Embedded finance, or Banking-as-a-Service (BaaS) is one of the fastest growing areas in financial services. According to research, the market will see an average annual growth rate of 26 percent between 2021 and 2028. This new trend is important for any customer-facing company and concerns both financial services companies and any other organization looking for extra revenue and more loyal customers.
Changing consumer behavior is one of the main reasons why embedded finance is taking off. People’s lives are so crammed with activities that they will always seek the most efficient and seamless way to make purchases. E-commerce was already on the rise, but brick-and-mortar shops being shut during Covid lockdowns gave a further boost to digital shopping. To simplify their life, they are turning to one-stop-shops that can deliver as many services as possible. We have already seen retail banks become the supermarket of services by setting up digital ecosystems, selling both financial and non-financial services.
The benefits of digital ecosystems
Not only financial services companies like banks and insurance companies are bundling products, so are others. Just think of airlines that complement a ticket with luggage insurance, hotel bookings and car rental. Companies realize they cannot build all the functionality that consumers want, themselves. By teaming up with third-party service providers, they can deliver more value to their customers and by choosing those services that have the best fit for their audiences, they can ensure that customers use their mobile app or digital channels more often, improving customer loyalty. As an example, many organizations are partnering with the mobility services of Tranzer. This is a no-brainer, as up to 10% of the average household budget is spent on travel. By getting people to plan, book and pay their travel through their mobile app, companies can ensure themselves of frequently returning customers, gaining more eyeballs for their own services.
Another example is webshops adding services from a ‘Buy Now Pay Later’ (BNPL) service provider as a checkout option. Not having to pay right away will sweeten the deal and will lead to a higher conversion rate.
An extra source of revenue
In many businesses, margins are eroding, for instance through fiercer international competition, or because their products and services are commoditized. Adding third-party services to their digital channels can provide an extra source of revenue. As a commissioned study conducted by Forrester Consulting on behalf of TrustBuilder in March 2021 showed, organizations go through different maturity stages in their digital transformation. From merely digitizing their products and services, they evolve towards connected companies and ecosystem extenders thru to what we called ‘monetizing masters’ who are getting extra revenue thanks to third-party services. They can achieve extra margin by simply reselling services, or by combining services into bundles and putting an attractive price tag on that bundle.
Financial services have become a basic need
Digital generations have become accustomed to always having access to their financial information. They have their bank in their trouser pocket and expect banking to be embedded and ubiquitous. Withdrawing money, making payments, taking out a loan, checking how many meal vouchers they still have on their Monizze account… These financial dealings have to come as natural to them as reading a news page on their smartphone or securing a date on Parship or Tinder. They only find it natural that financial services are embedded in any application they use. Embedded finance in mobile apps or other digital channels is quickly becoming a necessity for any organization that wants to be taken seriously by digital natives.
IAM is an enabler
Whatever these good reasons to embed finance in organization’s digital channels, without the right technology in place this would not have been possible. For starters, applications are no longer built as large monoliths, but as microservices that can be interconnected through Application Programming Interfaces (APIs). More importantly, Identity and Access Management (IAM) solutions like TrustBuilder can ensure that moving from one application to another in a digital ecosystem feels completely transparent to the consumer. If a user has been authorized for an application, TrustBuilder ensures the security throughout the user journey in the digital ecosystem, only asking for step-up authentication when required. Passwordless authentication makes onboarding even easier for the consumer, thus ensuring a great customer experience.
Embedded finance, or Banking-as-a-Service is here to stay. Service providers who are looking for ways to attract new customers, increase customer loyalty and grow their revenue and margin, should definitely investigate the topic.
Contact us to learn how TrustBuilder can embed financial services into your digital channels, securely.