It might seem as if Embedded Finance is an existential threat to the incumbent banks. Fragmentation and decentralisation are radically changing the financial services landscape, and the dominance of the legacy institutions has already been fundamentally
Indeed, for many players in the Embedded Finance ecosystem, this is entirely the point: to open up access to what has traditionally been a highly centralised, opaque, and often inaccessible world.
But incumbent banks still have a major role to play in the Embedded Finance future - and, in fact, the changes brought about by Embedded Finance also present a major opportunity for the legacy institutions.
Here are the five things the major banks need to do now in order to survive and thrive in the new digital economy.
Embrace ecosystems thinking
First, the Embedded Finance paradigm requires a major shift in thinking within the incumbents. The days of an adversarial or purely competitive outlook are over, and are being replaced by
an approach defined by ecosystems thinking. In an embedded financial services system the model is not linear but, rather, rhizomatic. Everyone’s position within the system depends on everyone else’s - and, far from stifling competition, this encourages
innovation and growth.
For banking veterans, this change might require a shift in thinking. The future of banking is about creating a tightly integrated network of collaborative players, all striving not only for profit and sustainability, but also for the creation of the best
customer experience possible.
Double down on digital transformation
The incumbents have been historically very slow to adopt and adapt to new digital technologies. Indeed, the extremely slow pace of change within the major banks has been one of the major drivers behind the fragmentation of financial services, with nimble,
tech-first challengers demonstrating to customers that there is a better way for them to do banking, payments, and more.
It is of fundamental importance for the banks that they fully embrace digital transformation, and recognise that the digital genie is not going to go back into its bottle. This is a huge task, involving not only a change in mindset but also, in many cases,
a complete overhaul of the cumbersome legacy systems on which banks have relied for so many decades.
Banks need to invest heavily in the 'platformification' of their services, and in getting up to speed with the API model. Without the digital transformation
piece, incumbents are going to be left behind in the new economy.
Provide the pipes
The legacy institutions need to understand that their role is changing, and their position in the value chain has moved. They are no longer the store-fronts for or sole providers of financial services - in fact, consumers have now learned that they can get
better alternatives elsewhere.
The new space occupied by banks will be as the utility providers of the embedded economy, providing the 'pipes' on which the ecosystem is built.
The institutions also have a key role in the provision of back-office processes such as KYC, AML/PEP, sanction screening, and transaction monitoring. They already have the expertise and regulatory coverage required to build and maintain these crucial functions,
and they now need to make them as automated and as accessible as possible.
Forget customer ownership
As banks begin to understand their new role as utility providers, they also need to abandon a key shibboleth: their ownership of customer relationships. The era in which we 'do' banking or payments solely with High Street institutions is already gone, and
those institutions are no longer the face of financial services. Legacy banks need to understand that customer relationships are not an area in which they are good at generating value. The sooner they realise this, the better the outcome for everyone: it will
unleash a new wave of CX-first challengers, and it will enable the incumbents to refocus their efforts on the things they are actually good at, and will generate revenue: the provision of services and regulatory coverage to other organisations further down
the value chain.
Get buy-in from the top
A culture of entrepreneurship and innovation is crucial for banks' ongoing success. This culture needs to percolate throughout the organisations, and this needs to begin from the top. Leaders in the highest positions at incumbents need to buy into the new
economy, recognising when they have blind spots and surrounding themselves with individuals digital natives.
There are many good examples of this already happening, and they are within businesses that are reaping the rewards of Embedded Finance.
Goldman, for example, has invested heavily in platformification, and is an early leader in the Embedded ecosystem through work including its partnership with Apple. Barclays, meanwhile, has had huge success not only as an 'enabler' of Embedded Finance but
also as an important player in its startup scene. Its
Rise Accelerator Programme has supported dozens of exciting new startups using cutting-edge practices to solve real consumer problems - precisely the promise of the Embedded Finance ecosystem.