RESOURCES - The Fintech

5 WAYS EMBEDDED FINANCE IS CHANGING THE FINANCIAL SERVICES EXPERIENCE

September 7, 2022

Open APIs and fintech innovation could intersect when open banking first spread over the Asia Pacific and the rest of the world. As a result, the usage of APIs to integrate financial services into non-financial platforms quickly expanded, giving rise to embedded finance as it is known today—a crucial component of contemporary digital services.

Nevertheless, what we have seen so far in embedded finance is actually just the top of the iceberg. The effects of embedded technology on banks, non-financial organizations, and the clients and customers they service will be extensive as it becomes more commonplace both in front of and behind the user interface.

We highlight the five ways embedded finance might alter the financial service experience to give you an idea of the extent of this impact.

1. Financial servicing, anywhere, anytime

The most prevalent embedded finance use cases for consumers today involve embedded payment, such as e-wallets used by delivery or shopping platforms, embedded lending, where deferred payment can be approved by a non-banking company providing credit, debit, and non-card options, and embedded investment, such as small insurance riders used to set a product apart from rivals.

It would be able to expand partnerships and collaborations with non-banking businesses and provide services that better fit modern customer demands if FinTech provided pre-built embedded solutions for API connectivity with financial institutions. And it’s also possible to accomplish what B2C can for B2B.

Until recently, only big businesses could use embedded financing solutions. FinTech changed it such that small businesses can now transition to digital B2B commerce to improve cross-border payment capabilities. Benefits include providing equal payment terms to all of a B2B company’s clients, regardless of where they are from. FinTech solutions also assist payment companies in determining the regulatory needs of various nations and potential areas of conflict. This is crucial for digital commerce’s buy now, pay later (BNPL) model since it enables a wider variety of embedded finance alternatives.

The development of innovation and new revenue streams in the financial services industry will swiftly accelerate as more businesses begin integrating embedded finance into their payment process. This would result in a time and place of independent access to financial services, or, in the words of tech investor Angela Strange, “any company will be a FinTech company.

2. Reaching the unbanked and underbanked

More than six in ten people in Southeast Asia are reportedly still unbanked or underbanked, according to the World Economic Forum. This is an increasing problem because micro, small, and medium-sized firms (MSMEs) in Southeast Asia are largely responsible for the region’s economies. MSMEs and their clients depend on access to financing and other financial services to maintain the region’s post-pandemic economic recovery.

Despite the difficulty in reaching the unbanked and underbanked populations, embedded finance unquestionably provides quicker, more cost-effective, and superior solutions to some enduring hurdles to financial inclusion. It gives people in emerging nations, who typically lack bank accounts and simple access to financial services, the ability to hold money digitally, make international payments, and perhaps even invest with nothing more than a smartphone and an Internet connection.

Super apps in the APAC region are paving the way for a variety of financial services to be made available over a platform, including embedded payment, lending, and insurance, as well as the lucrative embedded investment services. Examples include China’s WeChat, Australia’s Bano, and Southeast Asia’s Grab.

For instance, the Australia-based financial super app Bano aims to simplify money management for Gen Z and millennials. By incorporating Currencycloud’s APIs directly into Bano’s super app, it recently debuted an FX Converter that was made possible through cooperation. Bano now has access to Currencycloud’s competitive FX rates, enabling it to offer some of Australia’s lowest FX rates and the most affordable AUD to USD exchange rates to its customers.

Australian consumers of its investment package have access to US stock trading at the lowest price. Visitors from other countries can also quickly send and receive the money within the app in real-time and commission-free using more than 35 different currencies. This includes the currency exchange from any of these to Australian Dollars or vice versa, instantly.

3. Helping smaller banks grow

Despite everything that has been written about embedded finance’s benefits for customers, traditional banks can still gain a lot from it.

Banking-as-a-service products from FinTechs like Currencycloud, which have thousands of local banks, community banks, and credit unions in the APAC region, can quickly bolster their portfolio of banking services with new capabilities in automation and cross-border accounts, two of the most significant enablements to reduce cost and time for payment processing and to enable effective geographic expansion for themselves and their customers.

