In recent years, a new wave of young neobanks has emerged and transformed the landscape of consumer banks. This year is expected to be the year of integrated finance, tha is, financial services integrated with traditional non-financial services

In particular, embedded financial services revenue was $16.1 billion in 2020, but is projected to reach $140.8 billion in 2025. However, this is only the beginning of a real FinTech revolution.

Definition

Integrated finance has emerged in the last 18 months, representing a new model through which financial services can be offered. It allows non-financial companies to integrate banking and payment services into their applications and ecosystems through the use of an Application Scheduling Interface (API). This means that these companies can offer financial services to their customer base as part of their existing products or they can create completely new ones, quickly and easily using program-friendly integrations.

So far, this has led to a split in consumer banking offerings, providing technology to financial institutions and allowing neobanks to compete with traditional players. However, thanks to the advent of Banking-as-a-Service (BaaS) providers, who lease access to individual departments of banking and payment data, companies can access the specific services they require, deducting significant costs associated with exclusive compliance, development and regulatory coverage.

Why it is important

As businesses revisit their value chain, they will seek to improve their operations, create new sources of revenue and reduce costs. The advent of integrated finance, also known as Banking-as-a-Service (BaaS), allows them to do all three - minimizing the hassle and cost of hiring new service developers and ensuring that they comply with regulations. The rise of BaaS providers means that companies can offer financial services that meet their unique requirements and do not require the same investment they would have made before.

Therefore, embedded finance offers businesses the opportunity to attract new and existing online audiences by generating new revenue streams, for example by allowing the customer to shop "directly" from the brand through embedded payments.

Upcoming Trends

We observe six key trends in the field of integrated finance and banking as a service. Understanding and monitoring these trends can help banks and those hoping to delve deeper into the technology, identify opportunities and protect against threats.

1. Customer demand for integrated experiences: The most important trend is that customers are increasingly looking for simpler, holistic, embedded and immediate experiences. Orchestrators all over the ecosystem, therefore, seek to offer more and more personalization to their customers and thus, a built-in financial service fits this model perfectly. Take for example Walmart's recent announcement that it is creating a range of financial services with financial technology company Ribbit or IKEA's recent announcement that it is acquiring 49% of its banking partner.
2. Requirement from new FinTech's and beyond: The plethora of FinTech companies that are established each year need banking partners to provide access to bank accounts, payments and lending. Large tech companies and other non-banking entities can create and offer financial services, but are unable to "become" the same banks in the United States and many other markets where the regulatory line to do so is demanding. This leaves banking as a service as the only means for FinTech to offer customers integrated finance.
3. Increased transparency: Regulatory trends, including PSD2 (Payment Service Directive Two) and open banking, promote the development of universal access. The need to comply with these new requirements - often through IT modernization - leads some banks to consider expanding or creating new ones. business banking models as a service to cover costs and take advantage of technological developments.
4. Looking for new revenue models: Taking into account the projected reductions in bank revenue and profitability, financial institutions are exploring alternative sources of revenue and product development. Particularly advantageous are sources that have scalable business models and stable IT investments (eg distribution models).
5. Adopt technological capabilities: With the acceleration of digitization, including automation and open technologies, banks can scale banking as a service faster by making integrated finance affordable for more companies considering it. At the same time, companies seeking to integrate financial services are increasingly seeing their digital experiences as a synthesis of modules built by others.
6. Changing levels of confidence in financial services: In the United States, traditional banks have lost the confidence they had over financial technology companies. At the same time, many other companies have higher levels of trust, which they can leverage in offering financial services.

In conclusion

The embedded financial revolution is happening now. To create a real innovation, however, we must reject our long-standing claims about what it means to access banking services, from whom we might be willing to access them, and the role traditional players will take. Only then will we be able to unlock the next wave. In addition, although the costs required to complete a bankruptcy proceeding are low and the legal framework is satisfactory, it takes a long time to complete the necessary procedures.

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*Greek version of this article is available on Naftemporiki.