Are Digital Banks the Catalyst in Making Embedded Finance the New Norm in Asian Finance?

Are Digital Banks the Catalyst in Making Embedded Finance the New Norm in Asian Finance?

by November 2, 2023

In a dynamic and ever-changing financial landscape, the concept of embedded finance has emerged as a powerful force shaping the future of financial services. 

During a recent fireside chat, a panel of experts delved deep into the intricacies of embedded finance, its immense potential, and its transformative impact. 

The panellists included Sheyantha Abeykoon, Group CEO of Boost; Arnost Micek, Chief Strategy Officer at Tonik and Todd Schweitzer, Co-founder and CEO of Brankas. Guiding this discussion was Vincent Fong, Chief Editor of Fintech News Malaysia.

The fireside chat titled ‘Embedded Finance – Seizing the Multi-Trillion Dollar Opportunity’ provided a platform for these thought leaders to share their insights and experiences. It offers a glimpse into the vast opportunities embedded finance presents to financial institutions and consumers alike.

Bridging the financial inclusion gap

Sheyantha Abeykoon, Group CEO of Boost, a regional fintech leader in Southeast Asia with a much-anticipated upcoming digital bank in Malaysia, shared valuable insights during our discussion. He emphasised how embedded finance has the potential to drive financial inclusion by offering seamless experiences that do not require any changes in customer behavior.

Boost’s experience with micro-financing in Malaysia and Indonesia demonstrates that when embedded finance is executed correctly, adoption rates can soar, especially among underserved segments such as micro, small, and medium-sized enterprises (MSMEs). The key lies in keeping the customer journey simple and embedding financial services seamlessly into their everyday activities.

In regions like Southeast Asia, traditional financial institutions and technology companies have recognised the potential of embedding financial services within digital platforms. This strategy has gained traction due to several key factors.

Firstly, many traditional financial institutions have embraced technology, making it an integral part of their growth strategy. Simultaneously, large technology companies have developed platforms to monetise their services by seamlessly embedding financial products.

Regulatory attitudes have shifted, allowing financial products to be categorised and integrated into third-party platforms such as e-commerce websites. Technological advancements and evolving data privacy standards have also facilitated this shift.

Democratising financial services through embedded finance

Arnost Micek, Chief Strategy Officer at Tonik, emphasised the customer-centric nature of embedded finance. He pointed out that customers have four fundamental financial needs: transactions, credit, savings, and safety. 

Historically, these needs were primarily served by traditional banks and their ecosystems, leaving underserved segments struggling to access financial services. However, digital banks and embedded finance solutions are changing the game by democratising access to these services.

Digital banks, which have emerged as disruptors in the financial industry, have also contributed to the growth of embedded finance. As Arnost pointed out, the significant opportunity in Southeast Asia lies in the underserved sector of the market.

By embedding financial services seamlessly and simplifying user journeys, especially for underserved segments, digital banks have witnessed higher adoption rates. This approach contrasts with the traditional model of cross-selling and referrals, which often struggled to scale efficiently.

Changing operating models for the future of finance

Todd Schweitzer, Co-founder and CEO, Brankas

Todd Schweitzer, CEO of Brankas, added that embedded finance is a catalyst for financial institutions’ operating models. 

As the financial industry shifts towards open finance and banking as a service, it is necessary to separate financial products from the channels through which customers access them. This shift can revolutionise the economics of customer acquisition and servicing.

Financial institutions must transition towards infrastructure-focused models to succeed in the embedded finance space, making standardised APIs available for third-party consumption. 

This requires a fundamental shift in mindset and technology adoption, moving from traditional app development to providing the necessary infrastructure for seamless integration.

The dynamics of financial partnerships

When it comes to embedded finance, a key aspect discussed by our panellists was the importance of partnerships between financial institutions and non-financial entities.

Sheyantha underscored the deep importance of teamwork within these partnerships. He highlighted the necessity for financial institutions to recognise the latent potential of technology platforms and non-financial entities as allies in providing integrated financial solutions.

This collaborative endeavour should be geared towards achieving mutual profitability and enhancing customer engagement.

Arnost echoed the sentiment by emphasising that these partnerships should be rooted in mutual understanding and transparency.

He pointed out the delicate balance that financial institutions must strike between ensuring profitability to meet regulatory requirements and providing guidance to non-financial entities who may require assistance in navigating the complexities of the financial industry.

The ultimate objective should be a cooperative endeavour where both parties collaborate to achieve mutual profit and elevate customer engagement.

Todd contributed to the discussion by shedding light on the vast untapped market within the ASEAN region. He pointed out that traditional banking institutions have yet to serve millions of potential customers effectively, leaving underserved segments needing innovative solutions.

