How Embedded Finance Is Helping Fintech Reach Maturity
By Emma Steeley, CEO, Freedom Finance
The fintech (financial technology) sector is evolving rapidly and seeing a new land of opportunity. Behind major consumer-facing brands, an entirely new ecosystem of businesses is emerging that works hand-in-glove with traditional and alternative financial services providers to better meet the demands of new, highly digital customer segments.
These businesses, like my own, are not so much disruptors as enablers—dedicated to improving customer outcomes and providing truly personalised service. This is where I see the most exciting opportunity for fintech organisations: Less concentrated on chasing rival incumbents for their customers, cash and cards but laser-focused on improving out-of-date practises and circumventing data black holes that are preventing the industry from delivering the truly seamless, personalised service that people want.
The emergence of embedded finance
Collaboration between big banks and household brands to embed financial services is a fantastic example of how fintech is evolving to accomplish these goals. At its core, embedded finance digitally integrates financial products—insurance, loans or bank accounts—with non-financial organisations, such as shops or car dealerships. While the term embedded finance itself may be unfamiliar to your average Joe on High Street, there’s no doubt most people will have encountered it in some guise. Whether that is the offer of a store credit card at the checkout of a department store or being offered finance options to spread the cost of a large purchase (yes, Buy Now, Pay Later [BNPL] is a form of embedded finance), the application of embedded finance is increasingly commonplace.
It sounds simple, but the challenge is managing vast data demands and executing complex technical delivery. The role of Freedom Finance is to work with the existing financial services community, not against it; to widen and deepen customer relationships; to provide a more streamlined, simple journey; and to help people find the best products for their circumstances.
Embedded finance meets a fundamental desire for firms to provide their customers with the personalised services needed to drive a product-led growth strategy.
Where is the opportunity?
This pandemic has driven a seismic shift in customer behaviours. With shops and banks shuttered at short notice as restrictions were imposed, customers became increasingly digital as accessibility became all about online. Embedded finance responded to this demand and is now entrenched in the everyday customer journeys of millions.
The elephant in the room that I want to address is as follows: If embedded finance is so commonplace, where is the opportunity for thrusting, innovative fintechs to make their marks? Put simply, it is incredibly difficult for traditional providers to implement robust solutions for five key reasons:
1 – Data
Embedded finance requires a vast amount of data to ensure it collects enough of a picture on both sides—the customers and the financial services providers—to match one with the other. Offering loans for which the customer wouldn’t be eligible will simply lead to frustration and alienation among both parties. Specialist fintech providers have the data technology, platforms and algorithms to help match providers with customers quickly and accurately.
2 – Legacy systems
Many traditional financial services providers will be operating on legacy systems that already handle immense volumes of data. Migration is an inherent risk that many are understandably unwilling to take. Using software-as-a-service (SaaS) solutions in partnership with fintechs is a good way to circumvent that risk and provide a valuable service that enhances core offerings.
3 – Emerging rivals
With many traditional financial services providers moving at a slower pace than nimbler firms, we are now seeing a raft of non-financial services brands starting to enter the embedded-finance space. Inertia means moving backward in this space, and providers need to join forces with fintechs to regain their competitive edge.
4 – New customer bases
One major success story of consumer fintech was attracting a new, younger customer demographic and introducing them to the wide variety of financial services products the industry can offer. Embedded finance is a great way for traditional providers to meet a genuine need and desire when it comes to rivalling peers for attracting—and retaining—this new customer, who is typically focused on simplicity, speed and choice rather than brand or sector pedigree.
5 – Customers know when you are meeting their needs
In the new post-pandemic, cost-of-living-crisis environment, the customer is king. They are also extremely well informed, so if you don’t meet their needs, they can easily find someone who does. With various digital marketplaces, comparison sites and regulations driving the “shopping around” agenda, traditional financial services providers are now less afraid of passing customers to other market participants when they cannot provide a certain service or product.
Meeting the customers’ needs becomes paramount, so offering additional partner-led services enhances the provider’s reputation, encourages return business and helps the customer, all while enjoying the additional benefit of adding commercial value through commission and transfer fees.
What does the future hold for embedded finance?
We expect embedded finance to become increasingly sophisticated and ubiquitous within the financial lives of the vast majority of British consumers. Innovation is happening at pace, with more sectors beginning to see the potential to tap into this revolution—the utility and energy sector, for example, as firms look to increase accessibility and affordability of items such as solar panels.
Data mining and manipulation are also being developed to allow fintechs to provide an ever-more bespoke service. This includes improving the technical delivery of embedded finance, which requires significant investment in technology to bring these fruits to bear.
Where does Freedom Finance fit in?
I became the chief executive officer of Freedom Finance at the start of July, and the potential for the business to play a leading role within the embedded-finance revolution is massively exciting. Our digital-lending marketplace matches millions of people in the United Kingdom to only the loans for which they are eligible—credit cards, personal loans, mortgages, auto finance and other borrowing products.
We access millions of customers through our B2C (business-to-consumer) platform, our partnerships with trusted lenders and financial services providers and our embedded-finance services to high street brands, such as Argos, Asda, Very Group and more. This means we have data, and lots of it, putting us at the centre of embedded finance in the UK. This is where we are seeing huge growth—we are realising some of that growth already, but we see even more opportunities to lead and innovate in this space.
There has been a significant change in the attitudes of big banks toward fintechs—and each other. The fear of losing customers to different providers and challengers is waning, and collaboration is now the key. Where they were once wary of fintechs, they now have huge appetites for partnerships that will provide them with the technology and data to create a rich digital financial ecosystem that allows them to serve clients seamlessly.
Ultimately, this brings us full circle and back to where I see the future of fintech: enabling traditional incumbents as well as disruptors in the financial services space, such as Amazon and Apple, to plug into non-financial household brands and improve the financial lives of customers within the United Kingdom.
As CEO of Freedom Finance, I am motivated to push forward this innovation within the financial services industry and achieve the true potential of embedded finance.