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Modularbank: Is Embedded Finance a Threat or an Opportunity for Challenger Banks?

With embedded finance making banking and financial activities seamless for the end-user, it’s also providing competition to banks. As embedded finance continues to take hold, what does this mean for challenger banks?

Someone who has thoughts on this is Rivo Uibo Co-founder and Chief Business Officer at Modularbank, an API first cloud-based banking platform for different retail, business and corporate banking use cases. Here he shares his view on embedded finance, and what it means for challenger banks. 

Rivo Uibo, Co-founder and Chief Business Officer, Modularbank

When challenger banks started to emerge on the banking scene around a decade ago, they were welcomed by end-users as positive new alternatives to the ‘old fashioned’ and inflexible incumbents at that time, offering cheaper, simpler and more innovative banking services.

From day one they have tailored their offerings to specific target markets and achieved traction in terms of customer numbers. However, their impressive growth has come at the cost of revenues; most are still yet to turn a profit and many find themselves in an uncertain economic position.

Today, the advent of embedded finance, where companies outside of the traditional realm of banking integrate financial products and services as part of their offerings, is set to make banking even more seamless and easy for the end-user. But it is also testing the current monopoly of banks and threatening to break down the customer relationships that challenger banks have worked hard to build and had planned to leverage in order to bring in revenues. So what is the appeal of embedded finance and what will it mean for challenger banks?

The lure of embedded banking

Businesses across all sectors face fierce competition and tight margins and are looking for new ways of attracting and retaining customers. By embedding financial services to their core product offerings, non-financial businesses are able to offer more appealing, more convenient and more tailored services to their customers. It also opens up opportunities for up-selling and cross-selling and potentially unleashing completely new revenue streams.

There are endless possibilities for non-financial companies to embed financial services, so the scale of opportunity is vast. Estate agents, travel agents, construction firms, retailers and utility providers are just some examples of non-financial companies which can benefit from integrating financial services, such as flexible payment options or credit facilities, directly into their customer offerings.

Embedded finance offers a win-win situation and what is more, the technology needed to offer financial services no longer involves huge, upfront investment or long timescales. Thanks to open APIs and cloud-based capabilities as a service, businesses can easily connect with technology providers to seamlessly integrate the right plug and play modules into their own infrastructure, to quickly roll out the specific services that fit with their customers’ needs and aspirations.

A threat or opportunity for challenger banks?

Considering the ease of implementation for non-traditional players, and benefits for customers in ‘banking’ directly with retailers and service providers, embedded finance could be seen as a veritable cause for concern for challenger banks. They have all come to market through pursuing a ‘scale first’ strategy, building up customer volumes and engaging customers with ‘freemium’ services and high-interest savings with the aim of ramping up revenues further down the line. But if embedded finance removes banks as the primary interface in customer transactions, and challenger banks struggle to compete with more experienced incumbents, where will this leave them?

Having been operational for up to a decade, challenger banks are already under pressure to bring in profits and some have already had to close; after only being operational for six months and with 11,000 customers, RBS took the decision in May last year to wind down Bo, its digital banking brand to focus its attention on other, more lucrative areas.

Indeed in the UK, the first challenger bank to break even was only announced four months ago. Starling bank posted revenues in November 2020 of £9million and profits of £800,000. Unlike other challengers on the market, however, it acknowledged from the start that it couldn’t rely on account or transaction fees to make a profit; instead, it focused on adapting its portfolio to quickly roll out the products its customers most needed. During the pandemic, while incumbents were closing credit lines, Starling Bank pursued SME customers, and thanks to its digital platform was able to quickly offer them new lending products. Starling also took the strategic decision to offer its Banking as a service capabilities to other companies wishing to offer financial services, thereby creating an additional revenue stream, with minimal costs involved in setting up.

So, does embedded finance put a further obstacle in the path of challenger banks as they seek to drive up revenues?

The answer is no. On the contrary, embedded finance actually presents an opportunity for them – but only if they are willing to capitalise on it. In order to roll out banking services at the point of purchase, third parties, such as online marketplaces etc., need banking infrastructure partners. Challenger banks have the technology, the access to capital, the knowledge and expertise to enable this and to play a key role within the embedded ecosystem. They can tap into new customer bases and service millions of transactions all while reducing the cost of customer acquisition and retaining their retail infrastructure.

Through their reliance on core banking technology, challenger banks are agile and able to quickly respond to customer needs with innovative value propositions. Embedded finance is essentially a response to customer demand for a more seamless way of banking. For open-minded challenger banks, willing to adapt their business model to the evolving needs of the industry, there is no reason why they cannot continue – and moreover improve – their provision of the best financial products to fit their customers’ needs and thereby play an intrinsic part in the banking industry of the future.


  • Polly is a journalist, content creator and general opinion holder from North Wales. She has written for a number of publications, usually hovering around the topics of fintech, tech, lifestyle and body positivity.

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