McKinsey’s Financial Services Practice recently spoke with leaders to explore the opportunities, challenges, and innovations in the embedded-finance landscape.
- Diego Caicedo, the cofounder and CEO of KLYM, a data-driven lender;
- Sabrina Dar, chief of staff to the CEO at Mambu, which provides modern core banking technology;
- Steve Naudé, managing director of foreign-exchange fintech Wise Platform;
- Ray O’Brien, COO of Quantexa, which provides data analytics; and
- Benedikt Voller, the chief revenue officer of Raisin, a deposit brokerage platform.
All five panelists were at the 20th Global Digital Banking Conference held earlier this year in Barcelona, where leaders in digital banking gathered to discuss the business’s next imperatives and ways to capture value for the long term.
In the conversation which McKinsey had with these bank leaders, they describe how banks can juggle three key objectives:
- Offering the services and personalization their customers want and need
- Modernizing their core technology, and
- Competing with digital disruptors.
McKinsey: What effect do you think the as-a-service economy and embedded finance generally will have on the financial services industry over the next three to five years?
Customers expect a seamless, personalized, and fast banking experience, similar to Netflix. And they need speed when it comes to service.
Financial institutions must adapt quickly, integrating best-of-breed services into their core architecture. Banks now focus on customer service while outsourcing services like payments or KYC, realizing it’s better to integrate external services.
‘As-a-service’ is expanding to core services, with banks open to replacing their systems with third-party offerings, potentially leading to complete substitutions like deposit functions.
Banks will focus on core competencies, serving domestic customers in retail, small business, or corporate sectors, and seek best-in-class providers for other products instead of building everything in-house.
McKinsey: How can emerging technologies in AI improve embedded finance and as-a-service offerings? And how are you thinking about using AI at your company?
Banks use AI to speed up code development and review, improving efficiency and quality, though its lack of transparency limits its use in regulatory operations for Raisin Bank, requiring guidance for compliance.
Emerging technologies enable quicker decisions, such as automating KYC with analytics for risk-based reviews. Banks examine new technologies to improve engineering, enhance partner interactions and optimize operations, aiming to reduce friction and create seamless experiences.
Exploring smaller data sets for underwriting, they see current AI benefits as mostly internal, like faster cohort analysis, with future advances expected to improve client-facing services over time. Previously, banks struggled to integrate with external providers, but today’s easier integration has significantly impacted banking partnerships.
McKinsey: What are the critical success factors for providers and partners to develop a successfully embedded finance and as-a-service proposition?
Ensure a clear benefit case and stick to it. Partner with those who have real needs and can deliver efficiency, effectiveness, or profitability. Successful partnerships require a strong technological base, the right culture, data sharing and scalable integration.
Focus is crucial due to limited resources. Identify the right partners, often mid-market or regional players. Clear problem-solving, defined purpose, and trust are essential.
Invest time and effort in strategic technology partners for long-term collaboration, adapting to rapidly changing markets with mutual investment in resources, time, and technology.
Click to read more: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/the-new-importance-of-partners-in-banking
