Traditional banking has experienced an evolution over the past decade or so and continues to transform digitally due to customer demands and financial technology innovation. Challenger banks, embedded finance and banking-as-a-service (BaaS), all supported powerfully by application programming interfaces (APIs), are now an integral part of the financial fabric.

Some bankers react with glassy eyed looks when confronted with evolving financial terminology. Even the expression fintech, a shortened version of financial technology, now defines the technological underpinning of the banking industry.

Three of these new schemes on the financial services ecosphere have been wide-ranging and all-embracing:

  1. Challenger banks, also known as Neobanks or online-only banks, are fintech companies that provide the technologies to streamline mobile and online banking.
  2. Embedded finance is a novel method for fintechs to integrate banking and payments services into their apps and ecosystems through the use of APIs.
  3. BaaS and embedded banking services, aided by fintech advances and APIs, enable financial services to incorporate more open banking and open finance features.

These have not only have tested legacy financial institutions but established that multiple consumer and digital friendly-services can coexist to meet customer demands.

Embedded Finance Supports Fintech Growth

The early conception of ground-breaking embedded finance capabilities focused on unbundling retail banking products and services, providing advanced tech to financial institutions, and allowing the neobanks to compete against tech-lethargic incumbents. Embedded finance permitted fintechs to offer or produce financial services as a part of existing products or create new developer-friendly integrations.

Embedded finance supports the growth of a whole landscape of new players targeting specific segments through the provision of tech, licensees, and operational activities. The most common embedded finance offerings include banking, lending, insurance, payments, and branded credit cards.

One of the defining future trends across the industry is expected to produce niche target verticals. For example, in March 2022, Uber launched Uber Money, which allows Uber drivers to manage and access their money in real-time.

Embedded finance presents a huge opportunity for legacy institutions; they can become the conduits on which financial services function. The embedded finance ecosystem also removes many of the most significant challenges and costs associated with building a financial product at any scale.

Increasing Demand for Universal Banking Options

To meet the growing customer demand for universal banking options, many financial institutions are increasingly offering BaaS (frequently white-labeled or cobranded); embedded finance (aka embedded banking), the integration of traditional financial services, such as payment processing, with other services such as a ride-share app; and open finance, the extension of open banking data-sharing principles to enable third party providers to access customers’ complete financial data.

Finastra’s recent “Financial Services State of the Nation Survey 2022,” which polled professionals at 758 global financial institutions, revealed that open banking and open finance are increasingly seen as essential, with a growing proportion of respondents regarding them as “must-haves.”

Many financial institutions recognize the necessity to embrace customer enablement and deliver a seamless experience incorporating BaaS and open finance. Finastra’s research showed BaaS and embedded finance are already firmly rooted in the financial services sector, with demand for these technologies among institutions largely driven by customer expectations. 83% of financial institutions agree that BaaS and embedded finance are already expected/demanded by customers.

In addition, more than a third (35%) of institutions have improved or deployed BaaS in the past year, thereby offering complete banking processes originating from within, ‘as a service’ through an open API-enabled platform. A fraction less (33%) have pursued embedded finance, improving or deploying products or services, through APIs, within another (typically non-banking) customer journey.

Transforming Legacy Systems

With this new banking age brought about by digital transformation, neobanks, embedded finance and BaaS, many financial institutions must implement new tech strategies to stay relevant. Fintech was already transforming financial activity digitally due to the mobile internet/smartphone growth period, but the pandemic hastened many financial institutions and their customers online to conduct transactions remotely.

Examples of fintech applications and activity on the rise include robo advisors, payment, lending and investment, money transfers, remote check deposits, and credit and lending approvals. Fintechs and financial institutions can benefit by coming together rather than competing.

Collaboration remains important to 98% of financial services institutions, according to Finastra survey respondents. Financial institutions gain technology and insights through mergers, acquiring startup companies, or mentorship programs. In the meantime, fintechs increase customer trust and market reach through such partnerships.

The highest rated ways in which technology enables partnership are improving data security; improving openness and sharing of data between financial institutions; and making it easier for start-up tech companies and innovators to access financial institutions.

In addition, banks and credit unions need fintech partnerships to accelerate innovation and growth. Q2 Holdings, Inc. in a report on banking innovation and digital evolution, revealed more than 60% of financial institutions surveyed see fintech partnerships as key to their growth strategy – but only 12% of the respondents have fintech partnerships.

Many questions remain about the security of open banking. While open-banking APIs enable financial institutions, vendors and fintech companies to share data, there are still valid concerns over the safekeeping of information passing through them. Apprehensions related to cloud security and an upsurge in cyberattacks are also important to consider when entering the open-banking/cloud fintech API marketplace.

NXTsoft offers several secure routes to free up and connect banking data:

  • OmniData enables financial institutions to access its data quickly and securely when a financial institution is involved in a core conversion, legacy data migration or other data event. The OmniData solution can assist financial institutions free-up data stored on legacy systems.
  • OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions. OmniConnect removes integration obstacles and provides a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems.

NXTsoft has implemented and managed data connectivity events for over 2,000 financial institutions and provides connections to more than 40 different banking core accounting systems including platforms from Fiserv, Jack Henry and FIS.