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Oleg Chanchikov is CEO of CapyGroupan embedded finance company focusing on the MarTech industry.
Over the past few years, I’ve seen how embedded finance has transformed the financial services scene. The seamless integration of fintech services with nonfinancial services and daily necessities has changed how we work, shop and pay. According to Globe News Wire, the embedded finance market is estimated to touch $384.8 billion by 2029. The market is expected to grow at a high rate of 30% CAGR during the forecast period.
Today, customers and businesses expect financial services to be integrated into their daily lives. However, traditional banks and nonfinancial companies are facing limitations in adapting to modern financial needs for several reasons.
Many see banks and embedded finance providers as irreconcilable competitors. However, I believe the key to accelerating the growth of the embedded finance industry and resolving the challenges of traditional banking lies, as is often the case, in cooperation. Here are four takeaways on how both sides can use each other’s strengths to thrive.
Understanding The Business Inside And Out
One of the primary reasons why banks struggle to meet their clients’ financial services needs is when they lack understanding of their clients’ businesses. For instance, banks that do not specialize in sectors like martech may offer generic solutions that fall short of overcoming specific industry challenges. On the other hand, nonfinancial companies that lack understanding of the financial sector often struggle with knowing what to expect from financial services and how to build them correctly.
There are now embedded finance services that can respond to the needs of both of these groups and integrate expertise from both sides. However, sometimes the concept is only good on paper. For example, say a company turns to your bank to create cobranded cards. The audience might look attractive, leading the bank to invest in issuing thousands of cards. But in the end, the cards remain mostly unused. Often, the reason these collaborations fail is because either the company doesn’t pay enough attention to card promotions or it doesn’t provide its customers with enough benefits to stimulate them to use a cobranded card instead of the regular one.
In cases like these, it is important that both sides have a clear idea of why the user will start and continue to actively use the card or other product. A simple application of embedded finance is not a magic button; technology will not save a project that does not meet the real needs of customers.
Flexibility Over Legacy Constraints
Many traditional banks are still bound by outdated systems and regulatory constraints. With rigid infrastructure that operates in a certain way, developing new products and changing policies to create a comprehensive business solution is a risk banks often avoid taking.
Nonfinancial companies and insurance companies also face challenges due to their business practices, legacy systems and regulations. Embedded finance companies, on the other hand, often thrive on innovation and can overcome these limitations by integrating various external providers that bypass any jurisdictions. For example, if a bank needs to change its policies to create factoring solutions, there are embedded finance providers that can develop comprehensive solutions by integrating external providers and service providers into a unified and user-friendly interface. (Full disclosure: My company offers this service, as do others.) This flexibility can allow embedded finance projects to address specific business needs more effectively compared to traditional banks or nonfinancial companies, which can make them more valuable.
However, it cannot be denied that, due to their rich background and expertise, banks tend to be very good at calculating every detail that affects the profitability of a financial product. They are typically much more accurate in calculating launch costs and thoroughly thinking through the business models of planned projects. If your embedded finance team is working with a banking organization on such a project, listen to their experience, and don’t let the enthusiasm of launching a new product override the need for careful calculations and meticulous planning.
Seamless Integration And User Experience
Embedded finance companies can create solutions where various providers can work with different geographical markets. Usually, in order to launch such products, the company has to open multiple legal entities. It’s also important that the product have a unified and user-friendly interface.
This seamless integration of different financial products into one unified and intuitive interface can provide a clear, coherent and efficient user experience. If banks were to do this, however, they might require multiple logins and interfaces due to their complex legacy systems, which could result in a confusing and inconvenient user experience, such as providing dozens of login options for various clients and regions.
Even so, it is impossible to argue that banks’ technical teams are often much better at understanding the technical intricacies of financial flows. For example, a bank specialist should understand exactly what their financial organization’s processing is capable of. They know how to squeeze the most out of the technical infrastructure, and what expectations of the financial product the bank is able to make true. In this respect, representatives of embedded finance should still rely heavily on bank experts to make the collaboration as successful as possible.
Scaling Solutions Efficiently
Banks and nonbanks often focus on niche markets with limited ROI; hence, they struggle to sell their financial products. Embedded finance companies, on the other hand, integrate different providers and services into one interface, which is why they tend to excel at effectively selling financial products. Our goal as bank and embedded finance professionals should be to work together to understand our nonfinancial clients’ businesses and the requirements of financial products so that we can offer scaling solutions efficiently.
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