"I believe banking will soon become very different from how we know it today"

Financial institutions are increasingly investing in the ‘platform economy.’ 20 percent of them already offer embedded finance solutions to bring financial services to consumers leveraging these digital environments. In addition, 70 percent of bank executives say that embedded finance is critical to their business strategy or supports it in key ways. To succeed, banks must address challenges such as monolithic processes within the banking organizations themselves, as well as privacy and cybersecurity across broader ecosystems. These are some of the insights from the report ‘Embedded finance: Creating the everywhere, everyday bank,’ produced by IBM Institute for Business Value (IBM IBV) in collaboration with BIAN and Red Hat, after surveying 1,000 financial managers and 12,000 financial services consumers in 12 countries.

Within the context of the report, Paolo Sironi, Global Research Leader in Banking and Financial Markets at IBM IBV, interviewed 22 international experts in embedded finance on the opportunity that this offers to banks, their partners and their customers. One of them is Carmela Gómez, Global Head of Open Banking at BBVA, a bank that was among the pioneers in the implementation of ‘open banking’ solutions to enable financial services on digital platforms.

“Embedded finance empowers us to attract a broader market and provide convenient access to financial products where the customer needs it and when the customer needs it,” she stated. “Our partners often choose to collaborate with BBVA because they recognize our strengths and the trust we instill in users when it comes to secure payments and opening accounts.” Unlike smaller competitors, which focus on offering a few services in uncharted waters, “as a dominant player, we now have a unique opportunity to leverage our existing suite of value-added in-house services and adopt a long-term strategy aimed at integrating a broad range of financial products and solutions.”

Question: As a banker at the forefront of business model transformation, what is your understanding of embedded finance?

Answer: Banks have always looked to deliver products in a more convenient way for customers, like consumer finance through third-party agents in the physical world. This is what I call “traditional embedded finance”. What digital economy and open banking brings anew is the ability to do this in the digital world, which means convenience and immediacy for final customers.

Q: To what extent does the concern of losing customer relationships influence the preference of bankers between "traditional approaches to embedded finance" and "digital embedded finance," such as utilizing agents for consumer lending?

A: Through embedded finance we are not losing the relationship with clients, but bringing the financial service to the place where clients are doing their daily journeys through an open funnel created in a third party. Client capture is much more expensive for banks than for e-commerce companies or travel websites. Embedded finance empowers us to attract a broader market and provide convenient access to financial products where the customer needs it and when the customer needs it. The customer-facing privileges are shared with our partners and the end customer relationship remains with the bank.

Q: Is the effectiveness of this funnel consistent across different client segments—for example, retail clients, small and medium-sized businesses, and corporate clients?

A: Retail and SME clients look for third-party portals where they conduct their day-to-day activities. This digital behavior allows us to collaborate with third-party portals to make finance services available in the most convenient way. On the other hand, acquiring and managing relationships with large corporate clients is more complex and traditionally relies on professional services. Embedded finance enables these companies to digitally manage relationships, as business decisions occur in various contexts. I cannot imagine a treasurer of the future, who is now in university, not thinking of having embedded finance solutions for managing costs, taxes, accounting [...] It’s something that is going to happen.

Q: What’s the appropriate first step when embarking on an embedded finance journey, and what potential pitfalls or actions should be avoided along the way?

A: The first step is carefully identifying which verticals to serve. This is essential to design a customer-centric approach. The partner helps you understand deeply the vertical you want to tackle, and that will lead to the creation of products that will serve their customers better, bringing the necessary financial solutions into client journeys and events. In some sectors it’s not easy to gain that level of customer understanding to leverage financial needs if you don't have the full context. That's the main value of embedding finance now. That's the main value of partnering.

Q: You said partners, not buyers. Is embedded finance about exposing APIs for a third party which consumes them autonomously? Or is a partnership model necessary?

A: I think learning how to partner is the main value that embedded finance brings to the industry. Many companies which don’t aspire to become banks want to offer excellent financial solutions inside their client journeys. Simultaneously, many banks strive to target these companies’ customers who are unlikely to visit the bank's website. So, partnering is a win-win for everyone.

One of the first things you need to do—the one step you need to get right—is understanding which partners you want to work with, and what is the value that we can jointly offer to the final customers. This is not about one big business case or building a product that suits just one big client. This new way of banking needs to grow with small learning steps which will help us adjust systems and services and transform processes as a whole. Connecting to clients outside banks’ traditional perimeters has many challenges in terms of processes and contracts.

