Do you have a built-in Fintech strategy?
Learn the difference between embedded finance and embedded fintech, and how to make the latter realistic and effective.
As credit unions face thinner margins, soaring member expectations, rapidly evolving technology and an increasingly competitive marketplace, they are challenged with how to maintain relevance and prominence in their members’ financial lives. This becomes even more difficult as non-financial services companies, such as retailers and technology companies, continue to try to offer banking and payment services, threatening to disrupt deposits and intermediaries.
In response, more credit unions are looking to embrace embedded fintech, extending their brand and presence to everything their member does in e-commerce. To create a strong path forward, one that enables rapid innovation with reduced risk and maintains their position in members’ lives, it is important to first understand the power of embedded fintech (especially compared to embedded finance) and then find a realistic model to future-proof their business.
Embedded Fintech vs. Embedded economy: Similar words, very different meanings
Embedded fintech versus embedded finance models have very different meanings and implications for credit unions.
The embedded finance model actually takes the business away from the credit union; according to Cornerstone Advisors, it is the integration of financial services into non-financial websites, mobile applications and business processes.
While this approach generates revenue for the credit union behind fintech, it also segments and erodes business and relationships away from financial institutions. With embedded finance, credit unions risk becoming little more than back offices for fintechs.
Embedded fintech, on the other hand, centers around financial institutions and fintech working together. Cornerstone defines it as the integration of fintech products and services into financial institutions’ product sets, websites, mobile applications and business processes. Credit unions maintain the relationship with the member and offer services based on the members’ needs – all within a regulated environment.
While embedded fintech seems like the best option, actually executing on this model is easier said than done. Credit unions have long struggled with burdensome one-to-one fintech integrations, which typically take more time and resources than available internally. Between the due diligence process to reduce liability and risk and the intensive ongoing vendor management, it’s no wonder that credit unions have traditionally struggled to effectively launch fintechs at scale.
Collaborative Banking: A New Way Forward
However, there is another way. A collaborative banking approach to embedded fintech uses APIs to connect fintechs to credit unions through a third party that tokenizes, normalizes and anonymizes all member data before it is shared with fintechs. This means that credit unions can be the gateway to a secure marketplace for member-facing apps.
Such a model eliminates the risk of fintech competition because the fintechs are contractually prohibited from competing with credit unions – they cannot offer current accounts, cards or loans. Instead, the fintechs actually share leads back with partner institutions to provide banking products and services. Credit unions’ biggest disruptors can become their biggest benefactors. And fintech’s advantages; credit unions send them more users and they don’t have to jump through hoops to try to be a bank. They can instead focus on their core competence.
The member also gains significant value from a collaborative banking approach. Data sovereignty and privacy continue to be major issues, with more members aware and careful about what they share and with whom. With co-operative banking, members have unprecedented flexibility and choice; for the first time, they can try out the latest technology through a safe, secure platform that anonymizes and tokenizes their PII data. Such secure access to a wide range of financial tools empowers members to find and utilize the solutions that best support their unique situations and goals.
Embedded fintech through a collaborative banking lens provides a new opportunity for credit unions to securely unlock innovation for their members and the industry. They save time, money and ongoing fintech contracts and partnership management while avoiding the need to develop technology partnerships themselves. Perhaps most importantly, members benefit from financial empowerment, choice and control. Credit unions that embrace co-operative banking are strongly positioned to maintain their relevance, increase market share and create member loyalty that lasts.
Landon Glenn is the CEO and founder of Asa Technologies, a Provo, Utah-based technology company that connects banks and credit unions with fintechs.
