Embedded finance is the new ‘norm’ in banking, but what is needed to unleash its full potential?
By Rivo Uibo, Co-Founder and CBO at Tuum
Convenient banking services when and where we most need them is where banking appears to be heading. Rather than banking being a separate process carried out by the end customer and their chosen bank, the concept of embedded finance enables consumers to access financing, payments or other financial products through a non-financial provider directly at the point of purchase. Payment through embedded finance makes for a much more simple, convenient process for the customer while also enabling third parties to offer an enhanced service which in turn helps to increase customer ‘stickiness’. And the advantages of embedded finance products are not limited to consumers and the third parties offering them, banks too stand to gain from embracing embedded finance and extending their products to end customers via indirect channels. But will it become the new standard way of making purchases? What factors are holding it back?
Who is saying yes to embedded?
The appeal of financial services at the point of sale for consumers lies in the fact that it makes processes easier, quicker and more seamless. Increasingly people are showing less allegiance to their bank and are more disposed to taking out financial services with other providers. This is particularly true for younger demographics. Our recent survey found that it is Gen Z and millennials that are more receptive to new and convenient embedded finance offerings. For example, when buying a high-value item, people between the ages of 18-38 are approximately 10% more likely to take these out using an embedded finance product such as buy now pay later (BNPL) than people aged 39-54 – and more than twice as likely as people over the age of 55. Nevertheless, the overall demand for embedded services is very encouraging. The research also found that 44% of people are likely to take out embedded insurance at the checkout, 42% are likely to take out BNPL and 39% are likely to take out a loan for a high-value item such as a car at the point of checkout.
The drawback of embedded services
Despite an overall promising reception to embedded finance products, there are still hesitations among some, namely older generations. The level of trust attributed to third party providers that are not financial institutions remains a key concern among consumers. As part of this, both non-financial companies offering embedded services as well as banks should seek to educate and inform people that products taken out directly with third parties at the point of sale still abide to the relevant regulation (e.g. the Financial Conduct Authority (FCA) in the UK) and are underpinned by established, licenced banks. Another hurdle that was identified in the survey, was the need for simpler and slicker processes and technologies to avoid discouraging customers from taking out financial services at ‘the checkout’. Across age groups, 40% of people who had already considered taking out a financial product at the point of purchase said they ultimately decided against it. Critically, aside from simply forgetting or deciding the product wasn’t needed, nearly a quarter (22%) cited the reason for not continuing with their selected embedded financial product at checkout as being because the process was too complicated. There is therefore still work to be done to get financial services offered by non-financial companies to be adopted with open arms, particularly among older demographics who find the concept of embedded finance more complex.
Looking to the future of banking
Banking is increasingly becoming faceless, and people are increasingly drawn to more convenient ways of banking. Embedded finance as a concept responds to these demands and embraces the future of banking in a way that serves the evolving needs of consumers in a digital age. Despite some initial ‘teething’ issues, the signs are that embedded services are undeniably here to stay, and we will be seeing more of them in the future. Forward-thinking banks have already embraced the concept, offering their services via third parties and powering the switch to finance and banking services at the point of sale.
Embedded finance ultimately presents a ‘win-win-win’ situation for all parties involved. For the end-customer, it offers more convenient purchasing process; For non-financial providers, it presents an opportunity to achieve a unified customer experience and in turn, increase customer retention; For banks, integrating embedded finance into their business model and accepting the role of facilitator of this concept, enables them to reach new customer segments and revenue streams. Indeed, as the powerhouses behind embedded finance, banks should not only embrace but actively encourage this evolution in banking services. Why resist change that moves toward the interest of consumers, better customer service and financial services when, ultimately, they stand to gain big too?