Will Embedded Finance Become the “Default” for Consumers?

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Sean O'Connor

Jun 29, 2022 • 7 min read
Will Embedded Finance Become the “Default” for Consumers?

Embedded finance, an evolution from open banking, has been on the rise for a number of years. It’s a system widely used for payments with companies such as Lyft and Uber, but this is a growing market. Embedded finance is not just about payment processing functions, it has expanded in lending, insurance, and beyond.

While the EU’s PSD2 regulations were first introduced in 2013, similar legislation was written into law in July 2021 by US President Biden.

President Biden signed an executive order directing the Consumer Financial Protection Bureau (CFPB) to define the rules for an open and secure consumer data exchange between banks and other financial institutions. The aim of this is to foster more competitive and innovative financial services while also ensuring strong data security.

The Disruption Forum Fintech panel

To discuss the changes and the rise of embedded finance and open banking, Netguru hosted a panel of experts at the Disruption Forum Fintech. Jesse Owens II, VP of Product at Wells Fargo, Richard Scioli, Head of Growth at Alloy, and Skyler Nesheim, SVP of Technology at Dwolla, joined to share their thoughts.

As part of his role, Jesse is delivering on the connectivity of banking products and solutions across the fintech ecosystem through secure, scalable, reliable, and modular developer tools. Richard is running all kinds of new market and new product initiatives. He joined Alloy as the first member of the Business Development team, helping the company to go upmarket and matching Alloy’s go-to-market strategy with its product strategy.

Skyler is responsible for Dwolla’s systems, performance, and day-to-day operations, as well as strategic leadership and team building.

While it may take time for US open banking regulations to take full effect, the panel discussed where the US financial industry is on this journey and the practical aspects of banking APIs that need to be taken into account. They also share their thoughts on the risks and opportunities of open banking and embedded finance from the perspective of banks, developers, third-party service providers, and end-users.

Lessons from EU regulations

Despite the implementation of PSD2 regulations in EU countries, there has been some debate on how successful this really was. Common complaints include the quality of services, response times, and a lack of standards.

What can we learn from this?

Jesse breaks it down by looking at the impacts on consumers, aggregators, and banks. On the consumer side, the regulations provide consumers with more autonomy to choose the products they want while ensuring they’re fit for purpose.

On the aggregator’s side, they are essentially responding to the optionality and consumer demand for innovative and personalized products.

It’s all about building consumer-led experiences.

For the banks, we’ve seen that they are responding to the choices and demands of the consumer. Banks are working with the aggregators to ensure that needs are met regarding documentation and performance.

In Jesse’s view, it’s the bank’s responsibility to build robust services that its partners and stakeholders can work with while also ensuring that the data that the customer has consented to share can help to build a better product for them.

The three pillars of open banking

Skyler explains that the three pillars of open banking, represented by the panel, are:

  • The financial institutions and the banks themselves (Wells Fargo)
  • The aggregators and data providers (Alloy)
  • The payment service providers (Dwolla)

These three entities form together to make an open banking ecosystem that must work together effectively for the benefit of the end-user.

The role of the regulators

Where do the regulators fit into that picture? While one complaint about open banking is a lack of standards, regulators must work hard to ensure the whole ecosystem is working safely.

What does that mean for innovation? There’s a common concern that regulation dampens innovation because it creates restrictions.

However, Jesse has another take on it.

From a regulator’s perspective, for open banking to be successful, different perspectives need to be brought in to help design frameworks and standards.

The fact that open banking touches many different entities in the ecosystem isn’t necessarily a bad thing. Each pillar of open banking can all work together to build frameworks and provisions that are comprehensive, flexible, but implementable for all parties. Regulators belong in those talks as well.

The developer journey of embedded finance products

Skyler challenges a commonly held belief by developers and companies – that most people understand the user experience. The reality is that we’ve all used an app that’s meant to be tailor-made for us, only to find it doesn’t work right.

Skyler believes that’s because we don’t think about the user experience holistically enough.

In the world of embedded finance, banks and other financial institutions need to now work with third-party providers and their developers, which expands the types of customers financial institutions need to keep satisfied.

On the side of the developers, it can be difficult to understand what the developer needs are. They are trying to solve a problem for the company and produce a product that meets that need, but they also need to decide if it’s a good fit for their company overall. It’s a balancing act for developers.

On the next layer down in the developer journey, developers must test the products. They need to think about how difficult it is to use, the tools they might need, SDKs, developer documentation, workbooks, clear APIs, and so on.

Even once everything has gone live, the developer journey isn’t over because there will be problems to fix and challenges for customers.

The solution? Skyler believes to build a solid developer experience, you need to hire amazing engineers, give them tough problems, and challenge them to automate them.

Embedded finance defined

Embedded finance can be defined in slightly different ways, but Richard has a simple definition. It’s when a non-financial company starts offering financial services or products.

For example, when you buy a Peloton, there’s a lending element behind it. Other examples include Lyft and Uber, which seamlessly integrated a ride-sharing service with a payment platform.

It’s not about building a financial product but rather thinking about the simplest way to integrate financial products into the app or website.

In Richard’s eyes, the term embedded finance will become the default, and we’ll stop using the term because it will be just the way things are. His prediction is that lending and insurance will become the next big things for embedded finance, and this trend will only continue as end-users come to expect it.

Are the banks losing their hold on the financial services industry?

With banks in some ways losing control of financial products, they must become more intentional about how to build great customer experiences. Jesse believes that banks will have to work harder to provide fintechs and aggregators with the tools to build solutions fit for their consumers.

Rather than being the traditional consumer-facing product, banks will start to shift into the background as the underlying infrastructure behind financial services.

Overall, a bank’s aim is to provide good customer and end-user experiences, and Jesse argues that this is the way forward for them in the future.

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Sean O'Connor

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