"Embedded finance is not only about disruptive innovation, but a joint transformation of the whole financial and non-financial ecosystem."

Q: To play that back, your main point is that banks need a long-term strategy, and opportunistic approaches won’t enable banks with the foundations they need to build for the future?

A: That’s right. In their pursuit of catering to small business clients, banks run the risk of overlooking critical elements that may emerge later and potentially strain the client relationship. This is a common mistake that arises when delving into the realm of embedded finance. Neglecting to grasp the strategic understanding of the overall context in which clients operate is like setting up mobile banking just as one service on a little mobile screen instead of a bigger laptop screen, and forgetting to consider business continuity, new vulnerabilities, need of tailored processes, and new approach to clients.

Q: What is the most significant lesson learned from your experience with embedded finance initiatives?

A: I think the first lesson learned is about addressing regulators’ concerns and requirements. It has taught us a lot. European regulators, for example, have many fintechs talking to them about open banking while many banks are fairly disengaged because they think they cannot monetize on open banking requirements. Current regulation does not allow fair play, does not promote standards, and does not motivate banks to invest in offering good-quality APIs. However, embedded finance is something that is going to happen. It’s not only about disruptive innovation, but a joint transformation of the whole financial and non-financial ecosystem. All the community must have a voice in discussing future regulation.

The second major learning is about data. I don’t see yet many embedded finance solutions that are really leveraging data correctly either in the banking or non-banking world. How can we leverage data considering privacy, and how to explain to the customer for what are we going to use your data and which benefits will bring for them? And how are you going to get value here? Those are the main challenges I see looking forward.

Q: Banks have their own closed verticals, and integrating embedded finance would inevitably intersect with these. Are you inferring that banks need to open up internally to effectively support an embedded finance system, and thus cater to external clients?

A: Banks need to open—or more than that, need to change—the way we have looked at financial services until now. Managing an internal customer funnel is not the same as helping partners manage their funnel, including the financial part of it. This requires not only a different sales approach much more based in discovering together with the partner what works well, but also a different approach to sell banking products.

A clear example is selling credit products. Learning how to use external data to improve the risk scoring could be very interesting for both, but the client consent to use their data is critical and needs to be managed. It could be very interesting for the partner because they will have more satisfied customers. It could be very interesting for the final clients, because they will get more opportunities to finance their goods or whatever they are looking for. And of course, it's advantageous for the bank as it drives more business.

The question arises: How can we combine these three elements? How do we explain to regulators the new models we wish to implement? How do we test these models in a regulatory sandbox to gain acceptance? It's essential to find a way to navigate these questions because managing risks in non-traditional financial ways requires careful analysis and consideration, and of course a different selling and operating approach.

Q: In the context of embedded finance, how important is the relationship between business and technology?

A: It’s not just business and technology. For me, it’s a square that considers business models, new technology, transformed processes, and secured access to data. Technology plays a crucial role in determining what can be done. I appreciate it when technical experts say that we can do anything, and it's true, we do have endless possibilities. However, we must consider the cost, timeframe, and associated risks. At BBVA, we call these elements ‘shapers’ which mold the development of technology—for example, legal, compliance, risks. We as a business would love to do many things. We might have 25 ideas. Of those 25, maybe 20 are viable on technical terms. Fifteen more are excluded by regulatory or risk constraint. And once we define the valuable use cases that remain, we need to consider how can we explain our value to the end users.

Q: Should banks adopt existing infrastructure to enhance embedded finance architectures? Or is it more advantageous to start from scratch with a greenfield approach?

A: For years, we've had a wide range of proprietary APIs that we use internally to access BBVA's back-end services. However, there is a major difference between internal use and exposing APIs externally to a non-owned channel. At BBVA we use third-party tools to facilitate API exposure and orchestration. But for us, the best approach is a mix of both. Some banks may opt for a greenfield approach, aiming to start from scratch to avoid any constraints. While I understand the appeal of such a strategy from a business perspective, it also carries the risk of losing ground. As an incumbent, we possess a unique opportunity to leverage our existing suite of value-added internal services. While smaller competitors may initially focus on one or two services in a greenfield setting, as incumbents we should adopt a long-term strategy aimed at embedding a wide range of financial products and solutions. A logical approach involves blending new infrastructure with the modernization of our traditional core systems.

"I don’t know any case in which standards didn’t help to grow businesses exponentially."

Q: To what degree does resolving talent and culture gaps help embedded finance initiatives succeed?

