The usage of application programming interfaces (APIs) in finance started over 10 years ago, and is now the most effective method to deliver financial services from both non-banking organizations and financial institutions.
The newest trends in fintech development are already underway. Embedded finance permits non-banking brands to offer financial services as a part of their existing products, or build entirely new ones, using developer-friendly integrations.
Somewhat related, banking-as-a-service (BaaS), another relatively new business model, allows virtual or digital financial institutions to offer financial products by connecting with banking systems via APIs.
Embedded Finance Becomes Entrenched
The dramatic rise in the adoption of digital payments among both consumers and businesses, has enabled people and businesses to do more with technology than ever before — leading to enormous growth for embedded financial services.
Many business-to-business (B2B) firms are already offering embedded finance solutions to solve three top critical business pain points: customer retention, cash flow management and revenue growth. That is according to new research conducted by Juniper Research in collaboration with Galileo Financial Technologies.
Key Galileo research findings include:
- Eighty-five percent of B2B businesses are familiar with the concept of embedded finance.
- Sixty-five percent of those not currently offering an embedded finance solution are now considering offering one.
- Sixty-eight percent would prefer to offer embedded finance services from a non-bank provider.
- Among the 63% of businesses that use embedded finance, the majority (78%) work with two or more providers to enable their solution, with fintechs the preferred provider.
- Payments, employee/employer services, and credit and lending solutions are the top three use cases in the market today.
Galileo research highlighted the inherent need for U.S. businesses to offer embedded finance, which allows non-financial brands to integrate banking, payments, payroll, credit, lending, insurance, and other financial services s into their apps and ecosystems using APIs. Use cases include offering third-party payment options such as fixed-rate installment loans or buy now, pay later (BNPL) choices; retail or airline cards, car rental insurance, or coffee shop apps offering one-click payments.
The report noted embedded finance tools could enhance customer retention, a major pain point for businesses, and could grow into a critical differentiator that businesses must leverage.
According to a Plaid report, embedded finance changes when, where, and how people interact with financial services — and creates substantial opportunities for both financial and non-financial companies: 88% of companies that implement embedded finance report increased engagement, and 85% said that it helps them acquire new customers.
Plaid projects embedded financial services will produce $230 billion in revenues in 2025 — a 10-fold increase over the $22.5 billion in revenues in 2020.
Banking-As-A-Service, Part Of New Fintech Wave
The possibilities presented by embedded finance also encouraged fintech players to offer banking and payments services to their customers (or their customers’ customers) as it allows for a more immersive experience. The addition of open banking to the fusion provided an extra layer of support, particularly in areas such as account aggregation and payment initiation.
To meet the increasing customer demand for universal banking options, many financial institutions increasingly offer banking-as-a-service (BaaS); and embedded finance (aka embedded banking), such as payment processing, within other services such as a ride-share app; rewards programs, and open finance, the extension of open banking data-sharing principles.
Traditional financial institutions typically consider two API options:
Banking as a platform. Allows the enhancement of product portfolios via partners’ financial APIs; and access to new product verticals, or customer re-engagement via upsells and cross-sells. The platform helps ensure safe data communication between the banking entity and a business/fintech company. This level is also known as the middleware or banking as a service layer.
Banking as a Service (BaaS). The financial institution distributes some of its core financial services as APIs for others to use. BaaS allows non-banks or virtual banks to offer access to standard banking products or features by connecting to a banking system through APIs and webhooks. Payments, loan underwriting, savings, and credit products are several things banks and credit unions can offer via an API. A Finastra 2021 survey found 81% of financial institutions see BaaS as a means to grow business, enhance their distribution channels, shorten time to market and streamline operations.
The Paybacks of Getting Connected
Embedded finance and BaaS are interrelated in that they are both tied to the digital marketplace and efforts to simplify and streamline financial services for consumers and businesses. In essence, they permit almost any company to participate in the fintech ecosphere. The difference: whereas embedded finance centers on integrated access to solutions, BaaS relies on the tech underpinning that digital banks and non-banks rely on to deliver financial services.
Fundamental to this access are APIs, which power today’s digital functionality by allowing applications to access data and link with peripheral software components, operating systems, or microservices. They allow developers to generate a request for specific information such as providing the geolocation in mapping apps, a communication tool in customer service, and login authentication for banking apps.
Many financial institutions and fintechs use APIs to deliver inflexible on-premises software to the cloud and a collection of apps such as an API marketplace. With APIs, financial institutions can also reposition and blend data assets and functionality from diverse systems.
Typically, an API marketplace comprises several components, including an API manager, gateway, security and developer areas. The marketplace model lets financial institutions continue to provide and develop their central services, but also provides an opportunity to fill gaps from partnerships with carefully handpicked allies.
This approach also levels the playing field for API providers as the marketplace increases exposure for API developers of all sizes, especially those seeking a bigger fintech presence. For some providers, deploying to a marketplace can mean replacing their portals completely.
NXTsoft’s OmniConnect Platform, which utilizes cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensures that its clients have safe and reliable integration, is an open banking marketplace for all API needs.