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Embedded finance platforms unlocking opportunity

Vincent Pugliese Chief Product Officer / General Manager, Finastra
Bank station, on London underground, signage on platform

Customer service in banking has struggled to keep pace over the last decade with clients' changing needs. The evolution to "mobile first" and "connected everything" has created expectations that sit outside the four walls of the financial institution.

Customers today expect digital products and services to be offered to them in the right context, exactly when they need them. For example, if they're making a purchase, having the ability to choose from a range of financing options at the point of sale is highly attractive and convenient.

Using what is known as embedded finance, brands are actively looking to embed finance propositions, provided by regulated financial services providers, within their digital platforms, websites, applications, and online communities. But financial institutions are not set up to service this need and to capitalize on the opportunities ahead.

Many banks today remain held back by the limitations of their technology. All too frequently they're bogged down in legacy systems and struggle to work with partners at the pace required to offer the innovation and flexibility customers desire.

To survive and thrive in a new world of embedded finance—a market that's expected to reach a value of $7 trillion by 2030—financial institutions can no longer do everything in house. They must seek to innovate through open collaboration and co-innovation.

To achieve this, they need to adopt a platform-based approach that supports the delivery of their offerings through a banking-as-a-service (BaaS) model. This is not just about a single point of consumption; it's about creating a virtuous cycle that includes BaaS producers (financial institutions), the supporting capabilities of fintechs, and BaaS consumers (merchants, embedders, and end users). A platform allows all these ecosystem participants to interact with zero to low friction.

Open platforms vital for financial institutions to innovate fast

In the past, large financial institutions had the tendency to build their own solutions, while smaller ones didn't have access to the same level of technology resources to compete on a level playing field. In many cases, this led to rigid customer experiences.

An open platform approach turns this on its head, democratizing access to the latest technology for all. It gives large and small players alike the ability to collaborate with partners much more easily, allowing them to leverage the power of the cloud, APIs, and more to spur innovation.

A platform-driven, agile, iterative, continuous delivery approach to development is vital for those wanting to deliver the best possible service to customers, both directly through the bank's own channels and indirectly, by embedding offerings into the brand experience in context for customers.

Scalability and repeatability crucial for growth

In many cases, large financial institutions are starting out in embedded finance by building direct, one-to-one relationships with brands. But this point-to-point approach is time-consuming and doesn't scale. Instead, you should adopt a centralized open platform, or marketplace approach, working with a technology expert from the outset.  

Smaller financial institutions especially value partnering with a BaaS provider; this allows rapid time to market and scale. Knowing that a partner is managing the integration and overall infrastructure, as well as the security and protection of API endpoints, allows the institution to stay focused on innovating, differentiating its product offerings, and servicing its clients.

How financial institutions can benefit from a platform-based approach

Platforms sit at the heart of open ecosystems—connecting financial institutions with fintechs, large general technology providers, and third-party brands in a multi-sided network. In the point-to-point integration world, this is expensive and complex and can lead to security and risk concerns. By reusing integration patterns via a platform, institutions are lowering the cost to integrate and unleashing the ability to quickly collaborate with these partners to enhance their offerings and reach new audiences. This effectively opens up previously inaccessible revenue streams, at a much-reduced cost of customer acquisition.

By leveraging APIs and a platform-based model, financial institutions can unlock exciting new business opportunities. This includes tapping into new sources of revenue by offering a wide variety of financial services to banks and non-bank corporations such as those providing foreign exchange, payments, cash management, deposit accounts, and loans. These opportunities place the financial institutions' services into places they weren't traditionally integrated.

By adopting a platform approach, financial institutions can focus their resources on the customer experience. Giving customers a 24/7, always-on, highly performing service requires them to look to the public cloud and coalesce their offering to a platform, because providing this level of service is no simple task. Financial institutions are not infrastructure companies, and leveraging a cloud partner is practically a must to deliver the required level of service.

Serving its customers to the level they expect requires the financial institution to think differently about who runs parts of their ecosystem.

Delivering embedded finance in practice

Among the areas ripe for growth through embedded finance is lending to small and medium-sized enterprises (SMEs)—a sector that's historically been underserved.

New financing options are becoming available to thousands of SMEs through collaboration with distributors with vast networks of SMEs, such as enterprise resource planning (ERP) systems and business management platforms.

Microsoft is just one example. US financial institutions are connected to Dynamics 365 through open APIs, and SMEs using the platform will be able to access the most relevant and valuable financing options for their specific business needs.

Another area that offers huge potential is giving consumers greater choice in how they finance high-value transactions at the point of sale. Seattle Bank is looking at embedded finance use cases where merchants and consumer brands want to add point-of-sale financing solutions for purchases and need credit underwriting for these longer-term loans. The bank plans to use a collaborative cloud platform and APIs to integrate, via BaaS, with brands that want to leverage the bank's license and liquidity to provide services where the brands own the client relationship.

Seattle Bank is a great example of how smaller financial institutions can pioneer new technology, and leverage platforms and APIs, to extend their reach beyond their existing client base, offering services to the mass market through embedded finance partnerships.

Embedded finance is available now

The key takeaway for financial institutions is that embedded finance is providing opportunities to reach new audiences at scale and at a reduced cost of acquisition. Don't delay; start leveraging cloud, APIs, and open platforms now so that you can play your part in creating the dynamic financial services ecosystems of the future that deliver the choice and convenience that customers crave. 

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