The Future of Banking and Embedded Finance

The ever-changing evolution of technology has reached the far corners of almost all facets of our lives – including how we bank. The connotation with the word “bank” used to be of brick-and-mortar buildings; with staffs and ATM’s ready to assist you with your financial needs. With time comes change: the word “bank” today may elicit a very different image in one’s mind – rather mobile and digital banking.

The number of traditional banks has been on the decline ever since digital banking has been introduced to the game. It has been proven that an increasing number of customers prefer mobile banking over traditional banking. Some benefits of digital banking include an increase in money saved, conveniency for customers, as well as a decrease in human labour. 

The reduction of traditional banks has also been accelerated by COVID-19. Now more than ever, it is favourable to minimise physical contact with others as much as possible; leading to the inevitable growth of mobile banking.McKinsey: “Physical distancing has necessitated a sharp change in branch usage. In March 2020, 25 percent of branches globally were closed, and 15 percent remained shuttered by May”

courtesy of smartasset

With traditional banks keeping up with the times: the chances of coming across a bank that does not offer some sort of app or website where a customer can make transactions, investments, and more services from the comfort of their home is increasingly shrinking.One concept that has been born and benefits greatly from this financial turmoil are Neobanks; banks that operate completely online without any physical branches.

Neobanks have amassed a large number of users worldwide. Some prime examples of successful neobanks would be Monzo, Toss, N26, Revolut, and Karat in the US. Not only have these neobanks accumulated large user bases, they also continuously pivot to new business segments. N26 – a Berlin based neobank with users in over 22 countries, has recently announced plans to partner with local insurance providers. Users may be able to directly manage and buy their insurance through N26, this will drastically increase user stickiness and switching costs. Another less known but just as innovative neobank would be Toss – based out of South Korea. Toss reached unicorn status a few years ago and has recently become profitable in 2020. They have achieved profitability through constantly adding new features as well as products to their services. As of now, they have combined over 40 different features such as seamless peer-to-peer transfers, online payments, credit management, embedded insurance, and with plans to launch a brokerage service in 2021. 

Another trend that has been strongly fueled by the rise of neobanks is the switch of non-financial apps towards payments and financial products – WeChat can thereby be seen as one of the first movers. Starting out as a simple chat servicer, WeChat quickly realised the potential they could unlock by providing embedded financial services. As the company progressed, it launched an incredible amount of features around financial services that has increased user stickiness to an extent users now use the platform for everything – such as managing assets, facilitating peer-to-peer payments, as well as online and proximity payments. The list of services are endless as WeChat’s success story gets written in stone. 

Did other companies gain inspiration from WeChat? Of course they did! Extraordinary use cases emerged especially in Asia where mobile payments and digital banking adoption is high. Kakao is one of these companies – similar to WeChat, it started out in South Korea as a chat service before pivoting to peer-to-peer payments, taxi booking services, a rewards platform, and eventually even acquiring a banking license. The user base of Kakao? A sheer half of the Korean population! Several other Korean firms followed chase of this business model – such examples are Coupang; the largest e-commerce platform, and Naver; the largest search engine. All these companies expanded to financial services with extraordinary success. 

Other prime examples of successful embedded finance endeavours Include Grab; a ride-hailing company that pivoted into payments, deliveries, and more. Gojek is a similar Indonesian multi-serviced app platform which offers various services such as ride-hailing, internet shopping, food delivery, and more. 

The creation of individually-owned financial services are obviously all the rage these days as fintech continuously expands. Even if companies did not start off with financial services embedded into the user journey, there are always opportunities to move towards expanding their presence into this digitally-run industry in order to keep up with modern-day demands and compete in market relevancy. With these examples in mind, it is evident that heightening the seamless integration between payment processes and purchasing processes of e-commerce and digital products is increasingly important – benefitting the companies and customer satisfaction alike.

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