Embedded Finance: Transforming Financial Institutions of Every Size

December 3, 2024 | Matt Kojis
Embedded Finance: Transforming Financial Institutions of Every Size

Financial services technology is rapidly evolving, with embedded finance emerging as a pivotal innovation. This approach is transforming the way traditional banks and credit unions connect with customers by effortlessly incorporating financial products and services into the digital interfaces we use daily.

For leadership in these organizations, this transformation presents an unprecedented opportunity to harness technology for revenue growth, cost savings, and operational efficiency. By reducing friction in customer transactions, embedded finance promises a richer, more streamlined user experience that aligns with the broader objectives of digital transformation and innovation. As the sector adapts to these advancements, the role of technology in facilitating secure, compliant, and cost-effective solutions is crucial.

Regardless of size, banks and credit unions should explore embedded finance opportunities to remain competitive in an ever-changing market.

Five Embedded Finance Strategies

Embedded finance is disrupting the banking landscape, forcing traditional financial institutions–community banks, regional/midsize banks and global/large national banks–to execute new strategies to retain and grow market share. The viability of each largely depends on the financial institution’s asset size, distribution footprint, and product suite.

For example, an Ohio-based community bank leveraged an embedded finance strategy and partnered with Square to offer Square Card, a business debit card linked to Square’s payment processing platform. This strategy enabled the small community bank to provide an additional service to its customers and grow its footprint in the local banking market. Here are five strategies you could consider when you develop your embedded finance program.

  1. Banking-as-a-Service (BaaS)

    BaaS allows non-financial companies to offer banking services by leveraging the risk, governance, and compliance infrastructure of traditional banks. Banks provide APIs that enable third parties to integrate banking services into their platforms.

  2. BaaS Platform Integration

    Instead of working directly with a nonbank partner, banks can use intermediary BaaS providers like Treasury Prime, Unit, and Bond to distribute their financial products to a broader audience through fintech companies and other nonbank entities.

  3. Lending-as-a-Service (LaaS)

    With LaaS, banks provide their lending infrastructure and capabilities—underwriting, compliance, and servicing—to third-party fintech companies, e-commerce sites, and other businesses, enabling these platforms to offer loan products directly to their users. This can include personal loans, business loans, mortgages, and other credit products.

  4. Vertical Market Expansion

    While retail e-commerce leads in adoption, sectors such as healthcare, manufacturing, education, and telecommunications hold untapped potential for embedded finance.

  5. Distribution Platform Development

    This strategy requires banks to build or acquire their own embedded finance distribution platforms such as fintechs, e-commerce platforms, or other digital marketplaces.

These strategies should not be viewed as mutually exclusive. By combining multiple strategies, financial institutions can leverage the strengths of each approach while mitigating risks. Moreover, a multipronged approach allows banks to be more agile and responsive to market changes, ensuring they can capitalize on emerging opportunities while maintaining a competitive edge. This can also help balance short-term goals with long-term growth, providing a more stable and resilient business model.

Taking Action

Whether you are formulating your embedded finance action plans, evolving them, or just seeking to better understand what all the hype is about, our latest eBook, “Keeping Pace with Embedded Finance,” dives into these various banking strategies in more detail. Learn about each strategy’s benefits, opportunities, risks, tradeoffs, and suitability for your financial institution.

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