The Promise of Embedded Finance
FINTECH (Financial Technologies) space is full of innovation but one trend has been catching our eye more than others. Embedded finance, or the technological integration of financial service within traditionally non-financial products and services, is set to disrupt consumer experiences.
Some commentators expect market opportunity from embedded finance to exceed $7 trillion within a decade. By allowing enterprises to create new revenue streams while reinventing the services they offer to the customers, embedded finance service providers are disrupting traditional revenue cycles.
The MENA region has witnessed massive fintech growth and embedded finance has been a part of that story. Here are some interesting trends to watch out for that will impact consumers, service providers, and banks alike.
Rising Demand for Integrated Experiences
Consumers are increasingly demanding fully integrated, one-stop-shop experiences. Thanks to greater customisation and services on demand, consumers have become accustomed to receiving all the services they need on a single platform. For instance, research conducted by McKinsey and Company highlights that the largest companies in the world are ecosystem driven enterprises.
This is a significant development for traditional service providers. Instead of handing consumers over to third party payment providers, why not integrate payment options within their native platforms? Walmart’s recent announcement of its partnership with financial services provider Ribbit is a good indicator of which way the winds are blowing.
We expect MENA-region companies to follow suit and build integrated ecosystems that place consumer experiences first and foremost.
Greater Collaboration
It’s challenging for a newly launched fintech company to establish themselves within a traditional banking function.
Despite the rapid growth that MENAP fintechs have experienced, they face significant hurdles in receiving banking and financial licenses that allow them to accept deposits and access consumer capital.
This is a trend that has repeated itself worldwide. New entrants require infrastructure support to offer consumers embedded services and this puts banking as a service front and centre. Recent announcements such as NymCard forming a strategic partnership with Visa to provide onboarding facilities to fintech companies onto Visa’s global network point to this trend becoming a reality in the region.
Similarly, newly launched cards as a service (CaaS) platforms like SimpliFI are aiming to simplify cards product offerings for corporates and gig economy platforms in MENAP region enabling them to launch fully branded corporate cards programs for funds disbursement, delivery payouts, corporate expenses, BNPL, etc, by using their simplified API platform and integrated ecosystem in multiple markets.
In addition, open APIs from these CAAS / BAAS platforms allow non-traditional institutions to issue cards to consumers and embed financial services into their regular offerings. As demand for integrated experiences grows, there’s no doubt that such providers will experience exponential growth.
Regulatory trends in open banking are encouraging the development and growth of banking APIs and universal access.
Companies such as Bahrain’s Tarabut Gateway allow fintechs and nontraditional institutions to build their own ecosystems and develop embedded finance functions. A significant advantage that these BaaS/CaaS providers offer is reduced technological establishment and upkeep costs. Using a third party expert like Tarabut allows institutions to get up to speed and offer services instantly without having to establish costly IT infrastructure. The result is faster go-to market times and better customer experiences thanks to faster scalability.
Greater Tech Advancement and Adoption
As technology continues to improve, the democratisation of financial applications will increase. Currently, BaaS/CaaS service providers offer companies the ability to issue cards and set up payment ecosystem. However, as technology improves, it’s likely that the entire banking and payment function will be managed on the backend by a traditional bank that offers BaaS-like services.
The result will be an invisible banking layer that consumers don’t differentiate from a company’s core services. For instance, offering deposits, loans, and accounts will be integrated within a shopping experience. To get to this state, banks and fintechs will need to collaborate more intensely since the sector’s growth is in their interest. As a result, we’ll witness faster BaaS scaling and more companies like SimpliFI, M2P, NymCard expanding their offerings in the market.
The MENAP region has always benefited from strong regulatory presence that supports innovation, particularly in the UAE and KSA. We have no doubt that increased technological development will be welcomed by governments which will lead to faster adoption of embedded financial services.
Affecting Trust
Research conducted by McKinsey shows that consumers have lost trust in traditional banks and financial institutions. Despite this, banking is an essential function that consumers can ill-afford to ignore. The rise of embedded banking has given them alternatives to traditional banks. On the surface, this might seem like a death knell to traditional banks.
However, by providing BaaS/CaaS services and backend financial management, banks can leverage the trust that other non-banking brands possess. For instance, a large bank can manage back end operations of Walmart, GE, or any other brand that has built considerable trust with its consumer base. By white-labeling the banking function, banks can rebuild trust and move towards more lucrative B2B markets.
These moves need regulatory support in the MENAP region and it remains to be seen how events unfold.
Conclusion
Embedded finance is evolving fast, and it comes with several benefits to the consumers by allowing them to obtain different products from one source. There’s no doubt that embedded finance offerings continue to grow while bringing consumers and companies a ton of benefits. Interestingly, banks also will benefit from such offerings, provided they are ready to react and ride the wave.
HypeFin is a boutique fintech consulting community based in London and Dubai, helping fintechs from sail to scale in multiple geographies. Get in touch with us to discover how our experts could support your innovative services to scale across multiple markets.