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The evolution of embedded finance

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Kanika HopeChief Strategy Officer at Temenos, discusses the trends in embedded finance emerging across different regions.

A lot of the excitement surrounding embedded finance has been around the fact that the development will allow big tech companies to enter the financial services market. What are the most important advantages of having a super app that incorporates everything? What are the disadvantages?

This is not about big companies entering financial services per se. The excitement is about consumers getting seamless, contextual accessible finance, and banking products within the everyday app or super app they use for a particular lifestyle need, whether it is hailing a ride or ordering a takeaway. This app could be a large brand like Shopify or Amazon or a smaller niche brand. The value proposition of a large brand is the convenience of a one-stop shop as well as cross-subsidies across products. The advantages of embedded finance for a brand include greater loyalty, higher lifetime value or revenues per customer.

For merchants, embedding payments into the invoice workflow improves accounting and reduces the time spent on reconciling invoices and payments.

Disadvantages are around lack of regulation in certain areas and complexity of value chain with a complex web of unclear responsibilities across multiple players.

Regulators are gradually adjusting their policy frameworks to cope with the risks that the new products and players pose. To what extent are regulatory requirements a constraint for non-financial firms to embed financial services?

For Banking-as-a-Service (BaaS) providers and brands, the decision is how much of regulatory risk to take on versus the license holders. Any risk they take on will need to be priced. And at what point do they become a full-fledged bank themselves?

How does regulatory oversight, supervision, and risk management need to change and adjust?

Regulators would need to become comfortable with brands and BaaS providers making credit decisions that may affect traditional balance sheets using their own proprietary data held outside the regulated bank.

They also need to look at protecting the customer as in the case of Buy Now, Pay Later (BNPL) which can lead to financially struggling consumers falling into debt, especially when they secure BNPL from multiple different apps and providers. As BNPL loans are typically zero interest, consumers fail to recognize BNPL as debt. Also, making an item more ‘affordable’ in the short term may encourage impulsive buying, overspending, and the late fee charges can increase financial burden.

Hence regulators in different jurisdictions are having to step in. In the UK, the Financial Conduct Authority (FCA) is recommending that BNPL products should be brought within the scope of the consumer credit regime and the government intends to make legislative changes soon. The Monetary Authority of Singapore is assessing if a regulatory framework is needed to guide such payment services as they become more widely used.

What use cases are you seeing in retail and SME banking?

Already, Open Banking is helping retail customers manage all of their personal finances in one place, giving them a holistic view of their financial footprint. For example, ABN Amro collaborated with Tink to develop Grip, a PFM application that allows customers to view their consolidated finances from other banks. Within three months of launch, they had attracted 670,000 customers, 50% of whom reported improved perception of the bank.

Credit risk decisioning for loans and mortgages is also being transformed by automating and incorporating Open Banking data like shopping history. This can help people with no credit history access to credit they would not otherwise receive. The not-for-profit lender, Fair for You, uses Open Banking to enable low-income families to access credit.

Charitable giving is an area seeing the positive effects of Open Banking. Sustainably is a fintech that allows users to roundup their digital spare change from shopping and debit card use towards charitable giving.

On the business banking side, Open Banking is especially useful to SMEs as it allows them access to the same technology benefits that were previously only available to larger, well-resourced corporate organizations. New players like Tide, Holvi, Plaid, and Coconut also offer aggregation solutions, mostly focused on accounting and bookkeeping.

Open Banking data can be analyzed to provide additional value-added services. For example, Barclays’ SmartBusiness Dashboard offers marketing effectiveness tools as part of a customizable business dashboard. The data can also lead to provision of services beyond banking. Wells Fargo together with Quickbooks (accounting software) provide automatic invoice issuance to SMEs. RBS and Chase are providing collections for example.

What trends do you see emerging across different regions to embedded finance?

Embedded finance is expanding rapidly around the world. This is happening primarily in retail but also in the small business segments. The most mature consumer use cases include ecommerce payments and embedded consumer lending in retail. Bukalapak is the Indonesian online marketplace where 13.5 million merchants and 100 million users transact with savings accounts and digital debit cards provided by Standard Chartered bank’s BaaS platform. Ride-hailing apps like Uber and Deliveroo and Singapore’s Grab are offering credit cards, digital wallets, and an instant payment service to their gig workers. For small businesses, embedded payments in working capital management and embedded pay day loans within payroll and accounting services are examples.

Finally, how do we use this new wave of technology to power financial inclusion, to give people access to products and services?

Embedded finance allows the brands or fintech apps to provide greater financial access as they can use proprietary real time and contextual customer data to make credit decisions on customers who might be rejected, ignored, or mispriced by traditional banks.

About Kanika Hope

Kanika Hope is the Chief Strategy Officer, leading Temenos' global business strategy with responsibility for market intelligence, strategic sales support and value-based selling.  Kanika joined Temenos in 2015 as Global Strategic Business Development Director and she laid the foundation of value selling in Temenos.Kanika Hope is the Chief Strategy Officer, leading Temenos’ global business strategy with responsibility for market intelligence, strategic sales support and value-based selling. Kanika joined Temenos in 2015 as Global Strategic Business Development Director and she laid the foundation of value selling in Temenos. She established the renowned Temenos Value Benchmark program (now called the Temenos CEO Navigator) and an influential series of thought leadership insights on strategic banking issues and trends.

About Temenos

Temenos is the world's leading open platform for composable banking, creating opportunities for over 1.2 billion people around the world every day.Temenos is the world’s leading open platform for composable banking, creating opportunities for over 1.2 billion people around the world every day. It serves over 3000 banks from the largest to challengers and community banks in 150+ countries by helping them build new banking services and state-of-the-art customer experiences. The Temenos open platform helps its top-performing clients achieve return on equity three times the industry average and cost-to-income ratios half the industry average.