Take an agile approach to embedded finance

Embedded finance will significantly change the cooperation of financial services corporations with non-financials. Take an agile approach with APIs.

Steffen Lorenz Steffen Lorenz

Embedded finance is a trend that will significantly change the cooperation of financial services corporations with non-financials, especially small and medium-sized companies.

Embedded finance, the seamless integration of financial services adopted by non-financial companies, could comprise a quarter of the banking market with small and medium enterprises (SME) by 2025, equaling $124 billion in revenue, according to Accenture.

This estimation is based on a survey that found that 47% of non-bank platforms are planning to offer embedded finance to retain customers and to increase their “lifetime value.” Examples of non-financials integrating financial services offerings into their platforms are Uber, Lyft and Shopify.

Losing share of wallet

Incumbent financial services companies risk losing share of wallet when SMEs turn to more innovative, more agile providers of financial services. Financial services companies are just too hesitant offering services that can be integrated as white labelled services into other companies’ platforms.

Possible reasons are fear of losing the contact to their customers and fear of becoming a pure transaction platform. But this reservation leaves the field to fintechs (like Stripe and Klarna) and big techs (like Amazon Pay and PayPal). And what’s even worse: the more sophisticated and complex such embedded services are (think of working capital management or trade finance for banking or complex insurance policies), the more severe the financial consequences.

Developing embedded finance offerings is a major transformation endeavor that affects the business and operating model, processes and IT. Financial services providers need to have a holistic perspective that ranges from selecting ecosystem partners to identifying where the services reside in the existing IT backend. Taking a piece-by-piece improvement approach, driven by the need to keep up with competition and to create new revenue streams, will not create competitive new offerings quick enough to compete.

APIs for innovation and speed

What if an insurer could accelerate customer-centric innovation by eliminating data silos and enabling actionable insight? What if they could provide innovative APIs based on existing IT functionalities?

The insurance company could streamline the development and composition of innovative services and make changes faster than before. Customer-centric services can be developed based on APIs and microservices that connect to the existing IT systems. An engagement platform, including a portal for developers, attracts and educates ecosystem partners and facilitates collaboration. The insurance company creates a consistent, secure, and fluid offering that creates additional revenues.

The key capability required for this transformation is API Management.

A customer example that shows how efficient the development of API can be, is Clal Insurance from Israel. Clal was able to cut the development time for APIs from 5 months to 3 weeks. And they were able to eliminate duplicate APIs by 25% – immediately accruing financial savings. Clal created a foundation of APIs to continue adapting to emerging trends in the insurance market.

The right API management platform can help financial services companies get the most value from data, whether it’s to accelerate innovation, improve efficiency or open new revenue channels. Read the latest Gartner report on Full Life Cycle API Management to learn more.