Software development What the embedded-finance and banking-as-a-service trends mean for financial...

What the embedded-finance and banking-as-a-service trends mean for financial services


The acceleration of digital financial services in the past few years has created innovative new ways to interact with the end consumer. Users now demand a seamless experience in all steps of their journey online, from product selection to payment authentication. Outside in embedded banking represents a chance for SMBs to modernize their digital experiences and streamline operations, and for banks to form stronger relationships with embedded payments trends their SMB partners. Banks are perfectly positioned to throw a lifeline to their small business customers. Embedded banking might still be relatively unknown to many bankers, but it may just be thing that helps countless SMBs get through the imminent economic crunch. One possibility is that banking as a service and API banking become as ubiquitous as online or mobile banking, a channel that every bank must build and maintain.

They enable customer and agent interaction with the financial application on the front end to communicate the intended messages with the banking infrastructure. The API is the reason embedded solutions from non-bank providers don’t need an independent banking system. BaaS has led to the development of a number of virtual banks without any physical branch locations. These providers focus on the front-end app tools and features users want and rely on licensed bank systems to facilitate the requisite back-end banking functions. The primary purpose of embedded finance is to streamline customer experiences by eliminating extra steps to obtain financing, such as loans, insurance, or investments. It is in play in a number of industries, including real estate, retail, and some employment sectors.

Data Driving the Embedded Era

For example, a retailer might offer point-of-sale financing, allowing customers to pay for a purchase in installments, or a ride-sharing app might offer a credit card to its drivers for fuel and maintenance expenses. Launched in 2012, Affirm enables merchants to embed flexible payment plans in their checkout flows. To illustrate how it’s different from traditional financing options, let’s say you’re interested in buying a mattress from Eight Sleep, but you don’t want to use a credit card. Behind these services are new BaaS platforms such as Solarisbank and some banking institutions such as BBVA which, via BBVA API Market, makes a robust catalog of APIs available to its technology partners and developers. Ultimately, as with the web and mobile channels, banks will want to be where their customers want them to be.

  • Banking as a Service (BaaS) is a relatively new business model whereby virtual or digital banks offer financial products by connecting with bank systems via application programming interfaces (APIs).
  • Namely, in their Enterprise Resource Planning (ERP) systems and accounting software.
  • We will see increasing penetration in certain industries and significant revenue multiples across smaller subsegments, such as business-to-business (B2B) payments and BNPL.
  • The challenge is that customers are demanding banking services
    to be available integrated with different points of sale, devices, service providers etc.
  • Examples of embedded finance might include an e-commerce merchant providing insurance, a coffee shop app that offers 1-click payments, or a department store’s branded credit card.
  • Embedded lending allows companies of any size to easily offer their customers more payment options.

Using APIs, they gain access to specialised tools by piggybacking on regulated providers. These tools can build financial products without needing compliance or development costs. Second, many technology providers are seeking to capture a larger share of embedded-finance revenues by expanding across the value chain.

Embedded finance vs. Banking as a Service (Baas): What’s the difference?

As of 2021, US consumers and businesses spent $3.60 trillion on their debit cards and $3.55 trillion on their credit cards. Between 3% and 4% of these transactions for debit cards, and less than 1% for credit cards, were conducted using embedded banking offerings. By 2026, the nonfinancial services market penetration for debit cards will increase potentially fivefold to around 15%, while we see the start of credit card SaaS models adapted for embedded finance. The total embedded penetration across both will average around 9% (see Figure 10). Embedded finance brings financial services to the exact moment it’s needed, instead of being an entirely separate part of a consumer’s life.

What is Embedded Banking

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. 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 carts. Embedded lending allows companies of any size to easily offer their customers more payment options.

Company Announcements

Embedded finance allows you to pay for a purchase online without entering bank details or instantly take out a consumer loan on digital platforms outside banks, among many other options. This Bank-as-a-Service model, which allows the integration of financial services via APIs, moved $22.5 billion in 2020, a figure that will increase tenfold in the next four years. Building a successful embedded finance proposition will require a fundamental rethinking of the capabilities needed, especially in terms of risk. Having a certain share of nonbanked customers unconditionally processed through a real-time credit decisioning engine will challenge most banks’ tolerance for risk. Banks and regulators will have to get comfortable with platforms and enablers making credit decisions that may affect traditional balance sheets, based on real-time and contextual data held outside of the bank.

What is Embedded Banking

Embedded banking can refer specifically to the integration of traditional banking services—such as checking accounts and debit cards—with a non-financial company such as a retailer or marketplace. Embedded banking services can be set up through a banking as a service (BaaS) provider. We see that everywhere we look when it comes to consumer banking, with ATMs, online, and mobile banking.

Discover how pricing plays a crucial role when formulating strategies to deliver superior customer experience.

By doing that via Open Banking now doesn’t suddenly change the fact that, then and now, Insurance industry
is not Banking industry. For companies wishing to join the embedded finance revolution, the time to start building is now. BaaS (Banking as a Service), Embedded Finance, and Open Banking are related concepts, but they are not the same thing. Here is a look at definitions for each of them, how they are interrelated, and why Open Banking ultimately helps all three models. I’ll also share recommendations for what you can do now to prepare for upcoming CFPB 2024 North American regulation that will impact the way financial institutions handle data within these models.

What is Embedded Banking

Open banking enables financial institutions to provide customers with more personalized and innovative services by leveraging their data. For example, thanks to open banking APIs, a consumer could connect their bank account to a budgeting app or a robo-advisor, allowing the app to analyze their spending habits and provide personalized financial advice with the customer’s explicit consent. When you work with a financial-service provider to build a financial product into your offering, that’s embedded finance. Platforms use banking as a service as a way to offer, for example, branded payment cards. Embedded finance has been one of the most discussed topics in FinTech in the past couple of years.

Platforms choose their partners

Fintechs that offer embedded finance products are also gaining significant ground. In 2021, venture capital investments in embedded finance were triple those of 2020 (see above). In 2022, the overall embedded finance market was valued at $65.46B, and is expected to see a compounded annual growth rate of 32.2% from 2023 to 2030. Companies have various ways to embed digital insurance options, most via partnerships with fintech companies. These fintech companies build insurance options into the checkout flow, enabling consumers to choose insurance as an ‘add-on’ to their purchase.

What is Embedded Banking

Embedded finance has brought challengers and stiff competition to banking territory. For those institutions and platforms already struggling with technology debt, embedded finance could prove too high a hurdle in the battle to stay relevant. With the squeeze on fees tightening, the strongest providers are looking to offer a range of value-added services as part of the package, such as anti-fraud, dispute management, know-your-customer, compliance, and merchant acquisition management. If platforms or enablers are willing to accept some of the underlying credit risks, they could earn significantly more.

Consumers change their habits

We aim to be the most respected financial services firm in the world, serving corporations and individuals in more than 100 countries. BaaS and embedded finance have been major talking points in the fintech ecosystem in recent years, Swan’s CEO, Nicolas Benady, told Insider. Swan, a banking-as-a-service fintech startup, has raised $39.2 million in new funding, which it plans to invest into its expansion into new European markets. It would be very, very odd if you’re a company that just started, and you aren’t adopting embedded finance. Applications that integrate stock market investing like Robinhood, Acorns and Cash App are examples of embedded investment companies. Buying, selling and trading stocks can happen without leaving the app or working with an investment adviser.

Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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