As embedded finance continues to transform the financial services sector, Currencycloud questions how banks will shape that future.
The cross-border payments Fintech notes that this is the question “on the minds of industry insiders — and with the rise of embedded finance, it’s never been more pertinent.”
Currencycloud adds that embedded finance “continues to cement itself as the next step for the sector.” In the payments space alone, Barclays has predicted that embedded finance revenues should expand from around $16.1 billion last year to approximately $140.8 billion in 2025, Currencycloud writes in a blog post. It also mentions that by 2030, embedded finance will have “changed market structures and business models dramatically.”
At present, banking platforms are “varied in their response,” the company reveals while pointing out that some are “playing catch-up, digitizing traditional services; many provide the infrastructure and rails for embedded services; others try to compete with specialized Fintech providers.”
Currencycloud also mentions that the argument usually goes that these are the “only options” for banks: “they are an outdated model, soon to be outpaced by new trends. But we see a different future.” As noted by the cross-border payments firm, banks are “facing a key opportunity to shape the evolution of embedded finance — provided they engage.”
Currencycloud further notes that they spoke to Alex Reddish in order to get his take. As Chief Commercial Officer of Tribe Payments, Alex is tasked with managing the firm’s business strategy and customer success “as a leading payments technology provider in Europe.” He posits that “the ultimate goal of embedded finance is intuitive financial products tailored to individual consumers.”
As explained by Currencycloud, that goal is achievable via “a virtuous relationship between banks and Fintechs.” The Fintech firm also notes that “to claim their role in that future and open up new revenue streams, banks could become platforms that provide specialized services with Fintech partners.”
Currencycloud added that banking services, in Alex’s view, have been “part of the catalyst for embedded finance: they offer a wide array of financial products via one provider.”
But those services historically have been built “for the many and not the few; so personalization was not a consideration,” Currencycloud writes in their blog post while adding that at first, they were designed “for in-person transactions, not online platforms.”
The company adds that banking services “struggled to provide a seamless digital payment journey or customer experience.” They could “not out-compete specialized service providers.” Because of these shortcomings, non-bank financial institutions and Fintechs “moved into the space with services that answered those needs.”
Soon after this, embedded finance “was born” and banks became pressured “to replicate things like software that enabled ‘invisible’ checkout processes such as Lyft or Shopify,” Currencycloud added.
Alex remarked:
“They’ll retain consumer trust for the foreseeable future. Bank switching is at an all-time low of 4% right now, and most individuals keep the same account for 15 years. Traditional activities like taking deposits and focusing on net interests are still profitable, and banks can continue to focus on margins there. It’s likely, therefore, that consumers will use Fintechs for transactions but retain their bank accounts as a primary source from which transactions are fed.”
Banking institutions also have the infrastructure that backs a lot of the existing embedded finance world: both traditional and challenger banks offer the rails and channels used to power Fintechs. Because of this, they have managed to address one of the main challenges which “otherwise stalls adoption for Fintechs: compliance and regulation,” Currencycloud reveals.
According to Currencycloud, that combination is “powerful” as it gives banks “the opportunity to center themselves in embedded finance and transition from the passive foundation to the main force influencing its evolution.”
As noted by the Fintech firm:
“It boils down to this: consumers trust their banks and want to maintain those relationships. However, Fintechs are currently the driving force behind specialized financial service innovation. Banks are perfectly positioned to connect those two pieces: by partnering with Fintechs, they can create more revenue streams for themselves and offer true embedded finance experiences for their trusting customer base.”
The company adds that by “doubling down on their own core values — banking services — and turning specialized Fintech partners into revenue-sharing channels, banks can carve out a niche for themselves in embedded finance.”
As noted by Currencycloud:
“In this model, core banking remains with banks, and financial services disperse to specialized providers who can provide more niche services. Yet banks sit at the heart of it all, weaving together a new model of finance that provides the most customized service for each user by connecting them with top providers at every opportunity — and connecting banks to additional revenue streams. It’s a version that maximizes the trust and infrastructure of banks by combining it with the digital expertise and service delivery of Fintechs.”
(Note: for more insights from Currencycloud, check here.)