When open banking first proliferated in the Asia Pacific and around the world, it created an environment where open APIs and fintech innovation could converge. This quickly broadened the use of APIs to embed financial services into non-financial platforms, thus giving birth to embedded finance as we know it today, an integral part of modern digital services.
Still, what we have experienced of embedded finance so far is really the tip of the iceberg. As embedded technology grows increasingly ubiquitous in front of and behind the user interface, its impact on banks, non-financial enterprises, and the consumers and businesses they serve, would be far-reaching.
To get an idea of how extensive this impact is, we shine the spotlight on the five ways embedded finance would be changing the financial service experience.
1. Financial servicing, anywhere, anytime
Today, embedded finance is most visible across consumer use cases, the commonest of which are embedded payment, like the e-wallets of shopping or delivery platforms; embedded lending, where deferred payment can be approved by a non-banking business offering credit, debit and non-card options; and embedded investment, such as small insurance riders to create product differentiation amongst competitors.
With FinTech to supply pre-built embedded solutions for API integration with financial institutions, more partnerships and collaborations, and services that better meet today’s customer demands with non-banking enterprises would be possible. And what can be achieved for B2C is also possible for B2B.
Previously, only large companies had access to embedded finance products. FinTech turned it around so that small companies can also migrate to digital B2B commerce to facilitate better cross-border payment. Benefits include allowing all customers of a B2B company equal payment terms, no matter where they are from. FinTech solutions also help payment providers to figure out the regulatory requirements of different countries and where potential conflicts could occur. This is important for buy now pay later (BNPL) in digital commerce and allows for an expanded range of embedded finance options.
As more companies start including embedded finance in their payment process, the growth of innovation and new revenue streams in financial services will quickly escalate. This would bring about a future where financial services could be accessed anytime, anywhere, or in the words of tech investor, Angela Strange, where “every company will be a FinTech company.”
2. Reaching the unbanked and underbanked
The World Economic Forum estimates that over six in 10 Southeast Asians remain underbanked or unbanked today. This is a growing concern as Southeast Asian economies are largely driven by micro, small and medium enterprises (MSMEs), and these businesses and their customers need access to capital and other financial services to sustain post-pandemic economic recovery.
While reaching the unbanked and underbanked demographics is a complicated problem to solve, there is no doubt embedded finance offers faster, cheaper, better alternatives to overcome some persistent barriers to financial inclusion. For those without a bank account or easy access to financial services, particularly in emerging markets, it provides them with the means to digitally store money, makes cross-border payments, and possibly even invest, with nothing more than a smartphone and an Internet connection.
In the APAC region, super apps like China’s WeChat, Australia’s Bano, and Southeast Asia’s Grab are leading the way for a mix of financial services to be made available over a platform, including embedded payment, lending, and insurance, as well as the lucrative embedded investment services.
Bano, for instance, is an Australia-based financial superapp aimed at making finances easier for millennials and GenZs. It recently launched an FX Converter that was enabled in partnership with Currencycloud, by integrating its APIs directly into Bano’s superapp. This gave Bano access to Currencycloud’s low FX rates, providing its users with some of the lowest FX rates in Australia, and the lowest AUD to USD conversion rates in the country.
Australian users can use its investment product to access the lowest cost for US stock trading. Users who are visiting from abroad can also conveniently access more than 35 currencies from which to easily send and receive within the app in real-time, commission-free. This includes the conversion of any of these currencies into Australian Dollars or vice versa, instantly.
3. Helping smaller banks grow
Despite all that has been said about embedded finance for the consumers, traditional banks can greatly benefit from embedded finance too.
For the thousands of local banks, community banks, and credit unions across the APAC region, banking-as-a-service offerings from FinTechs such as Currencycloud, can quickly beef up their portfolio of banking services with new capabilities in automation and cross-border accounts, two of the most impactful enablements to cut cost and time for payment processing, as well as to facilitate effective geographic expansion for themselves and their customers.
As a case-in-point, Currencycloud worked with Tonga Development Bank (TDB), whose broader mission is to provide trusted financially inclusive solutions to customers through teamwork, to help them reach their dreams. Currencycloud’s services allowed them to bring technology and connectivity to e-commerce marketplaces via card issuing and a payment gateway to SMBs. Armed with these added capabilities, TDB was able to transform the lives of customers by opening a new revenue stream, helping SMBs to modernize and provide access to digital payments to help develop the nation.
Instead of trying to compete with embedded finance, banks should explore integration opportunities with such technologies to raise digital competitiveness without the fear of contradicting myriad regulations, or the need for infrastructure investments and upkeep.
4. Complementing big bank services
For major banks in the region, embedded finance can be complementary to what they have going with their open banking ecosystems. With more customers today shunning credit cards and personal loans, they can jump onto the Buy Now, Pay Later (BNPL) bandwagon, for example, to recoup some of their automatic revenue via the API economy.
Today’s BNPL offerings provide consumers with an embedded solution within a shopping app or platform. Customers can literally click a button during check-out to secure financing for anything from a pair of shoes to a big-ticket item like a sofa or TV set.
Banks can also funnel the data generated by open banking and embedded banking to their customer experience systems. By deploying advanced analytics with artificial intelligence (AI) and machine learning (ML), they can mine the data for insights that deliver deeper personalization and more sophisticated user experiences to their customers.
5. More investment choices with better control of funds
Embedded finance can empower consumer and business users with better control of their financial investments, by providing more investment choices across more sales channels.
Investment-linked insurance policy is one such option mushrooming across lifestyle and investment platforms. This combines life insurance coverage with a sub-fund investment. Generally considered lower risk, this long-term, low upfront cost investment is easily consumed and hence, gaining popularity with entry-level or infrequent investors.
For the more serious players, fractional trading is trending across fintech investment platforms, such as the UK-based micro-investor, Wombat. With its platform services enhanced by embedded trading, Wombat attracts the underserved small investors market segment with offerings like the trading of fractional UK, US, and EU shares, and the unlimited commission-free trading of UK and US shares from a new, no subscription-fee service.
Embedded finance is making the financial services industry more vibrant and competitive. But that also means that without a banking-as-a-service adoption strategy, conventional banking and financial services institutions can lag behind the competition in the blink of an eye. With digitalization mandating a customer-first approach, we are no longer in the era of financial services, but that of financial service experiences.
Anthony Man is Vice President APAC at Currencycloud. Anthony is
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