How embedded finance is changing bank reconciliation

Embedded finance is revolutionising the way businesses and banks interact with each other, as well as with consumers and users. Advances in new technologies and the support of APIs have completely changed the current financial paradigm, altering many of the business processes we encounter daily.

But how exactly is such a fundamental process like bank reconciliation changing? What advantages does this new reality bring? Discover more below.

What is embedded finance?

The term embedded finance refers to the integration of financial services into platforms or applications that traditionally do not belong to the financial sector. In other words, it is the merging of banking and financial services within non-banking applications, allowing these applications to offer services such as payments, loans and  insurance more directly to their users.

The idea behind embedded finance is not entirely new. For years, companies have sought ways to simplify the user experience by reducing friction in their payment processes. However, with technological evolution and the emergence of fintech, this integration has become deeper and more diverse. Now, we are not just talking about payments but a complete range of financial services that can be integrated into e-commerce platforms, mobility applications, social networks, and more.

Technology has been the catalyst in the rise of embedded finance. Open Banking in general and APIs in particular have allowed non-financial platforms to connect securely with financial service providers. This has democratised access to financial services, enabling companies of all sizes and sectors to offer their customers embedded financial solutions.

Advantages of embedded finance for a business

The advantages of adopting embedded finance are multiple and can significantly impact a company's growth and profitability. Below, we explore all these benefits in detail:

• Direct access to financial services: companies no longer have to rely solely on banks and other intermediaries to access the financial industry. They can obtain services such as loans, payments, insurance, and more directly from third-party platforms, simplifying transactions and reducing intermediary costs.
• Improvement in customer experience: by integrating financial services into the same platform where customers already interact, the need to switch between different applications or websites is eliminated. This creates a smoother and more convenient experience for the user.
• New revenue streams: by offering financial services, companies can benefit from commissions, fees, and other revenue derived from these transactions. This diversifies their income sources and can significantly improve profitability.
• Process automation: bank reconciliation and other financial processes become simpler and automated thanks to embedded finance. This reduces the possibility of human errors, saves time and resources, and allows companies to focus on other critical areas of their business.
• Personalisation of offers: with the integration of financial data, companies can gain a clearer insight into their customers' behaviour and preferences. This allows them to offer personalised products or services, improving customer retention and satisfaction.
• Market expansion: embedded finance can enable companies to access market segments that were previously inaccessible. For example, an e-commerce platform could offer financing to customers who do not have access to traditional credit.
• Less transaction friction: by simplifying and streamlining payment processes and other financial services, transaction friction is reduced. This can lead to an increase in conversions and a decrease in cart abandonment on e-commerce platforms.
• Strengthening customer loyalty: by offering integrated financial solutions, companies can become the "single point of contact" for their customers' needs, strengthening the relationship and fostering long-term loyalty.

Advantages for banks

Embedded finance is not just an attractive option for businesses. Banks can also benefit from its full potential:

• Expansion of customer base: by partnering with non-financial platforms, banks can access a wider and more diverse audience. These collaborations allow banks to reach customers who might not have considered their services otherwise, especially in younger or digitally native segments.
• Cost reduction: partnerships with established platforms can significantly reduce customer acquisition costs. Additionally, by leveraging the infrastructure and technology of these platforms, banks can minimise the expenses associated with developing and maintaining their own solutions.
• Constant innovation: by working together with tech companies, fintechs, and startups, banks have the opportunity to stay at the forefront of financial and technological solutions. This enables them to quickly adapt to changing market demands.
• Diversification of services: embedded finance allows banks to offer their services in a variety of sectors and niches, from e-commerce to mobility applications and more. This diversifies their market presence and reduces dependence on traditional channels.
• Brand strengthening: by integrating with popular and everyday platforms, banks can strengthen their brand recognition and presence, positioning themselves as innovative leaders in the financial space.
• Access to valuable data: collaborations with non-financial platforms provide banks with access to a wealth of data on user behaviour and preferences. This can be invaluable for creating personalised products and more effective marketing strategies.
• Improvement in customer retention: by offering more integrated and frictionless financial solutions, banks can improve customer satisfaction and retention. An optimised user experience can be a determining factor for customers to choose to stay with a particular bank.
• Cross-selling opportunities: by being present on multiple platforms and customer touchpoints, banks have more opportunities to offer additional products and services, thus maximising the value of each customer

APIs & UX

Embedded finance could not have reached its peak without the power provided by APIs. Application Programming Interfaces (APIs) are essential within embedded finance, allowing different software to communicate with each other. In the financial context, APIs enable platforms to integrate banking services securely and efficiently.

In this regard, UX is also important. A smooth and simple user experience can be the difference between the success and failure of financial service integration. It is essential that transactions are intuitive and that the user feels confident when using these services.

