The rise in embedded financial products: is the new norm of banking?
By Rivo Uibo, Co-Founder and CBO at Tuum
We have recently seen a rise in the demand for embedded finance products. Embedded finance is essentially the use of financial tools or services, such as lending or payment processing, provided by a non-financial provider. It simplifies financial processes for consumers, making it easier for them to access the services they need. For instance, embedded payments on apps, BNPL or embedded insurance on your car, all streamline the purchasing process and close the gap between company and consumer. At the point of payment, consumers are often given the choice to utilise these embedded services, and this is ultimately changing the way in which we expect financial services to be handled: efficiently and simultaneously. But do consumers welcome this approach and what does this mean for the future of banking?
Who is saying yes to embedded?
Much of the appeal for embedded products lies in that fact that it makes processes easier, quicker and more seamless for consumers. Increasingly people are showing less allegiance to their bank and are more disposed to do banking with non-banks. 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 or taking out BNPL products, people between the ages of 18-38 are approximately 10% more likely to take these out 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 buy now pay later (BNPL) and 39% are likely to take out a loan for a high value item such as a car at the point of checkout. It is clear how embedded products are in favour for their convenient and streamlined approach.
The drawback of embedded services
Despite the appeal for embedded 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, retailers and 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 using such a financial product said they ultimately decided against it. Critically, aside from simply forgetting or deciding their embedded product wasn’t needed, nearly a quarter (22%) cited the reason for not continuing with their selected embedded product at checkout as being because the process was too complicated. There is therefore still work to be done to get embedded services to be adopted with open arms, particularly among older demographics who find the concept of embedded more complex.
Looking to the future of banking
Banking is increasingly becoming faceless, and people are increasingly drawn to taking out finance products directly with the retailer/travel agent/solar panel company rather than buying a product and having to sort out finance themselves. Embedded finance responds to these demands and does embrace the future of banking in a way that serves the evolving needs of consumers in a digital age. Despite some ‘teething’ issues surrounding embedded services, the appeal and the convenience they offer, seemingly outweighs these negatives. Embedded services are undeniably here to stay, and we will be seeing more of them in the future, forward-thinking banks are already onboard with the concept and encouraging third parties to offer embedded financial services as there are benefits to be had not just for end user but for banks themselves as they represent new channels for banks to indirectly serve new customers.
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