Industries develop over time and when they mature, they tend to become more specialized. That’s what is currently happening with the FinTech industry and financial service in general. It’s entering a new phase of division and specialization where many players in the game are beginning to focus on what they’re good at and leaving the rest to other players. We’re exploring the multiple aspects of this ongoing trend, which has been coined in various terms such as FinTech Enablers, Embedded Finance, FinTech-as-a-Service, and Modular Finance.
The general idea of embedded finance is there are more and more companies providing the technology, operation, licenses, and other services to their clients —which can be large corporates, SMEs, and startups — so that their clients can develop their own FinTech and offer financial services. With this evolution of embedded finance, it’s very likely that the Finance Sector as we know it will no longer exist. We’ll be exploring a five-part series on the subject of FinTech enablers, and here is what you can look forward to learning more about.
This might be the most well-known sub-sector amongst all Fintech Enablers and embedded finance. First emerging in the UK, Germany, and other parts of Europe, the concept of Banking-as-a-Service (BaaS) blossomed along with the rise of Challenger Banks and Open Banking API (application programming interface). The same concept has also found its way to the US, LatAm, Africa, and Asia. (If you’re curious about the landscape of Challenger Banks in Asia, you can check out this research article we’ve published.)
It’s hard to define exactly what Banking-as-a-Service is, as there are various types of BaaS and various banking functionalities related to a bank account. Some provide access to the bank accounts at incumbent banks while others supply the software, such as a core banking system. Others still offer not only software but also service operations. Some even issue banking licenses. In PART II, we’ll be examining some case studies of the biggest players in this embedded finance field of banking (a.k.a. embedded banking) in Europe, the US, China, and Japan.
When we talk about enabling companies to issue credit cards, the techie aspects are often mentioned first. People love to talk about how to collect and analyze all kinds of data to build credit models, how to predict the default rate, or optimize the interest rate.
However, there is another side to the embedded finance of such financial products that we cannot avoid and that is working with card networks, payment processing, issuing banks, and printing companies to issue cards, authorize transactions, and communicate with settlement entities. This applies not only to credit cards but also to debit cards and any other kind of payment card. Check out our Card Enabler article to learn more.
Although banking services technically include lending in most cases, many Banking-as-a-Service only includes the functionalities of a savings account and debit card. On the other hand, there are a different group of companies that are highly focused on the embedded finance of lending (a.k.a. embedded lending) in particular, which requires a different set of technology, operation know-how, and licenses. Check out our Lending-as-a-Service article here!
Unlike Banking-as-a-Service, whose early adopters are mostly startups that try to become challenger banks, Credit-as-a-Service has a lot of Big Tech adopters and traditional corporations that utilize embedded finance to provide their own lending services. This makes sense because compared to banking services, lending services actually faceless rigid regulations, but has higher profitability potential in the short term. We will be looking at some of the players in this embedded financial services industry at a later date.
While banking, lending, and card issuing services have been mostly divorced from insurance and brokerage firms, issuing insurance and brokerage services has not. The reason is that insurance and investment products are much more complicated, and the learning curve for the average consumer is much steeper compared to a simple savings account or a payment card. There is still considerable debate amongst the regulators and the potential clients of Insurance and Brokerage-as-a-Service as to whether these financial services should be distributed in this way.
However, despite the obstacles, some companies are working to revolutionize how insurance, investment products, and other financial services are being built and distributed with embedded finance. We have gone into more depth regarding some of the difficulties and case studies these fields must overcome in this article.
The driest part of the finance industry might just be compliance, security, and custody, yet it may also be the most crucial part. This is the bedrock on which the finance industry builds the trust (and earns the money) of their customers with their financial services. This is also why many companies have not provided financial services thus far, because of how rigorous financial institutions are in regards to compliance.
Compliance and security measures include KYC (Know Your Customers), AML (Anti Money Laundering), CTF (Counter Terrorist Financing), Data Privacy, and also protecting one’s assets from all kinds of attack, including both digital ones and physical ones. With embedded finance, such tasks required for providing financial services as well as creating digital wallets become simple. In this article, we listed the unsung heroes protecting our finances in the FinTech scene.