Technology advances have simplified the process to offer digital services through embedded finance. Any company can choose to pivot or complement its core business to become a FinTech, but succeeding takes more than technology alone, writes Vlad Lounegov, CEO of Banking-as-a-Service (BaaS) provider, Mbanq.
The Rise of FinTech
The march of human progress is visible through its technology, and I am privileged to have a close-up view of an industry that is pushing the boundaries of what is possible in business. FinTech is an industry moving at lightning speed, which disrupts traditional financial services through technology to improve the use and delivery of finance to consumers.
Progress and innovation in FinTech is in step with internet infrastructure and increases in computer power. Consumers have benefited from advances – from secure internet shopping and stock investing, to easy and cheap international payments and remittances, as well as blockchain-based smart contracts and cryptocurrencies.
Every aspect of peoples financial lives is in their pockets, on the go, secure, accessible and instant. All because technology has made it so.
It is also much easier and far less capital intensive to set up and operate a digital bank than before. Technology and operational costs have plummeted, and new markets have opened up across the USA and the rest of the peaceful world. Whether it is an unbanked, low-income segment of a nation, or a niche, highly-competitive industry sector, such as transport, music or crypto, a digital bank or Credit Union can step in to provide highly-targeted financial services.
Non-Finance is Waking Up to FinTech
The ease of implementing financial services, especially digitally, is not lost on established non-financial companies and organizations. Today, companies such as airlines, healthcare providers, supermarkets, clothing retailers, fast-food franchises, sports teams and educational establishments are waking up to the possibility of creating new revenue streams through a newly emerging FinTech trend – embedding financial services into existing product offerings.
Finance is a lucrative industry and the advantages of success are a clear temptation. Corporations already have relationships with an existing customer base and plenty of market data and industry knowledge. They can effectively predict what financial services their customers are interested in, and they already have the marketing processes to target consumers effectively.
Types of services they can offer include a mix of traditional and innovative – Buy Now Pay Later, checking accounts and debit cards, payments processing and foreign exchange, crypto investments, various loans such as consumer, automobile or mortgage lending, and bundled products such as insurance, to name a few. All of these are profit powerhouses if implemented successfully.
Technology stacks to offer such services are already mature and accessible, in some cases off the shelf, from FinTechs, so there is no need for a development team or for huge operating budgets. Embedded finance requires relatively straightforward technology to implement and provides a big win if successful.
Regulators Are the Reality Check
However, despite the euphoria, embedded finance is actually far from being the new wild west of business for one simple reason – finance is a highly regulated industry.
All financial services in the USA, including banking and FinTech, are directly or indirectly regulated both at state and at federal level. For a company new to financial services, just making a list of financial regulators and understanding what they require is, quite frankly, a daunting endeavor.
For example, the organizations they need on-side include the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Financial Institutions Examination Council (FFIEC), as well as various State Bank Regulators, depending on where they are operating.
Additionally, applying for and being approved for a banking license or Credit Union charter is only the beginning of the journey because compliance is an ongoing process.
Reducing Regulatory Pain
Applying for a bank license or Credit Union charter, complying with laws to prevent money laundering, managing risk of fraud and monitoring lists of entities and individuals who are banned from engaging in financial activities in the USA are all highly specialized processes.
Luckily, just as the technology to create financial services now has a much lighter footprint and can be outsourced, so too can regulator relations and the compliance process as a whole. In some cases licensing itself can be simplified greatly by working with an established bank to provide a licensing shelter. Additionally, external teams of compliance experts can manage the entire day-to-day regulatory and compliance process.
In conclusion, I have observed that being mindful of the compliance process is just as important as choosing the right technology for operational success as a FinTech.
Just as technology has changed society, FinTech has changed the financial world and the businesses and consumers it serves. Businesses themselves are adapting to integrate FinTech into their product offerings as embedded finance. They have a choice of great technology options to integrate into their core offerings. But the real differentiator is the regulatory and compliance aspect.
Those companies that seek to provide financial services need to be aware they are entering a highly regulated environment which serves as a great filter. Any mistakes are punished harshly – from fines to business closures and even to jail time. But don’t let that scare you, because regulators are a vital part of the financial safety mechanism.
In the spirit of the Financial Policy Council (FPC) insight and outlook – those that get it right will reap the rewards.