We’ve all heard the talk of the embedded finance revolution. It’s enabling any business to incorporate financial services into their offering through a simple API integration. In theory, we may be entering an era in which you can get a loan from your florist and build your investment portfolio when buying a coffee.
While these examples may be a bit fanciful, there are already plenty of examples where embedded finance is making a big impact. But it’s not where you think.
So who are the early adopters of this exciting new approach to finance?
Established finance companies.
From DIY to out-of-the-box
In the past when financial service providers wanted to build out their offering or streamline their operations, they had to do it themselves. Banks, insurers, FX providers and asset managers have spent decades and billions of pounds building bespoke internal software, along with the licensing and regulatory compliance to support each new product line. It was expensive, cumbersome, and acted as a handbrake on building and scaling new services.
Fast-forward to the 2020’s, and that DIY-first mentality has come to an end.
Now businesses are able to solve specific pain points and expand their products, by embedding the services they need from a provider. It’s completely up-ended the way financial service providers think about the infrastructure their products are built on.
Lending – a model example
Let’s look at an example: lending. Lending is a service which is literally millennia old, yet it still has certain persistent challenges. At the core of any loan is the credit decision that a financial institution makes. In its simplest form, that involves answering the question: Will this person pay back what I lend to them?
To make this decision for your typical retail lending, lenders will perform credit checks and may ask for bank statements for a given period. For larger loans, they’ll require collateral – a mortgage lent against the value of the property for example.
So far, no surprises. But there are still a lot of flaws with these steps lenders take to answer the question of creditworthiness.
Bank statement data provides a limited snapshot of a borrower’s financial health. And what happens if certain documents are forgotten? Or falsified? There are plenty of people who have a limited credit history simply because they are new residents in a country, despite having a healthy salary, a stable career and being otherwise credit-worthy.
Then there’s the repayments. Lenders are constantly receiving inbound payments from borrowers, it’s in their very nature. That also creates a day-to-day risk for the lender; incorrect payments can be a logistical nightmare, leaving Ops teams wasting time chasing and correcting transactions.
Embedded payments and banking infrastructure can remedy some of these age-old pain-points in the lending process. Open Banking can give lending services access to a customer bank account and its transaction and balance history through an Account Information Service provider (with the customer’s consent). This allows them to create a far richer picture of financial health and lend on a more accurate basis – and the chance to lend to more credit-worthy people.
As for payments, virtual IBAN providers can instantly assign an IBAN to every customer, with their loan information attached. This automates much of the reconciliation process and eliminates human error, allowing Ops teams to focus on other areas of the business.
I’ve only scratched the surface of how lenders can use embedded finance, and lending is just the tip of the iceberg when it comes to applications for embedded finance within financial services firms.
In practice – OpenPayd and Caxton
Sounds good in theory? Let me give you a concrete example. Caxton is a finance giant that processes more than £1bn in transactions annually and has been operating for over 20 years.
When they partnered with OpenPayd, we provided virtual IBANs to all their customers. This completely changed the way they handled their incoming and outgoing client payments. As opposed to having to manually reconcile payments, with IBANs they were all routed automatically, with a record created along with it.
The experience for the customer remained the same, but for Caxton, it has saved time and increased efficiency. In the words of their CEO: “OpenPayd’s unique API-driven infrastructure will help our teams continue to shape the future of payments, automating time-consuming processes, delivering improved operational efficiency and an even better service for our customers”.
This is just one example, but there are countless others. As much as embedded finance offers non-financial companies, it is the established financial players who are using it today to defend their market share precisely against those new entrants.
The key point is that embedded finance is improving finance for the everyday person. Just, perhaps, not in the way many thought it would.