The Future of Finance is Embedded

Introduction

The financial world of today is, as we all know, evolving rapidly. At its core lies a significant transformation called embedded finance. This shift is more than just a passing trend. It's a fundamental change in how we navigate finance in the digital age. By now, it should be clear for anyone paying attention that people want accessible finance. They want it integrated into their online existence. The future of finance isn't confined to banks. It's seamlessly woven into our daily online lives.

Typically, embedded finance revolves around payments and insurance, but we're taking it a step further. Here we want to explore how it can also revolutionize business lines such as investments, pensions and insurance protection. As what we're going to discuss goes beyond the ordinary, equipping yourself with some imagination and innovative thinking is key. We'll go into how embedded finance can help reshape the world of investments and pensions, making it more accessible and also offering additional value to a broader set of stakeholders. This expansion of services distribution could signify a rather monumental shift.

But first, why is this shift important. In the increasingly competitive financial landscape, there are numerous hurdles to overcome for financial institutions. Among the many challenges out there, here are three fundamental ones we think are significant for the embedded finance case.

• High Customer Acquisition Costs (CAC): One significant hurdle we encounter is the high cost of getting new customers. In a digital-first world where competition is fierce, the price tag associated with bringing in fresh clients can be substantial. With a multitude of options at their fingertips, potential customers are discerning and demanding. Also, as more and more barriers to churn is being dismantled, either by technological developments or by regulatory means, churns is naturally on the rise, and a focus on retention is ever more important.

• Finding New Clients: Where do we find these new clients? Expanding client bases in this highly competitive environment is no small feat. Traditional marketing and outreach strategies are often no longer sufficient. Digital advertising, partnerships, and innovative customer engagement techniques are becoming essential tools in the arsenal of financial institutions. The challenge lies not just in attracting attention. It also lies in retaining these clients in an increasingly competitive environment.

• Supporting Un-economic Clients: Financial institutions also grapple with the challenge of supporting clients who may not fit the typical economic model. How can these individuals be assisted effectively, and how can the services supplied and to what scope and extent be made compliant with the ever-increasing amount of financial regulations? It's a complex puzzle that requires innovative solutions and a commitment to financial inclusion.

As embedded finance marks a new era where our digital and financial lives intersect even more. The future is a world where finance is not just a separate entity but an integral part of our online experiences. We'll see how embedded finance is at the forefront of this change, and how it can help resolve these challenges. Embedding investments and pensions into our daily lives can make these sometimes-complex areas easier to use. It is about seamlessly integrate investments and pensions into our daily digital routines. Hence, addressing the growing demand for user-friendly and digital financial services.

Evolving Financial Relationships

In this first section of our exploration into embedded finance, we'll delve into some of the developments that have paved the way for this potentially transformative shift. As the financial landscape is evolving at a rapid pace, it's crucial to understand the key factors driving these changes.

Automated Processes & Digital Transition

The financial industry has notably shifted towards automation. It has also embraced digital platforms. Traditional financial institutions are no longer just brick-and-mortar entities. They are becoming digital powerhouses. Why? Because consumers demand it.

From mobile banking apps to seamless online platforms, the financial industry has been forced to adapt to this new reality. As tech-savvy consumers have become the norm, they're not just comfortable with digital interfaces; they expect them. Mobile and web-based access has emerged as the preferred mode of interaction with financial services.

Today's consumers all have smartphones and a strong desire for convenience. They expect their financial institutions to keep up. In many regions, the era of visiting a physical bank branch for routine transactions is fading into memory.

Hybrid Financial Models

As we have seen with the recent comings and goings of the Robo Advisor concept. The evolution of finance isn't a binary switch from traditional to digital; it's more of a blending of these worlds. Early attempts at purely digital robo-advisers had limitations. They offered automation and convenience. However, they often lacked the personal touch and human expertise that many investors looked-for.

Enter the era of hybrid financial models. When the dust has settled after the initial hype of digital possibilities, the hybrid approach marries the strengths of traditional finance with the capabilities of the digital age. Recognizing this, the industry has been quick to pivot towards these hybrid solutions.

A hybrid model is able to inject human interaction into an omni-channel framework. Using human ability and expertise when needed and leaving the customer to get on with their life and business in digital self-service interfaces when that's the preferred approach.

