What is Embedded Banking and Why Do Banks Need It?

Banking as a service and embedded finance are related, but they’re not the same thing. This customer is one obtained via a new route that required very little marketing or corporate effort — with APIs and their economy potentially becoming the digital financial broker. Banking as a service is basically the opposite if banking as a-platform. APIs — or pieces of software that let applications talk to each other through a defined set of rules.

One of the most notable examples of digitization is in the fintech sector, particularly how traditional businesses engage finance on a new level by integrating financial mechanisms into their overall business plan. The era of embedded finance is taking hold, and with an estimated market value of over $138 billion in 2026, it’s clear that it’s not just a financial fad, it’s the future. Embedded finance and BaaS are simply new, innovative ways of utilizing APIs. They enable customer and agent interaction with the financial application on the front end to communicate the intended messages with the banking infrastructure.

This financial transformation will continue to gain strength across nearly every sector as more companies adopt embedded finance and as consumers become more comfortable with these services. As embedded financial services become widespread—and more non-financial companies start wading into these new waters—financial services companies will need to rethink business models as they compete for new frontiers. Embedded finance changes when, where, and how people interact with financial services—and creates substantial opportunities for both financial and non-financial companies. 88% percent of companies that implement embedded finance report increased engagement, and 85% say that it helps them acquire new customers.

By making the checkout process four times faster, Shopify Pay increases checkout-to-order rates 1.7 times—showing that added convenience plays a significant role in preventing consumers from abandoning their cart. Embedded finance is a huge opportunity not just for fintech companies and businesses, but also for consumers. It gives consumers options to increase convenience and savings, like zero-interest point-of-sale loans, or rewards for using a brand’s e-commerce app.

Embedded finance vs banking-as-a-service

Today’s systems were mostly created in the 1950s and based solely on a person’s employment record and borrowing history. In the 2020s there’s the opportunity to assess someone’s credit worthiness using thousands of data points – such as browsing history and even whether they use caps to complete a form. When moving money, multiple checks and balances are needed to ensure the payment is legitimate, accurate and secure. Minimal oversight is needed when the music industry moves from CDs to streaming.

Plaid Auth provides account authentication in as little as seven seconds when users connect with their bank account credentials. Bernstein, by offering a seamless one-touch experience for consumers using its Apple Pay facility. Developers creating open banking applications can come across some challenges, including issues around API reliability and identity management, and the enduring concerns around privacy and trust.

But first and most importantly, banks must figure out if embedded finance will work for them. With more companies acting as financial companies, financial providers will need to become more accustomed to sharing customers with non-financial companies for services only they used to provide. Convenience is one of the main reasons consumers are willing to adopt embedded finance. Shopify Pay, which allows users to save their payment information for later use, is a prime example.

  • For example, if you are seeking to improve customer service and satisfaction, an embedded payment could be one method to explore.
  • Digital transactions leave a data trail, and service providers can analyse the patterns to improve their offerings.
  • In all cases, product and service companies hope that the more efficient process helps attract and retain customers .
  • APIs allow for connections to be made between banks and other financial institutions and non-bank companies.
  • By opening up new markets and improving customer experiences, embedded finance presents a significant opportunity to both financial service providers and non-financial companies.

The explosion of available data is making it possible to tailor experiences for the individual. Digital transactions leave a data trail, and service providers can analyse the patterns to improve their offerings. And to give one final example, consider the changes happening in accounting software. All the major providers are now working towards a future in which cloud-based http://pelenashka.ru/comments/page4/ accounting products become the central hub of a business finances – and let users connect to banks, lenders, insurers and more without migrating away. With over 50,000 technologists across 21 Global Technology Centers, globally, we design, build and deploy technology that enable solutions that are transforming the financial services industry and beyond.

The API is the reason embedded solutions from non-bank providers don’t need an independent banking system. How exactly do these fintechs offer so many services at such low costs? « If you’re managing a legacy stack that requires 1,000 engineers to run and it’s on localized hardware requiring redundant capacity, all that adds to cost and time to revenue, » says Richard. « A lot of these fintechs are digitally native and cloud-based. Their tech, which can scale efficiently, comes at a much lower price point, so they can pass those savings onto consumers. » By embedding financial services into established buyer journeys, many new revenue streams have already been established. Additional revenue streams are likely to continue popping up as companies find new and creative ways to add value through embedded finance.

What is embedded finance? 4 ways it will change fintech

Having a bank that knows “the industry-specific pain points that you are targeting,” says Cai-Lee, “is going to solve a lot of issues.” This becomes especially important when customers run into issues. Thanks to contactless payments phone-based wallets, tokenization is now moving into physical environments too. Obviously, any card stored in a phone wallet is virtual, not plastic. Tokenization replaces sensitive payment information with a randomized number. This string of numbers and letters can be decrypted only by the eCommerce company that issued it. And since tokens don’t store any identifiable customer information, they are worthless if stolen.

