Taner Akçok “Are we still at the beginning of “Embedded Finance” revolution?” başlıklı İngilizce makalesi ile gömülü finans dünyasının derinliklerine iniyor…

Gömülü finans, bağlamsal bankacılık ve hizmet olarak bankacılık (BaaS), genellikle birbirinin yerine kullanılan terimlerdir, ancak aslında finans endüstrisinde farklı kavramlara atıfta bulunurlar. Bu terimler arasındaki farkları anlamak, finans alanında çalışan veya finansal teknolojinin nasıl geliştiğiyle ilgilenen herkes için önemlidir. Bu noktadan hareketle Forbes 30 Under 30 listesinde yer alan Deutsche Bank, API Platformu ve Entegrasyon Hizmetleri Başkanı Taner Akçok, gömülü finans dünyasının derinliklerine indiği bir makale yayınladı.

Are we still at the beginning of “Embedded Finance” revolution?” başlıklı makalede;

  • Gömülü Finans nedir?
  • Gömülü Finans Ekosistemine Genel Bakış
  • Gömülü Finans İş Modelleri
  • Bankalar Gömülü Finans Tekliflerini Nasıl İyileştirebilir?
  • Gömülü Finans Kullanım Örnekleri ele alındı.

Gömülü Finansa kapsamlı bir bakış sunan Akçok’un yazısının özgün halini [İngilizce] okurlarımızla paylaşıyoruz. İyi okumalar dileriz.

An extensive look into Embedded Finance by Taner Akcok.

Embedded finance, contextual banking and banking as a service are the terms that are often used interchangeably, but they actually refer to different concepts within the financial industry. Understanding the differences between these terms is important for anyone working in finance or interested in how financial technology is evolving. In this article, we will deep-dive into embedded finance world.

What is Embedded Finance?

Embedded finance refers to the integration of financial services into non-financial products and services. This allows companies to offer financial services and products to their customers without having to build their own financial infrastructure. The use of embedded finance can provide a convenient and seamless experience for customers and create new revenue streams for companies.

Embedded Finance Overview
Embedded Finance Ecosystem Overview

There are a wide variety of use-cases for embedded finance, including retail, travel, and healthcare. For example, a retail company may offer financing options for customers to purchase products, a travel company may offer travel insurance to customers, and a healthcare company may offer medical billing and payment services to patients.

One example is the use of PFM (Personal Finance Management) apps that are offered by fintech companies. These apps allow customers to check their consolidated account balances, transfer funds, manage contracts and organize spending categories. By offering these financial services, PFM apps are able to provide full control of different financial institutions and account types from a single mobile application.

Another example is the use of payment options within e-commerce platforms. Many online retailers now offer the ability for customers to pay for their purchases using a variety of payment methods, including credit cards, debit cards, and digital wallets. This not only makes it easier for customers to make purchases, but it also allows the retailers to capture a larger share of the payment processing fees. Besides, it increases the competition around financial products such as BNPL (Buy Now, Pay Later), instalments and financing options both for consumer and retailer.

Embedded finance is also being used in the transportation industry. For example, ride-hailing companies like Uber and Lyft offer in-app payment options, allowing passengers to pay for their rides directly through the app. This not only simplifies the payment process, but it also allows the companies to collect a larger share of the transaction fees.

“Banking is necessary, banks are not.” Bill Gates

Embedded finance has the potential to revolutionise the way that financial services are delivered, making them more accessible and convenient for consumers. We are still at the beginning of this revolution. New products, services, and business models are appearing every day.

Business Models for Embedded Finance

Banks and third-party financial technology (fintech) companies may use similar revenue models in the embedded finance space. Some common revenue models include transaction fees, interest and other financial products, and subscriptions. However, there are some key differences between the revenue models used by banks and third-party fintech companies.

Embedded Finance Business Models
Embedded Finance Business Models

These business models can create value for the bank directly or indirectly from embedded finance partners and clients/customers.

