As the financial services landscape rapidly evolves, traditional banks and financial institutions (FIs) find themselves at a pivotal juncture. The emergence of embedded finance and banking-as-a-service (BaaS) is revolutionizing the industry, pushing banks to adapt or risk being outpaced by nimble competitors from the Big Tech and FinTech sectors.
A recent PYMNTS Intelligence report, “Embedded Finance and BaaS: From Marketing Buzz to Banking Bedrock,” in collaboration with NCR Voyix, shows the integration of application programming interfaces (APIs) is transforming financial services by embedding them into daily digital interactions.
With 41% of financial institutions adopting embedded finance solutions and 48% enhancing their BaaS capabilities, banks are responding to digital demands and competitive pressures. Despite this progress, challenges such as outdated systems, regulatory hurdles, and security risks remain barriers.
Despite the potential, only 79% of global banks foresee banking becoming deeply integrated into daily activities, indicating that many are still in the initial stages of adopting these technologies.
Issues such as legacy systems, fragmented technological infrastructure, and evolving regulatory requirements can slow progress. The growing adoption of these technologies reflects a broader industry shift toward more agile and integrated financial services, positioning banks to better compete with emerging digital and FinTech players.
In the U.K., two-thirds of banking executives cite over 10 types of barriers, with a notable absence of a unified internal strategy being a major concern.
European FIs are also grappling with inadequate API security measures, with only 24% having consolidated security solutions for their web and API interfaces. These systemic and security-related issues highlight the complexities banks must navigate to successfully implement modern, cloud-based systems.
Additionally, the rapid pace of technological change and evolving consumer expectations further complicates the transition, requiring banks to balance innovation with robust security and regulatory compliance.
Strategic partnerships with FinTechs are emerging as a crucial strategy for banks and community credit unions to innovate and overcome digital transformation hurdles.
Examples include HSBC UK’s integration of Ember’s tax services via APIs, and EBizCharge’s partnership with Lendica to streamline SMB credit access.
These partnerships enable banks to tap into specialized expertise and innovative solutions that may be beyond their in-house capabilities. By leveraging FinTechs’ agility and technological advancements, traditional institutions can accelerate their digital transformation journeys and offer more tailored, user-centric services. This approach also helps mitigate the risks associated with in-house development, such as prohibitive costs and extended time frames.
The evolving landscape of BaaS is facing shifts as regulatory scrutiny intensifies, the focus sharpens on core banking functions, and the sector experiences a wave of consolidation, according to payments executives. This trifecta is reshaping the industry and setting the stage for a more refined and robust BaaS ecosystem.
“The regulators are now awake,” Thredd CEO Jim McCarthy told PYMNTS. “At the end of the day, it’s the banks that sponsor these banking-as-a-service programs that will be the ones that are impacted … so they will take this all quite seriously.”
Amias Gerety, a partner at QED Investors, added to PYMNTS: “If you want your business to survive, you have to figure all this out.”
Meanwhile, during a conversation for the “What’s Next in Payments” series, Ingo Payments CEO Drew Edwards told PYMNTS’ CEO Karen Webster, “regulatory orders and regulatory scrutiny have taken a front seat in the industry. We’ve gone through a bunch of these cycles over the last 23 years, but this regulatory environment is back to where the bank sponsorship [model] is getting tighter and more difficult.”
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