A: The challenge in organizations is moving the whole structure to explore new ways of doing banking when they are happy with the business they do today. And as we discussed before, open banking requires a different approach to sales and operations. Funding and development of embedded finance will only materialize if we seriously consider the changing behavior of our clients, and therefore the change in people skills. We must consider the pace of their digital adoption as well as how they expect to interact with financial services within their digital experiences. I don't know if it's going to take three, seven, or 10-years’ time. But I believe that banking as we know it today won't be there soon. That’s why we need to fund this transformation now.

Q: Are the CEO’s and board’s commitments essential?

A: Embedded finance won't be a reality at any bank without board and C-level commitment.

Q: What stands at the intersection between standards, regulation, and quality APIs?

A: Regarding standards, PSD2 is an excellent example. Many intermediaries build their business case by offering their own set of standards, which results in multiple conflicting standards in the industry. This affects the speed and clarity by which non-banking companies can embed financial services. The industry should agree upon a common set of standards to promote as a foundational component of embedded finance. In business history, I don’t know any case in which standards didn’t help to grow businesses exponentially.

Q: Leading the competitive landscape are those who establish and control the standards, whether they are intermediaries or jurisdictions. Which regions do you perceive as being the most advanced in terms of embedded finance development?

A: Asia is a leading market in embedded finance. The main reason is a combination of technology adoption by businesses, digital behavior of the population requesting financial services to be embedded, and regulation. There banks want to be active players in the ecosystem.

We talked about how critical the top-down mandate is to change the bank mindset to transform how products are developed and offered. There are also many examples in the US where smaller companies are offering embedded services. The US benefits from a single market with a single language, and the possibility to offer same API functionality across many local states. Adequate ROI is more complicated in smaller markets like some Latin American countries, parts of Asia, or even Europe because of the need for passporting from one country to another, which also takes time.

Forward-looking regulation is also a key driver, and some countries such as Australia and Brazil are making fast inroads benefitting from all the lessons learned from countries who started earlier.

One example of regulatory advantage is digital onboarding. Jurisdictions that enable small business representatives to utilize a power of attorney for online onboarding provide embedded finance players with a clear advantage. This allows clients to onboard and start utilizing services without friction. Otherwise, banks would need to maintain a dedicated registry for powers of attorney to facilitate onboarding for users from third-party companies.

"Our partners often choose to collaborate with BBVA because they recognize the trust we instill in users when it comes to secure payments and opening accounts."

Q: Given the central role of banks as trust agents, what factors contribute to a bank being perceived as more trustworthy? Can a cool brand alone suffice?

A: Trust is the key issue, and trust is not just a cool brand. Financial education plays a relevant role to answer key questions such as, “Is my money safe?”. In this regard, trust is a big asset for us. Our partners often choose to collaborate with BBVA because they recognize our strengths and the trust we instill in users when it comes to secure payments and opening accounts.

Q: When non-banking firms seek partnerships with banks to embed financial services into their client journeys, what do they value the most when selecting which banks to collaborate with?

A: What the ecosystem of partners want is easy integration, from clear technical documentation to state-of-the-art sandbox capabilities. They want monetization options as agents. And they also demand security and resilience. For example, systems must not fail on Black Friday, no matter how much the transaction volumes spike. What they demand is frictionless journeys for their clients. Banks are the financial business, and partners are in another business; embedded finance is just a component of the journey.

Q: Turning the question around, what do banks value most about embedded finance partners?

A: First, the value for the bank is opening the funnel to connect with a cohort of clients who would never come to the bank website or app. Second, but not less important, partners provide better understanding of cohort needs, enhancing the bank capability to ideate new products or solutions that fit.

Q: Considering the time required to deliver value for most embedded finance initiatives, what is the most effective approach for reporting progress to top management?

A: Embedded finance is not an easy journey, and it takes several levels of conversations to reach same understanding and strategic consensus. The best way to do this is demonstrating that clients are changing their behaviors and want to do business through third parties. Half of existing clients of our embedded finance solutions are already BBVA clients, but the other half are clients that are difficult and more expensive to attract with traditional channels.

Q: You referred to embedded finance as a square made of business, technology, processes, and data. If we add the ecosystem, it becomes a cube featuring the interest of partners, lines of banking business, technology departments, and regulators. How important is the concept of value orchestration and furthermore the construct of a value office taking center stage inside this cube?

A: It is more than relevant. This is critical. You must transform your way of seeing the market and the ecosystem. Unless you understand that you are part of that ecosystem, you can’t grasp the potential value that embedded finance brings.