Some examples for direct revenue models between bank and embedded finance partners:

  • Integration and Licensing Fee Model: This can involve integrating financial APIs (application programming interfaces) into an embedded finance partner’s platform, or integrating financial products and services into the company’s business processes. Integration allows companies to offer financial services and products to their customers without having to build their own financial infrastructure. This fee can be in one-time (for development and integration) or regular license payment model.
  • Subscription Fee Model: This business model involves generating income through recurring fees for access to the company’s platform or certain features. Mostly, banks are providing some embedded finance APIs for free and positioning some of them as premium APIs. In this model, banks can charge for the premium APIs as long as it creates a business value for embedded finance partner as well. Most common usage of this model is premium xs2a APIs to provide wider information about the customer and the account.
  • Transaction Fee Model: This business model involves generating income through fees associated with processing transactions. This could include fees for xs2a, payment processing, foreign exchange, or other financial transactions. Most common example of the transaction fee is open banking / aggregator use-cases. AISPs and PISPs are monetising their service by number of transactions (especially for Corporate Bank), number of users or number of active users (fetching new transactions for the dynamic time intervals). Same as well banks are generating revenue from some of their premium APIs around AIS and PIS.
  • Commission-Based Services / Revenue Sharing Model: Companies may offer services such as insurance or investment advice and generate income through commissions on these services. Banks bundle their products with third party service providers – such as insurance – or third party service providers bundle their services with bank products -such as lending, account opening-. In both cases the commission based revenue model would be used for creating a business value.
  • Referral Fee Model: Companies may offer referral programs that pay a fee to users who refer new customers to the platform. This model mostly works on complementary products and services. For example if you are promoting specific bank for the real-estate, automotive or insurance in retail industry, referral fee model would fit for your business case.

Some examples for indirect revenue models between bank and embedded finance partners:

  • Affiliate Marketing / Advertising Model: Companies may partner with affiliates who promote their products or services in exchange for a commission on sales. There are some affiliate marketing companies which are specialised into banking and fintech area. They target potential clients with DSPs(Demand Side Platforms) and other advertisement channels with the bank services such as account opening and lending. These affiliate marketing companies get commission per sales. Besides, some banks does the same with insurance companies especially in lending processes.
  • Lead-Generation Model: Banks may use embedded finance integrations to generate new leads for the financial products. Banks can integrate their application or go data sharing model depends on the nature of the partner. For example embedded finance integrations with procurement and tendering solutions can generate leads for government backed procurement loans or procurement factoring leads which are high value opportunities for the banks.
  • Data Acquisition Model for Clients and Merchants: Banks may collect more data about their customers for having holistic view about the life events and other financial products. Besides, banks can create merchant insights from the consumer transactions to discover merchant financing opportunities. Some examples of this model are discovering consumer life events such as car owner, have kids, job change, unemployment and some financial habits. Besides, banks can discover new raising merchants and identify changing consumer trends between the merchants from the holistic data that they acquire.
  • Aggregated Market Insights: Companies or banks may collect and sell non-PII (Personally Identifiable Information) data in an aggregated way about their users or their financial transactions to third parties. Most common use case is aggregating payment partner (companies) transactions in a historic structure to compare different partners’ performance with real market data. For example seeing the trends between Uber and FreeNOW or Lieferando and Wolt by using real transactions. This data is valuable for hedge funds, VCs and cash-flow backed loans.
  • Adapting into New Business Models: Banks can discover new business models and revenue streams by working with embedded finance partners. For example, BNPL (Buy now pay later), instant payment, sum up the transactions kind of business models originated by non-financial players or fintech companies.

Also, there are so many direct and indirect business models around the clients/customers. But deep diving into those models later in contextual banking scope would be more insightful.

How Banks Can Improve Their Embedded Finance Offerings? 

Investing into embedded finance and improving the offerings can bring a number of benefits to banks including increased customer acquisition and retention, enhanced customer experience, new revenue streams, competitive advantage and improved risk management.

Embedded Finance Guide for Banks
Embedded Finance Guide for Banks

To build embedded finance foundation and improving the offerings, banks need to:

Enhance the partner and vendor ecosystem and aim to establish or follow market standards.

