Embedded finance platforms are disrupting the traditional banking model by offering financial services through non-financial companies. Rather than going to a bank, customers can now access financial products through apps and sites they already use daily. But is this new model better than traditional banking? There are pros and cons to both approaches.
Embedded finance partners financial institutions with non-financial brands to provide banking services. For example, a shopping app might offer customers the ability to apply for a credit card or loan through the app. Or a rideshare app could allow drivers to get paid instantly after each ride.
This gives companies outside of banking the ability to provide financial services. And it gives financial institutions access to new customers through the apps and sites people use regularly. Embedded finance is growing rapidly, with the market expected to reach over $7 trillion by 2030. As more companies integrate financial services, embedded finance promises greater financial access and innovation.
Benefits of Embedded Finance Platforms
There are several benefits this new model provides over traditional banking:
Convenience
Rather than visiting a bank or managing accounts across multiple apps, embedded finance brings banking to where users already are. This makes financial services far more convenient and accessible.
Personalization
Embedded finance allows financial services to be tailored to each brand. A shopping app might offer specialized credit or discounts, while a gig platform could enable instant payouts. This personalization streamlines the user experience.
Innovation
Detaching financial services from banks fosters greater competition and innovation. Non-banks are free to build services catered to user needs, not bound by legacy systems. This can accelerate the development of new financial products.
Trust
Many customers already trust the apps and brands they use regularly. Getting financial services through those apps Piggybacks on that existing trust. For those hesitant to trust big banks, embedded services may feel more reliable.
The Enduring Importance of Banks
While the rise of embedded finance is shifting power away from traditional banks, banks still retain some key advantages:
Regulation and Oversight
Banks have decades of experience operating under strict regulation and oversight. This helps ensure stability and protections that new fintech players often lack.
Security Infrastructure
Banks invest heavily in security, with mature standards, systems and insurance to prevent fraud and theft. New entrants can’t match the sophisticated security infrastructure of banks overnight.
Financial Resources
Banking is extremely capital-intensive. Banks have the financial resources to provide services embedded fintechs rely on, like payment processing, credit issuance, custodial services and more.
Trust and Reputation
For many, banks still retain an advantage in public trust and reputation. Large national banks are seen as less risky than newer startups or tech companies dabbling in finance.
Striking a Balance is Key
Rather than being diametrically opposed, embedded finance and traditional banking can actually complement each other. Partnerships between fintech innovators and banks allow each to play to their strengths.
Banks provide the reliability, security, and financial backbone needed to scale new embedded services safely. Embedded finance gives banks customer reach and product innovation.
Regulation will need to evolve to nurture innovation while still providing adequate oversight and protection. But by striking the right balance, embedded finance can make financial services more seamless while banks continue providing stability and security.
The most consumer-friendly outcome may be a financial landscape where customers can access both innovative embedded finance platforms and rock-solid banking institutions tailored to their needs. This hybrid model could democratize financial services far better than either option alone.
The Future is a Hybrid Model
Embedded finance is a game-changing innovation, but still relies heavily on the strengths of the traditional banking system. Banks retain advantages in regulation, security, resources, and trust that remain essential to a stable financial system.
The ideal future is likely one where embedded finance and banks evolve together, with partnerships that play to each model’s strengths. Customers would benefit tremendously from this best-of-both-worlds hybrid model.
Regulation will need to encourage innovation while ensuring adequate oversight. But if balanced properly, embedded finance and banking can complement each other and bring more financial access, convenience and choice to consumers and businesses. The traditional world of banking remains critically important even as embedded finance opens new possibilities.
The blog was written by Bahaa Abdul Hussein and has been published by the editorial board of Fintek Diary. For more information, please visit www.fintechdiary.com
