The standalone products that once provided direct-to-consumer offerings through independent companies or partnerships with larger financial institutions are expected to be replaced by tied-in embedded finance products.
This is the key insight provided by the sequel to Rize Money‘s original industry insight whitepaper. Rize is a fintech infrastructure platform that provides fintechs and non-financial companies with single-API tools to build, launch and scale new financial products and services.
Its second whitepaper outlines how the industry has developed from banking as a service (BaaS) 1.0 to where it is today; including predictions for the future of fintech 3.0.
The data points to the rise of tied-in embedded finance products being delivered directly to the consumer, and although ‘as-a-service’ is far from redundant, the fintech-as-a-service age of fintech 3.0 will pioneer reliability, regulation, increased ability to scale and embedded compliance protocols; all to the benefit of the ambitious businesses they serve.
“The rise of embedded finance has allowed fintech to evolve exponentially in the past few years,” comments Justin Howell, the company’s CEO and founder. “It’s an exciting time to be a fintech, but an even more exciting time to be a customer as brands are able to offer personalised financial solutions, integrated directly into apps that are used every day.”
Synthetic core vs. on-core
One of the key propositions of the white paper is the functionality of synthetic cores versus regulated, on-core custodial accounts when embedding financial services.
On-core accounts mean that the business takes the existing infrastructure of the bank it has partnered with, to allow its consumers to open accounts and use the tools within its partner bank’s core.
On-core accounts must abide by a specific set of rules regarding the types of transactions they can perform, with the process relying on a shift in the underlying infrastructure.
Although on-core banking incurs less paperwork and obligations to maintain, the model remains limited to how businesses would be able to customise the tools they would be embedding from the bank.
On-core isn’t for everyone, but for white-labelled non-fintechs looking to incorporate peripheral financial services within their own products, it would provide a solution.
The whitepaper puts forward the synthetic core model as superior. Synthetic cores, including the model offered by the company, are capable of overcoming the limitations of on-core models.
Synthetic models allow fintech companies and their users to move money across account types while staying fully compliant and without needing to make changes to the underlying infrastructure.
The whitepaper identifies the inherent differentiation between account-driven and objective-driven accounts, including the company’s own ‘Rize synthetic account‘, building on the flexibility and adaptability of the potential use cases for synthetic core models:
- Challenger banks can automatically move money from every one of a customer’s paycheck into savings and/or investments based on a time horizon set for each goal. Customers can outline future financial goals they would like to make tangible and create appropriate asset allocations for each goal.
- For consumer lending, the synthetic model automatically pulls the right amount out of each paycheck when each monthly payment is due, while also enabling customers to earn yield on idle cash in the ecosystem, offsetting their effective interest rate.
- When it comes to subscription and bill pay, companies could deploy a fully-packaged, fully-compliant bill pay product without in-depth banking relationships or KYC flows.
- Customers could link deposit accounts to an existing crypto solution, allowing them to liquidate and spend crypto-assets quickly and securely.
While fintech 3.0 is set to open up the door to many new product use cases and financial solutions, identity, risk, security and other problems still remain a top priority. The synthetic core enables user freedoms and product capabilities while remaining secure for end-users.
The result is a financial tool that adapts to the needs of the customer while breaking the boundaries of banking, brokerage and other financial silos.