  • Partner with more fintech companies: Banks can leverage the innovation and expertise of fintech companies to improve their embedded finance offerings. Banks can distribute existing embedded finance offerings across these partners and discover new embedded finance offerings from the needs of the fintech partner clients.
  • Collaborate with other financial institutions: Banks can collaborate with other financial institutions to offer a wider range of financial products and services to customers. Sometimes collaboration creates more value than competition. Especially for the common pain points, instead solving the problems individually, creating market standards and joining the visions can be more beneficial for the banks, embedded finance ecosystem and clients.
  • Foster partnerships with non-financial companies: Banks can partner with non-financial companies to offer financial products and services to their customers. This can help banks expand their reach and generate new revenue streams. Embedded finance is not only about financial players and technologies. There are so many areas which are not financial but financial products are crucial to complete sales or customer lifecycle – such as real-estate, automotive etc.

Invest in creating a seamless experience across platforms by offering a diverse range of personalized financial products and services.

  • Offer a wide range of financial products and services: Banks can offer a wide range of financial products and services, including traditional banking products such as checking and savings accounts, credit cards, and loans, as well as more specialised financial products such as insurance, investment products, and payment processing.
  • Make use of data and analytics: Banks can use data and analytics to better understand the financial needs and preferences of their customers and design products and services that meet these needs.
  • Focus on user experience: Banks should focus on providing a seamless and convenient user experience for their customers, including through the use of mobile and digital channels. This experience design should cover from design to the integration models as well. Unnecessary screens and redirected flows mostly cause churns into user experience.
  • Offer personalised financial offerings: Banks can offer personalised financial offerings to help customers make informed financial decisions. Especially with the use of the data, analytics and segmentation, so many products can be personalised and prevent unnecessary product offerings and client spamming.

Establish a technological and organisational foundation to effectively and securely integrate embedded finance offerings into partner platforms in a compliant way.

  • Foster a culture of innovation: Banks should foster a culture of innovation to encourage the development of new financial products and services. To achieve that, banks should invest in innovation culture and agile mode of operation at the same time. Otherwise innovative mindsets will not find a delivery ground to create impact into the market.
  • Leverage technology to improve efficiency: Banks can use technology such as API Platforms, integration services, automation and machine learning to improve efficiency and reduce costs. Decomposing services, investing into API platforms and designs, training the organisation for being API First are crucial to the success of these actions. Not only embedded finance APIs, all APIs should be designed in an externalisation friendly way and discoverability, usability, life-cycle management, documentation etc. of these APIs should be observed and managed.
  • Focus on security and fraud prevention: Banks should prioritize security and fraud prevention to protect their customers’ financial information and assets. Some of the integrations have standards and regulated by authorities but considering changing needs and integration models, secure and compliant integrations are crucial. Banks should invest into experts who can understand complex integration cases and check the security and compliance of them.

Let’s Discover Some Embedded Finance Use-Cases

Understanding the embedded finance use-cases is important for several reasons. Firstly, it allows financial institutions to identify opportunities for integrating financial services into other products or services, and to design and develop these offerings in a way that meets the needs and preferences of their customers. This can help financial institutions attract and retain customers, and generate new revenue streams.

Secondly, understanding the embedded finance use-cases can also help financial institutions to mitigate risk by identifying potential vulnerabilities and developing appropriate controls and safeguards.

Finally, understanding the embedded finance use-cases can also help financial institutions to stay competitive in the market, by being able to offer innovative and differentiated financial products and services that meet the evolving needs of their customers. Overall, understanding the embedded finance use-cases is essential for financial institutions to effectively leverage this approach and drive business growth.

