PYMNTS Intelligence: How Embedded Finance Can Help Banks Compete With FinTechs

Personal banking has become more digital than ever since the pandemic’s onset, when physical bank branches shut down, leading consumers to develop a penchant for online services.

A recent study found that 78% of Americans prefer to bank via mobile app or website rather than visiting branches in person, thanks to the added convenience of being able to bank from anywhere.

This digital push has opened the door for FinTechs, challenger banks and digital-native financial institutions (FIs) to disrupt the industry as bank customers question the need for traditional banks. Two-thirds of consumers now say they need FinTech solutions to manage their daily finances, giving traditional FIs reason to worry about their long-term future. This month, PYMNTS Intelligence examines why banks are concerned about FinTechs’ upheaval of the financial industry and how embedded finance can help FIs catch up to their younger digital cousins.

Why Banks Are Losing to FinTechs

Digital banking is the new normal for most of the United States population, so it is not surprising for consumers to feel that a digital-native FinTech can address their financial needs better than a traditional bank. Sixty-seven percent of consumers in a recent survey said they are finished with visiting brick-and-mortar bank branches for good — up from 46% in 2020 — and 80% believe that cutting-edge financial technology will make them better off with easier, less costly and more accessible transactions. All these factors have led 66% of consumers to the conclusion that FinTechs are a necessity for personal finance rather than simply a bonus, up from 41% who said so in 2020.

Banks are taking notice of this challenge to their status in the financial pecking order. A recent survey found that 70% of FI CEOs thought that FinTechs were their biggest competitors, followed by Big Tech companies at 53%. These CEOs said that enhancing digital offerings was a top priority to regain a competitive edge, but they face an uphill battle in trying to recapture a customer base that is now more digitally entrenched than ever. Another study found that 75% of consumers are drawn to FinTechs’ cost-effective and seamless services. In addition, 52% said that banking with a traditional FI was not “fun,” while 49% said their current banking relationship was unrewarding and 48% said it lacked an emotional connection.

These factors could spell trouble for the traditional banking industry if left unchecked, as FinTechs continue to poach customers from FIs. To keep up, banks must turn to new tools. One in particular that can help them stand out from the crowd is embedding more FinTech services into their digital offerings.

How Embedded FinTech Can Level the Playing Field

Embedded FinTech has the power to level the playing field for traditional banks by allowing them to offer specific, branded digital experiences. By incorporating FinTech innovations into their own offerings without disrupting the customer experience, this embedded service model provides a level of differentiation that can essentially make any bank appear to be its own FinTech.

PYMNTS’ research found that 92% of FIs are currently innovating or have plans to innovate embedded FinTech experiences to improve their digital suites, with large FIs taking the lead in these endeavors. More than three-quarters of large international banks are currently implementing embedded services, with just 9.5% of credit unions and 24% of community banks doing the same. The most common areas in which embedded solutions are helping are loans and cash flow management, according to the research.

Buy now, pay later (BNPL) embedded solutions are another common area of innovation. While just 14% of FIs currently offer a BNPL product, 25% expect to launch one in the next 12 to 18 months. Large banks are again leading the charge when it comes to this innovation, with 47% of FIs having more than $50 billion in assets saying they plan to introduce BNPL options within the next 18 months.

Banks need not conduct these innovations alone, however. Instead, most are turning to partnerships with FinTechs themselves to curate embedded solutions. More than two-thirds of FIs leverage these partnerships instead of developing solutions in-house to permit faster product rollouts and easier integration. Working with a third party also can reduce risk, a substantial worry for banks looking to implement new services. Almost one-third of banks said fraud prevention was their top concern, and 60% of respondents ranked regulatory problems highly as well.

The financial industry is competitive even in the best of times, and the growing popularity of digital-native FIs is creating especially stiff odds for traditional banks. Embedded FinTech could be the key to evening those odds.