How Banks Should Take Advantage of the Embedded Funding Opportunity

It may seem that integrated finance is an existential threat to incumbent banks. Fragmentation and decentralization are radically changing the landscape of financial services, and the dominance of legacy institutions has already been fundamentally undermined.

Indeed, for many players in the Embedded Finance ecosystem, this is the whole point: opening up access to a world that has traditionally been highly centralized, opaque and often inaccessible.

But incumbent banks still have a major role to play in the future of embedded finance – and, in fact, the changes brought about by embedded finance present a major opportunity for legacy institutions as well.

Here are five things big banks need to do now to survive and thrive in the new digital economy.

Embrace ecosystem thinking

First, the embedded finance paradigm requires a major shift in the way incumbents think. The days of an adversarial or purely competitive vision are over and are being replaced by an approach defined by ecosystem thinking. In an integrated financial services system, the model is not linear but rather rhizomatic. Everyone’s position in the system depends on that of others and, far from stifling competition, this encourages innovation and growth.

For banking veterans, this shift might require a shift in mindset. The future of banking is about creating a tightly integrated network of collaborative players, all striving not just for profit and sustainability, but also for creating the best possible customer experience.

Double the digital transformation

Incumbents have historically been very slow to adopt and adapt to new digital technologies. Indeed, the extremely slow pace of change within big banks has been a key driver of financial services fragmentation, with nimble, technology-driven challengers demonstrating to customers that there is a better way for them. to bank, make payments, and more.

It is of fundamental importance for banks that they fully embrace digital transformation and recognize that digital genius will not return to its bottle. This is a daunting task, involving not only a change of mindset, but also, in many cases, a complete overhaul of the cumbersome legacy systems that banks have relied on for so many decades.

Banks need to invest heavily in “platforming” their services and upgrading the API model. Without digital transformation, incumbents will be left behind in the new economy.

Provide the pipes

Legacy institutions need to understand that their role is changing and their position in the value chain has changed. They are no longer the storefronts 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 utility providers of the integrated economy, providing the “pipes” on which the ecosystem is built.

Institutions also have a key role in providing back-office processes such as KYC, AML/PEP, sanctions screening and transaction monitoring. They already have the expertise and regulatory coverage to build and maintain these crucial functions, and now they need to make them as automated and accessible as possible.

Forget customer ownership

As banks begin to understand their new role as providers of public services, they must also let go of a key shibboleth: their ownership of customer relationships. The era in which we “do” banking or payments only with High Street institutions is already over, and these institutions are no longer the face of financial services. Traditional banks must understand that customer relationships are not an area in which they are good at generating value. The sooner they realize this, the better the outcome for everyone: it will spark a new wave of CX-first challengers, and it will allow incumbents to refocus their efforts on the things they are really good at, and generate revenue: the provision of services and regulatory coverage to other organizations further down the value chain.

Get summit buy-in

A culture of entrepreneurship and innovation is crucial for the continued success of banks. This culture must seep into all organizations, and it must start at the top. Leaders in the highest incumbent positions need to embrace the new economy, recognize when they have blind spots, and surround themselves with digital native individuals.

There are already many good examples of this happening, and they are found within companies that are reaping the rewards of integrated finance. Goldman, for example, has invested heavily in platforming and is an early leader in the Embedded ecosystem through work such as its partnership with Apple. Barclays, meanwhile, has been hugely successful not just as an “enabler” of integrated finance, but also as a significant player in its startup scene. Its Rise Accelerator program has supported dozens of exciting new startups using cutting-edge practices to solve real consumer problems – precisely the promise of the Embedded Finance ecosystem.