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Today: Jun 13, 2024

Future Facing: Banks Crossroads of Embedded Finance

2 mins read

TLDR:

– Traditional banks are facing challenges in the rapidly evolving world of embedded finance
– Non-bank players, including tech giants and payment service providers, are reshaping the game
– Global Payment Service Providers (PSPs) are a significant threat to incumbent banks in the payments sector
– Comprehensive digital ecosystems are revolutionizing consumer engagement and reshaping how users interact with financial services
– The rapid growth of embedded finance is challenging traditional banks in the lending segment
– New entrants in the embedded finance space are using flexible and dynamic pricing models to attract a broader spectrum of consumers
– Fintechs and big-tech players are leveraging embedded finance to disrupt the role of traditional banks in the primary bank account space
– Strategic investments in customer-centricity, data capabilities, and operational efficiency can help traditional banks navigate the shifting landscape successfully.

The financial services industry is experiencing a shift as traditional banks face multifaceted challenges in the world of embedded finance. Over the past two decades, the payments sector has undergone transformative changes driven by digital transactions and the demand for seamless cross-border payment solutions. However, new players, including tech giants and payment service providers, are reshaping the game by offering innovative services and solutions.

In the United States, diverse entities such as PayPal, Apple Pay, Google Pay, and Alipay dominate the payment landscape. The decentralized regulation of payments at the state level creates an environment conducive to innovation. In Asian markets, the payment landscape is highly fragmented, with India’s Unified Payment Interface (UPI) processing over six billion transactions monthly.

The emergence of global Payment Service Providers (PSPs) poses a significant threat to incumbent banks in the payments sector. These PSPs not only seamlessly embed payments into transactions but also offer additional services such as data analysis, reconciliations, and integration with enterprise resource planning systems. Traditional banks face challenges in keeping up with the innovation and capabilities offered by these global PSPs.

New entrants in the embedded finance space are leveraging comprehensive digital ecosystems to reshape how consumers engage with financial services. By embedding financial services within popular platforms and applications, these entrants offer users a one-stop-shop for banking, investment, and payment functionalities. This approach capitalizes on the growing consumer preference for convenience and accessibility, providing integrated solutions that cater to their financial needs within the context of their digital lives. These comprehensive digital ecosystems not only provide convenience but also increase user engagement and enhance customer loyalty and satisfaction.

The rapid growth of embedded finance is challenging traditional banks in the lending segment. Big-tech players and major retailers are expanding into embedded lending, leveraging partnerships and strategic acquisitions. This expansion, coupled with regulatory changes in Buy Now Pay Later (BNPL) schemes, intensifies the pressure on interest margins for incumbent banks.

New entrants in the embedded finance space deploy flexible and dynamic pricing models to attract a broader spectrum of consumers. These models adapt to the diverse and evolving financial needs of users, offering personalized pricing structures that align with their unique circumstances. The implementation of these models also leverages data analytics to gain insights into consumer behavior, enabling new entrants to craft pricing strategies that resonate with specific demographics. Traditional banks, with more rigid pricing structures, face the challenge of responding to this dynamic landscape and need to adapt to provide flexible and competitive pricing solutions.

Fintechs and big-tech players are leveraging embedded finance to offer seamless services that challenge the assumption that traditional banks will maintain their core role with their customer base. The allure of customer data from bank accounts is drawing new entrants into the financial services space. Traditional banks need to invest strategically in customer-centricity, data capabilities, and operational efficiency to evolve and stay competitive in this changing landscape.

The emergence of embedded finance presents opportunities for innovation and reimagining the value proposition offered to consumers. However, traditional banks need to adapt and evolve to navigate this landscape successfully or risk becoming obsolete.