Editor’s Note: Embedded banking, where third-party technology includes financial services, is a powerful marketing concept with vast potential for financial institutions of all sizes. Embedded banking benefits both the financial institution and the third-party partner—banks extend reach into new markets while lowering the cost of customer acquisition, and third-party partners improve their customer experience with convenient point-of-need financing.
While many believe the technology is too complex or expensive for smaller institutions, an experienced financial technology company can help any size bank benefit from embedded banking by supporting the necessary integrations and identifying appropriate non-bank partners. Working with third parties is an excellent strategy to boost efficiency and productivity for any business. However, communication, connectivity, and especially security can prove challenging when dealing with third-party partners.
Summary:
Misconceptions about embedded banking—a technology that allows users to serve customers through a non-bank third-party partner—are hindering banks and credit unions from fully embracing a powerful tool that can benefit institutions of all sizes.
As a relatively new option for banks and credit unions to expand their reach, the emergence of embedded banking has caused confusion for some in the industry. Many financial institutions are still unsure what the technology is, while others simply don’t understand how to tap into its potential. Misconceptions are hindering many from fully embracing a powerful technology that can benefit institutions of all sizes.
What is embedded banking?
Simply put, embedded banking is a technology that allows banks and credit unions to serve their customers and members through a non-bank third-party partner. Banking services are “embedded” within a partner’s technology, enabling consumers and businesses to take advantage of financial services at the point of need, without switching to a digital banking solution.
Here’s an explanation of the technology in brick-and-mortar terms. In 1996, Walmart began adding bank branches to its stores. Walmart didn’t want to become a bank, and the corporation didn’t directly compete with the bank. It just wanted to provide financial services to customers as a convenience.
Embedded banking extends this concept to the digital realm. A non-bank partner can elevate its customer experience with financial services—such as enabling a homeowners’ association administrator to check balances and transfer funds directly within the HOA software, rather than switching from HOA software to a separate digital banking application. This integration saves the user time and provides a much-improved user experience.
With embedded banking, the brick-and-mortar concept of providing financial services to customers as a convenience is extended to the digital realm.
Who wins with embedded banking?
The technology benefits both participants—your financial institution and the non-bank partner. Your institution can extend its reach into new markets while realizing a lower cost of customer or member acquisition. Deposits may also increase as new consumers and businesses access your brand. Additionally, you gain new opportunities to cross-sell and engage with existing customers.
The non-bank partner wins by offering invaluable convenience to those using its software. When the partner creates a seamless transition to financial services, its users can complete financial transactions at the point of need, and as a result, retain better control of their finances.
Fitting embedded banking into your strategy
An embedded banking strategy can complement your institution’s existing goals. For example, if your goal is to increase deposit or loan growth year-over-year, an embedded banking partnership that exposes your brand to new users outside of your geographic area can help you expand your user base to a larger area and thus fuel organic growth.
Wading through some misconceptions
Some financial institutions have been hesitant to engage with embedded banking, wary of engaging because they think the technology may be a passing fad or that it’s too complex to implement. Others think only the largest financial institutions can participate due to the technology investment.
Community and regional banks and credit unions are successfully rolling out embedded banking solutions: 70% of the banks that are live today with embedded banking partners have less than $10 billion in assets.
Though myths abound, community and regional banks and credit unions are successfully rolling out embedded banking solutions today. The potential of the technology is immense—and it’s an option for financial institutions of all sizes. In fact, according to FedFIs.com, 70% of the banks who are live today with embedded banking partners have less than $10 billion in assets.
Putting the pieces together
Embedded banking strategy may appear to be complicated on its surface, but it doesn’t have to be. An experienced financial technology company can help banks and credit unions navigate this new territory, supporting the technical integrations required as well as helping identify appropriate non-bank partners.
This article was from American Banker and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.
Banks and credit unions of all sizes can take advantage of the many benefits of embedded banking and avoid worry about third-party connections by leveraging Windstream Enterprise’s suite of cloud-optimized connectivity, communications and security solutions.
Key takeaway
Experienced financial technology companies can help banks and credit unions navigate embedded banking technology, clarifying strategies that on the surface may seem unnecessarily complicated.
