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Demystifying open banking and embedded finance

In the latest in our series of blogs on the BPC annual client conference, Zil Bareisis, head of retail banking at Celent explores some of the key issues around open banking and embedded finance.

We (BPC) have spoken in the past about how open banking allows merchants to build richer customer experiences by bundling loyalty and payments into one seamless customer proposition.

In his presentation, Bareisis looked at the implications of open banking and what has been achieved to date as well as discussing the concept of embedded finance and other strategies how players can participate in the increasingly open financial services ecosystem.

He began by discussing where we are right now and how banks have been evolving from a traditional banking model of selling their own products through their own channels, both physical and digital.

What we are starting to see is the financial services ecosystem opening up with banks as well as non-bank third parties vying to curate customer experiences that integrate financial services with other things customers want to do. Banks are eager to curate more than just the financial part of customer journeys, either directly or through partners. 

As previously discussed by Oleg Patsiansky, head of digital banking at BPC, Bareisis also touched upon super apps and whether there is an opportunity for these applications in the West for financial services and potentially beyond. He says there is evidence of companies positioning themselves to achieve this, such as PayPal, which launched the PayPal app in September 2021 offering buy-now-pay-later, savings accounts, and crypto trading in addition to other services. It has even begun acquiring companies in this space to offer customers a more holistic experience.

Other companies have pursued similar strategies and Bareisis refers to this to explain that while there may be different emphasis depending on a company’s strategy, the idea remains to aggregate a lot more of these transactions and types of activities into one app.

When it comes to open banking, one of the questions that is often asked is how it can be monetised and commercialised. Many banks went into open banking to stay compliant with regulations and with a vague idea that they might be able to charge for it later.

Bareisis suggests that as we move beyond the compliance APIs and into more premium APIs, this will start to happen. In the meantime, what is happening is that banks are realising that there are other benefits to be had from open banking. For example, it can be leveraged to increase operational efficiency by improving existing workflows and processes, such as loan origination, customer onboarding, billing, and collections.

Bareisis went on to discuss embedded finance in more detail, stating that it is important to define it precisely because the banking capabilities required to deliver modern, embedded finance are quite different. According to Celent, embedded finance is the discovery and acquisition of tailored financial services products at the point of need within the digital experience curated by non-bank third parties. Examples include new offerings in the market like Apple Card and Stripe Treasury.

In contrast, according to Bareisis, the “invisible payment” experience, such as paying for an Uber trip, is not an example of embedded finance. That experience is achieved by utilising a payment card stored with a merchant and from the bank’s point of view they don’t have to do anything different to support it. The customer is using their previously issued card, rather than getting a new financial product. 

Bareisis sums this up by saying that banks wishing to get into embedded finance have to consider a number of factors, such as how to differentiate their proposition, how to decide on banking partners and offer them favourable economics. Also, their technology might not be up to scratch and might need updating. And yet, the biggest risk might be doing nothing at all.

Bareisis concludes that traditional banking isn’t dead, but also says there is no question that the financial services ecosystem is becoming increasingly open. Each institution needs to determine what role they want to play within that ecosystem and what the right strategy is for them.

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