Banking is continuously changing, especially as the world becomes increasingly digital. Adrian Toynton, Head of Banking Solutions, APAC, FIS, tells us why Banking-as-a-Service (BaaS) is instrumental in shaping the payments landscape into what it is today.
The hottest FinTech sector in the ANZ region right now is arguably Buy Now Pay Later (BNPL). With consumers embracing digital payments at fever pitch it’s no surprise to see that the Global Payments Report found BNPL to be the fastest growing online payment method in Australia, set to hold a share of 14% by 2025.
BNPL is just one example of the widespread adoption of ‘Embedded Finance’. This refers to the seamless joining of traditional financial services – such as payment processing, lending or insurance – with a non-financial service provider. It allows companies from all industries to layer in financial capabilities to their products and enhance their customer propositions.
Embedded Finance is continuing to grow and provide businesses with seamless, integrated opportunities to better meet customer expectations. Retailers, payment processors and financial institutions will all need to work together, embracing embedded finance to create new products which provide the best consumer experience possible.
Embedded Finance in action
Embedded Finance is not necessarily a new concept, but its adoption has accelerated over the last few years. There are a growing number of solutions now in the market with BNPL among them.Embedded lending – which we see through BNPL – allows consumers to take out an interest-free loan with the retailer at the point of purchase, without going through a bank. The pool of BNPL providers is continuing to grow in ANZ with local businesses, AfterPay and ZIP amongst the top players.
Another example of embedded finance already in use every day is through ride-sharing apps – from Uber to newcomers such as DiDi and Ola. When a customer pays for a ride-share at the end of the ride, they pay directly through the app and there is no need to pull out a credit or debit card separately. In addition, with Uber, all those who ride in their cars are automatically covered by insurance for the duration of their journey – this is extended to the drivers – simplifying the process for the consumer.
How FIs are enabling embedded finance
With the demand for integrated products rising, banks have the opportunity to provide non-financial institutions with banking-related capabilities, making financial services available to consumers when and where they are needed most. Invisible to consumers, embedded finance seamlessly blends into the everyday routine and has become an essential service to the majority of consumers.
Embedded Finance is made possible with BaaS (Banking-as-a-Service). Through open APIs (Application Programming Interface), financial institutions can distribute core financial products such as payments, mortgages and loans to third parties as part of an integrated service. In simple terms, APIs enable connectivity between systems and platforms. But they also boost innovation by allowing data to be extracted, shared and combined to create new propositions that add real value. Essentially, APIs enable banks to provide access to the data held in its systems to customers or third parties.
To enable open APIs, banks will need to start from the bottom up, reinventing their core and launching digital-first initiatives throughout their business models, technology stacks, software solutions, strategic plans and more. Powered by and fully participating in a platform ecosystem of FinTech solutions, modernisation will help banks to build up and out to become full-service partners with access to a complete customer picture that will enrich the customer experience and make interactions with customers more successful, efficient and profitable. With the ability to offer BaaS solutions, banks can also enjoy a rapid expansion of their distribution channels and increased market reach to new customers.
What Embedded Finance brings
Banks aren’t the only ones to benefit from embedded finance though. The concept appeals to both consumers and businesses. From the consumer’s perspective the Embedded Finance model streamlines financial processes via a ‘one-stop shop’ approach that makes it easier for people to access goods and services when and where they’re needed.
From a business POV, these innovations allow businesses to reinvent the services they offer customers, making financial services an integral part of the user journey. As an example, we have seen car manufacturers move into the space through embedded insurance. The likes of Tesla are now offering their own insurance across the range of vehicles, streamlining the process for consumers and – in some cases – reducing the cost of the insurance overall.
Businesses are seeing that creating a streamlined and frictionless process can boost revenue streams and expand their offering into adjacent services – providing more value for their customers in the process. Through the use of APIs, businesses also have the opportunity to collate data and understand how to better serve their customers. Having greater visibility of their transactions enables businesses to recommend tailored products for their consumers and personalise the experience.
Embedded Finance is the future
As Embedded Finance becomes more popular, financial institutions need to act now to modernise their platforms and have an open API strategy ready to provide BaaS. The priority is to deliver unique differentiating digital experiences that attract and retain new customers. The quality, depth and richness of the customer experience is ultimately powered by the core system. If that core is cloud-enabled via microservices and APIs then the bank is well positioned to open new channels, using API-based services to connect with partners, regulators and different parts of the bank itself.
Embedded Finance has the potential to change how financial services are consumed and it is the financial institutions that stay ahead of these innovations and deliver the best solutions in the market that will see the most benefits.