Economist Impact/Temenos Research Shows the Rise of Embedded Finance in Banking
By Roy Urrico
Financial institutions must harness disruptive technologies and create their own, or actively participate in, digital ecosystems to remain at the heart of the banking universe, according to a global Economist Impact study, commissioned by Temenos.
Geneva, Switzerland-based fintech Temenos partnered with research and analysis organization Economist Impact for Byte-Sized Banking: Can Banks Create a True Ecosystem With Embedded Finance? The report contained the findings from a survey of 300 banking executives spanning Europe (25%), North America (23%), Asia Pacific (18%), Middle East and Africa (17%), and Latin America (17%) about different trends in the industry worldwide. Five credit unions participated in the study.
The report found that payment companies, technology companies and e-commerce disruptors are competing against financial institutions (FIs) with embedded finance solutions. Coupled with consumers’ growing expectations for better, more personalized products and services, this is forcing FIs to assess the role they play and how they must adapt.
Among the key insights from North America (NAM) banking executives surveyed:
· The top three priorities in the next five years: improving personalized and embedded customer experience and engagement (34%), improving product agility (31%), and improving productivity (26%), generally in line with the global sentiment.
· North American FIs are far more optimistic on artificial intelligence (AI) than their global peers. North American respondents overwhelmingly cited emerging technologies like Generative AI (GenAI), a type of AI that can create a wide variety of data, (63%) and digital technologies (66%) as the top trends impacting the industry in the next five years, compared to global respondents (40% and 39%, respectively).
· In terms of defining an innovation strategy, North American FIs were less likely to invest directly in fintech startups (29%) than their global peers (41%).
Embedded in Consumers’ Lives
Almost four-in-five (79%) survey respondents agree that banking will become embedded in consumers’ lives and businesses’ value chains. One-in-five financial institutions expect business models to evolve in the coming years to offer banking-as-a-service (BaaS) embedded finance. Nearly twice as many of these orgaqnizations want to retain the consumer-facing experience and act as a true digital ecosystem themselves.
“New technology and customer demands are the top two trends expected to impact banking in the next five years,” Jonathan Birdwell, global head of policy and insights, Economist Impact, said. He added, “To maintain their direct connection with the consumer, banks are recognizing that they must become true digital ecosystems. Customer centricity will also drive banks to offer more embedded ESG (environmental, social, and governance factors) and sustainable banking propositions to their customers in the future.”
Kanika Hope, chief strategy officer, Temenos, added: “Banks need to tap expertise in new technologies like cloud and AI, as well as collaborate with fintechs and technology companies to offer embedded finance, as well as to build digital ecosystems. The case for the public cloud is becoming more apparent; 51% of respondents agreed that banks will no longer own any data centers due to the move to public cloud in next five years. Environmental concerns have also joined the list of reasons— business agility, efficiency and security—why banks are accelerating the shift to the cloud.”
New technologies are expected to have the biggest impact on financial institutions in the next five years, more than customer demands and changing regulation, according to 63% of respondents. Seventy-one percent say unlocking value from AI will be the key differentiator between winners and losers with generative AI in particular expected to drive banking by 75% of respondents.
Collaboration with fintechs or other technology providers is key to accessing expertise in emerging technologies. Against this backdrop, banking executives surveyed expect relationships within the industry evolving over the next one to three years. As many as 44% of survey respondents believe that financial institutions will acquire majority stakes in fintechs and 32% believe that there will be market consolidation among challenger banks in the next one to three years.
Harnessing Emerging Technology
“As payments, technology and e-commerce disrupters cut banks out of the equation with embedded finance solutions, banks must harness emerging technologies to create their own digital ecosystems and remain at the center of the banking universe,” surmised the report.
Other findings include:
• Generative AI (GenAI) in particular is expected to impact banking, according to 75% of Economist Impact respondents.
• Collaboration with fintechs or other technology providers is key to access expertise in emerging technologies as open banking initiatives multiply across the world.
· Financial institutions see their business model evolving in the next 12-24 months, offering banking as-a-service to brands and fintechs, and enabling embedded finance within their own products and services.
• Nearly two-in-five financial institutions (38%) foresee acting as a true digital ecosystem offering their own and third-party banking and non-banking products and services.
• Improving personalized and embedded customer experiences remains a top strategic priority. Three-quarters of survey respondents agree that financial institutions will seek to differentiate on customer experience rather than products in the next five years.
• Customer centricity is driving banks to offer more embedded ESG propositions to their customers (73%), as well as providing capital to environmentally friendly projects (74%).