Asif k. Durrani on LinkedIn: Digital Banking - 2024 Trends & Predictions (2024)

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Digital Banking: Embedded Finance Oppourtunity Space 👍🤞The embedded finance opportunity space refers to the integration of financial services into non-financial platforms, products, and services. It involves embedding financial capabilities, such as payments, lending, insurance, or wealth management, directly into other industries or applications, creating seamless and convenient payment experiences for users, such as e-commerce, travel, healthcare, and transportation, to offer financial services within their platforms. For example, a ride-sharing app may offer users the option to pay for their trips directly through the app, or an e-commerce platform may provide instant financing “BNPL / Invoice discounting” options for purchases.The embedded finance model enables businesses to enhance customer engagement, increase revenue streams, and differentiate themselves in the market. It also benefits consumers by providing them with convenient access to financial services without having to navigate multiple platforms or providers.As the embedded finance ecosystem continues to grow, opportunities arise for startups, technology companies, and traditional financial institutions to innovate and collaborate in developing new products and services. Additionally, advancements in technologies like APIs, blockchain, and artificial intelligence are driving further expansion and customization within the embedded finance space. Overall, the embedded finance opportunity space represents a significant shift in the way financial services are delivered and consumed, opening up new avenues for innovation and growth.

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Embedded Banking Space: Adoption of BaaS Powered Embedded Finance Capabilities - Outsource / Build or Buy ? 🤔Modern banking is all about customer experience & user journey. Similarly banking products & solutions are increasingly embedded in customer journeys across almost all industries and verticals. The “Embedded Finance - Model” is, in turn, enabled by BaaS, which resides at the core application and feeds into the various embedded finance offerings at the front end.For traditional banking players this tectonic shift in the catchment environment has posted serious threats to their business model & existence, as most of the institutions runs on outdated technology stacks.This leaves Traditional Institutions with 03 options to address the product & technological gap in their offerings1- Outsource: Compliance & Regulatory Challenges. 2- Build: Technology Upgrade & Extended Development & Deployment Timelines - Opportunity lost. 3- Buy: Funding Vanished / Dried, Low Valuations, Perfect Buyout / Takeover Environment. Several success stories / use cases are available for banks to draw conclusion on the journey of Embadded Finance / BaaS players in the fintech space:- Major fintechs emerged on the back of collaboration - BaaS model, i.e. using the infrastructure and licensing of partners while staying focus on the customer relationship. - The problem is that the BaaS model has been lately challenged by increased compliance & regulatory scrutiny, threatening BaaS.For well established financial institutions instantly willing to adopt Embedded Finance / BaaS capabilities, should consider buyout (100% stake) a technology provider / fintech player to gain considerable strategic benefits in a quick time with instant values - as below- Instant access into the middle (technology) layer, without long building cycles.- A great match towards their ongoing efforts to become leading player in technology and digitization space.- Becoming an instant player in the embedded banking space, enabling fintech innovation for a plethora of use cases - SME Merchant financing, BNPL, Cards-as-a-Service, Digital onboarding, payments, white-label mobile app).- Getting direct control and overview of compliance processes, which are the regulators’ key concern.- Removing dependency on an external provider that might fail.Customers are buying finance products outside of the traditional value chain. Incumbent banks can choose to be either in or out of the game. Getting and integrating Baas capabilities under a one-stop shop umbrella not only enables them to tap into new markets and clients, but also expedites their digital transformation. This is the new name of the game 👍🤞🙏

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SME Digital Lending “Merchant / Retailer - Advance Cash” 👍Technology backed automation has disrupted Banking sector in a big way. Digitisation & digitalisation has shortened & improved UX/CX. This sectoral transformation has also disrupted/ing SME lending space in a massive way, as it has reached a point of convergence between platform models - ecommerce, embedded finance and payments. Impact on commerce disruption:— Rise of the e-commerce— Platform economics— social commerce,algorithms and AI — Alternative payment methods (i.e. BNPL) Over last 36 months or so, merchants & retailers are successfully adjusting to changing macro headwinds, specially pandemic, which has resulted additional working capital requirements / liquidity demand from merchants & retail businesses.Considering above - Retailers have a bigger than ever appetite for access to lending and working capital, whereas the traditional banking liquidity solutions continues to be limited and sub-optimal (expensive, complex, extended TATs, lack of customization and digitization).Impact: SME merchants & retailers are increasingly meeting their working capital needs outside of traditional banking. Where / Who?Partners that know them well, with 3 categories standing out: — Platforms and marketplaces (which account for big shift of the retailers business)— Payment providers that have become one of their most critical infrastructure supplier— Software partners, powering their back-office set-up: accounting, tax, ERP and CRM systemsThe offering is known in most cases as “Merchant Cash Advance” and works as follows:— Embedded in the providers’ native offering— Addressing SME merchants only within the providers’ ecosystem— One fixed Fee, deductible upfront — Automatic repayment tied to sales (fixed %)— No collateral - cash flow base model— In partnership with banks or specialized providers — In practice working capital financing.The success lies in meeting a core SME need in a fast and uncomplicated way, following an embedded flow, on the back of data analytics, digital loan contract execution contained simplified repayment clause as Platforms, marketplaces, payments software providers help their existing clients grow by utilizing data they already have. It’s a win-win set-up based not on price but flexibility. A E2E “merchant cash advance solutions” that go beyond core offerings to cover adjacent needs of merchants will be a significant growth driver in the B2B space. Creating an all-in-one offering under a common roof that touches upon many areas of the merchant value-chain is the name of the game going forward 🤞👍

