Topic of the Month

Banking without Walls- An era of Embedded Financial Services

-Vivek Gopalakrishnan, Federal Bank

In today’s day and age, the idea of a brick and mortar Bank is long lost. This is notably stark in case of millennials and Gen-Zs. The very concept of a Bank itself is fading off, as Financial Services are getting embedded into the daily lifestyle of the Customer. Embedded Finance thus refers to non-Banking products whose value propositions are significantly enhanced through the associated financial products and services, embedded within.

Social Media, Music, Ecommerce, OTT platforms and Food Delivery Apps are constantly raising the bar when it comes to Customer Experience. Intuitive, contextual and hyper-personalised services are now part of an everyday app. Financial services are also seeing this evolution, but interestingly pioneered more by Fintech and non-Banking applications, than by Bank themselves.

Is Banking or the standalone Bank brand, facing an existential crisis?

Well, at least in gaining the mind share of new age customers, it seems to be.

Among other things, unbundling of financial services along with popularity of Apps that often transcends functional boundaries has given rise to this phenomenon. In other words, your ecommerce app is also a wallet that stores your money, facilitates loans to buy stuff, and provides payment features as well. Your chatting App doubles up a payments App. Such online journeys are getting converged at multiple levels giving rise to AI-driven insights and use-cases that cut across utilities. Financial Services is one theme that is undergoing such an immersive transition.

Let us validate this thought over four basic themes into which we can club Financial Services:

  1. STORING MONEY: Accounts > Storing your money securely and ensuring easy access is the most basic service. Today, your ride hailing apps or food delivery apps are already providing a wallet where your money is stored. In more sophisticated apps, we see Deposit opening at a Bank happening seamlessly when you agree to open one.
  2. TRANSFERRING MONEY: Payments > This seems obvious and the standard UPI ecosystem is a classic case study. More than 90% of UPI transactions happens over non-Bank Apps. Transferring money is an important problem, but has been solved long back. A recent announcement by Google Maps letting users pay for parking within its app, doesn’t sound that futuristic anymore. In India also, the digital infrastructure to support such use-cases already exists (read as NETC/FastTag) and it will not be long before we see similar adoption here.
  3. BORROWING MONEY: Loans > Getting loans is relatively complex, but even in that case, we see credit getting embedded in the consumption journey at Ecommerce sites or at POS physical stores. The frictionless user journey and near-real-time credit decisioning is attributed to the fact that the customers seldom get a notion of availing a loan. Even use cases such as Gold loans which require physical handling and transit of loans are now initiated in non-Bank Apps and serviced at Customer’s door step, while the Banking part (Gold appraisal, Loan account opening, disbursement etc.) happens invisibly in the background, without extracting customer’s mind share.
  4. GROWING YOUR MONEY: Investments > So your tax filing app also nudges you to open a tax saving deposits or your payment app offers Personal Finance Management tools that helps you manage your savings better with a side variety of savings and investment instruments, again with minimal friction that limits itself to a few clicks or swipes.

As unbundling of products & services evolve across the Financial Services value chain, the range of use cases are far and wide. Come Account Aggregator and maturation of Neobank’s model, the floodgates of innovation would open. This would pave way for some exciting value propositions.

Why is it logical and business-wise to embed financial services in popular Apps?

• It helps improve customer’s engagement and create greater sustainable differentiation

• Financial services gels with lifestyle branding that focus on emotional experience of customers

• Generates new lines of financial value for businesses

• It helps positioning themselves as accessible and symbiotic with consumers’ routines

While digital-first mind-set and customer expectations are anchored on seamless, real-time, Omni-channel, and personalized experiences, creating a wow-factor is not an easy task. Banking, like any other sector is also undergoing a digital churn, and the use-cases and customer experience that it brings out would be an interesting space to watch out for. Staying relevant in customer’s daily life has become a challenge for every player as the sectoral boundaries have started to evaporate.

As embedded finance gets evolved, it is imperative to strengthen the foundations of Governance Controls, Risk Assessment, Data security and Privacy Policies adopted by all players. This would pave way for a sustainable business models and rewarding customer experiences.