EY estimates that the market size of global embedded finance will grow from $264billion in 2021 to $606billion as early as 2025. With the space set to dramatically disrupt the financial sector worldwide, The Fintech Times seeks to understand how.
As with most things financial, the rise of embedded finance hasn’t been identical across all regions of the world. In order to understand why, The Fintech Times got expert opinions on the greatest cultural and technical barriers that embedded finance has to overcome.
The regulatory “speed bump”
Jonathan Vaux, head of propositions and partnerships at issuer processor Thredd, explains the increasing number of challenges when ensuring regulatory compliance.
“In their early days, many fintechs prided themselves on adopting a ‘move fast and break things’ culture. This enabled them to bring new products to the market in time frames that would have been inconceivable for more traditional players. In their drive to achieve early customer adoption, they focused on enhancing the customer and end-user experience.
“However, as some of these services have become increasingly successful and visible, the need for greater attention to factors such as compliance and regulatory requirements has, to put it lightly, created a significant speed bump for many players. On the other hand, legacy players such as banks have often struggled with customer experience but put significant effort and resources into compliance and risk management.
“As the market has matured, we are now witnessing more efforts to find areas of cooperation and collaboration between banks and digital partners. For this to succeed, significant differences in business processes and organisational cultures will need to be resolved. For example, legacy players have deliberately designed their technology to be ‘walled gardens’ to minimise risk. The need to open up these walls to both distribute and consume APIs to enable embedded finance, for example, is no straightforward task.
“Both sides will need to adapt and evolve their business processes and behaviours to enable embedded finance to achieve its full potential.”
“Generational challenges for the adoption of embedded finance”
John Kim is the chief product officer at FINSYNC, a fintech platform including a payments and partner network for the benefit of US-based businesses. Kim outlines the wide range of barriers facing embedded finance:
“One of the barriers to embedded finance includes adoption and acceptance by traditional banks and service providers. The digital transformation needed for institutionalising embedded finance can be a significant undertaking, especially for cultures with long-standing and established processes, products and services.
“In addition, as part of adopting embedded finance, financial institutions will need to adopt more advanced technologies. To quantify the value versus cost, effort and risk, and then clearly articulate it as part of the organisation’s strategy can be difficult. This will hinder organisational buy-in. Concerns for security and risk management can also be a technical challenge.
“For services like lending, deposits or other traditional financial services, non-financial platforms may look to partner with banks. Traditional banks may be hesitant to partner with these platforms due to pricing competition on traditional products and services. FIs will have the heavy burden of supporting infrastructure, regulatory compliance, risk management, and other activities. Given that, banks may look toward their own delivery of embedded finance but will continue to face the challenges of culture and technology.
“On the consumer side, there are generational challenges for the adoption of embedded finance. Older generations are less likely to adopt embedded finance services. Consumers in general are reluctant to move away from traditional FIs when it comes to more standard financial products – perception of trust or lack thereof comes into play. On the other hand, there are opportunities to service the underbanked or unserved markets.”
“Audiences in different markets have different preferences”
Simas Simanauskas, chief business officer at all-in-one financial platform ConnectPay, discussed the challenges faced by the embedded finance space:
“Although embedded finance is on the rise, there are still multiple challenges it has to tackle. Firstly, IBAN discrimination and fragmented local payment rails, as we still have some instances where local legacy banks are reluctant to send funds to IBANs from specific countries. This overlaps with the cultural challenges as well; despite the EU’s passporting system and the free flow of capital and goods, bank accounts still remain very local, meaning people are used to local IBANs with local prefixes.
“IBAN discrimination is not the case of specific or conscious targeting, but rather that banking rails — especially instant payments – remain predominantly local. This means that clients sending funds within the country are able to take advantage of instant payments. However, clients send funds to other member states via standard SEPA transfer, which is subject to clearing times.
“In addition, many providers still offer renting of a license where all compliance and monitoring functions have to be outsourced. This means clients are forced to be looking for 3rd party solutions to do KYC and monitoring. This is highly worrisome, as businesses that seek to offer embedded finance on their platforms are forced to venture into a highly regulated area that requires a very particular set of skills and procedures just to launch operations.
“Audiences in different markets have different preferences. This inevitably slows down the adoption rate of new financial solutions and contributes to cultural barriers embedded finance still has to overcome.”
“Utilising open communication”
Gautam Bakshi is the CEO and head of product at 15Rock, an innovative climate risk management and decarbonisation solutions provider. Bakshi concludes with his take on both cultural and technical barriers for embedded finance:
“Cultural barriers include resistance from traditional financial institutions when adopting disruptive technologies. Utilising open communication and successful examples, like 15Rock, can demonstrate the potential benefits of embedded finance.
“The technical barriers lie in the handling of diverse data sets and connecting them to existing systems. Innovative approaches like big data and cloud-based pipelines are essential to process large data volumes daily, ensuring seamless integration.”