As the digitization of financial services strengthens across business and consumer payments, it seems as if new terminology emerges every week.
It can be difficult to keep it all straight.
While you’re unlikely to be quizzed on the definitions of these terms, it’s important to understand how Embedded Finance can have a positive impact on your business and benefit your customers. Evidence is mounting that the “Embedded Finance revolution” is an increasingly profitable bet, with $20 billion in revenue generated in 2021 alone.
“Financial products are increasingly becoming integrated with the applications consumers and businesses are already using,” says Jordan McKee, director of fintech research and advisory at 451 Research.
Inherent in Embedded Finance are Open Banking and Open Finance. These terms represent the engine under the hood that powers the digital, interconnected world we live in today.
In this blog post, we’ll establish common ground around key terms and the role APIs play in connecting financial institutions and third-party data providers with innovative companies.
Defining Embedded Finance
Embedded Finance allows non-financial platforms (think: Uber, GOAT, Airbnb) to offer payments or other financial products and services inside their application.
For example, a marketplace platform can embed a payments API into its platform to enable customers to buy and sell sneakers, apparel and accessories. By embedding a payment API, these types of platforms can keep and control their customers’ payment experience inside its branded interface. The same can be done within property management or insurtech platforms, or even in the transportation and logistics industries.
Inherent in Embedded Finance is Open Banking.
Connecting to Open Banking
Open Banking is the framework that makes embedded finance solutions possible.
A new report from Discover Global Network and 451 Research found 87% of consumers in the United States have at least one fintech app on their smartphone (e.g. Intuit for budgeting, Metromile for insurance, Robinhood for investing, Zelle for payments).
“Open Banking enables enhanced connectivity between financial institutions and fintechs,” McKee says. “This helps fintechs to streamline their customer experience while improving data quality and data access.”
Open banking empowers consumers to link or permission their financial data from bank deposit accounts to trusted third parties for specific purposes like paying bills, investing and purchasing goods and services.
Open banking involves three parties working together:
- Financial Institutions (e.g. Wells Fargo, Veridian Credit Union, JP Morgan Chase)
- Data Providers (e.g. Plaid, MX, Finicity)
- Payment APIs (Dwolla, Modern Treasury, Stripe)
When these three parties are in sync, innovative companies like GasBuddy, Rally and Ibotta can use the consumer-permissioned data to enable a more interconnected experience for their customers.
Moving Towards Open Finance
If Open Banking and Embedded Finance are the solutions, think of Open Finance as the movement.
Like Open Banking, Open Finance is predicated on consumer-permissioned data sharing.
While Open Banking deals specifically with consumer-permissioned data related to traditional bank deposit accounts, Open Finance encompasses all manners of financial data ranging from investment accounts and crypto wallets to data sharing in fintech applications.
Enabling Innovators to Embed Financial Services
We developed the Secure Exchange solution to give our clients a choice between data providers (Plaid, MX, Finicity) that can complement their account-to-account transactions with a financial institution. By using a tokenized solution, Dwolla clients or partners can leverage the power of Open Banking and Open Finance to speak with another API at a financial institution or data provider in a seamless, tokenized process.
The Secure Exchange solution is Open Banking and Open Finance at work. By connecting financial institutions and data providers, Dwolla enables innovative companies to embed financial services into their product and give end users—which could be businesses or consumers—more access to and control over their data.
This developer documentation features a good guide to the Secure Exchange workflow using Plaid as an example.
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To hear Dwolla President and COO Dave Glaser explain the three pillars of Open Banking and share more examples of how they work together, listen to the Fintech Growth Talk Podcast.