To learn more about how embedded finance is evolving and becoming intertwined with open banking, PaymentsJournal sat down with Betty DeVita, Chief Business Officer at FinConecta, Paul Chang, Payments Principal in Global Financial Services at Amazon Web Services, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group. Business and technology executives in banking, payments, and Fintech will benefit from their discussion.
Trends in Embedded Finance
Embedded finance is the integration of financial services, such as banking, insurance, or lending, into traditionally non-financial user experiences. It occurs when a non-financial provider integrates financial services into its offerings to enhance the customer’s experience and, ideally, retain them. According to Research and Markets, embedded finance revenues are forecasted to increase from $241B in 2022 to $776B by 2029.
Embedded finance is evolving, moving from a fixed system to a flexible one. Chang noted that, traditionally, payments worked on a four-party model. In the four-party model, four main entities are involved in transactions:(i) the customer (ii) the customer’s bank or issuing bank (iii) the merchant accepting the payment; (iv) and the merchant’s bank. In this system, you had to connect with just a handful of partners to make your use cases work. However, Chang emphasized, “What we’re seeing with open banking and embedded finance is the need to increase the number of parties involved two to three-fold, even potentially more, to create a holistic solution that works across different retail scenarios.”
Embedded finance requires the use of Application Programming Interfaces (APIs), which enable companies to open up their applications’ data and functionality to external third-party developers, business partners, and internal departments. They allow services and products to communicate with each other and leverage each other’s data. DeVita explained, “Whether you’re a retailer, telco, financial institution, or Fintech, whichever side of the game you’re on, all of these players are now able to easily connect with each other in the cloud, using API’s.”
Sloane explained how regulation around APIs has varied internationally, causing differences in uptake. He stated that in Europe, they came up with a standard (PSD2) for APIs. However, “they allowed every country to modify the standard the way they wanted. So there was little to no interoperability despite a standard.”
By contrast, Sloane highlights that “Brazil and other places are trying now to use API’s as a way to break through and connect merchants and financial institutions in new and interesting ways. They’re using some standards, picking and choosing what’s needed.” This contrasts with the U.S., which “has no regulatory mandate, but has a lot of technology chops and is just starting to figure out how this is all going to work. For example, the Financial Data Exchange is moving towards unifying the financial industry around a common standard that protects consumer and business financial data. We’re only just now looking at early stage access, and Buy Now Pay Later (BNPL) and other financial services that can be offered to your businesses and other solutions. So, it’s fascinating times as we move forward, find new use cases, find things that really benefit consumers to grow this market, and to build out that infrastructure.”
Chang is observing that payment customers are expanding beyond payments with recent announcements to build embedded financial products for eCommerce platforms, or be the platform for merchants to create accounts, secure loans, and provide insurance on goods and services. AWS provides the infrastructure and tools to support these platforms, including a scalable API gateway and management platform, consent management, and identity management along with the capability to stream real-time data for risk, decision, and authorization engines leveraging AI and machine learning.
Embedded finance is enabling merchants to differentiate themselves and can provide the following benefits to these merchants including:
- Improved customer experience though enhanced personalized offers and rewards
- Increased online conversion
- Increased customer loyalty and customer lifetime value
Use Cases for Embedded Finance
FinConecta’s open banking platform, which runs on AWS, enables institutions (financial and non-financial) to leapfrog to API-enabled business models such as Banking as a Service (BaaS) and embedded finance, generating new revenue streams through the power of an interconnected ecosystem.
DeVita highlighted that one of the use cases for embedded finance is with retailers, who can partner with Fintechs to offer BNPL financing for large purchases. She said, “the retailer represents an interesting use case, as they have their consumer who’s looking to purchase a larger ticket item in multiple payments, and they want to facilitate that in a way that’s easy, frictionless and expected for the customer in their checkout experience.”
With embedded BNPL, the retailer’s checkout process is on par with other digital consumer experiences such as Netflix. And, of course, the consumer doesn’t know that it’s being facilitated in the back-end through this mobile wallet that is connected through some middleware. Furthermore, the retailer does not have to develop this financial setup in-house, but can instead rely on a third party like FinConecta who provides this as a turnkey solution.
DeVita describes FinConecta’s embedded finance capability as a middleware platform that connects financial institutions and Fintechs to retailers (and other industries such as telcos, etc.) and their customers, and enables several uses including BNPL, payments, insurance, and loyalty programs.
She said, “one of the really interesting components of embedded finance is how it’s bringing together players that didn’t necessarily play together in the past.” This notion of strategic alliances is crucial in the API economy. It can be a game changer when interacting with your customer, saving them time and offering them more products and services that goes way beyond the retailers’ core business.
Supporting Financial Services Institutions with Embedded Finance
Typically, financial institutions deal directly with retailers to offer payment and other banking services to their customers. This can be time consuming and expensive for both the financial institution and the retailer and limits options on both sides.
FinConecta offers a new model, supporting financial services institutions with open banking and embedded finance in multiple ways. These include turnkey solutions for standardized API technology, a sandbox environment, integration of core processors and multiple Fintech solutions, and a developer portal. In essence, FinConecta is a connectivity hub, providing an embedded finance environment which is customizable and flexible to the specific needs of financial institutions, retailers, telcos, etc., and their customers.
Fintech enablers have developed and provided cutting-edge products and services in the cloud for their customers. The enablers are focused on key modules across embedded finance such as banking-as-a-service, data security, data connectivity, money movement, payments, verification, compliance and data insights. FinConecta brings the fast growing “As-A-Service” Fintech providers together and provides their services as options in their platform. A common interface is provided for 3rd-party developers and institutions along with a common set of practices and rules that govern the collaboration process across multiple parties. The result is simplified integration with best-in-class services and faster time to market.
DeVita elaborated that “this middleware platform allows for testing in a secure sandbox. Before you get to start working with this Fintech in production, you can actually ensure that these API transactions are flowing correctly, and that the front-end solution is working prior to rolling it out in production.” Also, FinConecta is unusual in the ability to manage multiple vendors at the same time — multiple Fintechs and core processors in an ecosystem. DeVita noted, “we can curate Fintechs for you, but you can also bring your own. We’re excited to be able to facilitate and accelerate all of this innovation in open banking and embedded finance with our cloud based interconnected ecosystem.”