The End of Business Banking As We Know It?

In an effort to attract and retain customers and increase revenue, a growing number of non-banking financial companies have been offering financial services to targeted business and consumer segments,however, most of the Banking as a Service (BaaS) solutions available today have critical limitations.

In the current environment of economic instability and increasing competition, most business leaders understand that their companies must fundamentally transform their core systems in order to remain relevant in the coming years. At the same time, the push toward cloud migration, AI powered operations, and the customer demand for holistic financial service offerings, is being hindered by growing regulatory pressure and strict compliance requirements, combined with sluggish B2B payments, and ineffective digital banking relationships. 

The question facing business leaders right now is how to provide the financial services their customers want in the most flexible, sustainable, and cost-effective manner. 

Conventional Banking Versus Today’s Business Needs

Up till now, BaaS has been the go-to model for fintech businesses and non-banking companies who offer a range of financial services to their customers. The BaaS model works similarly to SaaS, or Software as a Service, allowing companies to use software without hosting it in-house or having to pay exorbitant licensing fees. By integrating with banks via Application Programming Interface (APIs)BaaS enables companies to deliver banking services with limited complexity and a small initial investment.

Since many BaaS providers rely on traditional banking infrastructure and processes (the result of the bank’s “ lift and shift ” of existing processes to cloud), this presents several challenges for their business customers:

For one, innovative and continuously evolving businesses, such as international trade companies, startups, IT and software development services struggle to keep banks updated whenever notable operational changes are implemented. They may also find it difficult to explain the core of their business processes and services to bank compliance departments.

As a result, bank compliance departments lack the necessary insight and experience to analyze various innovative business models and emerging industries of their business customers in order to determine risk. As a result, bank compliance departments are forced to make decisions based on insufficient information, which leads to various biases. BaaS providers may, for instance, refuse to provide services to customers from an entire industry. They may also refuse to complete certain transactions for compliance reasons without notifying their client in the process. Their clients therefore have very limited control over the experience of their own customers and users. 

Additionally, B2B payment processes are still lagging behind modern business needs. Despite decades of accounting automation and the digitization of B2C payments, the vast majority of businesses still spend countless hours each week on cumbersome manual processes and numerous failed transactions. B2B payments are significantly more complex than B2C payments– especially if those payments are international. Manually intensive and inefficient payment processes are costly, error-prone, and come with increased security risks. There’s got to be a better way!

From Legacy Systems to Digital Ecosystems

These challenges stand in the face of an increasing pull toward integrated business ecosystems — where groups of independent businesses and service providers come together to produce solutions that they could not achieve on their own. 

Over the past few years, businesses have been moving an increasing number of critical business functions to the cloud. At the same time , the number of digital interactions and data points an average business conducts on a daily basis has skyrocketed. This has led to a growing interest in digital ecosystem business models . 

A digital ecosystem is a group of interconnected platforms and apps that share information and work together as a unit. Well known examples of digital ecosystems at work include Amazon, Microsoft, and Apple. There are several versions of this model, however in every case seamless integration and real-time communication and data-sharing are the keys to the ecosystem’s success. 

Some companies have seen the writing on the wall and are now actively replacing their outdated legacy systems in favor of the digital ecosystem. The benefits of this route are many: inherent adaptability and scalability, business and revenue growth from new products and services, and an increase in their customer lifetime value. 

Businesses are also empowered to serve customers throughout all stages of their journey. A good example of this is Zillow, an online real estate marketplace based in the US. The platform offers customers a mix of complimentary services, such as property search and comparisons, home loans, tenant screening, and the ability to connect with a number of local professionals, from home inspectors and builders, to real estate photographers and moving companies.

The Rise of Embedded Banking

Above all, the drive for digital ecosystems underscores a growing trend toward the unification of business processes and functions, as well as sharing of data among different core operations and third-party solutions. 

Embedded finance is both a part of this trend as well as one of its key drivers. 

It allows any company to seamlessly integrate financial services into their own service offerings and customer experiences. Fintech companies that enable this integration provide both a range of financial products as well as the underlying technology and regulatory stack, so that their clients are free to focus on the core of their business.

Embedded finance, which relies on modern core banking technologies and cloud-based digital ecosystems, overcomes many of the challenges of the early BaaS systems. Instead of a front-end digital service, embedded finance becomes a key ingredient in a company’s core software platform stack . This structure enables open accessibility, flexibility, scalability, and improvements to payment processing that businesses need to help meet evolving customer expectations. 

Banking services can then be enhanced through AI, and vertically embedded into numerous user experiences and processes. 

According to McKinsey, consumers are embracing this shift with 71 percent of consumers interested in integrated offerings with a broad spectrum of complimentary services. This includes payments, wallets, zero-interest, point-of-sale loans, and online bank accounts.

Embedded financial services can also be easily integrated into business management processes. The resulting exchange of data can be used by fintech service providers to streamline business processes, payments, and increase revenues. These institutions are then able to more fully comply with the current Anti-Money Laundering regulations.

Applying AI to decision making and risk assessment, also reduces mistakes due to human error. With access to business management data, algorithms can quickly and accurately make unbiased, data-driven decisions regarding payment processing without having to disrupt business transactions. Soon integrated close-tech business management solutions will support frictionless payments– both locally and internationally.

Another game changer of embedded finance solutions is that they offer no-code or low-code development. Such solutions are much more affordable, and therefore available to small to medium size businesses, which will lead to more innovation, as well as rapid testing and the implementation of new financial services. 

Embedded Finance Is the Future of Business Banking

In the future, financial institutions will be seamlessly integrated into every business’ day-to-day functions. Embedded white label banking apps will have full stack business management and accounting software as well as a wide range of financial services. Customers will enjoy a range of complimentary financial services while using their apps and platforms without having to deal directly with a bank. At the same time, non-banking companies will be able to enjoy new sustainable revenue streams, greater customer satisfaction and loyalty, valuable insight into their customers’ needs, and will be able to free up additional resources to focus on their core services. 

Alexander Legoshin (CEO, Gemba Finance)