Embedded Finance Use-Cases
Embedded Finance Use-Cases

Let’s check some of the embedded finance use-cases into the market:

Consumer Focused Embedded Finance Use-Cases

  • Personal Finance Management (PFM): Companies are now offering personal finance management tools, such as budgeting and expense tracking apps, as part of their core offerings. These tools can be integrated into other products and services, such as mobile banking apps and online banking platforms. Personal finance apps, such as Mint and YNAB, allow users to track their spending, set budgets, and manage their money. These apps are often offered by companies as part of their product or service offerings, such as mobile apps.
  • Comparison Engines: Some companies are now offering financial account opening, lending and financing options, such as loans, lines of credit, and lease-to-own options, as part of their product or service offerings. This allows customers to finance their purchases directly through the company, rather than through a traditional financial institution.
  • Insurance: Many companies now offer insurance products as part of their core offerings. For example, a car dealership might offer extended warranties or gap insurance to customers when they purchase a vehicle. Same as well some lending products require insurance coverages from the clients/customers which can create a seamless experience with proper integrations.
  • Investing: Some companies now offer investment products, such as mutual funds or exchange-traded funds (ETFs), as part of their product or service offerings. This allows customers to invest their money directly through the company, rather than through a traditional financial institution.
  • Bill Payment / Contract Management Systems: Some companies now offer bill payment services as part of their core offerings. For example, utility companies may allow customers to pay their bills directly through their online portals or mobile apps. Some of them are integrating the bank accounts and detecting the contracts automatically from financial transactions. Clients can manage/extend/cancel their contracts from single platform. Besides, this provides holistic view about the customer’s financial overview.
  • Rewards Programs: Many companies now offer rewards programs that allow customers to earn points or cash back on their purchases. These rewards can often be redeemed for a variety of financial products and services, such as cash, gift cards, discounts, and travel. Especially digital banks are integrating these rewards program to create competitive advantage.
  • Subscription and Membership Services: Many companies now offer subscription-based products or services, such as streaming platforms, magazine subscriptions, and meal delivery services. These subscriptions often include payment options, allowing customers to pay for the service on a recurring basis.
  • Rent-to-Own Options: Some companies now offer rent-to-own options, allowing customers to rent a product for a period of time and then have the option to purchase it at the end of the rental period. This can be a useful financing option for customers who may not have the upfront funds to make a large purchase.
  • Crypto and Blockchain-Based Financial Services: Companies are now using blockchain technology and cryptocurrencies to offer a wide range of financial services, including lending, trading, and payments. These services are often integrated into other products and services, such as mobile apps and online platforms.
  • Virtual Credit Cards and Prepaid Cards: Virtual credit cards are digital versions of traditional credit cards that can be used to make purchases online or over the phone. These cards are often offered by companies as a secure way for customers to make purchases using their credit cards. Also, prepaid cards, such as gift cards and reloadable debit cards, allow users to load money onto the card and then use it to make purchases or withdraw cash. These cards are often offered by companies as part of their product or service offerings, such as retail stores, gaming platforms or mobile apps.
  • Financing Options for Education: Some companies now offer financing options for education, such as student loans and tuition assistance programs. These options are often integrated into other products and services, such as online learning platforms or universities.

