The Changing Digital Landscape: Financial Institutions Embrace Embedded Finance To Thrive

In the rapidly evolving digital age, consumer experiences have undergone a dramatic transformation with the rise of the platform economy. The impact of this new paradigm has far-reaching consequences for financial institutions, compelling them to adapt to the changing landscape or face the risk of obsolescence. 

Today, consumers and companies are increasingly seeking the convenience of having banking services come to them, shifting away from traditional visits to physical bank branches.

At the core of the platform economy are digital platforms that function as expansive marketplaces, facilitating the exchange of goods and services between suppliers and customers. 

The Rise Of The Platform Economy

These versatile platforms come in various forms, from transaction-based models that span the entire value chain, encompassing pricing discovery to fulfillment, to well-known B2C platforms like Amazon, Olx, Ola, Uber, AirBnB, and emerging B2B2C platforms such as Swigy, Dunzo, and Chime. These platforms have transformed the way business is conducted, opening doors to new possibilities.

Insider Intelligence forecasts a staggering 50% growth in global ecommerce between 2021 and 2025, with a projected value of $4.7 Tn. 

In India, the ecommerce sector, which amounted to $85.4 Bn in 2021, is estimated to reach a remarkable $850 Bn by 2030. 

However, this shift towards the platform economy brings both challenges and opportunities for traditional banks. The rise of digital banks and fintech firms has intensified competition, forcing banks to strive for a lower cost-to-income ratio while keeping pace with their technologically-driven counterparts. 

By adhering solely to traditional business strategies, banks risk hindering their ability to achieve sustainable growth and maintain market capitalization.

Embedded Finance: A New Approach For Traditional Banks

Embedded finance offers a promising solution. Banks can adopt an alternative value architecture that allows for swift customer onboarding and increased transaction volumes. 

This approach involves integrating financial services, such as lending, investing, and insurance, into non-financial user interfaces on digital platforms. Notably, in India, Buy Now Pay Later (BNPL) products have surged in popularity, driven by fintech companies like Simpl, Lazypay, and Zest.

Traditional banks are beginning to recognize the potential of embedded finance and have started to offer their own BNPL products, including HDFC’s Flexi Pay and ICICI Bank’s PayLater. However, the adoption of this low-ticket, high-volume transaction fee-based business model remains comparatively slow. 

Challenges And Opportunities 

To fully embrace embedded finance, banks must embrace open ecosystem-based business models, leverage API-driven secure open banking capabilities, and ensure efficient service design. 

Additionally, they must address challenges related to client ownership, aligning incentives with partners, enhancing risk management, and exploring alternative credit assessment models.

While embedded finance finds relevance across various industries, such as consumer goods, healthcare, education, and telecommunications, a 2018 survey by McKinsey Global Institute revealed that companies with a platform presence consistently outperform those without. 

To harness the advantages of the platform economy, banks must proactively integrate with diverse consumer platforms, seamlessly embedding their products into the customer journey. Embracing the potential of the platform economy promises tremendous growth opportunities for banks and financial institutions, ensuring their relevance in the dynamic digital landscape for years to come.

The advent of the platform economy has revolutionized consumer experiences in the digital world, demanding adaptability from financial institutions to avoid becoming obsolete. 

The Promise Of The Platform Economy

Embedded finance presents an innovative avenue for banks to leverage the value architecture of digital platforms, offering seamless financial services to customers. 

As the platform economy continues to expand, financial institutions must embrace transformative approaches, foster innovation, and tap into collaborative opportunities. By doing so, they can establish a firm foothold in the digital era and capitalise on the platform economy’s immense growth potential.