Why Plug-and-play Should Replace Embedded Finance as the New Norm

Embedded finance allows business models to operate more effectively by making working capital more efficient or making payments easier

FREMONT, CA: Embedded finance is fundamentally the fusion of the financial services and digital worlds. After being held apart for a long time, its combination creates several possibilities for innovation with significant practical benefits.

Embedded finance makes it possible for business models and the customer experiences that go along with them to function more successfully, for instance, by improving working capital efficiency or simplifying payments. Customers, embedders, financial institutions, and the overall addressable market are all expected to benefit from embedded finance.

Customers

When SMEs can access credit more easily due to the extensive data already on the systems they now use, such as accounting software or e-commerce platforms, this has significant value. For underserved consumers, a similar opportunity exists: by combining applications that deal with a wider element of their lives, such as their mobile phone contract with new financial services, these customers can be economically serviced with more than just basic financial services.

Embedders

Three key advantages accrue to innovators who incorporate financial services into their businesses. First, they can profit from the financial transactions that are currently conducted on their platform. Next, they draw in new clients and deepen their engagement by enhancing their product with fresh, turbocharged features. Finally, the outcome increases client lifetime value and retention.

Financial Institutions

Financial services provided by banks are distributed and used more widely and are used by more people thanks to embedded finance providers. The bank that offers the underlying instruments will benefit if embedded finance providers let more businesses, for instance, issue more debit cards to consumers.

The market has substantial and growing potential. By 2026, the US market for platforms and enablers will have more than doubled, reaching USD 51 billion in total revenue across payments, lending, banking, and cards from 2021. Over the same period, the transaction value of embedded finance will increase from US$2.6 trillion to USD 7 trillion.

Current Embedded Finance Climate

The current state of the art for constructing embedded finance solutions was to leverage banking-as-a-service (BaaS) programming interfaces supplied by banks for things like opening accounts or issuing cards (BaaS). BaaS is a difficult task for most innovators because it takes a long time to execute and costs a lot of money.

The BaaS concept will become more complicated as authorities scrutinise it more closely. EML Payments temporarily stopped accepting new customers when the UK regulator, the Financial Conduct Authority (FCA), expressed concerns about it in November 2022.

More regulation for the US BaaS market is on the way, according to recent hints from the Office of the Comptroller of the Currency (OCC). A clear instance of regulators taking action against a particular bank's use of BaaS models is highlighted by the public filing of an agreement between the OCC and Blue Ridge Bank. Although this is an alarming concern for Blue Ridge, it offers other fintech companies and banks in the market a road map on how to stay on the right side of regulation. Consequently, the end user's protection is enhanced and increased.

Customer Onboarding: identification verification, background checks, and risk evaluation. Innovative businesses can use financial data security tools to adhere to data security standards like PCI-DSS. Components, such as biometrics, satisfy the legal requirements for strong customer authentication. Keep track of any significant client financial activity and the customer's approval of terms and prices. Connection to transactional systems and record-keeping financial systems (e.g. ledgers). Coordination between various financial institutions, contractors, and service providers

Few, if any, innovators who want to benefit from integrated finance are willing to deal with the duties listed above. However, releasing innovators from the majority of these responsibilities must be complemented by enough freedom to foster creativity and deliver seamless client experiences.

The bank is reassured that these delicate issues are being handled to its standards rather than being delegated to the innovator, who generally does not want or have the capacity to do so.

Five Key Principles that Plug-and-play Finance Solutions Should Adhere

Software-only Responsibility: Plug-and-play financial solutions should be equally as easy to set up and maintain as any other software programme. Abstraction from financial protocols: Plug-and-play finance solutions should aggregate and encapsulate the numerous fine-grained sequences of steps, interactions, and data exchanges necessary to achieve them while abstracting away specific technical protocols associated with financial technology. Instead, they should expose functionality in high-level intentional terms, such as onboarding a customer, issuing a card, and enabling funds transfer.

Contextual Adaptation: Plug-and-play finance solutions should not offer functionality and procedures that are one-size-fits-all, whether they are concerned with risk management, compliance supervision, end-customer charges, approval workflows, etc. They ought to have deployment context adaptability.

Maximum Allowed Access to Financial Data and Controls: As permitted by data security, end-customer privacy, and financial regulation, the end-ability customer's to effectively delegate and withdraw access, and the risk of unintentional or malicious action by the innovator or third parties to the end-detriment, customer's plug-and-play finance solutions should offer maximum visibility over financial data and maximum control over financial actions.

Minimum Constraints Over Non-financial Data and Controls: Plug-and-play financial solutions should give the inventor as much freedom as possible to create any component of the solution they choose, as long as doing so won't jeopardise the solution's integrity or subject them to financial regulation.