Business Focused Embedded Finance Use-Cases

  • Credit Card processing: Some companies now offer credit card processing services, allowing customers to pay for products or services using their credit cards. This can be particularly useful for small businesses that may not have the resources to set up their own credit card processing systems.
  • Financing for Large Purchases and Purchase Orders: Some companies now offer financing options for large purchases, such as appliances, furniture, and electronics. This allows customers to spread out the cost of the purchase over a period of time, rather than paying for it upfront. Also, purchase order financing may part of this. Purchase order financing allows businesses to finance their purchases from suppliers, either by selling the purchase orders to a third party or by borrowing against them. This can be a useful financing option for businesses that need to make large purchases but do not have the upfront funds to do so.
  • Business Financing Options: Many companies now offer financing options for small businesses, such as loans, lines of credit, and merchant cash advances. These financing options are often integrated into other products and services, such as accounting software or e-commerce platforms. Besides, payment systems have full insights on the online cash flow which allows to provide cash-flow based lending options.
  • Expense Management Tools: Expense management tools, such as Concur and Expensify, allow businesses to track employee expenses and reimbursements. These tools are often integrated into other products and services, such as accounting software or corporate travel booking platforms.
  • Supply Chain Financing: Supply chain financing allows companies to finance their purchases from suppliers, either through traditional financing methods or through more innovative approaches such as dynamic discounting. These financing options are often integrated into other products and services, such as procurement software or supply chain management systems.
  • Trade Financing: Trade financing options, such as letters of credit and trade finance platforms, allow businesses to finance their international trade transactions. These options are often integrated into other products and services, such as cross-border payments platforms or e-commerce platforms. For example, sometimes banks integrate their BPU(Bank Payment Undertake) flows into B2B marketplaces for providing guarantee in supply chain purchases (especially for importing/exporting) according to the credibility of the client.
  • Payment Processing for SMEs: Many companies now offer payment processing services for small businesses, allowing them to accept credit card payments from their customers. These services are often integrated into other products and services, such as point-of-sale systems or e-commerce platforms.
  • Invoice Financing and Factoring: Invoice financing allows businesses to finance their unpaid invoices, either by selling them to a third party or by borrowing against them. These financing options are often integrated into other products and services, such as accounting software or invoice management systems. Factoring may part of this model. Factoring allows businesses to sell their accounts receivable to a third party in exchange for immediate payment. This can be a useful financing option for businesses that are waiting for their invoices to be paid. Invoice factoring is similar to regular factoring, but it specifically involves the financing of invoices. This can be a useful financing option for businesses that are waiting for their invoices to be paid. Especially on procurement and tendering cases in construction industry, these integrations into procurement or ERP systems help business to keep growing by monetising their receivables in advance.
  • Receivables financing: Receivables financing allows businesses to finance their accounts receivable, either by selling them to a third party or by borrowing against them. These financing options are often integrated into other products and services, such as accounting software or invoicing systems.
  • Working Capital Financing: Working capital financing options, such as lines of credit and short-term loans, allow businesses to finance their day-to-day operations. These options are often integrated into other products and services, such as accounting software or business management systems.
  • Equipment Financing: Equipment financing options, such as leases and loans, allow businesses to finance the purchase of equipment. These options are often integrated into other products and services, such as equipment sales platforms or business management systems.

Enablement Focused Embedded Finance Use-Cases

  • In-App Payment Options: Many companies, including ride-hailing firms, e-commerce platforms, and on-demand service providers, now offer in-app payment options, allowing customers to pay for products or services directly through the app.
  • Digital Wallets: Digital wallets, such as Apple Pay and Google Pay, allow users to store their payment information and make purchases with their smartphones or other devices. These wallets are often integrated into other products and services, such as mobile banking apps and e-commerce platforms.
  • Payment Processing Services: Many companies, particularly in the e-commerce and retail sectors, now offer payment processing services that allow customers to pay using a variety of methods, including credit cards, debit cards, and digital wallets.
  • P2P Payment Services: Peer-to-peer (P2P) payment services, such as Venmo and PayPal, allow users to send and receive money directly from their bank accounts or digital wallets. These services are often integrated into other products and services, such as mobile apps and e-commerce platforms.
  • Payment Gateways: Payment gateways, such as Stripe and PayPal, allow businesses to accept payments online. These gateways are often integrated into other products and services, such as e-commerce platforms and online marketplaces.
  • Crowdfunding Platforms: Crowdfunding platforms, such as Kickstarter and Indiegogo, allow individuals and organizations to raise money for projects and ideas by soliciting small contributions from a large number of people. These platforms often include payment options, allowing contributors to make donations directly through the platform.
  • Some Banking-as-a-Service Use-Cases: Digital banking services, such as online-only banks and mobile banking apps – which rely on another bank’s license and infrastructure -allow users to manage their money and make transactions directly through their computers or mobile devices. These services are often offered by companies as part of their product or service offerings. Besides, non-financial companies can provide some financial offerings such as lending or account creation/collection to complete their business flows or sales cycles.

I hope the article helps to understand embedded finance for the people who are working in finance or interested in how financial technologies are working. Thank you for reading it. Please don’t forget to like the article and share it into your network in case you found it useful.

The opinions expressed in this article are my own and do not necessarily reflect the views of any company, organisation or group. For further questions or recommendations, please reach out to me via LinkedIN or visit my website.

Yazı: Taner Akcok

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