Currencycloud Blog July 13, 2021

What Embedded Finance Means for Banks: Interview with Tribe Payments

As embedded finance evolves the financial world, how will banks shape that future? 

This is the question on the minds of industry insiders — and with the rise of embedded finance, it’s never been more pertinent.

Embedded finance continues to cement itself as the next step for the sector. In payments alone, Barclays predicts that embedded finance revenues will grow from $16.1B in 2020 to $140.8B in 2025. By 2030, embedded finance will have changed  market structures and business models dramatically.

Right now, banks are varied in their response. Some are playing catch-up, digitizing traditional services; many provide the infrastructure and rails for embedded services; others try to compete with specialized Fintech providers. 

The argument often goes that these are the only options for banks: they are an outdated model, soon to be outpaced by new trends. But we see a different future. Banks are facing a key opportunity to shape the evolution of embedded finance — provided they engage.

For the next instalment in our series on embedded finance, we’re focusing on what that engagement will look like. We spoke to seasoned industry expert Alex Reddish to get his take. As Managing Director at Tribe Payments, Alex is responsible for Tribe’s business strategy and customer success as a leading payments technology provider in Europe. He posits that the ultimate goal of embedded finance is intuitive financial products tailored to individual consumers. 

That goal is achievable through a virtuous relationship between banks and Fintechs. To claim their role in that future and open up new revenue streams, banks could become platforms that provide specialized services with Fintech partners. 

Banking in a Moment of Transition

From the beginning, embedded finance has been dependent on banks. 

Banking services, in Alex’s view, have been “part of the catalyst for embedded finance”: they offer a wide array of financial products via one provider.

However, those services historically:

  • Were built for the many and not the few; so personalisation was not a consideration
  • Originally designed for in-person transactions, not online platforms
  • Struggled to provide a seamless digital payment journey or customer experience
  • Could not out-compete specialized service providers

As a result, non-bank financial institutions and Fintechs moved into the space with services that answered those needs. Soon, embedded finance was born. Banks became pressured to replicate things like software that enabled “invisible” checkout processes such as Lyft or Shopify.

To remain relevant banks must use their advantages.

“They’ll retain consumer trust for the foreseeable future,” says Alex. “Bank switching is at an all-time low of 4% right now, and most individuals keep the same account for 15 years. Traditional activities like taking deposits and focusing on net interests are still profitable, and banks can continue to focus on margins there. It’s likely, therefore, that consumers will use Fintechs for transactions but retain their bank accounts as a primary source from which transactions are fed.” 

Banks also have the infrastructure that backs much of today’s embedded finance world: both traditional and challenger banks provide the rails and connections that power Fintechs. As a result, they’ve solved one of the core challenges which otherwise stalls adoption for Fintechs: compliance and regulation.

That combination is powerful. It gives banks the opportunity to center themselves in embedded finance and transition from the passive foundation to the main force influencing its evolution. 

It boils down to this: consumers trust their banks and want to maintain those relationships. However, Fintechs are currently the driving force behind specialized financial service innovation. Banks are perfectly positioned to connect those two pieces: by partnering with Fintechs, they can create more revenue streams for themselves and offer true embedded finance experiences for their trusting customer base.  

Evolving Banks and Embedded Finance

By doubling down on their own core values — banking services — and turning specialized Fintech partners into revenue-sharing channels, banks can carve out a niche for themselves in embedded finance.

In this model, core banking remains with banks, and financial services disperse to specialized providers who can provide more niche services. Yet banks sit at the heart of it all, weaving together a new model of finance that provides the most customized service for each user by connecting them with top providers at every opportunity — and connecting banks to additional revenue streams. It’s a version that maximizes the trust and infrastructure of banks by combining it with the digital expertise and service delivery of Fintechs. 

Alex sums it up well:

“ recognize that they retain the trust as the financial institution but can’t necessarily provide the excellence of product across the spectrum of services that traditional banking had historically provided — whether that be investment lending, mortgages, or pensions. So they look to that are a bit more adaptable… to provide a multitude of top-tier products via a range of partners, rather than just a sort of average outcome.”

He’s not alone in this view. In their most recent annual report, “Fintech 2030: The Industry View,” Tribe surveyed over one hundred executives in the European Fintech sector. 31% believed banks would default to “dumb pipes” or rails — but 51% asserted that banks “will become platforms that provide access to a multitude of hand-picked, specialized Fintechs.” 

It’s a wonderful vision for banks, particularly those feeling threatened by embedded finance and the digital era. Getting there is another story.

Here’s how banks can build that future

For Alex, it starts with digital transformation, which must be viewed not as a one-off event but as “an attitude around evolution.” His approach positions things like APIs as table stakes, with intuitive tech as the end goal:

“An API-first tech stack that evolves with the speed of tech innovation is incredibly important. Otherwise, you’re just pushing out the same problem with a static tech stack… I would be looking for a modular or microservice architecture… that through banking cycles, through blockchain cycles, through intuitive technology that will impact financial service. We therefore believe this is a move you only need to make once, not once every 10 years.”

From there, it’s about the user experience. The more banks can work to become — or partner with — invisible backend providers, the smoother the user experience will be, to the extent that a user won’t even see a payment being made. It’s what Alex sees as the payment process “nirvana.”

That means leaning into data and contextualization — as he’s written, turning the person into the payment. Banks can refocus on making more informed decisions, potentially even rethinking how they make risk decisions with access to a much deeper bank of personal information. Service providers can manage user experiences, while banks manage data, risk management, liquidity management, compliance and lending.

The futures of banking, Fintech, and embedded finance, therefore, are truly interconnected. In everyday life, the classic example is invisible payments in Uber: the focus is on the journey, and your payment is a seamless result of that everyday action. In banking, it’s about intuitive financial products that suit individual lifestyles. Alex gives the example of using data to personalize suggestions and provide immediate value. For instance, offering young parents child care expense management options rather than bombarding them with irrelevant offers such as retirement accounts. 

Most banks won’t be able to immediately pivot to this kind of approach. However, it goes back to that ideal future state: leveraging partnerships that enable banks to deliver a far superior, more personalized customer experience.

Want to learn more?

At Currencycloud, we specialize in providing the most streamlined, user-friendly cross-border transactions possible. Our embedded finance model is based on two core points: cutting-edge technology and industry-leading partnerships with providers like Tribe and future-looking banks. 

Pivoting to maintain a competitive edge is made easier by choosing partnerships with existing integrations and a robust ecosystem. The partnerships that embed in demand products such as cross-border functionality via an API provides banks with a quick way to market and a more elegant pivot around their competitors. Integrated with Tribe, Currencycloud brings that cross-border transaction functionality allowing for a quick implementation and a superior joint product that fulfils consumer needs.

Get in touch with our payments experts for case studies on how we help some of our banking clients such as Starling Bank, Brookline Bank or Standard Bank and more on how we could help you.

Learn more about embedded finance

Continue to explore Currencycloud’s series on the real-world possibilities of embedded finance with the other articles on embedded lending in this series:

  1. Embedded finance: Cross-border transactions
  2. Embedded Lending in Action: The Potential of Buy-Now, Pay-Later
  3. Transforming global business with embedded finance: The HUBUC story
  4. How embedded finance is bringing innovation to the lending industry

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