Embedded Financial Opportunities

The value proposition of embedded finance is becoming increasingly clear, as businesses see integrated personalized payments and loans directly connected to their digital platforms. Consumers see new payment options added to their digital experience. Non bank financial institutions can offer new services within their existing products. Banks see an opportunity to introduce the bank-as-a-service model into segmented markets for businesses and consumers.

Firstly, if there is any element in this equation that requires more attention, it is the bank. As stated by Deutsche Bank's Global Product Head for Banking as a Service, Situational Banking, and Embedded Finance, embedded finance allows for connectivity to the infrastructure of open banking, providing new opportunities. Banks are also establishing strategic partnerships with companies and fintech firms, making investment decisions, and building products related to embedded financial services internally. At a time when embedded finance is seen as a major opportunity for non bank financial service companies, Mitra believes that banks have a bright future with many emerging opportunities.

Secondly, although the opportunities are enormous, it is also acknowledged that banks face challenges in the field of embedded finance. Interoperability and scalability remain obstacles, especially when dealing with traditional platforms. Regulatory considerations have also brought challenges, leading to a more complex environment. Mitra pointed out that the boundary between regulated and unregulated services may be blurred, especially when crossing different jurisdictions. She said she expects stricter regulatory scrutiny in the future, but believes this is a positive development that will bring more clarity to the industry.

On the other hand, at first glance, embedded finance provides a highly attractive opportunity for banks to expand their distribution range at relatively low operating costs. In order to reduce the management fees typically required for sales and providing financial services, banks can collaborate with software platforms, markets, and retailers to directly reach thousands of small businesses and millions of consumers. However, it also brings significant risks to many banks, who often have to give up direct relationships with customers, thus facing the risk of commodification. The erosion of core products is also possible, as banks have limited control over distribution channels, which may include existing and potential customers. In the early use cases, these risks were minimal and mainly targeted at consumers with insufficient banking services, such as those with new bank accounts and higher credit risks under traditional underwriting methods. However, large enterprises and technology platforms offer a wider range of financial products to target the customer base that traditional banks serve more traditionally.

In addition, for small banks, it can become a distribution multiplier while minimizing the risk of eroding existing customers. But to take advantage of this opportunity, we need to reconsider technology, risk, and operations. Banks can solve this problem through partnerships and aggregators rather than internal construction. However, the relative simplicity of basic deposit and debit products, as well as the number of Durbin exempt financial institutions, with over 9300 banks in the United States, accounting for 95% of all financial institutions in the country, can commercialize this service. Implementing specialization such as loan products or risk services and differentiation through application programming interfaces may help small banks stand out in terms of technological infrastructure or customizable compliance processes.

Overall, through better data access, banks can provide customers with better predictive services. For accounts receivable and accounts payable, banks can provide automated and streamlined solutions to reduce manual labor and improve efficiency. For financing, by using real-time data, banks can provide more targeted financing solutions, such as invoice financing and supply chain financing.