Demand for Financial Well-Being

The recent global challenges, including the pandemic and economic downturn, have amplified the need for a comprehensive approach to financial well-being. Employees now look to their employers for greater financial security. This shift in expectations has spurred the development of innovative financial solutions. Solutions, that go way beyond basic salary transfers.

The workplace now has the potential to transform into a hub for financial well-being. Employees seek guidance, tools, and resources to manage their finances effectively. Employers are always looking for ways to improve their branding and attract talent. They recognize the value of supplying comprehensive financial benefits, and they want to communicate and visualise the value of these benefits to existing and potential members of staff. And this shift has the potential to reshaping the employer-employee relationship.

In this evolving landscape, embedded finance plays a crucial role. It aligns with the demands of tech-savvy consumers. It meets the expectations of employees looking for holistic financial solutions in the workplace. And it can provide competitive advantages for financial institutions looking to find more customers and win more business.

The Way Forward

As we kick-off our work towards a future shaped by embedded finance, certain prerequisites and strategic approaches must be considered. This section explores the key components that will pave the way for a more seamless and integrated financial landscape.

In the face of the developments and challenges outlined in the previous section, embedded finance emerges as one possible and powerful solution. Seamlessly integrating financial services into non-financial platforms seems to offer a way out. We can reduce customer acquisition value, reach new clients, and provide a range of services without compromising on service levels for un-economical customers. As we explore further, we'll uncover the strategies and innovations that can help you as a financial institutions navigate these challenges.

Pre-requisites

So, before we dive into the embedding opportunities, let's lay the groundwork for what's required if you want to embark on a journey of your own into embedded finance.

Embracing a Digital-First Approach

The foremost requirement for the success of embedded finance is embracing a digital-first strategy. Gone are the days when financial interactions solely occurred within the confines of a physical bank branch. This is especially important in an era where customers are intimately familiar with digital technology and use it daily.

Customers now expect financial services to be easily accessible through their devices. They have smartphones and digital platforms at their fingertips. It's where you check account balances, make payments, or seek investment advice.

Also, in the physical world, opportunities for embedding financial services are so much more work. It is in the digital world is where it all unfolds. And embedding financial services efficiently and at scale is really only possible in the digital realm. It's simply the case that, financial institutions that truly pivot towards a digital-first approach are better positioned to meet these evolving expectations.

Innovation in Processes and Services

In the context of investment, pension and protection services, new ways of thinking is the key to embedding these offerings seamlessly. One approach is to segment these processes into smaller steps. Then defining which are more relevant as digital self-service and which are naturally hybrid steps. Such separation makes these processes much more amenable to integration, since smaller portions of the entire process can be integrated differently or not at all.

One natural example is automated or digital self-service fact-finding tools, which can simplify the onboarding process. Financial institutions can gather essential information about clients' financial goals and preferences using technology. Then, they can focus on supplying tailored recommendations. This not only enhances the customer relationship but also optimizes the use of human expertise.

Embedding Opportunities

Now that we've established the pre-requisites, let's explore two of the embedding opportunities for investments, pensions and insurance protection that lie ahead.

Embedding Finance in Workplace and Corporate Spheres

The workplace and corporate sector offer promising arenas for embedding financial services. Employers can play a pivotal role in offering pension, protection and ultimately investment financial services to their employees. They can also leverage their platforms as channels for financial planning. All in the interest to take more responsibility for the financial health of their employees.

Imagine a scenario where employees log into a workplace platform to administer day's off, such as holiday or sickness, and review their recent salary payouts. Here, they could also have access to a range of financial services, starting with the ability to really understand the value of their occupational pension and insurance benefits.

They can be equipped with tools to forecast future pension, and understand how their protection works in case of prolonged sickness or even unemployment. This not only enhances employee financial well-being but also strengthens the employer-employee relationship. Employers can easily illustrate and communicate the value of their benefits, and offer additional resources ways to or resources for retirement planning, short-term savings, mortgage information, and insurance options, creating a comprehensive financial ecosystem within the workplace.

Incorporating financial services into the corporate world can extend beyond just employee benefits. Companies can benefit from embedded finance as well. With the proper tools, they can understand and optimize their financial decisions related to employee benefits costs. They can manage cash flows, or they can access tailored financial solutions to drive cost control and capital and tax efficiency related to pensions and other benefits.