In order to assist consumers in realizing their aspirations, Currencycloud collaborated with Tonga Development Bank (TDB), whose overarching goal is to deliver dependable, financially inclusive solutions to clients through teamwork. Through card issuance and a payment gateway for SMBs, Currencycloud’s services allowed businesses to link technology and connection to online marketplaces. TDB was able to alter customers’ lives by creating a new revenue stream, assisting SMBs in modernizing, and granting access to digital payments in order to advance the country.

Instead of attempting to compete with embedded finance, banks should look into integration opportunities with such technologies to increase digital competitiveness without worrying about conflicting with a variety of rules or needing to invest in and maintain infrastructure.

4. Complementing big bank services

Embedded finance may complement the open banking ecosystems that the big banks in the area already have in place. Customers today are less likely to use credit cards and personal loans, so companies can take advantage of the Buy Now, Pay Later (BNPL) trend to reclaim some of their automatic revenue through the API economy, for instance.

The BNPL products of today give customers access to an embedded solution within a shopping platform or app. Financing is literally just a button click away during checkout for anything from a pair of shoes to a large-ticket item like a sofa or TV.

Banks can additionally feed their customer experience systems with the data produced by open banking and embedded banking. They may mine the data for insights that result in more complex user experiences and greater personalization for their customers by implementing advanced analytics with AI and ML.

5. More investment choices with better control of funds

By offering more investment options through more sales channels, embedded finance can give corporate and consumer users better control over their financial assets.

One such option that is exploding across lifestyle and investment platforms is the investment-linked insurance policy. This combines a sub-fund investment with life insurance protection. This long-term, low-upfront cost investment is generally thought to carry a lesser risk because it is simple to use. As a result, it is becoming more and more popular among novice or infrequent investors.

Fractional trading is popular on fintech investing platforms, such as the UK-based micro investor Wombat, for the more serious players.

Wombat draws the underserved small investor market segment with its platform services enhanced by embedded trading and features including the trading of fractional UK, US, and EU shares as well as the limitless commission-free trading of UK and US shares via a new, subscription-free service.

The financial services sector is becoming more thriving and competitive because of embedded finance. But it also means that without an adoption plan for banking as a service, traditional banking and financial services organizations risk quickly falling behind the competition. We are no longer in the era of financial services, but rather one of the financial service experiences, with digitization dictating a customer-first approach.

Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry. Our guide will walk you through what fintech is and how it’s used.

What Is Fintech?

Fintech, a combination of the terms “financial” and “technology,” refers to businesses that use technology to enhance or automate financial services and processes. The term encompasses a rapidly growing industry that serves the interests of both consumers and businesses in multiple ways. From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.

Today, the fintech industry is huge. And if recent venture capital investments in fintech startups — which reached an all-time high in 2021 — can be considered a vote of confidence, the industry will continue to expand for years to come.

One driving factor is that many traditional banks are supporters and adopters of newfangled fintech, actively investing in, acquiring or partnering with fintech startups. Those are ways for established banking institutions to give digitally minded customers what they want, while also moving the industry forward and staying relevant.

How Does Fintech Work?

Different financial technology products and services have different internal workings. Some of the most recent developments process credit risks, run hedge funds, and more using machine learning algorithms, blockchain, and data science. There is even a whole branch of regulatory technology called regtech that was created to help businesses like, you guessed it, fintech, navigate the complicated world of compliance and regulatory difficulties.

As the fintech sector has expanded, so have worries about cybersecurity. Fintech infrastructure has become more vulnerable and a target for cybercriminals because to the enormous rise of fintech businesses and marketplaces on a global scale. Fortunately, technology is always improving to reduce current fraud risks and neutralize emerging threats.

Traditional banks and financial institutions are now participating in the fintech industry as well, using fintech services for their own objectives, despite the association of the sector with young startups and disruptive technologies. Here are a few examples of how the industry is advancing and changing some aspects of finance.

Types of Fintech Companies

TYPES OF FINTECH STARTUPS AND COMPANIES

Consumer banking and investing
Mobile payments
Insurance tech
Digital lending and leasing
Budgeting apps

Mobile Banking and Neobanks

Mobile banking is the central focus of many finance technology companies. In the world of personal finance, consumers have increasingly demanded easy access to their bank accounts, especially on mobile devices. Most major banks now offer some kind of mobile banking feature, especially with the rise of digital-first banks, or neobanks. Neobanks are essentially banks without any physical branch locations, serving customers with checking, savings, payment services and loans on completely mobile and digital infrastructure. Some banks also allow third-party software applications to access a user’s financial information, which is called open banking. Some examples of fintech banks or neobanks are Chime, Current, Aspiration and Varo.

