Embedded Finance, Banking-As-A-Service, and Neobanks Define a New Fintech Future

Category: Data Connectivity , The Bottom Line , OmniConnect
Author: NXTsoft

Embedded finance, neobanks, and banking-as-a-service (BaaS), all aided strongly by application programming interfaces (APIs), are now part of the fintech fabric undergoing an evolution based on financial technology innovation and consumer demand.  

The influence of these new entities on the financial services landscape has been extensive and deep. They have not only have challenged legacy financial institutions but showed that digital friendly-designed services can exist and grow to meet consumer requests.  

This end result of this ground-breaking approach features the unbundling of many retail banking products and services, the enabling of startup technology to infiltrate the financial services industry quickly, and the growth of neobanks looking to compete digitally against dawdling legacy institutions. 

Fintech and APIs Help Embed Finance into Many Brands 

Embedded finance, a relatively new fintech model allows any brand to integrate banking and payments services into their apps and ecosystems through the use of APIs. This new technological model has accelerated in recent years. The Lightyear Capital investment fund estimates that, by 2025, embedded finance services will be worth almost $230 billion in revenues, a significant increase over 2020 ($22.5 billion). 

With embedded finance, any business can offer financial services as part of its existing products, or create new ones, by easily making use of developer-friendly API integrations. Some examples of embedded financial services comprise payments for Uber, Lyft, which uses debit card accounts to pay drivers, and Starbucks; card payments by PayPal, lending use cases in Klarna and AfterPay; and banking such as used by Shopify. 

Embedded finance also supports the growth of new players targeting specific segments, through the provision of technology, licenses, and operational activities. Some industry experts see embedded finance as defining the next stage in the fintech revolution, providing a sharper focus on niche target verticals and startups providing specific banking and payments tasks integrated into existing apps. 

Fintechs Use Neobanks, BaaS to Challenge the Status Quo 

Neobanks, also called “challenger banks” or online-only banks, are fintech firms that offer apps, software and other technologies to streamline mobile and online banking. Generally speaking, neobanks are not state-or federally-chartered banks. To provide the crucial security of FDIC coverage, neobanks partner with one or more chartered banks, which sometimes provide the financial technology infrastructure. 

The early days of neobanks focused on digital enablement for the mass market. However, over the last year or so the emphasis changed. Many fintech firms observed certain communities or groups lacking financial services from traditional establishments and set out to fill those gaps.  

Neobank services focused on areas such as better lending access, onboarding instruments, or business-oriented tools and services. They also included many diverse groups in specialties focused on climate/green (Aspiration, Bunq, Current, Ando); Black/Latino/Asian/Muslim (Greenwood, First Boulevard, Wicket, Viva First, Niyah, C;heese); kids and teens, (FamPay, Spriggy, Greenlight); LGBT plus (Pride Bank, Superbia, Daylight); and music (Nerve).  

To meet this customer-specific demand many financial institutions are increasingly offering BaaS — bundled products and features, frequently white-labeled or cobranded; embedded finance, the integration of traditional financial services, such as payment processing, with other services such as a ride-share app; and open finance, and the extension of open banking data-sharing principles — to enable third party providers to access customers' complete financial data.  

Through BaaS, embedded finance also allows any type of company or online retailer to incorporate banking software right into their websites or mobile apps as another service, without redirecting users to third-party websites. Consequently, a company can integrate payments on its website so that consumers do not have to enter their credit card specifics for each transaction, suggest the option of payment by installments for online purchases, offer insurance or issue its own customized credit cards. 

Fintech Relationships Equals Shared Benefits 

Because banks no longer have the monopoly on such a wide range of financial products and tools, they must recognize that their new value proposition is as the customer service, marketing and utility layer in a more distributed banking data structure. 

It therefore becomes vital that traditional financial institutions embrace embedded finance into their organization’s technology. Banks and credit unions can use APIs to build digital banking experiences for customers, link their services to fintech apps, and enable specific groups of customers to open debit, credit, or savings accounts from within those apps.  

Many questions remain about the security of embedded finances enabled by APIs that connects banking data and fintech companies. Issues such as apprehensions related to cloud security and an upsurge in cyberattacks are also important to consider when entering the embedded finances/fintech/API marketplace. 

Nevertheless, APIs continue to grow into the core of consumer-permissioned model that provides banking customers with control over real-time access to their financial information in a digital environment.  

To enter this new open-banking marketplace, a start-up with ground-breaking idea that could fill a fintech gap needs to find a partner with the capability to deliver APIs and data layered integration to financial institutions.  

Connectivity For Your FinTech Solution

Partnerships between fintechs and financial institution are mutually beneficial. For credit unions and banks, an open-banking solution tapping into new technology can extend their market reach, connectivity to customers and provide new revenue opportunities. Meanwhile, partnering with financial institutions by gaining access through open banking APIs allows fintechs to strengthen their offerings. An API marketplace — which includes an API manager, gateway, security, publisher and developer — helps bring the financial institutions and fintechs together.  

NXTsoft, for example, provides a best-of-breed API connectivity solution for financial institutions and fintechs. Financial technology suppliers can close deals quickly with pre-built API integrations into so many existing applications; and the capability to connect fintech solutions securely to banks and credit unions, using the strongest technology foundation and the most cutting-edge cloud-based technology; and following the uppermost industry and regulatory standards. 

NXTsoft’s vendor agnostic OmniConnect Platform, the premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions, ensuring that NXTsoft clients have the most secure and reliable integration environment in the industry. OmniConnect provides the access needed to the financial institutions information, removing integration obstacles and providing a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems.  

September 21, 2021
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