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Excellent Publication by BCG over role of Platform in revolutionising Banking Services to SMBs. Platforms and marketplaces are at the center of a revolution that is changing the face of financial service Industry with emerging financial technologies.Research indicates that 64% of SMBs are interested in financial services embedded within a platform.

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Buy Now Pay Later (BNPL): The B2B Business Space 👍Primarily BNPL success has been driven by the consumer side, a lot has been talked & written about about BNPL “B2C” success stories. But experts do believe that their is massive BNPL “B2B” opportunity space.Now a days the most critical problems companies faces is realisation of receivable, as extended cash conversion cycle causes Businesses failures / insolvent. Can Bank borrowing alone address this critical issue alone. In emerging economies the SMEs borrowing gap is 5% to 7% of GDP.So, what sales strategy manufacturers / suppliers adopt to sell to ensure timely realisation of trade receivables? Selling goods on trade credit to buyers, which is receive goods now but pay later in 30, 60, 90 days, and invoice factoring (invoice financing) is one of the most popular ways that suppliers employ to improve liquidity:Under IF / IF arrangemnts seller sell their invoices to a third-party “factoring company” at a discount and in exchange receive 80-90% of their invoice value - money. Under the arrangement Buyers pay directly to factoring company. In the end manufacturer / suppliers get the remaining amount of the invoices minus the factoring company fee.Considering above - B2B BNPL can be a credible alternative. How ?- Set-up “as the B2C model”- manufacturer / provider integrates with the supplier and offers B2B BNPL as a payment option integrated at check-out.- The provider does the risk assessment and provides the buyer installment payment terms.- The seller gets upfront the total selling price.- The provider controls the e2e flow (product, risk, integration, collections, etc) and manages default – it usually charges the supplier a % fee for these services.The opportunity is enormous: estimates converge that payments between businesses are on a global scale a $120 trillion market. A number of fintech providers are trying to build on the momentum at this space.The model is similar to BNPL B2C, but below are some key differentiating factors:- Underwriting companies with much bigger amounts means considerably more risk.- Customer journeys are much more complex in the business world with high KYC requirements, additional steps and an array of software and systems (i.e. accounting, ERP) that come into play.Which is why most of the competing players in the B2B space aren’t the big B2C names, but rather stand-alone fintechs focusing on the specifics of businesses (although synergies exist.B2B BNPL has the potential to revolutionize business payments, but we are not there yet. Take-off depends on a number of factors with the following standing out: - Risk underwriting and fraud prevention capabilities need to improve. - Distribution via B2B software.- Marketplaces.- Focus on industries and verticals as a competitive edge.- Emerging top players will be those addressing SME challenges in holistic ways beyond financing. 👍🤞

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Buy-Now-Pay-Later (BNPL) 2.0 👍BNPL the phenomena that took the markets by storm, build customer trust and loyalty through seamless, embedded customer experiences. Powered by digital finance / e-commerce (digital wallets and alternative payment methods) BNPL has established itself as an indispensable element of anypaymentsoffering.However, the macro economics environment (low interest rates, growth cycle) that boosted its growth in recent years, has been the one to trigger the reverse course with high losses, plummeting valuations - at the startups level that has resulted failures for several BNPL players around the globe.Despite all that, the following needs to be considered:— Players offering e2e BNPL model requires high level of customisation ( starting from product communication to late payment acceptance) as the proposition offer very attractive margins—Customers across the globe – and especially the Gen Z / younger generations and clients in specific verticals such as electronics, fashion have become so much used to the model, that a lack of the offering puts providers and merchants automatically out of the market.At the same time, several changes are taking place:— The space is becoming increasingly commoditized with pricing and margins coming under pressure.—Players such as Klarna who found success and became synonymous with BNPL are moving away from sole BNPL into an ecosystem approach to become a one-stop ecommerce facilitator.— Santander, one of Europe’s biggest banks, has made a bigstrategybet on BNPL by launching its own BNPL offering (Zinia) across Europe in an effort to compete with Fintechs.— Apple has launched its own Apple Pay Later service.Going forward 4 trends will be underpinning BNPL’s transformation: 1) its transition from BNPL 1.0, a somewhat stand-alone proposition, to BNPL 2.0, where it finds its way to wider ecosystems’ offerings as a credible alternative to an increasingly multi-polar payments infrastructure2) the widening competition that includes fintechs, retailers,technologycompanies and infrastructure providers 3) the opportunity of the white-label approach 4) an increased regulatory scrutiny.

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