tl;dr
Swiss banking industry is facing declining profits, making innovations like Embedded Finance and Banking as a Service critical for future growth.
Embedded Finance allows non-banking companies to offer financial services seamlessly within their platforms, which enhances user experience and creates new revenue streams, particularly in areas like payments, lending, and investing.
Although consumer interest in Embedded Finance is high, with 76.3% of Swiss users already adopting such services, many non-banking companies are still hesitant to integrate them, indicating significant growth potential in the sector.
The Swiss banking landscape has proven to be stable in recent years, but gross profits have fallen by over 34% since 2005. This highlights the need to establish innovative business models. Developments in Banking as a Service and Embedded Finance could be an opportunity to change the business models of banks and the availability of financial services in the long term.
What is Embedded Finance, and why does it matter?
Consumers and businesses expect financial services to be instantly accessible when needed and invisible when not. Financial institutions, FinTechs and other new players capable of integrating into our digital lives will thrive, others risk to be forgotten soon.
One of these integrations into our daily lives is Embedded Finance – a new development in financial services, allowing non-banking companies to offer financial tools directly to their customers. This shift creates seamless, integrated financial experiences within everyday platforms like e-commerce or apps.
Revenues from Embedded Finance – the delivery of financial products by nonfinancial entities within their broader offerings – could surpass €100 billion in Europe by the end of the decade, according to McKinsey forecasts.
How does Embedded Finance work?
The concept of Embedded Finance centres on the integration of financial services directly into non-financial platforms through APIs and partnerships with licensed banks or financial providers. These connections allow companies to embed services like payments, lending, or insurance seamlessly into their existing products.
This process involves securely connecting financial institutions with businesses, enabling smooth data sharing and regulatory compliance. The use of customer data and AI helps to personalise financial offerings, assess risks, and streamline operations for users.
Real-world examples include platforms like Airbnb, which provides value-added services to its hosts and guests, or Shopify, which provides financing to its merchants based on sales data. Uber has been leading the embedded finance movement through its Uber Money division, which provides various financial products and services to both drivers and riders. These offerings include instant payments, debit cards, loans, and investment options.
Which emerging business models are made possible by Embedded Finance?
Instead of being an entirely separate part of a consumer’s life, Embedded Finance products and services are instant and seamless. This allows many different types of embedded finance products and services, such as:
Embedded banking allows non-financial companies to provide branded checking accounts for users, offering faster access to funds and exclusive perks, especially benefiting sellers or service providers using the platform for business transactions.
Embedded payments simplify digital purchases by storing payment methods for quick use, reducing friction, and offering alternatives like direct bank payments, which also help merchants save on fees.
Embedded lending, like "buy now, pay later", offers consumers access to favourable loan options at the point of sale, increasing lending accessibility and boosting sales by allowing payments to be split over time, unlike traditional credit cards or loans with higher interest rates.
Embedded investing enables non-financial companies to offer investment options, enhancing customer experience and creating new revenue streams, while allowing consumers to invest for example in cryptocurrencies, directly from platforms they already use, without needing traditional accounts with financial institutions.
What risks and challenges must be considered when dealing with Embedded Finance?
For companies, embedded finance offers numerous new opportunities to generate revenue by integrating financial services into their platforms, which in turn helps to improve customer loyalty and retention. However, Embedded Finance comes with significant regulatory and compliance challenges, particularly around data privacy, anti-money laundering, and Know Your Customer requirements.
Companies must ensure they meet these standards to avoid penalties and maintain legal compliance. Data security and privacy are critical concerns, as embedded finance platforms handle sensitive customer information. Robust security measures are essential to protect against cybersecurity threats and maintain user trust in these financial services.
Additionally, there are operational risks, including API reliability and scalability, as well as dependence on third-party providers. The growing number of companies offering similar financial services also raises the risk of market saturation, potentially leading to reduced profitability for some businesses.
The current state of Embedded Finance in Switzerland
The Swiss Banking industry has proven to be resilient in the past years, however, margins are under pressure and innovation is affecting the sector from outside the industry and from other countries.
