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What’s Driving the Growth of Embedded Finance?

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With customers looking at more personalized and user-friendly services, experts predict embedded finance to witness a strong growth. By definition, embedded finance is the seamless integration of financial services within a non-financial app or platform and a good example would be the Buy Now, Pay Later (BNPL) option that comes as a boon to the consumers where they can buy the product immediately and choose to pay later with interest-free EMI payments.

In a recent conversation with CXOToday, Clayton Weir, Chief Strategy Officer at embedded banking platform, FISPAN explains the trends to watch in the Embedded Finance space, key adoption challenges and the road ahead.

According to Weir, “The shift to embedded banking is happening, and banks need to make investment decisions based on this shift. Once a bank has made the decision to invest in embedded banking, the best way to move forward is through a mix of partnerships, taking advantage of APIs, and partnering with fintechs that give them a head start, without having to build out solutions themselves.”

Growth drivers

On the factors driving the growth of embedded finance, Weir sees the pace of change driving this space has become rapid in recent months, especially with the pandemic.

“Businesses have the urgent need to eliminate manual and paper-based processes and are looking to their banks to help them implement them quickly. Paper-based and manual processes that don’t work anymore for most businesses such as physically walking into a bank branch to submit business data or sending and receiving paper checks from the headquarters are the processes that ERP/embedded banking can automate,” says the senior executive of the Canadian firm.

People are consuming new experiences and doing so more efficiently, allowing both existing players and new start-ups to prosper. Weir expects that applying these new technologies can enhance all banks’ capabilities and deliver on the expectations of these increasingly tech-savvy consumers.

“In addition, startup activity tends to increase after a significant economic event (ie. global pandemic and resulting economic depression), and the innovations started in those early recovery periods typically become anchors for the next economic cycle. So, I think we will see an uptick in fintech start-up activity and as a result, more innovative and customer-centric business banking experiences,” Weir says.

Integration remains a challenge

Though the future of embedded finance looks bright, 90% of innovation managers cite that integration challenges are the biggest obstacle to digital transformation, informs Weir.

A recent Forrester study shows a substantial number of large IT projects at enterprise banking and financial services firms get delayed, overrun, and even more disappointingly fail to deliver all of the business value promised.

“When you look at the biggest drivers of a failed software project, a disproportionate amount of blame tends to fall on some failure to properly scope the mission in terms of vision, customer needs and potential constraints,” says Weir.

He cites an example wherein risks become heightened in a domain area like embedded/ERP banking. A team has to understand the nuances of client ERP systems, bank legacy systems, treasury banking, accounting workflows, banking workflows and deliver a program that can exist and add value within all of those different constraints.

“Technology has moved too far too fast for banks or corporate to build those capabilities themselves. Buying companies that can bring those services to market is well outside the purview of most commercial banks or corporates. The best way to manage the impact of rapidly evolving customer expectations is to partner with agile, innovative fintech services that not simply meet expectations, but exceed them.” He states.

 Brands looking to enter the embedded finance space need to be flexible and be willing to reassess their current processes. According to Weir, “They might find that they need to move their systems to the cloud, and begin asking their banks how they can improve the business banking/treasury management experience for them.”

 Weir believes that embedded banking is the future across the world. He explains that banks will have to become more customer-focused. Since people are consuming experiences differently now, applying new tech can enhance the banks’ service offerings and meet the needs of their more tech-savvy customers.

“Embedded solutions remove the technical burden for business users and eliminate the need for them to become payments or banking experts, allowing them to focus on running their business. By starting to make banking and commerce embedded in a democratized way, businesses will be positioned to thrive,” he concludes.

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Sohini Bagchi
Sohini Bagchi is Editor at CXOToday, a published author and a storyteller. She can be reached at sohini.bagchi@trivone.com