Will You Choose Embedded Fintech or Embedded Finance?

finance technology concept hands smartphone
By Virginia Heyburn

3 minutes

Each offers different but important strategies to future-proof your financial institution.

Sponsored by CUES Supplier member Engage fi (formerly CU Engage)

As financial institutions move into a new technology era, they realize that existing innovation cultures are broken. New fintech competitors are gaining market share while banks and credit unions are, on balance, losing deposits.

There’s much discussion within the industry about embedded finance and fintech as a technology strategy but not enough understanding to appreciate it as a future-proofing business strategy. The need to act quickly is essential as new competitors gain ground on traditional financial institutions.

Strategy had historically been around product innovation, then products became commoditized. The shift was then to innovate around service, then service became commoditized, too. Now, FIs must innovate around products and service as the center of the overall strategy.

As a result, they now face existential challenges. The consumption of banking services is increasingly unbundled from the traditional financial services industry. Niche players in mortgage, student lending, small business services and payments have long exposed the slowness of traditional banks and credit unions to respond to changing customer expectations—at a monumental cost.

Financial institutions that are open to exploring new strategies will put themselves in a better position for long-term success. Two of the most discussed strategies are embedded finance and embedded fintech. They are distinctly different strategies that offer exciting possibilities to reach new markets.

What Is Embedded Finance?

Embedded finance changes when, where and how consumers interact with financial services. Take Uber, for example. You can easily get to your destination in a click of a button with the added bonus of not having to pay the driver when you arrive. Payments are embedded behind the scenes for an easy experience.

Another example is insurance. You book a vacation and within the flight reservation options, you add travel insurance. Embedded finance is emerging across all markets—from Instacart to Amazon.

Embedded finance is more than using trendy apps for convenience. It’s also a credit union partnering with a consumer service provider to be the back-end deposit account. For example, a student lending company could provide financial advice for young people. Maybe it would like to also offer a debit card—in this case, the provider wouldn’t need a bank charter; it could partner with your institution to consummate the transaction. The consumer benefits from using an embedded service without stepping outside of their buying experience. It’s faster, easier and frictionless, which is exactly what today’s consumer wants.

What Is Embedded Fintech?

While embedded finance is about integrating traditional financial services into non-financial services companies’ buying experiences, embedded fintech offers a seamless experience for users to work within platforms they are already using.

Mobile payment applications that allow peer-to-peer money transfers like Zelle are a great example of embedded fintech. Consumers can send and receive money directly from their financial institution.

Another example is identity theft protection. Younger generations are aware of their credit and want to protect it—they demand a lot from the mobile banking experience and want to use applications that show credit irregularities in real time.

Take Control of Your Technology

New technologies are often met with challenges. Anyone who has worked on implementing fintech knows it can be difficult to deploy, as many FIs are still operating on legacy technology. Historically, especially in smaller institutions, IT has been outsourced to providers that specialize in digital experiences.

It’s time for financial institutions to evolve and become innovators. A core system conversion can be difficult but may be necessary to move your digital experience forward. Implementing new technology is critical to future-ready your FI. It’s time for rapid innovation, and digital strategies need to be managed from within your organization, with decisions based on strategy, not on currently available technology. It requires a rethink in terms of how much control you give to partners and how to bring differentiating skills in-house.

With recent improvements in technology, FIs can appeal to a new generation of consumers who are digital native. Whether you choose embedded finance or embedded fintech, take action now. Loyalty is increasingly built on the foundation of technology, and FIs must provide an exceptional experience before consumers choose other brands.

Over a 25-year career, Virginia Heyburn, now director of research, insights & advocacy at CUES Supplier member Engage fi (formerly CU Engage) has been at the forefront of advising technology companies on innovation opportunities to solve complex banking problems and to improve the customer experience. In parallel, Heyburn has served as a strategic advisor to financial institutions, helping them create essential distinction through rapid adaption to industry and consumer trends, business drivers and technology change. To speak with Heyburn about your financial institution’s strategies for future readiness, please click here to book a call.

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