How Embedded Finance is helping Fintech reach maturity

Of Emma Steeleymanaging director, Freedom Finance

TThe fintech (financial technology) sector is developing rapidly and sees a new land of opportunity. Behind large consumer-oriented brands, a whole new ecosystem of businesses is emerging that works hand in hand with traditional and alternative financial service 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 personalized service. This is where I see the most exciting opportunity for fintech organizations: Less focused on chasing rival incumbents for their customers, cash and cards, but laser-focused on improving outdated practices and bypassing data black holes that prevent the industry from delivering the truly seamless, personal service that people want.

The rise of embedded finance

Collaboration between major banks and household brands to embed financial services is a fantastic example of how fintech is evolving to achieve these goals. At its core, embedded finance digitally integrates financial products – insurance, loans or bank accounts – with non-financial organisations, such as retail stores or car dealerships. While the term built-in economy Although unknown to your average Joe on the High Street, there is no doubt that most people will have encountered it in one form or another. Whether it’s the offer of a store credit card at the checkout of a department store or the offer of financing options to spread the cost of a large purchase (yes, buy now, pay later [BNPL] is a form of embedded finance), the use of embedded finance is increasingly common.

It sounds simple, but the challenge is managing large data needs and performing complex technical delivery. The role of Freedom Finance is to work with the existing financial services community, not against it; to expand and deepen customer relationships; to provide a more streamlined, easy journey; and to help people find the best products for their circumstances.

Embedded Finance fulfills a fundamental desire by firms to provide their clients with the personalized services needed to drive a product-led growth strategy.

Where is the opportunity?

This pandemic has driven a seismic shift in customer behavior. With shops and banks closed 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 rooted in the daily customer journeys of millions.

The elephant in the room that I want to address is as follows: If embedded finance is so common, where is the opportunity for forward-thinking, innovative fintechs to make their mark? Simply put, it is incredibly difficult for traditional suppliers to implement robust solutions for five main reasons:

1 – Data

Embedded finance requires a huge amount of data to ensure it gathers enough of a picture of both sides – the customers and the financial service providers – to match one with the other. Offering loans for which the customer would not qualify will simply lead to frustration and alienation among both parties. Specialized fintech providers have data technology, platforms and algorithms to help match providers with customers quickly and accurately.

2 – Older systems

Many traditional financial service providers will operate on legacy systems that already handle huge amounts 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 – New rivals

With many traditional financial services providers moving at a slower pace than more nimble firms, we are now seeing a number of non-financial services brands begin to enter the embedded-finance space. Inertia means moving backwards in this area, and providers need to team up with fintechs to regain their competitive edge.

4 – New customer bases

A major success story for consumer fintech was attracting a new, younger customer demographic and introducing them to the wide range of financial services the industry can offer. Embedded finance is a great way for traditional providers to meet a genuine need and desire when it comes to competing peers to attract – and retain – this new customer, who is typically focused on simplicity, speed and choice rather than brand or sector pedigree.

5 – Customers know when you meet 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 service providers are now less afraid to send customers to other market players when they cannot offer a particular service or product.

Meeting customer needs becomes critical, so offering additional partner-led services improves the supplier’s reputation, encourages return business and helps the customer, all while enjoying the added 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 in the financial lives of the vast majority of UK consumers. Innovation is happening in tandem, with several sectors starting to see the potential to harness this revolution – for example, the utilities and energy sectors, as companies look to increase the availability and affordability of items like solar panels.

Data mining and manipulation are also being developed to allow fintechs to offer an increasingly tailored service. This includes improving the technical delivery of embedded finance, which requires significant investment in technology to bring these fruits to life.

Where does Freedom Finance fit in?

I became CEO of Freedom Finance at the beginning of July, and the potential for the business to play a leading role in the embedded finance revolution is hugely exciting. Our digital lending marketplace matches millions of people in the UK with only the loans they qualify for – credit cards, personal loans, mortgages, car finance and other loan products.

We access millions of customers through our B2C (business-to-consumer) platform, our partnerships with trusted lenders and financial service providers and our embedded financial services for high street brands, such as Argos, Asda, Very Group and more. This means we have data, and lots of it, putting us at the heart of embedded finance in the UK. This is where we see enormous growth – we are realizing some of that growth already, but we see even more opportunities to lead and innovate in this area.

There has been a significant change in the attitudes of large banks towards fintech – and each other. The fear of losing customers to different providers and challengers is diminishing, and collaboration is now the key. Where they were once wary of fintechs, they now have a huge appetite for partnerships that will give them the technology and data to create a rich digital financial ecosystem that allows them to serve customers 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 financial services, such as Amazon and Apple, to connect with non-financial household brands and improve the financial lives of UK customers.

As managing director of Freedom financingI am motivated to push forward this innovation within the financial industry and achieve the true potential of embedded finance.