Banking as a service

What’s holding Embedded Finance back?

  • Embedded Finance is still in its very early days with growth ahead for the industry.
  • We asked attendees at the Embedded Conference what one hurdle needs to be cleared in order to maximize growth.
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What’s holding Embedded Finance back?

As new technologies hit the market, it's frequently interesting to hear from market participants about the hurdles they face. That's exactly what we did at Tearsheet's inaugural Embedded Conference. Our audience was comprised of banking as a service providers, banks, investors and non-financial firms with financial products. We asked participants what they think is the biggest hindrance to Embedded Finance reaching its true potential.

The answers we received were generally grouped in three categories:

Better alignment with the customer

The banking industry is used to working with retail and corporate customers. You can make a value judgment about whether it does a good job as a whole servicing them, but at least it's standard practice. Embedded Finance turns FIs into a software and service layer for other businesses' financial products. As we see more firms like Walmart and Uber introduce new banking, payments, and rewards offerings, Embedded Finance can learn how to better service these firms' needs.

Focusing on customer KPIs as metrics for success would benefit the nascent industry. One participant suggested aligning Embedded Finance business models with their customer outcomes.

Improving UI and UX should be a priority. Humanizing the entire flow from onboarding to service would help improve this focus on Embedded Finance customers and ultimately their end users.

Technology advances: As end users have grown to expect everything instantly, participants responded that Embedded Finance companies will have to work on similar timetables with their products. If a customer applies for a new savings account through her robo-adviser, she wants to get it in as few clicks as possible. So, continuing to accelerate the entire lifecycle should be a priority for Embedded Finance firms.

Embedded Finance is still built around core banking technology that, in many cases, was built on decades-old technology. Moving cores to the cloud or to the edge would enable more agile development of banking as a service technologies. Data is the oil that makes the Embedded Finance ecosystem run and particularly when it comes to KYC data, participants called for a system that shares that data across apps and companies. Many of EF's early applications are consumer loans, so embedding credit history in the user experience would also help to accelerate transactions.

Regulations need to become clearer and lighter

Just as embedded finance required innovative thinking, participants believe regulatory frameworks in the U.S. require a similar exploration. Creating a single source of KYC, for example, takes the compliance onus off of each individual player in the ecosystem. Bottlenecking continues to be a problem and regulation is partly to blame. Lastly, compliance is a major focus of resources -- both human and technological -- and until it gets easier, industry players believe it's holding the entire system back.

Quite a few attendees at Tearsheet's Embedded Conference posted that payday and predatory loans should die. Though that response didn't directly answer the question we asked of them, there's a reputational cost to Embedded Finance's early work in high-interest loans. For the players who aren't involved in that space, they feel that association with payday is holding the industry back by putting a black mark on the entire system.

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