The Disruptive Force of Embedded Finance
The concept of embedded finance simply describes the integration of finance offerings (banking and insurance) into non-financial businesses. A typical example of an embedded finance platform is the MTN Ghana mobile application. MTN Ghana is a telecommunications network company; however, the company has integrated financial services such as payments, savings, access to loans, and insurance products into its platform to ensure convenient, streamlined, and customized services for end users. On a broader perspective, businesses like Apple provide credit cards under its own brand and let customers use their phones (the Apple wallet) to make both online and offline payments. The emergence of embedded finance platforms has brought about a disruption in the traditional finance industry; hence, traditional financial institutions will adopt a new operating model that places an emphasis on integrating essential financial services at the best possible acquisition point. This method eliminates the requirement for one-to-one relationship building and yields a higher conversion rate at a lower cost.
There are different primary motivations for switching from traditional financial services to embedded finance. End consumers want payments and transactions to happen more quickly, simply, and smoothly. Due to this, for businesses to attract and keep loyal users, it is necessary to have embedded financial services. Moreover, businesses want to leverage embedded finance and related technologies to stay ahead of the curve in highly competitive and crowded markets and increase sales of their financial services. By targeting underprivileged communities, embedded finance has the potential to enhance financial inclusion; thus, many people will be able to access and benefit from crucial financial services.
A Significant Challenge in Embedded Finance
A significant challenge in embedded finance is the uncertainty regarding accountability for regulatory infractions. When a customer’s data privacy is compromised, it can be challenging to determine who should be penalized and who is to blame for the data breach. Embedded financial services could also result in complex business relationships. Consider the instance of embedded lending. One issue that comes up is that financial institutions may not be aware of who the customer is when third-party institutions offer such financial services. For the bank, this may make loan recovery challenging. The bank does not directly interact with the final consumer because its loan was integrated into a non-financial company’s platform.
Though traditional financial institutions still offer banking and other financial services, they are now forced to choose between either joining the fintech community and becoming a part of the ecosystem or facing competition. Institutions that decide to work with fintech firms and become part of the ecosystem need to be able to handle a challenging environment when it comes to cybersecurity, core competency readiness, and data quality. Those who decide to compete will need to have a well-thought-out plan that addresses several key areas, such as fostering innovation in product offerings, life journey embedding, and user experience across all touchpoints.
