What is “embedded FinTech” and what does it mean for product innovation? We discuss how the two are connected.
As consumers demand faster, more integrated services from their payments providers — there’s no doubt that digital innovation has transformed the way financial institutions (FIs) conduct business. Weekly consumer engagement with a bank’s mobile app or website has grown from 32% in 2018 to 50% in 2020, according to a recent study by Accenture, and today as many consumers would prefer to open a bank account on mobile as they would in-person (47%).
There is clear consumer interest in digital solutions and therefore investing in a technical strategy is critical for success in today’s landscape. BDO reports that FIs believe that the digitization of consumer experience will have the most significant impact on their business in the next year (40%), while over half of FIs are planning to invest in new digital revenue streams. Yet these processes can be complicated and expensive if not approached strategically.
In order to achieve these digital transformations, companies need to be looking at embedded FinTech and the product innovation opportunities it provides.
Many companies may be familiar with embedded finance, but embedded FinTech is an entirely separate approach that was coined by Ron Shevlin. Embedded finance is targeted at non-financial institutions and is designed to enable them to offer competitive banking services within their platforms. It is this development that has put pressure on FIs to keep up with technology developments, as they are no longer just competing amongst themselves.
By contrast, embedded FinTech involves introducing financial technology services into traditional financial institutions, so that they may support digital-first operations. The emphasis is on the technology component and, when incorporated successfully, can allow FIs to access services like subscription management, bill negotiation, cryptocurrency investing, and data protection.
As consumers push for a more holistic digital system, whereby they can access all banking services both through a mobile app and in-branch, it is imperative that financial institutions employ the right technology support.
While it is possible for a company to develop its own proprietary technology, it can be both more cost-effective and more operationally efficient to integrate existing FinTech programs into the company’s platform, through embedded FinTech. Each company can select the features they need in a plug-and-play approach that removes operational redundancy and enables immediate implementation — a must in today’s fast-paced market.
When working with FinTech products that are already available, FIs also stand to benefit from customer familiarity. Many consumers are already using these products directly and so by incorporating them into their broader financial ecosystem, FIs can remove any barrier to adoption. Supporting all financial tools in one place may also earn goodwill from the consumers — it is easier to maintain visibility over finances with access to a single overview.
Once a company has committed to the technical integration of third-party FinTech solutions, the opportunities are expansive. The first priority should be to use these tools to strengthen existing company products, such as through improved data collection or analysis; this also allows the FI to test the integration internally before launching consumer-facing products. When this has been successfully achieved, companies can look towards new product innovation.
As these products are developed fully by the FinTech company, the only task for the FI is to integrate the product into its existing platform and optimize for its individual needs. Rather than having to make substantial investments upfront on tools that may or may not prove successful, companies can quickly test, adapt and launch new products for their market at much lower price points.
This provides multiple opportunities for the company to expand its product offering, whether through facilitating new channel integrations (such as mobile gateways) or launching entirely new revenue streams (like subscription support.) Some may choose to specialize in one particular area, while others may opt for broad financial coverage; whichever route they choose, embedded FinTech can help achieve this.
Increasingly, consumers are moving towards digital activities, with McKinsey finding that 76% of US consumers use internet or mobile banking at least once a month. With the majority of customers engaged in digital channels, companies must be prepared to meet these behavioral changes or risk losing business to competitors who can provide greater efficiency and convenience.
Keeping up with consumer demand requires more than just operating digital channels; it requires having the infrastructural flexibility to support new product integrations, whether developed in-house or introduced through embedded FinTech. Due to the short lead time required, FIs that use embedded FinTech will be able to react more quickly to these shifts and stay ahead of the market.
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