Over the past 10 years, there have been huge shifts in the way that we exist online. One of the biggest changes is the shift from traditional financial institutions – like brick-and-mortar banks – to embedding finances directly into apps and websites. Not only does this transition give netizens a sleeker user experience, but it also offers businesses new ways to monetize. As we continue to evolve in a digital-first world, the rise of embedded finance is securing its place as the new way forward in the finance industry.
From Software as a Service to Banking as a Service
SaaS is a software distribution model that allows service providers to host applications and make them available to customers over a network, like the internet. SaaS, or Software as a Service, version 1.0 was widely used over a decade ago. It was tailored to the clients, platforms and service providers who integrated it into their systems and used it to generate monthly revenue from recurring payments made by their customers. Currently, most platforms use SaaS 2.0, an upgraded version of SaaS 1.0, which has more of a focus on workflow management and business processes. SaaS 2.0 had more to offer, but while the idea was to become a one-stop shop for financial transactions online, it didn’t quite make the cut. However, it was a great predecessor to BaaS, potentially even serving as an inspiration. With Banking as a Service (BaaS) on the rise, platforms are now beginning to evolve to SaaS 3.0, which will offer additional financial features and services to customers beyond the traditional payment options and become the one-stop-shop that SaaS 2.0 aimed to be.
BaaS is redefining the banking value chain, allowing for new sources of revenue and growth. BaaS allows customers to access banking products and services through third-party distributors. Two great examples of this are Klarna and Afterpay, two fast-growing and prominent Buy Now Pay Later (BNPL) sites. A leading issue pushing BaaS to become so popular is the growing customer dissatisfaction rate with traditional banking.
The UK, for example, is far ahead of the US in terms of using BaaS. As the US works on catching up, experts in the UK expect BaaS to grow by 25% each year until 2024. This is a great thing for consumers as BaaS can reach a wider audience at a lower cost. Younger generations are sick of the gaps in traditional financial services and the growing cost to acquire these services. Even older generations would like to cut the cost of their financial services, which is why BaaS is great for most demographics – and why most people are loving it.
Embedded Finance Is a Problem Solver
Embedded finance isn’t just solving issues in the financial technology arena, it’s solving issues in many other sectors and providing massive benefits to underserved markets as traditional financial services usually come at a higher cost. These new channels have not only created better products and services but they are much more inclusive than traditional financial institutions. How? By meeting each customer’s unique needs and not excluding them based on monthly income, embedded finance can give people who wouldn’t be able to purchase products through traditional avenues the opportunity to do so. This opportunity is beneficial for all involved, as well as society at large, by creating more financial flow through the economy and helping markets advance.
Traditional financial models no longer work in our ever-growing digital expansion. As our economy, market and business all make the move to being more online, the digital world needs access to financial products and services that suits its needs. Old financial models and lengthy loan application processes are inefficient and no longer tolerated by digital consumers. With embedded finance, the online financial marketplace already has all the information needed to make instant decisions – which is just what businesses need and want. Waiting on the lengthy processes and cutting through red tape is not desirable to the digital business owner, especially in our ever-growing, fast-paced world. Most digital business owners want to hit the ground running, and embedded finance enables them to do just that. With its efficient and inclusive nature, embedded finance is the future of banking for digital companies.
Embedded finance is also giving small business owners the chance to get some of the funding that they desperately need to scale. Traditional financial models have customarily given small business owners the run around when trying to gain access to loans (and grants). It is a struggle for small business owners to jump through the hoops placed in front of them by these models, only to have doors slammed in their faces time and time again. Embedded finance offers a way around this and with its goals for inclusivity and instant decisions, opening many financial doors for the small business owner.
Current Trends In Embedded Finance
As consumer behavior changes so will the market, economy and financial technology. Currently, consumer habits are shifting from traditional purchasing habits, like shopping at stores, shops and malls, to shopping through social media and other digital platforms, creating more of a need for BaaS and embedded finance. People are naturally going to start shifting to embedded finance and digital banking as our world continues to shift towards digital.
Embedded finance also aims to create full inclusion by creating new levels of access to financial services and closing the gap created by traditional banking. This is a great opportunity to help close the financial gap and an agreeable option for the upcoming generation who will be spending their money using these new systems.
Software providers are also consolidating their products into one-stop shops that are finely tailored to the industries that they serve (i.e. digital, beauty, sports, etc). People will appreciate a system that doesn’t require jumping through hoops with several different institutions to get the financing they need. Younger generations like things that are convenient and budget-friendly, while still being able to receive the services that they are looking for and meet the experiences they desire.
Embedded finance is a great start to un-complicating finance, with a bonus being that because everything is digital, companies are now able to use their clients’ information to build better products that are more suited to individual needs. These embedded finance companies can put forth apps and platforms that will only increase client usability, as they can gain an understanding of what their clients want by getting that information straight from the source – the client.
The Future of Embedded Finance
One of the biggest predictions based on the success of embedded finance is that the days of credit cards are numbered. The BaaS industry is headed into the unchartered territory of providing the complete customer journey while holding down the lowest interest rates. BNPL loans are much more appealing with little to no interest, while credit card rates continue to rise. This makes BNPL much more attractive to consumers and as that attraction increases, the demand for credit cards will decrease.
Maybe most exciting of all, the rise of embedded finance has led insurance companies to take the same route. We could soon see embedded insurance take off, as the current insurance industry suffers from extremely high premiums, inflation and ever-increasing claims costs.
With all the exciting strides being made by embedded finance, how will you incorporate it into your business strategy?