The Intersection of Financial Institutions and Technology Leaders

Effectively and Realistically Embracing Embedded Fintech

By Landon Glenn

Banks continue to face shrinking margins, skyrocketing customer expectations, technology advancements and an increasingly crowded competitive field — challenging boards and executives with how to stay relevant and prominent in their customers’ financial lives.

Exacerbating the issue is that players from outside industries, such as major retailers and tech companies, continue to attempt to infiltrate the financial services landscape by offering banking and payment services that directly compete with existing banking relationships. To overcome these challenges, more banks are evaluating embedded fintech to extend their brand and presence into new areas of customers’ lives. Meanwhile, some are also considering embedded finance, which may sound similar but is, in fact, very different.

To determine the best path forward in banking — one that enables quick innovation, deposit growth and a stronger foothold in customers’ financial lives — bankers should first gain a clearer understanding of embedded fintech versus embedded finance and then identify an effective way to pursue their chosen path.

Clearing Up Confusion: Embedded Fintech Versus Embedded Finance
While these terms often get thrown around interchangeably, they have very different meanings and implications for banks. According to Cornerstone Advisors, embedded finance is the integration of financial services into nonfinancial websites, mobile applications and business processes. In other words, processes that used to occur within the bank ecosystem now happen extraneously.

Cornerstone defines embedded fintech, on the other hand, as the integration of fintech products and services into financial institutions’ product sets, websites, mobile applications and business processes. This option is all about banks and fintechs working together toward a common goal. Banks maintain customer relationships and provide new tools and technology based on customers’ needs, all within the bank-owned, regulated environment.

Embedded fintech may seem like the natural path, but executing a strategy may be easier said than done. For example, one-to-one fintech integrations have long burdened banks. The integrations, contracts and ongoing partnership management require time, money and resources — often more than are available in-house. It’s no surprise that banks have struggled to effectively implement new technology at scale.

A New Path Forward: Collaborative Banking
There is another option: pursuing an embedded fintech strategy through a collaborative banking approach that involves using application programming interfaces, or APIs, to connect fintechs to banks through a third-party platform. The key is that the platform should tokenize, normalize and anonymize customer data, allowing the customer to turn on fintech solutions without sharing personal identifiable information. This ultimately reduces liability and risk while positioning banks to become the bridge to a secure marketplace of customer-facing apps.

In this model, banks and fintechs work together instead of competing. What used to be banks’ biggest disruptors become a source of revenue. The bank remains the center of customers’ financial lives, deposits stay with the institution and new opportunities are sent back to the bank, leading to account acquisition and growth. Fintechs benefit by having a more effective path to market, including a distribution channel and customer acquisition and monetization model.

Increasingly, customers are in tune with data sovereignty and privacy and are increasingly wary of the risks involved with sharing personal information with technology providers. They’re looking for options to help manage identity, consent, data normalization, permissioning and data anonymization. Collaborative banking does this and more, presenting unprecedented flexibility and choice that allows customers to easily try out new technology and innovations through their financial institution. This empowers them to find and leverage the solutions that best meet their individual needs. Plus, they are able to manage all of their data and finances through a single, convenient location with a holistic view.

Embedded fintech via collaborative banking represents a new opportunity for banks to deliver needed technology and innovation to their customers in a safe, efficient and compliant way. Banks become the gateway to a secure marketplace of fintech apps, driving digital adoption, deposits and loans. This approach removes the time, money and burden of ongoing contract and partner management, along with the pressure to develop technology in-house. Customers benefit from a wider access to financial tools as well as greater control and choice over their data. Banks that embrace this path are primed to create new revenue streams, expand wallet share and strengthen customer relationships.

Landon Glenn is the CEO and co-founder of Asa. Asa connects financial institutions with customer-facing fintechs in a secure, compliant and easy to implement marketplace.