These underserved segments, particularly the younger generations who seek instant, convenient, and accessible financial services, represent fertile ground for implementing embedded finance solutions. It is in these partnerships and collaborations that the true potential of embedded finance can be harnessed to bridge the gap and cater to the evolving needs of a diverse consumer base.

Use cases of embedded finance in Asia

The panellists then delved into the use cases of embedded finance in Asia, sharing insights into their organisations’ strategies. 

Sheyantha discussed their efforts to bring financial services closer to customers at the point of transactions. Boost enables customers to make purchases, including supplies and goods, with the option of financing, all within a seamless customer experience.

This approach caters to customers who might not have access to traditional banking services while enhancing financial inclusion.

Sheyantha spoke about the organisation’s experiences with embedded finance in the micro-SME financing sector, emphasising the success of supply chain financing. 

By integrating financial products into the online ordering systems of small retailers, they achieved an 80 percent adoption rate compared to a 10 percent rate with a less seamless approach. This underscores the importance of context and customer experience in the success of embedded finance solutions.

Meanwhile, Arnost highlighted Tonik’s focus on open finance, emphasising two dimensions: providing services through alternative channels and leveraging alternative data for credit scoring. 

He stressed the importance of consolidating various financial data sources, including utility bills, telco data, and economic behaviour, to enhance credit access and financial inclusion.

Exploring new opportunities

When it comes to embedded finance, it’s not just about creating partnerships between fintech platforms and financial service providers. Sometimes, these fintech platforms evolve into digital banks themselves, as seen in the case of Boost and many others in the Southeast Asian market.

Sheyantha shared insights into how platforms like Boost have smoothly transitioned into offering banking services without causing complications in their existing relationships with financial service providers. This evolution often solves problems for these platforms and allows them to provide banking services to their ecosystem.

He also shared that Boost recently launched the Beyond Card in partnership with CelcomDigi on the Mastercard network. This prepaid card with PayLater functionality represents a significant step in leveraging embedded finance to offer new financial solutions to customers in Malaysia.

Todd highlighted several intriguing opportunities for embedded finance in ASEAN. Firstly, he discussed a digital bank in Indonesia aiming to double its customer base by offering embedded finance products. 

These include unsecured cash loans, “Buy Now, Pay Later” (BNPL) solutions, and entry-level credit cards, all accessible through third-party sites. This strategy allows the bank to acquire new customers through discovery rather than traditional downloads and registrations.

Additionally, Todd mentioned the potential of consent-based data sharing in open finance. Data partnerships that allow customers to share various types of data, including transaction history, with financial institutions can significantly improve credit scoring models and expand financial services access.

Finally, he explored the unique opportunity presented by overseas workers, such as Filipinos and Indonesians working abroad. These individuals face challenges in accessing financial services and remitting money.

By establishing partnerships between banks in host countries and home countries, embedded finance solutions can simplify cross-border financial interactions and improve financial inclusion for overseas workers.

Harmonious coexistence

One key question during the discussion was how platforms that evolve into digital banks, like Boost, navigate their relationships with existing financial service providers. 

Sheyantha highlighted that such platforms often establish digital banks to fulfil their ecosystem’s banking needs, aiming to provide financial services within their ecosystem.

However, this does not preclude them from partnering with other financial institutions. Regulatory restrictions typically determine the extent of such partnerships. These platforms maintain an arm’s-length relationship to ensure fairness and competition.

These platforms can create a blueprint for offering embedded financial services, making it easier to expand their offerings to other non-competing partners. This blueprint can be utilised to provide banking as a service, offering embedded finance to a broader spectrum of businesses.

Unleashing the potential 

Embedded finance is a transformative trend reshaping the financial landscape in Asia and beyond. The insights shared during the Fireside Chat highlighted the immense potential of embedded finance to improve financial inclusion, streamline customer experiences, and drive innovation in the financial sector.

The panellists were unanimous in emphasising the success of embedded finance hinges on collaboration, transparency, and a deep understanding of customer needs. 

It offers a multitude of use cases, from credit access to supply chain financing, e-invoicing, and more, with the potential to bring financial services to millions of underserved individuals in the region.

The evolution of super apps, e-wallets, and digital banks into banking entities is not a conflict but an opportunity. These platforms can leverage their expertise to offer banking-as-a-service solutions, creating a blueprint for seamless financial integration.

Ultimately, embedded finance is poised to unlock a multi-trillion-dollar opportunity, revolutionising how people access and use financial services in the modern age.

Watch the full webinar here: