Partnering for Success: How Banks and Fintechs are Revolutionising the Financial Industry with Embedded Finance

The fintech revolution is here. In an era where accessible, smartphone-friendly brands are transforming how consumers manage their money, traditional banks face an identity crisis. Forced to innovate, these legacy institutions find that when competing with such fintechs, the only way to beat them is to partner with them. In this article, we’ll explore the scope of this synergy while appraising the more comprehensive industry benefits it may bring.

So how does a competitor become an ally? To help rationalise the relationship underpinning this trend, it’s essential to consider the recent emergence of the term ‘embedded finance’.

What is embedded finance?

Embedded finance typically refers to the integration of financial services or tools within the products or services of a non-financial organisation. Famous examples include innovations like Open Banking and Buy Now Pay Later. These have been widely and rapidly adopted across the e-commerce industry, offering greater efficiency and convenience to online consumers.
But recent developments prove that such affiliations can also occur within the financial sector.

With tech-focused firms discovering ever more ways to streamline online transactions and money lending processes, established banks are embarking on an integration drive. Recent research found that 92% of financial institutions are innovating or plan to innovate embedded fintech experiences to improve their digital suites.

What do fintechs offer?

Recent research suggests more than two-thirds of financial institutions leverage external partnerships instead of developing solutions in-house. So why are banks so reluctant to take the DIY approach? First, partnering with a third party can help reduce risk, a significant worry for banks looking to implement new services. According to a recent report, almost one-third of survey respondents said stopping fraud was their top concern.
But risk prevention isn’t the only attraction to working with fintechs. There are numerous other advantages that such companies offer, including:

• Agility
  The most successful fintechs are those that react quickly to commercial changes, however unexpected. For example, the need for contactless payment solutions during the pandemic spearheaded the success of mobile payment providers, who rose quickly to the challenge.
• Differentiation
  The financial industry asks many questions. Increasingly, fintechs are providing the answers. With a diversity of innovative companies honing in on specific subsections of the market, banks can be assured that they’re working with masters in their field.
• Tech focus
  As one of the most potent efficiency drivers, technology makes money management cheaper, faster, and more accessible. Employing staff from tech-focused backgrounds, fintechs are well-positioned to identify, develop, and implement cutting-edge digital solutions.
  Is embedded finance here to stay?
  
  A recent study found that 75% of consumers are drawn to the cost-effective and seamless services provided by fintechs. Additionally, 52% said that banking with a traditional financial institution was not “fun,” with 49% saying that their current banking relationship was unrewarding.
  
  While these figures may appear discouraging to established banks, they indicate an exciting industry trend that all financial providers should embrace. Modern commercial consumers are tired of traditional banking services. They want more options, greater convenience, and better payment management methods.
  
  The growing popularity of fintechs demonstrates which way the wind is blowing. Therefore, banks must maintain their commitment to innovation, which means partnering with those at the forefront.