When we talk about innovation in fintech and embedded finance, we must consider that the Italian market is a little behind its European neighbours, but this means that it has the biggest potential for growth. Our recent report with Finextra, ‘The Future of Embedded Finance 2022: Which European stakeholders will win or lose?’ highlights that Italy can support the embedded finance ecosystem.
This has been proven with the arrival of Covid-19, the significant shift in consumer behaviour and the acceleration of embedded finance solutions being created. The economy was forced to operate differently, and the need for digitalisation became more urgent. Embedded finance is now a mandatory trend to follow and we at Solarisbank are working on consolidating our leading position in this space.
The importance of being educated
Traditional banks in Italy have tried to innovate for some years now. While some have tried to launch digital and mobile banks under different brands, the reality is that only the first movers have been attractive to customers, and yet only those that want to try new products. However, those products weren’t scalable at all, and this paved the way for incumbent lenders to emulate what European neobanks and challenger banks were doing.
This was also not successful because banks were usually continuing to operate with the same legacy, experience and mentality that had held them back from being truly innovative in the first place This resulted in many within the financial services industry questioning whether only the specialised players could make a difference.
While embedded finance is how organisations seek avenues to extend their product through financial services, by partnering with banks and specialty finance companies to enable technological functionality, banking-as-a-service allows firms to lease or license services to offer financial tools themselves.
Considering incumbent banks, to make BaaS a reality in Italy, legacy systems will have to be restructured and API ecosystems, forged. Although this requires considerable human and capital resources, with most European incumbents already having entered the open banking race, many banks have also already undergone the digital transformation necessary to be competitive in the BaaS space.
For those that haven’t, education is required. Some business leaders are familiar with how APIs work thanks to open banking, but in some cases the detail has been lost. Integration with the third parties is required for banks to operate at the same velocity as their tech-savvy competitors and to move from open banking to BaaS.
BaaS in Italy, where to start?
New technology allows financial players to leverage speed, efficiency, and co-opetition. Greenfield banking is the best way a financial institution can disrupt their business model, and experiment to launch new products at a pace not possible with legacy infrastructures, but success will depend on the maturity of the organisation.
But how can organisations be sure that an embedded finance offering will ultimately reach the volume necessary to justify the expense of the build? How do they decide whether to build the solution or partner with a third-party provider? Also, if banking as a service and API banking become as ubiquitous as, for instance, online or mobile banking, what is the route to success for Italian companies achieving long-term differentiation with BaaS?
These are common questions that are asked when I am speaking to potential partners – both financial institutions and non-banks. In my opinion, the frontend must remain in the hands of our partners, and they control what their customers see – their brand – and are responsible for increasing customer lifetime value. What companies like Solarisbank can support financial institutions with is working with APIs to allow them to move into more verticals and increase the number of products in their portfolios.
Financial institutions must build emotions around their brands to retain a connection with their customers. If we were to compare the two luxury brands Gucci and Prada, for example, in the offline world, consumers would go to the store to purchase products that are more or less comparable. However, they would choose one or the other because they feel more attached to a particular brand.
The same can be applied to online business and e-commerce; the backend service doesn’t change unless embedded finance and banking-as-a-service is leveraged. Also, as more people grow comfortable with digital services, brands are expected to weave financial services into their business models, which in turn can be very beneficial for them as they can increase customer loyalty, boost the number of customer touchpoints and generate additional revenue.
Click here to read the Finextra report – The Future of Embedded Finance 2022: Which European stakeholders will win or lose? – in association with Solarisbank.