PETALING JAYA: As competition spruces up in the banking landscape with the advent of digital banks, conventional banks are positioning to stay ahead, of which embedded finance will be one of their key “tools” to achieve this aim, moving into 2023.
Embedded finance refers to the placement of financial or banking products and services on a third-party non-financial website or app.
Simply put, it is the use of financial tools or services such as lending or payment processing by a non-financial provider.
Bain Capital Ventures projects that the global embedded finance market size would grow exponentially over the next 10 years and reach an estimated value of US$3.6 trillion (RM16 trillion).
Silverlake Axis Ltd deputy CEO Cassandra Goh told StarBiz: “For conventional banks, 2023 could be a good opportunity to bolster their offerings through newer channels, partnerships and ecosystems, for example, embedded finance.
“This will deepen their ability to facilitate liquidity in the market, especially for micro, small and medium enterprises (MSMEs).”
Elaborating on embedded finance, she expects four trends to take shape in this area in the coming years.
Firstly, she anticipates customers to increasingly seek simple, holistic, embedded and direct experiences, which would result in the creation of an ecosystem.
Secondly, the move to embedded finance would see the rise in banking transparency.
Thirdly, Goh foresees the acceleration in the adoption of technology capabilities as banks would scale up and put embedded finance within reach of a wider partner and distributor ecosystem.
Finally, besides increasing trust levels on innovative financial services, she said it would also create new revenue models for financial institutions and distributors.
Listed on the Main Board of the Singapore exchange, Silverlake is one of the leading enterprise technology, software and services companies that focuses on financial services and serves 40% of the top 20 largest banks in South-East Asia.
Goh said from now till 2025, banks should carefully prioritise their needs and focus on long-term partnership to iron out and sustain the technology deployment processes.
“Ultimately, we expect consumers to gain the most from a more competitive and challenging environment in the financial services market, with both traditional and digital banks striving to provide the best customer experience,” she added.
Looking ahead to 2023, as more digital banks enter the market in Singapore and Malaysia, she expects to see stiffer competition in terms of rebates and competitive deposit rates in order to gain and retain customers.
However, she said digital banks might face headwinds as the tech sector appears to be entering a cooling off period.
With a tightening of the funding tap, many startups including digital banks could be facing a more urgent pathway to profitability, she noted.
For traditional banks, Goh said this could turn out to be an opportune time to accelerate transformation exercises and give fintech challengers a run for their money.
Touching on some of the key points for banks to navigate out of the challenging times, Goh said this year would be the time for conventional banks to take stock and balance the need for innovation spending as well as managing their technical debt and increasing operational efficiency.
She said it is also important for banks to strike a customer-centric balance between digital and physical experiences.
As incumbent or mainstream banks increase the scope and technical complexities of their offerings to meet market demand, Goh said sufficient investment funds should be directed to modernising core systems, especially during this period where digital bank spending could be slowed down by a cooling capital pool.
With proper investment balance, she said they could emerge from 2023 and beyond ahead of agile competitors.
“Maintaining consistently high service standards with multichannel experience, hyper personalised and relevant offerings, integrated platforms of various services and domains are the key success factors for mainstream banks, moving forward, while ensuring a strong cyber security framework,” she said.
As for the most immediate challenges for digital banks in the country that would be expanding their operations in 2023, Goh said, in Malaysia, the challenge would be even greater.
“For a digital bank focusing on the less affluent B40 (the bottom 40% income group) and the MSME segments in line with the requirements of Bank Negara, their attention will be diverted to those segments of society that have been the most impacted by the Covid-19 pandemic.
“Taking into account the fact that the pandemic has threatened the viability of many MSMEs, this may translate into lower income and greater risks for banks servicing them.
“This will challenge digital banks’ capabilities to reach a break-even and profitable operating model within the digital banks’ assets at a RM3bil cap set by the central bank,” she said.