In its report on digital finance in 2022, the Swiss Federal Council has also defined specific measures to achieve a strong digital financial sector. These include, among other aspects, the area of ‘open finance’ , which has been identified as a significant driver of innovation with standardised interfaces.
While Embedded Finance allows non-banking companies to integrate financial products and other banking data into their customer-facing channels, open finance can be seen as an extension of the idea of Embedded Finance. According to the Swiss industrial conglomerate openbankingproject.ch open finance describes the exchange of any data from the financial industry. For example, securities account data, insurance data or financing information can be made accessible and useable in this context.The reality for customers in Switzerland at present is a mix of digital and analogue channels for interacting with their bank, but cross-company offerings are only emerging gradually.
Key findings of the first academic study on Embedded Finance in Switzerland
To better assess the situation in the Swiss market, Synpulse, a consultancy specialising in the financial services industry, has published the study ‘Embedded Finance and Banking as a Service in Switzerland: Outlook 2024’. This is the first study to provide comprehensive and country-specific insights into developments in Embedded Finance and Banking as a Service.
The study included all relevant players – banks, enablers, embedders and consumers. The aim of the study is to enable Swiss banks and embedders (non-banks) to better assess the economic potential of Embedded Finance and to gain a more differentiated understanding of the conditions for the successful implementation of new business and operating models.
The study design consists of a three-phase approach in which quantitative and qualitative methods complement each other and are finally rounded off by qualitative validation at C-level to develop strategic guidelines.
In Switzerland, 76.3% of consumers have used embedded finance services, according to the study by Synpulse conducted between October 2023 and April 2024. The report, based on surveys with 1026 consumers and over 70 industry stakeholders, shows a strong correlation between higher digital skills and increased use of embedded finance services. Key motivators for adoption include speed and efficiency (43.5%), cost savings (17.8%), and access to secure, personalised banking services.
In terms of new technologies, the key question is whether and when customers will start to use them in a way to create significant new value that either complements or even replaces the traditional ones in the medium term. In management literature, this moment is often referred to as the ‘tipping point’. Specifically, this occurs when 16% of potential users start to use a new offering. After that, a positive feedback loop creates a knock-on effect that leads other users to adopt the innovation as well.
According the Synpulse study, the tipping point has already been passed for the usage behaviour of the individual embedded banking services (investing, retirement planning and payments).
Nevertheless, only 40% of non-banking companies surveyed offered embedded banking services, with reasons for not doing so including lack of understanding (33%) and ongoing evaluations (22%), but 55.5% showed potential interest, signalling significant growth opportunities, particularly in retirement planning, financing, and payment services.
Recommendations to strengthen the potential of Embedded Finance
The study demonstrates that consumers are already adopting embedded banking services that offer tangible value and reduce pain points, or are prepared to alter their behaviour if such services become available. One of the key findings is that consumers are eager to adopt service combinations that simplify their lives, particularly in terms of managing their financial needs. There is a clear opportunity for providers to increase the use of banking services by developing solutions that meet consumer demand.
Over 50% of embedders and banks recognise the economic importance of the emerging value chains in embedded banking. However, banks perceive partnerships with modern embedders to be a more attractive proposition than those with traditional companies, given the significant changes that would be required to work with the latter. Embedders, on the other hand, view banking services as a highly attractive proposition, particularly in the payments sector, which is seen as a commodity.
As recommended actions for policymakers, the authors of the study purpose initiating cross-industry dialogue in task forces, supporting the interlinking of empirical research and practice by funding research activities, and promoting international exchange and know-how transfer.
For banks and embedders, the authors recommend both changes to the business model (review positioning, develop a roadmap for collaborations) and to the operating model (develop mindset and organisation as well as technological expertise for cooperative value creation configurations). The authors also see an important success factor in communication and cultural change at C-level and on the board of directors.
Culturally, embedders appear to be better positioned than banks to capitalise on embedded banking opportunities. However, the low response rate from embedders suggests a lack of strategic awareness. Banks, despite a higher response rate, face significant cultural and technological challenges in adapting to future business models. The analysis also highlights differences between current and potential players, indicating that both embedders and banks need to take further action to realise the full potential of embedded banking.