What does "embedded finance" have to offer today's more tech-savvy end of wealth management? This article seeks to explain what's to be gained.

According to one definition, embedded finance is a term meaning “the integration of financial services into non-financial offerings.” Examples include an app from a coffee shop that offers one-click payments, a branded credit card from a department store, etc. As technology has expanded, so has the phenomenon of embedded finance. There are implications for wealth management. This article from Philipp Buschmann, co-founder, and chief executive of AAZZUR, examines the terrain. The firm, based in Berlin and London, provides technology solutions for banks and other financial institutions. 

The usual editorial disclaimers apply, and if you wish to respond, email tom.burroughes@wealthbriefing.com

We have seen embedded finance modernise financial services, transform small businesses and give people control over their personal finance. 2024 will be no different as the sector seeks new ways to innovate and cultivate personal finance for all, regardless of geography or financial position. How we build, keep, and track wealth is becoming automated thanks to embedded finance, and data is playing a critical role in its seamless transition from traditional banking to online wealth management. This article will explore how embedded finance seeks to accomplish the goal of open banking and how data can re-imagine the sector and enhance businesses and people’s finances.

It opens doors to new markets
Before exploring the technical impacts that embedded finance has had on wealth management, I must highlight the social impacts which have led to increasing anxieties concerning personal finance. Millions of people globally have a limited understanding of personal finance and how to make the most out of their money.

According to the Financial Capability 2018 Survey, 39 per cent of adults in the UK don’t feel confident about managing their own money. Furthermore, according to Money.co.uk 34 per cent had either no savings, or less than £1,000 ($1,267), in a savings account. In addition, The National Centre for Social Research says that relative poverty rates in the UK in 2021/2022 after housing costs, were the highest they had been in 20 years. These statistics reveal the huge scale of the problem. The pandemic, the war in Ukraine, have all caused a great strain on people’s finances as inflation soared and the cost of living pushed more and more people into poverty. That’s why I want there to be fundamental change in how our industry approaches accessibility and creates opportunity for all. OpenPayd’s 2021 report says “73 per cent of enterprise leaders plan to introduce embedded finance in the next two years and 92 per cent plan to in the next five years,” so the willingness is there, and you shouldn’t be afraid to make the transition.

Embedded finance plays a crucial role in filling knowledge gaps and helps people realise the benefits of personalised financial services that give them greater control of their money. Pensions, for example, are a big topic as many people feel uncertain about how much is going in and by how much their pot will grow. Embedded finance is actively coming up with the solutions to shift the dynamic from only small circles understanding to entire populations instead.

It fixes operational and technological inflexibility 
Traditional banks rely on tired buildings which become underinvested and fail to adjust to modern innovations. Embedded finance removes this issue as everything can be done through your phone, thus smart wealth becomes accessible and doesn’t just reside in intimidating buildings which the average consumer may hesitate to go in. In addition, the average consumer doesn’t live close to a bank, nor do they always have the time to make a physical appointment. Embedded finance improves accessibility because it can all be done through a device. According to Statista, the global number of smartphone users is forecasted to continuously increase between 2024 and 2028 by 496.7 million. We are connected in so many different ways thanks to smartphones, and wealth management should be no different in providing a flexible and reliable service.

Data-driven = results driven
We take data for granted and only now – thanks to AI and other developments – are we seeing its use much more broadly and openly. Data, or more specifically, data analytics, empowers firms to leverage the vast amount of information they have at their disposal. Embedded financing strengthens this due its agility, enabling fast decisions to be made based on data without relying on intuition which can be costly. Data analytics enables us to be more strategic, spotting trends and patterns that may have been overlooked. 

A good example is in South Africa, where there is a large unbanked and under-banked population. If someone wanted a loan for a house, but had no financial services data, in the past, they would of course be denied. It was a risk because there was no clear analytics on credit, income, or expenses. 

But today, because of embedded financial solutions in non-banking corporates, there is vast data on the spending habits, priorities and focus of customers. We can use information from other financial data, novel, and non-bank data sets, to build a profile on the customer that wasn’t known before. A startup in South AfricaA is doing just that, using data from retailers, and making it available to banks so more customers can be granted loans.

It provides a personalised experience 
Embedded finance leverages the power of data to generate personalised recommendations based on an individual's financial goals, risk tolerance, and investment preferences. It considers historical data and market trends; wealth management platforms can offer tailored advice for optimising investment strategies. For wealth management firms, customer segmentation can be leveraged in a much more targeted strategy. Segmentation divides customers by their demographics, investment behaviours and therefore paints a more accurate picture. Once the strategy is put into action, customers respond positively as their experience is much more personal. OpenPayd reported in their 2021 survey that “88 per cent of companies said their customer engagement increased with embedded finance.” This illustrates the necessity of such tools for companies if they want to attract new growth which can be sustained long term.

Seamless automation is a given, not an extra
Using advanced analytics and machine learning algorithms, embedded finance solutions can automate the analysis of financial data. These systems can identify patterns, trends, and potential investment opportunities, providing users with real-time insights into their financial health and investment options. 

Expense management is a perfect example. With an embedded financial solution with tech specific to your company, expense management could be tailored to your company’s needs rather than a generic one-size-fits-all solution that only provides a company a limited range of information. The system could integrate with your company’s accounting software and financial data, streamlining information. Managers could access real-time dashboards and reports for spending trends and insights. Advanced analytics identify anomalies, triggering alerts for further investigation. ML algorithms could predict future expenses, aiding in accurate budgeting.

The system could check expenses against your company’s policies, flagging violations for review. Integration with payment platforms would allow for direct payments and reimbursements. ML algorithms would continuously learn, adapting to changing spending patterns and improving over time. All of which done without building the solution from scratch, saving time and immense financial inputs.

To end, smart wealth is only going to grow as new technology develops. If leaders in the financial sector are serious about helping people regain confidence in their finances and trust in their institutions, then embedded finance must be rolled out widely and robustly to combat these issues and pave a new way for wealth management. Data will become synonymous with embedded finance as tools enter the mainstream and more firms adapt to modern strategies. Customers want speedy, efficient, and accurate personal finance management and we have everything at our disposal to make that happen.