Meeting the big tech challenge: is embedded finance the answer for retail banks?

Some myth-busting is probably useful here. For the avoidance of doubt, embedded finance is not “more or less the same thing” as the earlier banking as a service (BaaS) model.

With BaaS, you are basically offering up your infrastructure and services to be consumed by fintechs and similar non-traditional banking or payments companies. Those partners then remix those services to suit their own finance-related products and services. In BaaS your fintech partner provides the front-end interface and customer experience in the case of each new distribution channel.

By contrast, embedded finance refers specifically to the integration of financial services and products into non-financial platforms. For banks, these products may include not just pre-existing capabilities from your banking product catalogue (e.g. current accounts, debit cards and credit facilities), but also more recent innovations that are in your catalogue already or are still in the product development pipeline (e.g. e-money accounts, peer-to-peer payments facilities, virtual or single use cards, tokenisation and credit products built around the BNPL theme). 

Crucially, embedded finance involves entirely new categories of partner. They are not fintechs seeking to piggyback on your infrastructure. Typically, they will be business software vendors who distribute their product via the software-as-a-service (SaaS) model. This might be e-commerce platforms (Shopify, for instance), HR management tools, payroll, accounts packages, customer relationship management (CRM), enterprise asset management or enterprise resource planning (EAM / ERP), or collaboration / project management tools. 

This list is meant to be illustrative rather than comprehensive; the key point being that although they are likely to be established names in their particular field, these potential partners will, in all likelihood, have no previous track record in the provision of financial or banking services. If your services are embedded into their platform, it will be ancillary to – or an enhancement of – their core offerings; not their primary raison d’etre (a key difference between embedded finance and most BaaS initiatives).