Embedded finance is taking flight. More non-financial businesses are embedding financial services into their offerings and ecosystems. For instance, many merchants now embed Buy Now, Pay Later (BNPL) in their shopping experience – and more than one-third of US consumers have used BNPL. There are dozens of other embedded finance models, too. Lending, e-wallets, and payroll automation are just a few. A FinTech startup is probably launching a new embedded finance innovation as you read this. But startups aren’t the only players in the embedded finance story.
Telecoms and traditional banks can combine their areas of strength to win with embedded finance. Banks can utilize their payment infrastructure and lending facilities along with their credit and fraud checking services. And telecoms have a large customer base and the latest technology. Together, they can reap the rewards of embedded finance by bringing telecom customers convenient ways to pay – while creating new revenue for banks. Already, telecoms and banks are forging partnerships to deliver embedded finance using payment methods like BNPL.
Embedded finance basics
With embedded finance, businesses (typically non-financial businesses) offer customers financial services that relate to their core products. Many types of embedded finance have been around for years. Airline credit cards? They’re an example of embedded finance that got started almost 100 years ago, with the American Airlines Air Travel Card in 1934. And the offer of travel insurance with the purchase of a tour or cruise? That’s another example of embedded finance. Not every example is consumer-related. For instance, Uber drivers can get paid through an Uber Debit Card, which also includes discounts on fuel purchases.
Many telcos already offer embedded finance in the form of carrier billing. With carrier billing, people make purchases that are billed to them through their telco. By working with banks, telcos can grow the embedded finance opportunity well beyond carrier billing. For that to happen, banks need to be able to extend their services to telcos. Some banks may be ready for that, but many will need to first modernize their systems and processes.
Why partner with telcos?
Partnering with telcos offers two critical embedded finance advantages for banks. First, telcos have a large customer base and a high degree of “stickiness” with those customers. That means telcos can easily connect finance offers to customers. Their other advantage is just as compelling: Telcos have the payment histories of their customers. Telcos know which customers pay their bills in full and on time. This positions them to make banking offers to high-value customers.
Insight into payment history can serve as a proxy for a credit check. This overcomes one of the key challenges of many types of embedded finance products that have a loan-like aspect. Today, merchants partner with providers of BNPL, offering installments as an option at checkout. But consumers then need to jump through hoops to take advantage, with the BNPL provider typically performing a soft credit check. The credit provider approves or denies the customer based on the soft credit check. But when a telco is involved, the process is streamlined because the consumer can be pre-approved based on payment history. This can make use of the finance offer completely seamless for the consumer.
At Amdocs, we’re working with a bank that’s extending the BNPL opportunity to telcos in a region where BNPL is already popular. The arrangement gives the bank access to a new group of high-potential customers. Just as crucially, the bank is able to gain traction for its new service by accessing the telcos’ customers.
The bank developed and launched its new BNPL offering using a microservices approach. With microservices, you divide applications into smaller services (like account and payment management). It’s quicker to develop and enhance new products when using microservices. Application programming interfaces (APIs) connect the bank to its embedded finance partners. Embracing microservices is one of the ways banks can modernize their platforms to enable and accelerate embedded finance.
Modern banking is requiring the seamless integration of technology between varying platforms outside of the traditional banking infrastructure. As open banking develops and more non-banks enter the space, financial services is now reshaping its business model for the digital age.
Get started with embedded finance
At Amdocs, we work with many of the world’s largest regulated businesses, enabling better customer experiences in 85 countries. Our team unites the insights gained by working with more than 40 banks with the experience of supporting 300+ telcos and media providers.
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