With the ease in internet accessibility and large user platforms, big tech companies are leveraging such opportunities to embed banking services into their plethora of services and products. Such extension of services not only gives them a range of coverage on a market share that didn’t have access to traditional banking services but is also pulling away from the market share of traditional banks. For increased long term financial services and safety of user data, a regulatory rule is necessary to create a smooth exchange between the big tech companies, fintech companies, and traditional banks. Find out how embedded finance turns techs into fintechs
The Revolution About To Come In The Financial Services
The financial service sector can be said to still be in its evolutionary stage and the coming years promise a lot more changes. While we can only speculate how many changes are at stake for the fintech market, we know that the traditional banking system will be shaken up significantly in the coming decades.
Only banks that are able to withstand the competition, create target user-centered products and services at a reduced cost, and consolidate other seamless financial services may be able to make it into the next two decades.
Tech Giants Embedding Financial Services To Their Platforms
In recent years, non-financial technological establishments are beginning to add financial services to the list of their offered products to customers. Many tech companies like Robinhood, Facebook, Coinbase, etc with massive customer outreach are embedding financial services to their platforms. In the U.S., Google recently declared that they will be allowing customers to pay for parking spaces through the Google Maps app. Embedding such financial services appears to be the future of banking in the next decades making every tech company a potential fintech company.
How Big Techs are Embedding Financial Services to Their Range of Products And Increasing Their Market Share
Embedded finance isn’t an entirely new trend. Decades ago, many companies were able to render financial services to customers that were separate from the banks. With recent technological innovations and expansion of internet services, the trend became more pronounced, creating its own market niche and reaching a massive market share.
Big Techs Becoming Fin Techs
The big tech now becoming financial service providers as well and fintech companies are mainly engaged with customers on a front-end level, delegating the back-end financial services like account reconciliation, regulatory reporting, and storage of fiat currencies to the traditional banks.
The big tech companies are centered on consumer services and based on established platforms like eCommerce, and social networks which are their competitive advantage over the traditional banks. With only a tap on a button, one is able to perform transactions through social media platforms without visiting the banks or adding one’s bank details.
Why Are Non-financial Tech Establishments Becoming Fintech by Embedded Finance
Tech companies embed financial services to their products and are able to provide customers with such services wherever they are with ease. The traditional banking sector, having been in existence for many years, has unfortunately not been able to serve a wide range of people. According to expert reports in 2017, more than 2 billion people have no access to banking services thereby perpetuating a vicious cycle of poverty.
Gaining Customers Through Embedded Finance
The tech companies that are embedding financial services into their range of products have a wider range of customers and ease of accessibility of their service product. Such ease increases the wealth of customer experience. Embedded services, like digital wallets, are fast, cheap, and wields a great influence on customers to complete their online transactions. Data gathered from user experience have shown that when payment transactions are more complex for the customers, they are less likely to complete the transaction in comparison to when such transactions are seamless and involve fewer procedures.
Data As A Key Reason For Techs Going Fintech
Most tech companies switch to fintech services to gather customers’ financial behavioral data. Data in the last decade has become indispensable for the growth of digital businesses. The collected and analyzed data enriches their understanding of users’ behavioral trends, like what they buy, their circle of friends, and how much they spend. The data also helps them to enrich the user experience and perspective for personalized service to customers, and advertisers. Algorithms generated from customers’ business transactions are also used to give customers automated algorithm-driven personalized financial planning services also known as robo-advisers.
Financial Benefits
Adding embedded banking to a company’s range of products increases the company’s financial benefits. No doubts, the race for the next multi-billion euro company depends on the company’s ability to increase their customer base and services, and customer satisfaction.
This will encourage customer loyalty. Digital platforms like Facebook, WeChat, Amazon, and Ali Baba are top players allowing users to transfer funds, make financial investments, and take insurance packages through their smartphones. According to a report by Andreessen Horowitz, a venture capital firm: “By adding fintech, SaaS businesses can increase revenue per customer by 2-5x and open up new SaaS markets that previously may not have been accessible due to a smaller software market or inefficient customer acquisition.”
What Customer Trends And Technology Are Driving Embedded Finance
Embedded finance or embedded banking is a trend centered on the consumers. One of the key trends driving embedded finance is a change in customer behavior. Due to technological advancement in the use of gadgets, and internet availability, brick and mortar stores record lower customer activities. Buyers prefer to shop from the comfort of their homes and offices. Customers are also able to make other business transactions seamlessly like money transfer to friends, family, and colleagues.
What Role Does Loyalty Play In All Of This?
Customers that have built loyalty to a brand are more likely to carry out business transactions when introduced by such a platform. So many traditional banking institutions have had a break of trust with their customers due to financial crises and irregularities that occur in the traditional banking sector. The tech company has established such customer loyalty that can comfortably facilitate financial services and sometimes mediate between the commercial traditional institutions and the customers.
The speed and agility with which digital companies render financial services are yet another encouraging factor. Customers do not have to wait for a long period of time for their credit applications or other banking needs to be completed.
Daily Customer Touchpoints
Daily existing customer touchpoints with the digital companies is another encouraging factor making digital companies add embedded banking to their range of products. With users increasing the time spent online, they stand a high probability of carrying out transactions based on impulse buying.
Embedded banking in a digital company is cheaper to manage compared to the costs of running a traditional banking system. Customers are happy to be offered varied payment services like postpaid services, loans, and mortgages at substantially affordable prices cheaper than traditional banks, or sometimes at no cost. Embedded finance also Offering consumers varied services that would not have been otherwise offered by traditional banks.
Offering customers direct and tailored services when needed promotes embedded banking. Fitness studios offer payment platforms for their services. Car production companies like Tesla and Mercedes-Benz offer customers car insurance packages, etc.
Regulatory Impact of Embedded Finance on Market Share Between Fintechs, Big Techs, and Traditional Banks
Following the increase in the number of emerging fintech companies and big tech companies embedding financial services to their platforms, there have been arguments concerning the security of users’ data. Some argue that such expansion in the number of platforms will encourage competition and better user experience while others say that a concentrated financial services sector will encourage stability. Regulating the financial sector will take into consideration factors like data privacy, lasting financial stability, and business models that increase competition.
There are speculations that the government should make regulations to govern the use of financial data collected from customers while they are engaged on their platforms. Such regulations of big tech’s repository platforms will encourage customers to rely on the digital financial service providers when sharing their financial data.
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