Embed with Partners in Payments and General Banking

As we've seen for a long time, a crucial strategy in embedded finance is partnering with payments and general banking providers. This collaborative approach allows financial institutions specialising in investments to provide value and gain access to customers through payment channels. It also allows these institutions to gain insights into customer behaviour, which can be used to tailor services offerings.

A better understanding of the customer can be had by analysing transactions. These insights enable the offering of personalized and relevant investment and pension services. Eg they can be nudged to increase savings and investments to reach a more suitable future pension income, they can be offered to switch to a more cost effective investment vehicle or to replace underperforming investments.

Furthermore, transaction-based investments and savings services can be developed. For example, rounding up small amounts from transactions and channelling them into savings accounts. Another possibility is offering micro-investments as alternatives to discretionary spending choices. For instance, redirecting the cost of a daily coffee into a mutual fund investment.

Another way is to embed insurance into credit-based payment services. This includes credit cards and buy-now-pay-later platforms. This integration offers added value to consumers. It provides insurance coverage for events such as unemployment or default alongside their payment methods.

By capitalizing on these embedding opportunities, financial institutions can create a more cohesive and user-centric financial ecosystem. These strategies enhance the accessibility of financial services. They also align with the evolving preferences and expectations of consumers in a digital-first world.

Overcoming Key Hurdles

In our journey through embedded finance, we've met a landscape filled with both promise and complexity. But it quickly becomes clear that this transformative journey is not without its share of very concrete hurdles. To wrap up this post, we'll dissect some of the hurdles that financial institutions face in their quest to provide seamless and integrated financial solutions.

• How to Reach the Customer: When embedding financial services into other areas of customers lives, you need a host environment. Typically, this host environment is owned or controlled by someone. How easy it is to gain access to the host environment of course varies from case by case, but is something you have to consider when designing your embedded business model. Here it can be helpful to also turn this idea on its head, and consider bringing in or embedding external services into your own. Alternatively, you can settle for an orchestrating role where you simply connect the dots in an otherwise disconnected process to increase convenience for users.

• Lack of Holistic Analytics Offerings: As we know, analytics sits at the core of financial services. Almost nothing goes on in finance without numbers being crunched. This roadblock is about the scarcity of financial technology offerings that provide holistic analytics capabilities. In the world of investments and wealth, many consumers want comprehensive solutions that cover not only their retirement plans but also short-term savings, mortgages, and protection. Fitting all these elements under one technology roof can be a daunting task.

• Due Diligence Dilemma: In the rapidly growing world of embedded finance, the range of tech solutions is naturally vast. However, performing thorough due diligence is far from straightforward. Validating the effectiveness and appropriateness of these solutions is paramount for financial institutions. A really robust due diligence process is needed to ensure the reliability of these technologies.

These challenges underscore the need for a thoughtful and strategic approach to embedded finance. Embedded finance is an area where innovation is usually celebrated, but it's equally essential to address these hurdles head-on. As we navigate the path forward, we must keep these challenges in mind. We should seek solutions that benefit both financial institutions and the individuals they serve. Here, embedded finance holds the promise of greater convenience and accessibility.

Conclusion and Summary

In our journey through the landscape of embedded finance, we've explored the foundations, challenges, and a few promising strategies. These are reshaping the financial industry, and the path forward is full with opportunities. The opportunities stem from embracing a digital-first approach and innovating in financial services processes. They also come from embedding investment, pension and protection services into our daily lives.

As we conclude this exploration, it's essential to envision the future we're striving to build. Our vision is clear: in the coming years, we should aim to improve financial health for everyone. This vision encompasses the essence of embedded finance. Financial services seamlessly integrate into our digital lives. It's a future where individuals have easy access to comprehensive financial solutions. They can manage investments, plan for retirement, and secure their financial well-being.

Embedded finance holds the potential to not only democratize access to financial services. But also help financial institutions overcome some of the more fundamental challenges of today's competitive landscape. It empowers individuals to make informed decisions. It also bridges the gap between traditional and digital financial realms.

Embedded finance is a journey that financial institutions, tech providers, and consumers are embarking on together. And together, we can create a financial landscape that is more inclusive, convenient, and aligned with the needs of a rapidly evolving world. As we move forward, let's remember that embedded finance is not just a trend. It's a transformative force. It has the power to redefine how we perceive and interact with finance. Together, we can make this vision a reality, putting financial empowerment at the fingertips of all.