Navigating Financial Journey

Blog: Navigating the Embedded Finance Revolution: Strategies for Simplifying Legacy Bank Technology

February 28, 2024  |  MICHAEL ENGEL

The race to seamlessly integrate financial services into everyday consumer experiences is heating up in the banking and payments industry. From loyalty apps to digital wallets, banks, fintechs and even major social media platforms are racing to expand their core offerings’ digital footprint to maintain maximum visibility with consumers and shape a seamless customer experience.

While embedded finance seems like a no-brainer in theory, in practice, implementing a cohesive and sustainable embedded finance strategy requires patience and a true grasp of the problem it promises to solve. If financial institutions truly want to integrate seamless user experiences into their offerings, they need to take a step back and examine the larger technological obstacles they are trying to overcome.

What’s driving the embedded finance revolution?
To understand the current embedded finance phenomenon, it’s important to examine what is driving the push for these omnichannel solutions: removing friction. Financial institutions are realizing that their offerings no longer meet the expectations of today’s banking customers. However, updating legacy technology to embed solutions that remove friction is not a simple task. Historically, financial institutions are cautious when updating their technology. If you think about legacy banking technology like building blocks, you would see layers often built on top of each other.

Rather than rewiring or rebuilding this infrastructure, which can be costly and time-consuming, many financial institutions build new layers on top of what already exists. While this can create short-term solutions, with each new layer, it gets harder and harder to rewire and create long-term solutions that can scale and quickly adapt to rapid changes in customer behavior.

Need for speed backed by careful strategies
In recent years, growth in the fintech sector has pushed financial institutions to move much faster to embrace change and technological advances like embedded finance. However, without careful consideration for even the most minor of impacted processes, the rollout of these solutions is susceptible to technical issues that can cause more problems than they solve. So, how should financial institutions approach implementing an embedded finance strategy?

While many believe the “grass is greener on the other side” when it comes to implementing embedded finance solutions, a poorly executed strategy can be more harmful than no strategy at all.

Legacy bank infrastructure does not adapt easily.

Like a surgeon performing an open-heart procedure, if you cut the wrong artery, or in this case, strip away the wrong piece of legacy technology, you put the patient (the bank) at significant risk. In reality, very few institutions have favorably implemented large-scale embedded finance integrations. So, it’s critical to learn from the successful rollouts using cloud-native services with open APIs that have taken place over the last several years when building out a roadmap.

Path forward: simplicity, scale, solutions
The drive to implement embedded finance solutions should be a push to simplify customer journeys. It could be a customer at an ATM who can’t access desired denominations or accounts, forcing them into the teller channel because access is restricted. Or a customer who doesn’t have the flexibility to perform a self-service transaction because of a limit or business rule, while the same request can easily be completed in the mobile channel.

Several journeys still suffer significant friction. This is due to the lack of connection or link through a modern services architecture and integration layer for consumer transactions and the complexity in consuming these services. There is a lot to be learned from advancements in tech. For instance, if you need to update the operating system, apps and connected services on your cell phone, whether IOS or Android, your phone is updated in minutes with the push of a button (and often in the background while you’re sleeping).

Try that on an ATM
You’ll face several unique challenges if you try to do something similar within a typical ATM solution stack. You need to know precisely what kind of ATM hardware version you have, the type of devices installed, the kind of firmware version that is compatible with your XFS version, and the list goes on.

If you now want even to reconnect this ATM stack into a customer journey – the efforts become nearly unmanageable. Financial institutions must apply proven modern cloud-native technology principles to position themselves for the continued evolution of banking behavior. That allows banks to simplify their technology and invest in solutions in their physical consumer channels that promote adaptability and openness, with the ability to scale across all channels, not just the digital ones.

Are we there yet?
Whether the industry fully understands the best way to use it, embedded finance promises to remain a top priority for financial institutions looking to innovate. However, it also remains a key tenet of engineering that often, the most complex solutions are the ones to make things simpler and easier to use.

Building a strategy around embedded finance should start with examining the motivating factors behind the push for embedded finance, as they often point to a larger fundamental need for simplicity within the sector. Only when financial institutions acknowledge the need to rewire legacy technology should they consider implementing embedded finance solutions into their systems. If and when they make that decision, their strategy should be rooted in solid and proven integration technology and partners that have proven to provide a strong foundation in this transformational journey.

Originaly posted in Payments Next

The Value of Creating a Customer Journey Using Different Channels

Listen as Michael Engel discusses the seamless journeys that banks can establish by bridging the physical and digital channels.


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