An expert perspective on current challenges and opportunities for banks.
Embedded banking is a key topic for banks seeking to meet customer demand for convenience and stay relevant in the face of new challengers.
To share leading insights on the value of embedded banking for consumers and banks, and on the value of collaborating with FinTechs to develop embedded banking solutions, we sat down with Match-Maker Rudolf Falat.
How has the banking sector been changing in recent years? What changes do banks need to adapt to?
We should not forget the financial crisis of 2008. To sum up, excessive risk-taking and government bailouts led to increased regulatory scrutiny in many areas. Let’s maybe simplify it and zoom in on the increased equity that the banks have to hold now vs. before the financial crisis and tightening the leverage exposures. Coupled with a low-interest environment – which is generally not great for the banks’ profitability – banks’ ROE hasn’t been particularly impressive ever since.
How have they reacted? In the US, there has been significant consolidation which eased the necessary restructuring. In Europe, where cross-border mergers were not possible, banks have been restructuring on their own, often adding to a substantial technological debt that they already had more than ten years ago.
At the same time, out of distrust of traditional banks and often their product rather than customer focus, emerged FinTechs. This change coincided with the rise of Big Tech,and the resulting ubiquitous access to the internet in the developed world has spoiled the consumer, who now expects ease of use like they have on Netflix or major social media platforms.
What does it mean for banks? Banks need to put the customer first again like they did when they first started. Further, they should learn to be agile, either on their own or through cooperation with FinTechs. Partnerships with FinTechs can be a cost-effective way to adopt some of FinTech’s innovation into incumbents’ franchises and benefit the massive consumer base incumbents still have.
What makes embedded banking overall a compelling proposition for customers? For banks?
Customers these days demand a seamless shopping experience, for example. That’s why while we will need banking services, we won’t necessarily want to go to a bank or “do banking.” Financial services need to be embedded into customer activities (or journeys) to remove friction and provide solutions where customers already are.
Embedded financial services are also sticky as they resolve many pain points of the customers right away. Again, by focusing on solving customer problems first, creating value for them, banks will remain relevant and capture some of that value for themselves too.
What value do you see in earned wage access solutions?
Let’s perhaps explain it first – most employees in Europe are used to being paid monthly, though, in the US, it is common to be paid weekly or bi-weekly. Earned wages access means you can get paid as you earn and spend the income you have earned instantly. In a way, it’s a competing financial product to consumer loans, bridging the cash flow needs of an employee. Why should you wait until you get paid to buy something?
Current payroll systems were created a long time ago, and they are the function of outdated technology. Earned wage solutions leverage the technology we have available today and remove unnecessary friction.
It gives employees more flexibility in their lives – purchase what they need when they want. Why should they finance their employers who have generally better access to the working capital, right? On the other hand, it raises the bar for managing their finances responsibly – don’t overspend!
How can banks respond to the emergence of fintechs in the embedded banking space? How can banks reclaim their share of this market?
If the banks take too long to get new features or products to the market, they should consider partnering with FinTechs. This has been the key trend emerging from the banks vs. FinTechs debate of the past few years.
It requires a streamlined onboarding process and focused cooperation, of course. Otherwise, the whole purpose of combining the distribution power of an incumbent and the innovative approaches of FinTechs falls flat. The market moves very fast in this space. Hence, banks need to quickly assess their capabilities and decide whether it’s worth developing embedded banking features on their own or accelerating bringing them to the market together with FinTechs.
There is no doubt in my mind that banks need to respond to the growing demand in this space – otherwise, they will be left behind in no time, and it will be tough to reclaim their market share.
Rudolf (Rudi) is a Digital Transformation, Innovation and Start-Up enthusiast, start-up mentor, adviser, business angel, executive education coach, founder and host of the Voice of FinTech podcast.
He is also a senior Corporate Finance and Strategy professional with a strong international profile and extensive experience in Financial Services. Rudolf has led strategic M&A transactions for Credit Suisse and Deutsche Bank in the Financial Services sector worldwide for more than ten years and worked in HSBC’s Consumer and Leisure Investment Banking after INSEAD MBA.
Before MBA, Rudolf worked in various roles in leading FMCG company in the US, Austria and Switzerland.
To learn more about embedded banking, check out our portfolio scaleup PayKey. For details on previous successful collaborations involving MMV portfolio scaleups, check out our success stories here.