Exemplary cases of embedded finance in the world

Embedded finance has enabled numerous companies, both within and outside the financial sector, to innovate and offer solutions that were previously unthinkable. These exemplary cases demonstrate the power and potential of integrating financial services into non-traditional platforms:

• Apple Pay: the Cupertino company has taken financial integration to another level with Apple Pay. This solution allows Apple device users to make contactless payments in physical stores and online transactions, all integrated into the Apple ecosystem. Additionally, with the introduction of the Apple Card, the company has deepened its foray into the financial world.
• Amazon Lending: Amazon is not only a giant in e-commerce; it has also ventured into the financial world. Through Amazon Lending, the company offers loans to sellers on its platform, providing financing based on the seller's sales and performance, all integrated into the Amazon ecosystem.
• Shopify Capital: Shopify, the popular e-commerce platform, offers financing to merchants through Shopify Capital. This solution provides loans and cash advances to sellers based on their sales history, allowing merchants to access funds to grow without leaving the platform.
• Uber Money: Uber, known for its transportation service, has launched Uber Money, a financial platform that includes a digital wallet, debit and credit cards, and savings accounts. It is designed for both drivers and users, integrating financial services into the mobility experience.

How to implement embedded finance

Implementing embedded finance in a company or platform may seem like a complex task, but with proper planning and the right tools, the process can be smooth and effective.

Below are the key steps and considerations for successful implementation:

1. Analysis and evaluation: before any implementation, it is essential to conduct a thorough analysis to identify the specific needs of the company and how embedded finance can address them. This involves evaluating customer demands, the company's current capabilities, and areas of opportunity.
2. Definition of objectives: setting clear and measurable objectives will provide the company with a clear direction during the implementation process. These objectives can include goals related to customer acquisition, additional revenue, or improved user experience.
3. Selection of providers and platforms: the market offers a variety of providers and fintechs that facilitate the implementation of embedded finance. It is crucial to research and select those that align with the company's objectives and offer robust and secure solutions.
4. Collaboration with financial entities: establishing strong relationships with banks or financial institutions is essential. These partners can provide the necessary support and infrastructure to ensure that integrated financial services are reliable and compliant with regulations.
5. Technical integration: with the help of development teams, the integration of embedded finance solutions will proceed through APIs. This phase must be meticulous to ensure smooth integration and optimal operability.
6. Compliance and regulation: the financial world is highly regulated. It is vital to ensure that all services and operations comply with local and international regulations. This may require consultations with legal and regulatory experts.
7. Support: to maximise the adoption and use of new integrated financial services, it is essential to offer proper training to staff and ongoing support to users and customers.
8. Launch and promotion: once everything is in place, the official launch of embedded finance services can proceed. It is crucial to accompany this launch with marketing and promotion strategies to inform customers about the new offerings.
9. Control and optimisation: after the launch, it is essential to closely monitor the performance and adoption of services. Collecting feedback, analysing data, and making adjustments as necessary will ensure long-term success.

Tools for implementing embedded finance

A successful implementation of embedded finance requires specialised tools and platforms that facilitate the integration of financial services into non-financial applications and platforms. Some of the most notable tools in this area are:

Banking API platforms:

• Yapily: founded in 2017 in the UK, Yapily has  ' oneAPI' technology and aims to facilitate interconnectivity between innovative solutions and banking entities. This API connects with hundreds of banks in Europe, providing a single interface to access them all and facilitating payments directly from bank accounts.‍
• Plaid: one of the most popular tools, enabling applications to connect with users' bank accounts, facilitating the integration of services such as payments, balance verification, and more.‍
• Yodlee: similar to Plaid, it offers banking connectivity and financial data solutions for businesses and developers.‍
• Afterbanks: a Spanish fintech regulated by the Bank of Spain. This API connects with banks in several countries, especially in Latin America and Spain, offering open banking with major national and international banking standards.

Integrated payment solutions

• Wise: since its launch in 2011, Wise has rapidly grown to become one of the leading options for international money transfers. It is a global financial platform that offers international money transfer services at lower rates compared to traditional banks. It provides an account where users can hold and manage money in various currencies, as well as an associated debit card for spending in different currencies.
• Stripe: a platform that facilitates online payment acceptance and offers solutions for subscription management, billing, and other financial services.
• Square: besides its well-known point-of-sale system, it offers APIs that enable the integration of payment solutions into various platforms.

Loan-as-a-Service (LaaS) Platforms:

• Affirm: allows businesses to offer financing options and instalment payments to their customers directly at the point of sale.
• Klarna: offers "buy now, pay later" solutions that can be integrated into e-commerce platforms.

At Embat, we have a flexible and customisable automatic reconciliation system. With this solution, you can automate bank reconciliation using criteria tailored to your business's specific needs.

With an agile and intuitive interface and verification and approval processes that ensure traceability and compliance with requirements at all times.

Conclusion

In conclusion, embedded finance is transforming bank reconciliation and the way businesses and banks interact. With benefits for both businesses and banks, this trend is here to stay and continue revolutionising the financial world.