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Embedded finance could be a gamechanger

Regions Bank is among the traditional institutions moving with purpose to integrate data and payments with outside service providers.

Jan 4, 2023 / Technology
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When customers of Regions Bank want to remodel or make other improvements to their homes, they can work directly with a participating contractor to complete a paperless loan application integrated directly into the contractor’s sales software. This easy loan application process provides the homeowner with a fast credit decision from the bank.

This capability is facilitated through Regions’ acquisition last year of EnerBank USA, a provider of home repair and improvement loans that enables a network of contractors to provide financial solutions at the point of sale.

The process relies on advanced technology called “embedded finance”—bundled offerings that allow banks to combine banking with other services in an integrated manner. Nonbank companies have offered embedded finance for several years, but financial institutions are just starting to make it available.

The technology not only empowers banks to better serve both retail and commercial customers through additional services but also gives them an opportunity to monetize some of their service offerings to corporate customers willing to pay for the additional capabilities, says Jacob Morgan, principal analyst at Forrester.

Morgan says that, while a few large banks in the U.S. have taken global leadership role in using embedded finance, most midsize and smaller banks and credit union have a long way to go to catch up.

He suggests that U.S. banks look to innovative initiatives such as Standard Chartered Hong Kong’s marketplace that allows small-business customers to do business with one another. “The entire effort is supported by the bank. It provides the payment capabilities and manages the introductions between businesses,” he says. “Small businesses are able to get technological services that they could not afford alone, but through the bank they are able to afford advanced AI and blockchain technology.”

Regions applied embedded finance for the first time in 2020, when commercial bank clients began to integrate the bank’s commercial card services into their back-office systems to allow for automated card issuance, authorizations, limits, alerts and virtual card creation, among other advanced capabilities.

The bank is also looking at a number of other embedded finance applications that integrate data and payments into software to create improved customer experience and automation. These range from the sharing economy (such as ride-sharing) to major life events. For example, financial services can be embedded within a wedding-planning solution to allow customers to plan and finance their wedding and make necessary payments through a single app, says Aaron Bridgers, head of strategic initiatives and innovation.

In another scenario, commercial clients can embed bank services into their enterprise resource planning tools or customer-facing applications. This could enable utility companies, for example, to send text messages to customers getting close to being late in paying bills. The customers could use the app to immediately pay the bill, avoiding the typical two-day clearing time associated with online bill payment programs.

Forrester’s Morgan says many banks are reluctant to use embedded finance offerings because they are afraid of exposing their customers’ financial data. They’re also concerned that partnerships with technology companies could lead customers to direct their loyalty and appreciation to the tech company instead of the bank.

He argues that banks can address security fears by developing strong cybersecurity systems. And fears about fintech alliances may be unwarranted. “Someone is going to be captivating consumers with these services. If it’s not you that is offering them, it will be some other bank,” he says. As for not wanting to work with tech companies, Morgan adds, “Banks have to ask themselves: Can I compete with the best of class in these technologies? In most cases, the answer is no.”

In implementing embedded finance services, many banks will have to make significant investments in their IT systems. For its part, Regions didn’t need to do much new development, instead using what the bank had been working on for the past several years in addition to executing the current strategy.

“We had already been investing in authentication, security, API development and other technical capabilities. Much of what we are doing in embedded finance is a culmination of what we are already doing and utilizing these capabilities to solve customer needs,” Shah says.

He advises other banks considering the technology to examine their existing strengths in banking and think about how they could build on those strengths with the additional applications that embedded finance provides.

Morgan adds that before banks even think about technology, they need to focus on the underlying strategy. “What is the marketing strategy? Who is the targeted audience? Banks have to look at how this is being used, not just the technology behind it.”

Lauri Giesen is a BAI Banking Strategies contributing writer.

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