Embedded finance: For German banks, this is just one of many, big topics. But other players from the financial services and retail markets are also getting into the business. The key is to pay attention to the success factors.
In Germany alone, the embedded financial products market is forecast to grow 33.5 percent by the end of 2022, reaching a value of $5,435.1 million. By 2029, the market is expected to reach a value of $14,886.2 million. On the customer side, research such as that conducted by Solarisbank has found that 61Percent of German customers would support the use of financial services products offered through an e-commerce platform (i.e., an embedded financial product).
However, this leads to a data dilemma: In order to compete with digital neobanks, established banks need to focus more on data and their data architectures, adapting and evolving them to create dynamic experiences for their customers.
Here's how incumbent banks can overcome the data dilemma when it comes to embedded financial products - from creating flexible cloud-based architectures to deliver more efficient customer experiences to ensuring regulatory compliance.
Getting data usage right for banking-as-a-service.
In an environment where 75 percent of retailers have already adopted embedded financial products, incumbent banks in Germany must continue to adapt their offerings to meet the growing demand for instant access to financial services products and services. Banking-as-a-Service (BaaS) offers established banks the opportunity to develop new revenue streams and optimize customer retention.
However, the success of BaaS depends on fully exploiting the data processing capabilities offered by the cloud. Often, this requires large-scale bank architecture transformation projects that use microservices to make processes more efficient, including extracting insights from data. Microservices can be used to remove barriers to software development, allowing banks to accelerate the pace of new product/service offerings using data. This is critical in the embedded finance world, where competition is fierce and new, dynamic means of integrating these products/services into the customer journey are essential.
Creating innovative customer experiences
The main purpose of embedded finance is to integrate banking into the sales process, rather than treating it as a standalone service, in order to reduce friction between different aspects of the customer process. This is especially true in terms of payments and "Buy Now, Pay Later" loans. Data is key here. Without effective handling of data, gaining insights into customer behavior becomes more difficult, ultimately impacting the quality of the customer experience.
The use of APIs is the logical next step to create this link between the incumbents' product/service offerings and a third party (most likely an e-commerce company). In contrast to the financial services market in the UK, incumbents in Germany have been much more reluctant to adopt API banking, particularly as a means of simplifying embedded finance. This puts the DACH market at a disadvantage compared to markets such as the UK and Ireland, where the adoption of open banking and embedded finance has been taking place for years.
Despite this apparent inertia, a major German bank has partnered with a telecommunications provider to create a mobile payments platform that allows customers to create virtual wallets and manage credit lines. In addition, European startups with single-API platforms have entered the German market and accelerated the adoption of features such as digital wallets, payments and virtual debit cards - which is useful in a market dominated by incumbents. Working with a partner with API project and technical experience could therefore be crucial for incumbents looking to expand their digital finance offering.
Data Governance
Embedded finance requires incumbent banks to focus more of their efforts on data. This comes at a cost, as these banks need to pay more attention to data usage regulations. Data usage between all parties in the sales process requires strict data security measures to avoid breaches. Since there is no regulatory sandbox in Germany, all financial service providers must adhere to the regulations established by BaFin.
A data mesh approach could be a solution for incumbent banks whose embedded financial products require frequent data transfer to and from third parties. By eliminating the silos often found in data governance processes and merging the teams responsible for data product versioning, governance, and access control and logging, incumbent banks can more efficiently ensure that their customers' data is secure at all stages of its journey between the bank and third parties.
Integrating knowledge about customers and financial services
Now is the right time for incumbent financial services providers in Germany to capitalize on the opportunities of embedded financial services - much of which will come from the effective use of data. Increased revenue, more efficient core architectures, and better customer experiences are what await incumbents that adopt embedded financial products. Talk to us, we'll be happy to support you on your journey to innovative, frictionless and more efficient products and services.
In Germany alone, the embedded financial products market is forecast to grow 33.5 percent by the end of 2022, reaching a value of $5,435.1 million. By 2029, the market is expected to reach a value of $14,886.2 million. On the customer side, research such as that conducted by Solarisbank has found that 61Percent of German customers would support the use of financial services products offered through an e-commerce platform (i.e., an embedded financial product).
However, this leads to a data dilemma: In order to compete with digital neobanks, established banks need to focus more on data and their data architectures, adapting and evolving them to create dynamic experiences for their customers.
Here's how incumbent banks can overcome the data dilemma when it comes to embedded financial products - from creating flexible cloud-based architectures to deliver more efficient customer experiences to ensuring regulatory compliance.
Getting data usage right for banking-as-a-service.
In an environment where 75 percent of retailers have already adopted embedded financial products, incumbent banks in Germany must continue to adapt their offerings to meet the growing demand for instant access to financial services products and services. Banking-as-a-Service (BaaS) offers established banks the opportunity to develop new revenue streams and optimize customer retention.
However, the success of BaaS depends on fully exploiting the data processing capabilities offered by the cloud. Often, this requires large-scale bank architecture transformation projects that use microservices to make processes more efficient, including extracting insights from data. Microservices can be used to remove barriers to software development, allowing banks to accelerate the pace of new product/service offerings using data. This is critical in the embedded finance world, where competition is fierce and new, dynamic means of integrating these products/services into the customer journey are essential.
Creating innovative customer experiences
The main purpose of embedded finance is to integrate banking into the sales process, rather than treating it as a standalone service, in order to reduce friction between different aspects of the customer process. This is especially true in terms of payments and "Buy Now, Pay Later" loans. Data is key here. Without effective handling of data, gaining insights into customer behavior becomes more difficult, ultimately impacting the quality of the customer experience.
The use of APIs is the logical next step to create this link between the incumbents' product/service offerings and a third party (most likely an e-commerce company). In contrast to the financial services market in the UK, incumbents in Germany have been much more reluctant to adopt API banking, particularly as a means of simplifying embedded finance. This puts the DACH market at a disadvantage compared to markets such as the UK and Ireland, where the adoption of open banking and embedded finance has been taking place for years.
Despite this apparent inertia, a major German bank has partnered with a telecommunications provider to create a mobile payments platform that allows customers to create virtual wallets and manage credit lines. In addition, European startups with single-API platforms have entered the German market and accelerated the adoption of features such as digital wallets, payments and virtual debit cards - which is useful in a market dominated by incumbents. Working with a partner with API project and technical experience could therefore be crucial for incumbents looking to expand their digital finance offering.
Data Governance
Embedded finance requires incumbent banks to focus more of their efforts on data. This comes at a cost, as these banks need to pay more attention to data usage regulations. Data usage between all parties in the sales process requires strict data security measures to avoid breaches. Since there is no regulatory sandbox in Germany, all financial service providers must adhere to the regulations established by BaFin.
A data mesh approach could be a solution for incumbent banks whose embedded financial products require frequent data transfer to and from third parties. By eliminating the silos often found in data governance processes and merging the teams responsible for data product versioning, governance, and access control and logging, incumbent banks can more efficiently ensure that their customers' data is secure at all stages of its journey between the bank and third parties.
Integrating knowledge about customers and financial services
Now is the right time for incumbent financial services providers in Germany to capitalize on the opportunities of embedded financial services - much of which will come from the effective use of data. Increased revenue, more efficient core architectures, and better customer experiences are what await incumbents that adopt embedded financial products. Talk to us, we'll be happy to support you on your journey to innovative, frictionless and more efficient products and services.