Neobanks, sometimes referred to as “challenger banks”, emerged on the scene in the wake of the 2007-2009 financial crisis and started rapidly gaining in popularity. As fintechs, they offer digital solutions and technologies geared towards streamlining mobile and online banking. The closest comparison in other industries would be “disruptors” like Airbnb for the hospitality market, and Uber and Lyft for the transportation market.
Given that innovation is at the very core of their attractiveness, neobanks stand to gain a whole lot by embracing the limitless functionality offered by embedded finance. The list of benefits includes not only simplified compliance and new revenue streams, but also a superior user experience, advanced technological solutions, and much more.
Enhanced user experience of embedded finance
In the context of neobanks, embedded finance means offering banking services traditionally provided by different financial institutions directly from their respective mobile apps. This could range from savings and checking accounts to insurance, loans, and investment products.
By integrating these services, neobanks can provide a seamless user experience that eliminates the need for customers to juggle multiple apps or platforms. With a consolidated platform, users no longer have to remember different login credentials or navigate multiple interfaces, which saves time and ensures consistency.
Furthermore, leveraging AI and data analysis provides neobanks with deep insights into their customers’ financial behavior, needs, and preferences, which opens the door to extensive personalization. For instance, a neobank can analyze a user’s spending habits to offer a tailored savings plan, or use transaction history to provide tailored investment advice.
Market access and revenue streams that embedded finance opens
Embedded finance represents an unparalleled opportunity for neobanks to enter previously untapped markets by collaborating with non-financial platforms. Instead of solely targeting individuals who are actively seeking banking services, neobanks can reach users on platforms where they regularly spend time, but wouldn’t necessarily expect to encounter financial services.
For instance, a social media app can integrate a neobank’s payment system, enabling users to instantly transfer funds to their friends and family or pay for products advertised on the platform. Marketplaces, for their part, can provide instant loans to users looking to make a high-ticket purchase – all courtesy of a partnering neobank. This not only leads to increased user acquisition but also fosters a more integrated and holistic digital ecosystem, where finance becomes an intrinsic, rather than extrinsic, part of user experience.
Beyond user acquisition, embedded finance can also be used to generate new revenue streams. Every transaction made through an integrated service generates fees, while facilitating services like insurance and loans earns commission. In addition, partnerships can be monetized via co-branding opportunities, access to premium features, shared advertising revenue, and more. A good example would be a neobank partnering with an e-commerce giant to offer cash-back or discounts on transactions made using its banking services.
Last but not least, embedded finance doesn’t stop at the initial point of contact. Once a user has engaged with a neobank’s service on a platform, there’s ample opportunity for cross-selling other financial products. This can be in the form of Buy Now, Pay Later schemes, instant loans, insurance for different types of purchased goods, financial literacy programmes or consulting services – the list can go on forever!
Compliance and security
Embedded finance integrations often come with built-in compliance features, which is a huge boon to neobanks, as building financial solutions from scratch is not only resource-intensive, but also time-consuming. It requires staying up-to-date with the constantly-evolving regulatory environment, conducting extensive testing, obtaining the necessary certifications, among other things.
Recognizing these difficulties, embedded finance providers are working hard to ensure their platforms always adhere to the relevant standards, theory making transactions compliant from the get-go. By integrating these solutions, neobanks are essentially availing themselves of an entire suite of tools designed with compliance in mind. This drastically reduces compliance-related issues and red tape, allowing neobanks to focus on innovation and enhancing customer experience.
The benefits made possible by embedded finance are ultimately the result of partnering with compliant legacy institutions and being able to draw on their long-standing experience, knowledge, and well-established regulatory procedures. For instance, if a neobank wants to offer a lending feature via an e-commerce platform, integrating with a traditional bank that already has a robust and compliant lending infrastructure can ensure that the lending process adheres to all the necessary regulations.
Moreover, these established institutions have tried-and-tested security protocols, fraud-detection systems, and risk-management strategies. This means that users get the best of both worlds: the agility and innovation of a neobank, and the reliability and trustworthiness of a traditional financial institution.
Open banking, a system where banks open up their data through APIs to third-party developers, is one of the most significant technological developments in modern finance. It breaks the traditional silos of banking, making financial data more accessible and shareable without compromising on security and privacy. The benefits of this extend both far and wide. By integrating open banking frameworks, neobanks can seamlessly share data with external platforms and other financial actors.
Just picture a scenario where a customer shopping on an online platform can instantly access their account details from a neobank, get a real-time credit assessment, and take out an instant loan – all without leaving the shopping platform. The seamless, personalized experience sketched out in this scenario is only made possible thanks to the data-sharing capabilities of open banking.
Now, another massive advantage of embedded finance to neobanks is that it can further amplify their agile, flexible, and innovative approach to finance. Its modular architecture enables neobanks to quickly respond to evolving market dynamics and customer needs. With embedded finance, they can swiftly integrate new payment gateways and features, develop novel investment tools, roll out unique savings schemes, or even partner with fintech startups offering unorthodox solutions.
And let’s not forget – technology is developing at break-neck speed. Blockchain, artificial intelligence, quantum computing, and more are on the horizon, each promising to reshape the financial landscape. Embedded finance ensures that neobanks remain at the cutting edge, ready to leverage these innovations and maintain their competitive advantage. Speaking of…
Today’s consumers typically seek a consolidated experience online – a one-stop-shop for all their needs. By integrating embedded finance, neobanks can transform their apps into comprehensive financial ecosystems, where users can not only manage their accounts but also access a myriad of financial services.
Using a single neobank app that amalgamates multiple touchpoints, users can now manage their savings, invest in stocks, take out insurance, get personalized financial advice, and even do their shopping – all within a unified platform.
Embedded finance also helps neobanks differentiate themselves from (and capitalize on the fact that) more traditional financial institutions beset by legacy systems and bureaucratic overcomplexity. Collaborating with fintech startups, e-commerce platforms, or even lifestyle apps and brands allows neobanks to continuously innovate – adding features that might take traditional banks years to implement.
Finally, embedded finance can equip neobanks with the tools necessary to enhance customer loyalty. All-in-one platforms are inherently attractive to modern users, and allow neobanks to offer rewards, incentives, and tailored experiences. For instance, if a user frequently shops on a particular e-commerce platform, the neobank could offer special discounts or cashback for each transaction made on the platform in question.
Such personalized experiences make users feel valued, and the convenience of having all financial tools in one place makes it less likely for them to switch to another service.