What will the bank of the future look like? To be honest, I am not sure there will be a physical bank where financial transactions take place. This is not to say that the banking industry will cease to exist. Banking systems have existed in some form, or the other as long as human beings have engaged in transactions and is likely to continue for as long as we do business. But banking in its current format and structure may not be around much longer. Deeper integration of financial services, or embedded banking is likely to be the norm in the future.
Banking as we know it today is vastly different from what our grandparents or even parents knew. Consider this – when was the last time you went to a physical bank branch to carry out a banking transaction? Do you use cash or even your debit card anymore or have you been primarily using mobile apps, digital wallets, and UPIs? The emergence of new technologies has opened the doors to a whole world of digitally powered experiences and banking is no exception. Customers have been vocal in their demand for uberized banking services with greater flexibility, ease of use, control, and personalization. In the face of increasing competition from fintechs and tech giants, banks too accelerated their digital transformation journeys. And the COVID-19 pandemic has proved to be the biggest driver of digitalization in banking. Social distancing rules and fear of infections led to increased adoption of online transaction methods, and these are likely to stay post pandemic as well.
The pandemic has in fact, accelerated the pace of technology adoption across the banking and financial services world and changed the rules of how businesses engage with financial services. At the heart of this transformation lies the modern customer and their expectations of seamless, and intuitive service. Banks are now exploring newer more customer-centric business models that call for deeper integration with non-financial businesses to offer a comprehensive and easily availed range of services. For example, Tesla is offering a quick and easy insurance program which allows customers to buy insurance directly from Tesla almost as soon as they buy their car.1 This also costs less than a policy from a third-party partner. Cab hailing company Lyft is offering debit cards for drivers that allows them to receive their payments immediately. Drivers can even set up savings accounts via this initiative. This sort of embedded finance model is built around the customer – get all the services and products need at one place quickly, and effortlessly, making this a seamless and optimized experience. And it is expected to grow exponentially, reaching an estimated market value of USD 138 billion by 2026.2
Evidently embedded finance is not a fad. It is here to stay because it ensures a win-win situation for all parties – customers find it easy to access what they need, and by making the process pain free banks and third-party businesses are more likely to close deals. It is also an excellent means for banks to study customer spending habits and requirements to finetune their personalization strategies. By building an embedded finance ecosystem banks and third-party vendors can encourage cross-selling and mutual growth. Embedded finance that finds expression in point-of-sale finance options or Buy Now Pay Later schemes can also help banks reach customers who were previously left out of the formal banking system.
Embedded finance can be used in several ways. BNPL options are of course one way of using it. Banks could take it further to even issue loans for larger amounts in partnership with companies working with bigger credit systems. Or like Tesla, businesses could embed insurance services into their offerings making it quick and convenient for buyers to insure their new purchases. Embedded finance tools could be used for investment and trading activities to connect users with their physical banks to make appropriate investments. And of course, as technology and customer requirements continue to evolve, financial technology-as-a-service models are rapidly making their presence felt in company portfolios, handling everything from deal management and customer acquisition to invoicing and revenue management
It is safe to say that banking will not be the same in the future. Banks will increasingly become orchestrators of ecosystems centered on customer needs. And banking itself will be deeply integrated with a variety of related and unrelated businesses delivering greater convenience and value to the customer than ever before. To do all this, banks need to move quickly to leverage emerging open banking opportunities. And for that, they need to continue accelerating their digital transformation journeys with well thought out investments in the right technology platforms and partners. The bank of the future will be digital and embedded into every aspect of a customer’s purchase journey.