Cryptocurrency Fintech

Cryptocurrency and blockchain intersect with fintech in a number of ways. For starters, several crypto trading platforms have emerged in recent years that allow users to trade different kinds of cryptocurrencies and take advantage of decentralized exchanges. And to keep people’s digital currency safe, a number of crypto wallets have sprung up as well. In addition, several fintech companies use blockchain technology for payment processing, money transfer and secure digital identity management. Some examples of cryptocurrency fintech companies include Coinbase, Blockfi and SALT.

Fintech Investment and Savings

Fintech has caused an explosion in the number of investing and savings apps in recent years. More than ever, the barriers to investing are being broken down by companies like Robinhood, Stash and Acorns. While these apps differ in approach, each uses a combination of savings and automated small-dollar investing methods, such as instant round-up deposits on purchases, to introduce consumers to the markets.

Machine Learning and Trading

Being able to predict where markets are headed is the Holy Grail of finance. With billions of dollars to be made, it’s no surprise that machine learning has played an increasingly important role in fintech — and in trading specifically. The power of this AI subset in finance lies in its ability to run massive amounts of data through algorithms designed to spot trends and risks, allowing consumers, companies, banks and additional organizations to have a more informed understanding of investment and purchasing risks earlier on in the process.

Payment Fintech

Moving money around is something fintech is very good at. The phrase “I’ll Venmo you” or “I’ll CashApp you” is now a replacement for “I’ll pay you later.” These are, of course, the go-to mobile payment platforms. Payment companies have changed the way we all do business. It’s easier than ever to send money digitally anywhere in the world. In addition to Venmo and Cash App, popular payment companies include Zelle, Paypal, Stripe and Square.

Fintech Lending

Fintech is also overhauling credit by streamlining risk assessment, speeding up approval processes and making access easier. Billions of people around the world can now apply for a loan on their mobile devices, and new data points and risk modeling capabilities are expanding credit to underserved populations. Additionally, consumers can request credit reports multiple times a year without dinging their score, making the entire backend of the lending world more transparent for everyone. Within the fintech lending space, some companies worth noting include Tala, Petal and Credit Karma.

Insurtech — Insurance Fintech

While insurtech is quickly becoming its own industry, it still falls under the umbrella of fintech. Insurance is a somewhat slow adopter of technology, and many fintech startups are partnering with traditional insurance companies to help automate processes and expand coverage. From mobile car insurance to wearables for health insurance, the industry is staring down tons of innovation. Some insurtech companies to keep an eye on include Lemonade, Kin and Insurify.

Fintech Trends

Fintech is not a new industry, it’s just one that has evolved very quickly. Technology has, to some degree, always been part of the financial world — whether it’s the introduction of credit cards or ATMs, electronic trading floors, personal finance apps and high-frequency trading in the decades that followed.

Over the past decade, though, the fintech industry has seen accelerated growth — and fintech innovations are likely to only advance from here.

Some fintech trends to keep an eye on include:

Digital Wallets

Digital wallets, like Apple Pay and Google Pay, allow people to store their payment information in a mobile app and then use that app when it comes time to pay for something. While digital wallets have been around for years, their usage is still on the rise.

Blockchain in Fintech

Blockchain — a public ledger capable of recording the ownership, origin and movement of digital assets — will continue to impact the financial industry. For starters, the ledger technology and proliferation of smart contracts will greatly help with making the industry more secure and efficient.

Embedded Finance

Embedded finance is the term for when a non-financial business integrates fintech tools into its point of service. Examples include payment processing terminals at coffee shops and buy-now-pay-later buttons on e-commerce store checkouts. This integrated finance stack makes for a smoother, more-flexible experience for customers — and we’re likely to see it more and more in the days ahead.

Serving Traditionally Underserved Populations

The overarching promise of fintech is that technology makes it easier to provide financial services to people who historically have had little or no access to them. Indeed, several fintech companies aim to eliminate long-standing barriers so that people — typically younger people and people of color — can more easily save, invest and build wealth for themselves.

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Types of Fintech Companies