The rise of embedded finance: revolutionizing the financial landscape

Traditional banks need to redesign their century-old business model. We are seeing checking accounts and loans no longer obtained at a branch, but at our favorite e-commerce store. What happens when we use embedded finance? Keep reading to discover all its advantages and not be left behind!

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Through BaaS (Bank-as-a-Service), embedded finance allows any company or digital marketplace to incorporate banking software directly into their website or app, with no need to redirect their users to the bank site to make payments. A Lightyear report estimates that embedded finance will generate about $230 billion in revenue by 2025.

In the world of finance, sometimes products or services appear that revolutionize the entire system. This is the case of the embedded finance revolution, which is here to stay.

This new service brings benefits for both companies and users and connects with other systems, such as open banking.

What is embedded finance?

Embedded finance are financial services that are embedded within other platforms accessed by a customer. In this way, the user chooses the product they want without having to leave the website they were on to purchase products or services.

Embedded finance allows the creation of a novel financial offer that integrates with the purchase of products or services that do not belong to the financial sector.

This type of product represents an opportunity for companies that are not part of the banking sector, as they can get closer to their consumers and create new sources of income.

With the appearance of embedded finance, financial services are part of the customer acquisition and retention channels. The clearest example can be found in an online store that offers financing to its customers.

Indeed in terms of regulatory compliance, this is not a concern for companies, as the regulated entity, be it a bank or a fintech, takes care of this complicated and necessary aspect.

How embedded finance benefits users

Although the biggest beneficiaries of embedded finance are the companies that offer it, users can also enjoy some advantages:

  • Convenience. They are offered the possibility of solving the whole process in one place.

  • Time savings. They do not have to look for several options in different places.

  • Personalized treatment. They acquire the products and services they want along with the financing they need.

  • Wide range of offerings. They will be able to choose from a growing catalog of products and services.

Faced with such important advantages for the user, most of them accept the embedded finance associated with the products and services they acquire, giving importance to convenience and time saving.

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Financial services perfectly integrated into our daily life

The BaaS model allows the aggregation of financial services via API. As BBVA indicates in its blog: “Now these integrations are easier than ever thanks to Application Programming Interfaces. A set of instructions that connects two pieces of software together, to facilitate the exchange of messages or data. A system that acts as a gateway between companies, customers and banking entities”.

Therefore, the idea of integrated finance, also known as contextual banking, is to “embed” financial services directly into the products of other non-bank providers. In this way, the financial service is available when and where it is needed. Specialized providers offer services such as bank accounts, cards and loans on the Apple, Amazon, Samsung or Walmart websites.

These brands recognized that, by enriching their products with financial services, they can benefit from greater customer loyalty, more customer touch points, and greater upselling and cross-selling options. Not to mention the possibilities to increase the richness of their data, something that they are already taking advantage of in the analysis of customer behavior.

Banking is necessary, banks are not”_Bill Gates.

Óscar Salcedo – Open Banking / Digital Business

This is how the tycoon summarized his vision of the  financial industry development back in 1994. As stated in the Solaris report When Brands Become Banks, although integrated financial services are gaining momentum in many industries due to increasingly deep digitization, the reality is that it is not a new concept.

The idea behind embedded finance dates back almost 100 years. In 1926, the Ford Credit Bank was the first “automatic bank” to be founded in Germany. Today, almost all of the world’s major automakers have banks as part of their corporate structure. For most people, the car was, and still is, a purchase that requires financing.

As a result, companies no longer have to share their customers with banks, it is possible to maintain direct contact with the user throughout the entire value chain. Integrating the financial service into your journey, rather than guiding the user back and forth between different interfaces, is the key. In a digital world, offering integrated finance has become much easier.

What is the real impact of embedded finance?

A transaction is not complete until the product is paid in full. So, if companies can keep that exchange on their playing field and seamlessly integrate it, they can strengthen the connection with the buyer and keep them coming back more often. Not to mention that customer value can be increased through 0% financing or bonus or cash-back programs.

In fact, the evolution that led to open banking is liberating the financial industry and allowing the integration of its services into larger ecosystems. Banking-as-a-Service allows us to offer a customer-focused approach, capable of meeting their demands in an increasingly digital world. In addition, providers are betting on large and growing ecosystems.

By integrating a very broad network of partners, companies can exploit a huge amount of data and increase customer loyalty. This flow of enriched information is what makes it possible to offer hyper-personalized services and products, which guarantee a longer use time of the platforms and increase user engagement.

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Banking o2: How Telefónica takes advantage of the BaaS

The German subsidiary of Telefónica o2 offers its customers the “o2 Banking” service, a checking account with a debit (or credit) card. The account can be controlled through theo2 Money app, where users can manage and monitor their finances via mobile. Apple Pay and Google Pay payment services are also integrated into your account.

By offering financial services, companies are transforming what was once just a user account into a full bank account. By linking user and behavior data with payment data, you can offer highly personalized services that are much more tailored to your personal needs and circumstances.

Since they already have relationships with existing customers through their core products, these companies have much lower acquisition costs for their financial services offerings compared to traditional banks. Something very important in a market where the degree of differentiation is low and competition is reduced to profitability and the strength of the brand.

For this reason, integration with financial services is becoming crucial for all sectors.

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