The Impact of AI and Embedded Finance on Modern Banking

Artificial Intelligence and embedded finance are transforming finance as they make it easier for customers to access, manage, and use financial services without directly involving traditional banking systems. This article will explore these changes, highlight real-world examples, and explain how companies and customers are benefiting.

Embedded Finance: Integrating Financial Services Into Everyday Platforms

Embedded finance refers to financial services provided within non-financial companies’ platforms, like shopping or ride-hailing apps. Rather than having to log in to a bank to make a payment or apply for credit, users can now access these services within apps they already use daily.

Imagine shopping on Amazon and using its built-in credit option to buy now and pay later — that’s embedded finance at work.

Embedded finance has grown significantly in recent years, especially after the pandemic highlighted the need for fast, accessible financial options.

According to research from Mambu, embedded finance is valued at $3.5 trillion in the global retail sector.

This model brings convenience and efficiency to users, and it provides new income streams for companies that offer embedded financial services.

Applications of Embedded Finance in Real Life

One of the best examples of embedded finance is the ride-hailing app Uber.

With Uber, not only can users book a ride, but they can also make payments directly in the app.

Uber even offers drivers banking features, like cash advances, and some can open bank accounts through Uber’s platform.

This allows both riders and drivers to manage all their transactions in one place, making it a smoother experience for all.

Another example is Apple, which allows users to pay directly from their phones with Apple Pay and even offers its own Apple Card.

This feature enables customers to make purchases, track spending, and manage their finances directly through Apple’s interface.

Amazon has also adopted embedded finance by offering credit options and gift cards, further encouraging users to keep all their shopping and payment activities within Amazon’s ecosystem.

How AI is Shaping the Customer Experience in Finance

AI is helping companies improve customer experience by making services faster, more personalized, and more secure.

For example, AI can streamline customer service through chatbots, which handle routine questions and save time for both customers and businesses.

Banks are using AI to quickly verify customer identity, detect fraud, and provide insights on spending habits, making banking more user-friendly.

In the fintech sector, companies like Revolut are already using AI to help users manage their finances.

With AI-powered insights, Revolut can notify users about unusual spending patterns or remind them of upcoming bills, making it easier for users to stay on top of their finances.

AI also enables Revolut to offer features like split payments and budget tracking, which improve customer experience and increase loyalty.

Security and Personalization: Key AI Applications in Banking

Security and personalized customer service are critical in banking, and AI is helping banks achieve both.

For example, banks are using AI to detect unusual transactions that might indicate fraud.

These systems can monitor millions of transactions in real-time, flagging anything that seems suspicious.

Additionally, AI-powered personalization can suggest services to customers based on their unique financial needs. By using data from past transactions, AI systems can offer tailored loan options, credit increases, or investment advice.

An example is M-Pesa, a mobile money transfer service popular in Kenya, which uses AI to provide secure and fast transactions, especially for individuals without access to traditional banking.

Similarly, Insurtech companies are using AI to adjust insurance premiums based on driving habits or health data, providing a more personalized experience for customers.

Real-World Challenges and Benefits of Embedded Finance and AI

While embedded finance and AI offer many benefits, they also come with challenges.

One major concern is data privacy.

When financial services are embedded into everyday apps, it can be difficult to determine who is responsible if there’s a data breach.

For instance, if a transaction goes wrong, the customer might not know whether to contact the bank, the app, or the embedded finance provider.

Another challenge is transparency.

Customers may not be fully aware of the costs associated with embedded finance services, especially when they’re presented as “buy now, pay later” options.

Clear communication and transparency are crucial to ensure that customers understand the financial commitments they are making. A study by Juniper Research predicts that the Buy Now, Pay Later (BNPL) model will continue to grow, with transactions likely constituting 4.2% of all global e-commerce transactions by 2024.

On the positive side, embedded finance is a win-win for both companies and customers.

For businesses, it’s an opportunity to generate revenue from financial services without needing a banking license.

For customers, it provides convenient, quick access to finance right where they need it.

This convenience is especially beneficial for those in regions where traditional banking options are limited, as it promotes financial inclusion by offering simple digital access to credit, payments, and even investments.

Future Outlook: What’s Next?

Looking ahead, the combination of AI and embedded finance is likely to become even more integrated into our lives.

According to a PYMNTS report, the global embedded finance opportunity could reach $7 trillion in the next decade.

With the expansion of AI, we could see further developments in personalized finance, where AI helps users build financial plans based on their goals.

Additionally, as embedded finance matures, we can expect tighter regulations to address issues related to data privacy and security.

In conclusion, the blend of AI and embedded finance is creating a future where financial services are readily available within the apps and platforms we use every day.

This transformation allows people to access finance on their terms, with speed, convenience, and more personalization than ever before. The ongoing growth in these fields promises to make financial services more accessible and inclusive, especially for those traditionally underserved by banking institutions.

Sources:

World Economic Forum. Addressing Trade Finance Gaps. Retrieved from https://www.weforum.org/

•Statista. Venture Capital Investment in Embedded Finance. Retrieved from https://www.statista.com/

•Business Insider. Market Forecast for Embedded Finance. Retrieved from https://www.businessinsider.com/

•Forbes. Banking-as-a-Service Growth. Retrieved from https://www.forbes.com/

•Juniper Research. Buy Now, Pay Later Growth. Retrieved from https://www.juniperresearch.com/

•PYMNTS. Next-Gen Commercial Banking Tracker. Retrieved from https://www.pymnts.com/

•Ozili, P. K. Embedded Finance: Assessing the Benefits, Use Cases, and Challenges. Journal of Internet and Digital Economics, 2022. Retrieved from https://www.emerald.com/insight/2752-6356.htm

•Barbu, C.M., Florea, D.L., Dabija, D.-C., & Barbu, M.C.R. Customer Experience in Fintech. Journal of Theoretical and Applied Electronic Commerce Research, 2021. Retrieved from https://www.mdpi.com/journal/jtaer