According to Plaid and Accenture’s research report, there are four central ways that embedded finance could alter the way both financial and non-financial companies conduct business. Plaid Balance provides an instant account balance check to ensure users have enough funds to make a successful payment. It can seem like a win-win for businesses and customers, but there are some challenges around open banking. Open banking is the industry’s attempt at ensuring enough customer data was securely shared with the third parties involved so that a delightful customer outcome such as this one was possible. In this post, we’ll talk about embedded finance, open banking, the benefits of challenges of open banking, and how open banking APIs are driving Digital Banking Solutions. Videos – Watch our videos to know how our products and solutions are helping organizations adopt a customer-first strategy.

What is Embedded Banking

Particularly advantageous are sources that have scalable business models and fixed IT investments (e.g., distribution models). Regulatory trends including PSD2 and open banking are promoting the development of banking APIs and universal access. The need to comply with these new requirements—often through IT modernization—is driving some banks to consider expanded or new BaaS business models to recoup costs and take advantage of tech builds. Even beyond regulation, Plaid and other aggregators are changing customer expectations for data and account information portability, which is increasing IT modernization and BaaS projects.

Inflation and interest rates increases means money is becoming tighter than ever; small businesses are the most at risk in an economic slump. Though they have some differences, embedded finance and Banking as a Service are both emblematic of the power of the digital age. To succeed in optimizing your customer experience, companies have to stay on the cutting edge of emerging technology.

How Gojek is boosting financial inclusion in Indonesia through embedded finance

Remove the friction caused by complex ecosystems with an end-to-end bank-led solution. Down the road, if your clients are more diversified globally, it’s important to recognize the different ERP players and where they exist. Contact the source provider Comtex at You can also contact MarketWatch Customer Service via our Customer Center. Financial services organizations can take advantage of opportunities inherent in each. Check out our article, “What is fintech”, to learn more about the six main types of fintech and how they work. When expanded it provides a list of search options that will switch the search inputs to match the current selection.

You must also evaluate each ERP’s portfolio strategy, do they offer one product for one market segment, or do they offer multiple products across multiple market segments? In addition, it’s important to assess the technical complexity of building an integration with that ERP. Building on a history of fintech entrepreneurship, Zac works with banking clients on creating digital businesses from scratch, transforming businesses to be digital-first, and partnering with or acquiring fintech companies.

What is Embedded Banking

Insurance – Identify and mitigate revenue leakages, rationalize products, connect with external partner ecosystems and present contextual offers. The humble application programming interface is the tech behind the dramatic disruption of the digital era. It offers a simple way for computer programs to communicate with each other.

Banking is becoming contextual, intrinsic, personalized, and increasingly invisible. Because it tells you where consumer expectations for your product are heading. Soon, they will expect to access financial products in non-bank mobile apps and online platforms as well.

Now, financial products are escaping the ‘walls’ of those banking apps. Choose from a full suite of embedded banking tools and services built on flexible APIs to empower platform growth. As a global leader, we deliver strategic advice and solutions, including capital raising, risk management, and trade finance services to corporations, institutions and governments. When looking at how to prioritize ERPs, it’s important to understand which systems are currently most popular, and which systems are quickly gaining market share.

What can Traditional Banks do to stand up to the challenges of Digital Banks?

It leads to faster checkout and settlement processes, thus offering a great payment experience. Embedded payments allow users to make payments from a single place without having the need to search their pockets for some cash or swipe cards. Food-delivery apps such as Zomato and Swiggy and payroll automation software, etc. enable users to make purchases and make embedded payments.

What is Embedded Banking

The third option is to collaborate with a company that focuses on embedding the financial infrastructure into its product or service and become a part of that ecosystem. Embedded banking is a model where banks can provide purpose-built digital services to their customers, including retail and small- to medium-sized businesses . Embedded banking enables banks to offer a bespoke technology solution through an open framework that can meet the expanding business requirements of their SMBs customers. As opposed to embedded finance, where businesses access financial services through a third-party platform that is not a specific solution from a financial services company, embedded banking places the bank at the heart of an SMB’s operations. Embedded banking both helps strengthen an SMB’s technology and its relationship to their bank. Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items.

’ for the SMB vertical and avoid the existential threat placed on them by the expansion of non-bank providers into the financial services space who are currently speaking the SMB’s language. Agree or not, but not many of us know about secure financial investments. But becoming financially educated is important as it helps in the effective management of our money. Embedded investments simplify the investment process by offering users a single platform to invest and manage their money. Embedded Investments allow users to invest in the stock market, mutual funds, retirement plans, without leaving the platform they’re on.

« The use cases we’ve seen so far are largely embedded payments and lending – like Uber and Klarna – and I think we’re going to start seeing more embedded insurance and FX. » If a customer is buying airline tickets online, Richard explains, travel insurance could be embedded into the journey. The customer gets a relevant offer, the bank sells its services, and the airline gets incentivized for every transaction. Open banking’s payment APIs present many advantages over other payment methods for businesses, including better conversion rates and acceptance rates, and overall ease of experience.

The Starbucks app, for example, saves credit or debit card information for 1-click payments while customers earn points for using the app. In both examples, embedded banking is designed to increase platform loyalty through a convenient user experience and special rewards. When a Lyft driver has a Lyft checking account that gets them paid faster, it’s less likely they’ll also drive for Uber. Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or something else. Tom is a fintech industry writer who creates whitepapers and articles for Plaid.

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