The rise of Banking as-a-Service and Embedded Finance

01 / 11 / 2022

The financial and banking industries are seeing rapid advancements in product, service and engagement. Thanks in part to digitisation, the collaboration between banks and third-party businesses is improving, resulting in enhanced customer experience and business development. Businesses that have embraced new digital services and technologies need support in new ways, including technologically and in an organisational sense. Two of these now key services are banking as-a-service (BaaS) and embedded finance. But what have these services emerged in response to and how can they support and drive product and market development? What has changed in the financial landscape? Discover more about Banking as-a-Service.

Woman having coffee and texting on her phone on Banking as-a-Service

Marie Cremier, Product Marketing Manager Digital Banking for Worldline, offers her thoughts on how these two services can lead to better customer engagement and satisfaction.

Banking as-a-Service and Embedded Finance

Embedded finance is the use of banking as-a-service and API’s to integrate financial services into non-banking companies product and services, for instance, payments being processed directly within the Uber app during the paid for service. This is a form of embedded payment. Other forms include embedded lending – whereby purchases are split into smaller payments, and embedded insurance, which many car manufacturers such as Tesla offer at the point of sale.

Banking as-a-service is an end-to-end process ensuring the execution of any financial service from the start to the end. It allows banks to integrate their digital banking services and products directly within the products of third-party distributors. This allows for the creation of white-label or co-branded banking services. In other words, it allows for the integration of non-banking businesses with financial infrastructure. This widens the portfolio of potential offerings and brings them to market faster. With banking as-a-service, non-banking companies can act like banks through third-party services without the need for a banking license. This also allows increased value to be delivered to customers and improves the overall customer experience.

Benefitting from digital technologies and ready access to cloud-based systems, banking as-a-service offerings provide increased scalability and agility, enhanced quality of services and reduced costs. It represents a way to meet the new needs and demands of customers and embrace all the changes that today's evolving financial world brings, such as selecting extras such as travel insurance or currency for a holiday within an airline app. 

“Embedded finance offers the opportunity for non-banking companies to integrate financial offerings through banking as-a-service to let them develop new services for customers and create innovative business models that will improve customers' day-to-day experience," explains Marie. "For example, this could be offering insurance products during product purchase, payment plans or different payment methods. This could also include services embedded into devices via software, such as e-wallets and digital cards. It also allows third-party apps to support financial services, such as the banking services offered to Uber by BBVA. In essence, it allows for all the needs of customers, both current and potential, to be met."

With Banking as-a-service, we have seen increasingly seamless integration of financial services, be it payments, foreign exchange, accounts, insurance or more, by non-banking businesses. This collaboration between non-financial businesses and financial institutions has revolutionised how people interact with money and business. Consumers now expect their installed apps to be capable of doing everything they require, with the more seamless the experience the better. With banking as-a-service, consumers can remain entirely in the app’s interface, not needing to leave the app or the company to facilitate additional tasks associated with a purchase, subscription or other activity.

"Businesses can use embedded finance to explore new sources of revenue and gain better insights into purchase behaviours. In industries where competition is high, embedded finance can help to increase customer loyalty or drive sales," says Marie. "It can also build a positive brand image. For brand apps, such as Amazon or Uber, onboarding processes can be simplified and an increased range of financial services can be offered to meet the needs of the customer directly."

Businesses in all kinds of industry can take advantage of the benefits of embedded finance to improve their customers' experience. Retailers can create better buying experiences, and organisations can provide convenient and straightforward financial transactions. As such, this has broadened the scope of support for businesses and banks alike, especially within the digital marketplace. Embedded finance & banking as-a-service are tied to the digital marketplace and the efforts to simplify and streamline customer financial services.  


How can the consumer benefit?

The customer experience and customer journey are becoming increasingly important in all industries. As digital integration increases, processes become more complex and the range of potential applications continues to increase. Rather than burdening customers to use multiple applications or navigate confusing systems and processes, embedded finance streamlines the process, effectively hiding the back-end processes and maintaining a practical, enjoyable customer experience. 

"With Embedded Finance, financial services can be integrated invisibly into applications, services and interfaces," explains Marie. " This facilitates the use of a separate process within another interface, such as logging into another website to make a payment, a transfer or to complete a loan application. This keeps things simple for the customer and can help build brand trust, loyalty and product satisfaction."

In effect, embedded finance opens the door for increased customisation and personalisation regarding interactive platforms such as customer portals, websites, apps and digital media. At the same time, thought must be given to any downsides associated with a move towards banking as-a-service. With the financial processes hidden, the consumer may lack clarity. There may be issues to consider regarding data and security, especially concerning personal devices and sensitive customer information. As digital processes evolve, embedded finance offers businesses the opportunity to evolve their offering in line with the needs and demands of the customer. It's not just about introducing something new, but supporting it long-term in order to best align it with the customer base.


How has the financial landscape changed? Why is embedded finance so important?

Technology, in particular, digital, has evolved at a rapid rate throughout the past decade. In many cases, this has led to slower integration of services by banks, lower customer satisfaction and ultimately, financial institutions lagging in keeping up with potential. 

"In response to this rapid evolution in technology and digital services, Fintechs emerged, delivering smoother customer-centric experiences with less overall friction," explains Marie. "This expansion has drastically transformed customer expectations of their services, particularly their banks. As modern life has become more agile, connected and digital, banks have had to adapt and digitise rapidly."

Concepts such as open banking and the rapid adoption of app platforms and digital payments have required financial institutions to be more flexible regarding their offerings. Suppose services are offered via a third-party app, for instance, an insurance company or car manufacturer. In that case, the customer must be able to complete transactions smoothly, without needing to access multiple websites or portals. There must be direct and open communication between the app's services and the bank's back-end processes to fulfil the transaction.

There does not appear to be a slowdown of digital evolution. As such, banks and businesses must be able to maintain and evolve their offerings in line with societal and technological changes. Therefore, the interconnectivity and customisability of embedded finance allows for creating responsive, contemporary and effective platforms and systems that the current market demands. Financial APIs also drive down costs and help e-commerce platforms make better use of time and resources. By integrating them into strategy and development, banks can keep their offerings relevant and directly interact with customers via third parties in various industry types. In short - it's more future-proof and modular. As with any new technology utilising customer data, security concerns are at the forefront of any scrutiny. Consumers are more aware than ever of the power their personal data holds. Therefore, security must go hand in hand with any development.


What does the future hold?

The embedded finance market is growing fast, and with no signs of slowing down in digital transformation, the future looks full of potential. Modern consumers demand speed, ease of use, security and connectivity from their products and services, all of which embedded finance empowers, which Marie agrees with: "I think that embedded finance and offering banking as-a-service will only become more and more important in the coming years.”

Today, so many of our products and services already support or require embedded processes. I think as time goes on, people will naturally demand all of their services to be included, as right now, everything is on one device - their phones. So, whether it be applying for credit cards, a loan or shopping for clothes or some other personal item, people want to have options for making that purchase or product, from payment methods to payment approaches." 

"This will only increase, so embedding these services will become part of the initial strategy or planning, rather than a retroactive addition. It may become increasingly important for banks and financial institutions to ensure they can offer these capabilities - otherwise, someone else will."

We hope this has helped you learn more about Banking as-a-Service.

Marie Cremier

Product Marketing Manager, Digital Banking, Worldline
As a Product Marketing Manager at Worldline, Marie Cremier helps drive awareness around digital banking topics from customer experience to digital currency. Passionate about digital and new technologies, she closely follows market trends and consumer habits to see how new usages are reshaping the future of banking. Marie brings with her a numerous marketing experience obtained in various industries for the last 7 years.