The impact of the challenger banks on the financial services landscape has been widespread and deep. The dominance of the legacy banks has been challenged, and consumers have been shown that they no longer have to put up with poorly designed services and old-fashioned support.

But the challengers are far from the final act in the ongoing fintech revolution - and Embedded Finance is the next step.

What is Embedded Finance?

Embedded Finance is a new model for fintech. It allows non-financial brands to integrate banking and payments services into their apps and ecosystems through the use of APIs.

The use of APIs (pieces of code that enable different systems to converse in a simple and machine-readable manner) in finance began more than a decade ago, and it is now becoming the de facto and most important method by which financial services are delivered. The developer-first approach of API-based systems has allowed a new fintech generation to flourish. The first wave of this new generation was focused on unbundling the consumer banking offerings, providing tech to financial institutions, and allowing the neobanks to compete against the slow-moving incumbents.

Over the last 18 months we’ve seen the emergence of the next wave in the fintech revolution: Embedded Finance. In Embedded Finance, brands can offer financial services as a part of their existing products, or they can build entirely new ones, quickly and easily using developer-friendly integrations. Service providers lease access to individual parts of the banking and payments 'stack' - including licences. Brands pay to access the specific services that they require, removing major costs associated with compliance and development.

What are brands building with Embedded Finance?

There are many exciting experiments already being conducted along Embedded Finance principles. Some of these are high-profile. For example, Uber is in the process of launching a banking product aimed specifically at its drivers, in a move that is being closely watched both by Embedded Finance practitioners and observers of the gig economy. Meanwhile Ant Financial, the largest fintech company in the world, is making a play for dominance in the platform banking space in China. It has launched a core banking product, and is hoping to become the payments provider of choice for global Embedded Finance applications.

Embedded Finance supports the growth of a whole landscape of new players targeting specific segments, through the provision of tech, licences, and operational activities. This specialisation will be one of the defining trends of the coming years, with a keener focus across the industry on comparatively niche target verticals.

Already, the possibilities presented by Embedded Finance are persuading existing tech players that they should be offering banking and payments services to their customers (or their customers’ customers) as it allows them to provide a better, more immersive experience, driving stronger loyalty, increased customer lifetime value, and creating new revenue streams. The addition of Open Banking to the mix provides a valuable extra layer of support for these immersive experiences, particularly in areas such as account aggregation and payment initiation.

An embedded future

Embedded Finance will also come to define the next stage in the fintech revolution. Over the coming years, I think we are going to see a further fragmentation in finance. Consumers will no longer just bank with banks - they'll bank with the fintech startup of their choice, and they'll conduct specific banking and payments tasks through white labeled systems integrated into their favourite existing apps.

At first glance, it might appear that the legacy institutions, and particularly the banks, are going to suffer from this. But in fact, Embedded Finance presents a huge opportunity for the incumbents. They will step back from their public-facing role, and will instead become the 'pipes' on which financial services run. They will lease technology and licences to a vast new ecosystem of fintech players - in fact, we'll come to think of banks as the 'utility companies' of finance.

The Embedded Finance ecosystem removes many of the most significant challenges and costs associated with building a financial product at any scale. With access to the 'pipes' of finance more open than ever, I am confident that a new generation of startups will be able to achieve stability and growth in much shorter order, and with a much lower failure rate, than the generation we've just seen.

What do banks need to do?

The groundwork is well and truly laid for Embedded Finance. But there are several things that need to happen in order for this new field to gain real traction and fulfil its promise. Amongst these, the most important is a shift in perceptions and behaviours within legacy banks.

It is vital that banks embrace Embedded Finance, and this must happen at the highest level. Embedded Finance needs to be deeply integrated into every layer of bank organisations, and this needs to start from the top.

The message that must be communicated is that banks are changing their thinking, and understand their role as moving away from that of a gatekeeper and towards that of a facilitator. Banks no longer have the monopoly on such a wide range of financial products and tools, and they must recognise that their new value proposition is as the utility layer in a more distributed banking stack.

Embedded Finance is the future of fintech, and the future of financial services. The fintech revolution is now truly upon us.