start taking place.
On the technical side of things, APis and open banking are the two avenues for the spread and implementation of embedded finance.
On the open banking front, the Payment Services Directive (PSD2) by the European Union is a very promising sign of what is to come. The directive essentially “forces” financial institutions to release previously secret data in a secure, standardised form, so that it can be shared between authorised organisations online.
Why is that important? Because the data released have to do with transactions. It allows third parties to gain access into the way people lend, borrow and spend money. To many companies, the frequency of buying coffee or the interest payments on a loan might mean nothing, but to fintech companies, this is data analytics gold.
What open banking can achieve is the birth of new products, new technologies and new solutions for a more optimised financial life for the end-user. What embedded finance can do is create an end-to-end financial profile where all financial information about an entity is both mangebale and accessible.
You would no longer have to log into one app to check your insurance, to another app for your savings and then another app for your loan. Your financial profile would be embedded in your life and phone in a more seamless way.
In a two-part essay (part 1, part 2), Matt Harris of Bain Capital Ventures explains what embedded finance is and will look like in the future. He very appropriately and successfully presents embedded finance as the next layer of the ‘stack’ to build on top of internet, cloud, and mobile.
The Internet, cloud and mobiles are not products or services, they are interfaces and all encompassing technologies that change the way we perceive entire industries. This is exactly what embedded finance is. A game-changing idea that will change the modern financial paradigm.
Embedded finance is not something you can actively work on or adopt. It’s a wave of new technology that will hit the industry in the foreseeable future.
What you and your business can do with this information is be aware of where things are moving. Having the knowledge of where the industry is heading can affect your long-term, strategic outlook and the positioning of your products/services.
The fintech space has been volatile since the day it came to life and in order to survive in such a competitive space, you need to be as prepared as you can be for big-time changes.