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Despite economic headwinds in 2024, a Finastra survey has found that financial institutions will prioritise investments in banking-as-a-service (BaaS), embedded finance, artificial intelligence (AI) and other technologies with payments use cases.
In 2023, financial institutions (FIs) across nine jurisdictions ranked BaaS, embedded finance and AI as their three most commonly improved or deployed technology categories over the last 12 months.
Almost half (48 percent) of respondents improved or deployed BaaS solutions in 2023, while 41 percent did the same for embedded finance and 37 percent for AI.
As can be seen below, adoption of these technologies has grown steadily since Finastra’s previous survey in 2022.
Source: Finastra
Radha Suvarna, chief growth and product officer for BaaS and value added payment solutions at Finastra, said that continued adoption of these technologies shows that their use cases are proving themselves among FIs.
“Growth in BaaS and embedded finance adoption shows that FIs understand the value of accessing new distribution channels and offering third-party value-added services through their own channels,” he said.
“This reflects the industry’s move away from the ‘euphoria stage’ towards use cases that drive client value.”
Finastra’s 2023 Financial Services State of the Nation surveyed almost 1,000 decision-makers at FIs in the US, the UK, France, Germany, Hong Kong, Singapore, Saudi Arabia, Vietnam and the UAE.
These FIs collectively employ 2.4m staff, have approximately 240m client and customer relationships and represented about $33bn in gross annual turnover in 2023.
BNPL: from 'euphoria' to value
Buy now, pay later (BNPL) schemes were identified as the most advanced BaaS or embedded finance use case among respondents, particularly in markets such as Germany, Vietnam and Saudi Arabia.
Source: Finastra
Speaking to Vixio, Suvarna said he sees embedded finance as the challenge of taking financial services from where they are “manufactured” and embedding them where they are “consumed”.
New age BNPL players have demonstrated what is possible in this regard, he said, by showing that credit can be provided seamlessly at the point of sale with built-in, automatic repayment schedules.
With many BNPLs now struggling, larger technology companies and increasingly banks are looking to exploit the same technology, he said.
“In the last two years, rising interest rates and macroeconomic conditions have begun to put a strain on fintechs,” said Suvarna. “So many banks are now starting to look at this as an opportunity to do some catching up.”
As covered by Vixio, BNPL valuations have all but collapsed over the past two years, and BNPL usage has begun to concentrate among a handful of larger players.
This concentration varies depending on jurisdiction, but in the US, for example, the three most-used BNPL brands in 2023 were PayPal, Afterpay and Apple Pay Later.
Another factor that drove the “euphoria” phase of BNPL’s evolution was the lack of specific regulation for BNPL products and providers.
Although the early BNPLs may have benefitted from this lack of regulation, which typically came in the form of an exemption for interest-free credit, this is set to change.
Both the UK and Australia are moving towards specific regulation of BNPL, following in the footsteps of countries such as Germany, Italy, Denmark, the Netherlands and Belgium. Last month, Qatar and Saudi Arabia also published new BNPL regulations based on revised legislation.
Merchant cash advances show promise
Embedded lending to small and medium enterprises (SMEs) was seen as the second-most advanced use case among Finastra’s survey respondents.
The rise of embedded lending to SMEs has taken place at the same time as the rise of BNPL, albeit with less fanfare.
For merchants, embedded lending products allow them to access credit based on their sales, with repayment charges and schedules also tailored to their daily revenues.
Dojo, a UK card solutions provider, launched a merchant cash advance service in partnership with YouLend, an embedded finance provider, in 2020.
In June last year, Amazon launched an almost identical partnership with YouLend in the UK, allowing merchants to borrow up to £2m based on their Amazon sales revenue.
In the last two years, Suvarna said that banks are increasingly looking towards third-party distribution models such as these to find new markets for their lending products.
“The question for them is how can they connect to and partner with other stakeholders to create new distribution channels for products that they already manufacture,” he said, as opposed to building out those channels in-house.
Embedded cross-border payments a key offering
Embedded cross-border payments were seen as the third-most advanced use case among survey respondents, particularly among those in Hong Kong and the UK.
Suvarna said the rise in these solutions is being driven by increased volumes of small-ticket cross-border payments, thanks to growing remittance flows, multinational workforces and the gig economy.
“It’s been quite interesting to see that cross-border volumes have gone up but ticket sizes have gone down,” he said, “and it means that traditional solutions such as Swift may not be able to serve some of these emerging use cases.
“That's where the alternative cross-border capabilities that will complement Swift come into the picture.”
In October 2022, Finastra launched a cross-border payments partnership with Visa, agreeing to co-develop using Finastra’s Payments Hub solutions and Visa Direct.
Visa Direct is a global account-to-account payments network that now connects to more than 7bn end-points — three times more than the 2bn end-points that were active when the partnership was launched.
In 2021, Finastra also launched similar cross-border payment partnerships with both Mastercard and Thunes.
