Embedded Financial Services: Use Cases to Increase Revenue

Celent recently held its in-person financial services event, Navigating Turbulence, in New York City. We were fortunate to have senior representatives from many leading banking, insurance, risk, capital markets, and wealth management firms. The event was an opportunity to exchange ideas on several topics. In the Banking Track, we covered Monetizing Data, Harnessing Public Cloud, and Embedded Financial Services. Colin Kerr summarizes his session in Navigating Turbulence to Find Value in Data and Craig Focardi in Harnessing Public Cloud for Transformation and Resilience.

I moderated the session, Embedded Financial Services: Use Cases to Increase Revenue. I was pleased to have a distinguished panel of experts:

• Meg Garand, Managing Director, CashPro, Bank of America
• Howard Forman, SVP, Head of Commercial Digital Channels, PNC
• Michael Little, Payments and Transaction Banking Strategy, Global Head of Trends and Advisory, JPMorgan Chase

I opened the session with an introduction to traditional vs. open ecosystem models. The traditional model is a bank-curated experience, with the bank delivering its own products as well as embedded third-party solutions, through its own physical and digital channels.

Banks are also taking advantage of open banking to integrate third party data, and some are extending their tech stacks and offering banking as a platform, maintaining the customer experience.

At the lower right, we see a growing dependence on partnerships to extend distribution channels, embedding banking data and payments into ERP and treasury platforms, or a bank’s financial services solutions into merchant and e-commerce offerings.

Thus, a bank faces a decision – should I embed third-party solutions in our tech stack, expanding and enhancing our value proposition, with the bank remaining the client’s primary destination? Or should we help partners to embed our solutions into their platforms, extending our reach outside the bank’s four walls?

The session’s panelists each take a different approach to embedded financial services:

• A bank embedding third-party fintech solutions into its client-facing portal to expand capabilities
• A bank leveraging a fintech to embed banking services into clients’ ERP and TMS systems
• A bank embedding its payment flows into third-party platforms, bringing merchant services closer to traditional transaction banking

And two of our banks won Celent 2023 Model Bank Awards in March, Bank of America for Digital Innovation, including One Payments API, and PNC for Embedded Banking.

Managing API-Enabled Embedded Finance Products

Each of the panelist’s banks approaches embedded banking and finance as a product, with product owners managing fintech and partner relationships. As this approach is quite different than managing traditional products like checking accounts or ACH payments, what are the best practices for managing API-enabled embedded financial services products? The panelists felt that the primary challenge is helping the bank’s customers to understand the art of the possible, along with the implementation and service experience. Client focus includes an advisory, consultative process focusing on the client’s vision, not leading with tools or technology. Every client is in a different place in the tech “comfort” spectrum, and it is on the bank to determine how to work with each. These are undoubtedly unique skill sets for many product managers.

Working with Fintech Partners

Working with fintechs certainly can increase operational risk. A fintech partner might be acquired or sold by their private equity backers – each partnership bet needs to be carefully made. Sometimes partners just don’t work out. This can cause collateral damage, as it can often be hard to change partners without disrupting the client. Is a provider a vital component of a bank solution? Banks should plan ahead and constantly think about how to unwind a partnership if need be. Third parties can be a hammer, viewing everything as a nail, so managing them requires proper due diligence. Banks need to model both possible usage as well as the service relationship. Existing contracts and due diligence processes might not fit the situation, so managing the compliance process is a crucial product manager role.

Benefitting from Embedded Banking

Every corporate bank has to have API services, or they aren’t competitive. Ease of connectivity, increased transparency, and 24x7 availability is a value add to the client and a differentiator that can grow the client base. Although there may not be a direct monetary benefit, embedded finance is a real differentiator versus traditional batch processing. APIs transform the way our clients can serve their customers; it doesn’t necessarily transform the corporate treasury itself. And banks can meet the timely, urgent needs of their customers, whether it’s paying gig workers throughout the day or distributing emergency funds in a natural disaster. In the end, enabling clients to grow is good for the bank. And a bank can fulfill needs such as external payment flows, an expertise the client may not possess.

Remaining Central to the Client Experience

Banks need to be smart about which services are offered. APIs can be a very “sticky” service and more tightly connects the bank to the client, not removing the bank from the client. This happens best when we start with a solid understanding of the customer’s needs. A bank empowers clients with a better experience and more control over their cash flow. The API channel complements other bank channels and doesn’t necessarily divert clients from the online experience. Ultimately, banks want to add more customers with API-enabled embedded financial services. It’s unreasonable to try to keep your clients in the bank’s proprietary channel with all of the choices they have today.

Keeping the Conversation Going

Celent has published extensively on open banking, embedded banking, and banking-as-a-service. Let us know how we can help you develop your innovation and ecosystem strategy.