Contributors: Scott Huie, Advisory Managing Director, KPMG in the US and Craig Thomason, Contributing Executive, KPMG in the US

Embedded finance is spawning new opportunities for traditional banks and non-financial services organizations alike. As digital technologies advance to meet increasingly sophisticated customer expectations, embedded finance makes banking capabilities from payments to offers for credit available through more access points. Retailers, platforms and B2B Corporates can embed financial services in a much wider range of consumer and commercial settings.

Think of this as the digitalization of established models.  Just as finance has long been available during the physical sales experience of buying a car, services such as buy now, pay later are now on offer at the eCommerce point of sale.

Upgrading the core

Crucially, however, embedded finance – like so many other digital banking innovations – relies ultimately on contemporary core banking technologies. It provides yet another reason for banks to reach their tipping point: the moment when they decide it is no longer possible to rely on legacy systems, and that now is the moment to pivot to a new core banking platform. This is how banks aim to meet the increased demand for new and unique digital experiences to retain and attract customers.

Multiple use cases now demand such change: new core technology will sustain innovation such as predictive balance recognition, delayed payments authorization, contextual behavior modeling used to deliver compelling point of sale offers and real time banking services that are either event driven or predictive in their nature. And there are also other drivers for a shift to cloud-native, consumption-based platforms:

  • to leverage the elasticity of the cloud to allow banks to meet demand, test new value propositions, and to iterate faster with reduced upfront capital investment;
  • to drive faster speed to market for products and partners by leveraging an API-first core;
  • to enable better and faster access to data for insights on customers and other analytics
  • to improve transaction processing speeds that are required for modern digital commerce use cases in e-commerce, platforms and account to account services.

These market dynamics and realities gave rise to Finxact, an alliance partner for KPMG in the US, which saw an opportunity to re-shape the future of the core banking technology stack. It designed a modern platform built on a microservices-based architecture, real-time, event driven and cloud-native solution – Finxact Core as a Service. The Finxact team spent five years re-imagining and delivering a new and innovative platform designed from the ground up without burdens from legacy banking. Finxact is now proven in the U.S. market with more than 30 banks and fintechs having adopted the Finxact platform.

Built leveraging decades of knowledge in this technology area, the Finxact solution is an approach by a non-traditional FinTech. Rather than focusing on more front-end digital user models, it chose to target the banking core with the aim of enabling the open accessibility, flexibility, scalability and speed required for banks to help meet evolving customer expectations.

“Finxact is uniquely positioned to lead on the evolving needs of the market, everything from helping banks launch new innovative products to powering embedded banking to decentralized finance and other Fintech and BaaS offerings” says David Ortiz, Head of Partnerships and Business Development at Finxact.

Building on stronger foundations

Banks that invest in this way can discover advances in embedded finance, now set to grow and evolve due to rapidly changing customer needs and expectations. We expect additional enhancements that allow banking to be vertically embedded into experiences and processes, many of which are hard to predict. They will likely include ‘mash up’ experiences of banking within non-banking experiences – models to be built upon and improved.

For those with a strong core, the future of innovation and customer benefit is wide-open for embedded finance.

Nevertheless, companies investing in embedded finance services should manage risks carefully. To meet customer needs and demands with the right solutions, they must address key questions:

  • What do customers want and need? It remains as important as ever to “create a customer” through your product or services. How do you identify new innovations that customers need but do not know they want yet? This goes beyond just asking customers via surveys.
  • What does the current economic environment allow and/or need? This is a particularly relevant question now as spending trends are changing; this could create opportunities for legacy providers, or for newer companies to step up in the wake of these changing economic patterns.
  • Is there a long-term path to profit? Profitability matters. Identification of the right segment, solution, entry point and plan for growth is a critical strategic step.
  • What regulatory and compliance requirements need to be met? Are there new regulations around the corner? Compliance with regulations and requirements for customer protection and maintaining safety and soundness is paramount. It will be important to monitor future regulatory trends and build in flexibility to meet them.
  • Are there new technology capabilities that could render investment obsolete? A thorough analysis of the market is critical to understanding and selecting the best technology strategy.

Served by a dynamic ecosystem

The digital marketplace is fueled by core economic principles of supply and demand and this applies to embedded finance.

Demand is driven by better and seamless experiences by customers who have amazing technologies at their fingertips and want – and expect – more of the same. Typically this is the “customers customer” of a legacy financial services organization.

Supply is driven by modern technology capabilities and skills to deliver on this demand; this means both technology and human capital skills are critical to meeting customer expectations.

The supply side ecosystem includes Fintechs, other third-party services companies (including KPMG), non-financial companies such as retailers, and traditional banks. And more and more banks are investing in new customer-centric technology enablement and talent, whether directly or partnering with third-party providers to help accelerate embedded banking.

Customers can benefit from having more options open to them in a straightforward and secure experience. Banks can benefit from additional sources of income and by staying in front of customer expectations through extension of banking services into non-banking distribution channels. Fintechs can benefit from delivering their services directly and/or with banks and non-banking clients to generate fee-based income and foster trust with their customers. And non-financial organizations such as retailers can benefit from increased sales, lower acquisition costs and improved customer loyalty through new digital access points.

Safety, soundness and customer expectations

Not long ago, shadow banking was on the rise with new money lenders and fast-finance players emerging to offer finance at often exorbitant rates. One positive aspect of embedded finance, enabled by a renewed core, is that it brings more finance, credit, and payments services back into the regulated banking space. That aligns customer behaviors and experiences to established safety and soundness practices. Banks must meet high standards, with multiple agencies holding them accountable for regulation and compliance; this oversight can help ensure consumer trust in embedded finance capabilities.

Well-managed and carefully scoped embedded finance propositions can enhance customer experience, drive innovation, and provide value in a safe and sound manner. Those are big wins for the customers, businesses, and corporate clients using them.

For this reason, we believe embedded finance will continue to grow and that it can be a positive force for the industry as a whole - and, most importantly, for the customers that use it.

Download Pulse of Fintech H1’22

Global fintech investments in H1 2022 recorded $107.8B with 2,980 deals

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  • Global and regional analysis with key investment data and insights
  • Interview with bolttech and spotlight article on embedded finance
  • Fintech segment insights for a deeper dive into payments, insurtech, regtech, wealthtech, cybersecurity, blockchain and cryptocurrency

To learn more about the analysis and topics raised in this edition, or to discuss your organization's unique fintech agenda and roadmap, please contact your local KPMG advisors or the contributors in this publication.

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