Embracing Embedded Finance in the Romanian Banks

Embedded finance is revolutionizing the financial sector worldwide, offering an innovative approach to integrating financial services into non-financial platforms. As Romanian banks continue to improve the customer experience and digitalize products and related processes, there is another area that is not yet fully tapped. Embedded finance, a new revenue stream, holds a transformative potential for banking that we believe cannot be ignored.

By Cristian Cârstoiu, Partner, EY Romania Digital Enablement and Chief Innovation Officer and Andrei Raţiu, Partner, Consulting, EY Romania

What is Embedded Finance?

Embedded finance allows the integration of financial services directly into non-financial platforms or services. This seamless integration disrupts the traditional banking paradigm, where every software platform or digital system can now offer financial services. According to a study by Lightyear Capital, embedded finance is expected to generate $230 billion globally in revenue by 2025 (Lightyear Capital, 2021).

Key Use Cases for Banks

1. Partnerships with the Retail Sector: Banks can collaborate with retail companies to offer loans or insurance at the point of sale, similar to what Klarna and Affirm have successfully done in other markets, leading to increased conversion and customer satisfaction. A noteworthy local example is Emag, which has partnered with the payment solutions provider PayU, non-banking financial institutions like Provident, and banks such as Banca Transilvania or TBI Bank. These partnerships have allowed Emag to provide customers with flexible payment options, such as “Buy Now, Pay Later” (BNPL) and on-the-spot financing, significantly improving the shopping experience.

2. Enhance Partnerships with other sectors – Real Estate, Travel, Healthcare or Automotive – Expand footprint in other industries and provide financial products. Embedded finance can be implemented at every step of an interaction where property / services / products exchange hands and financings or insurance could help such a transfer.

3. Digital Wallets: The integration of banking services into digital wallets, akin to Alipay and WeChat Pay in China, can streamline transactions and improve user convenience, boosting digital payment usage. e-Commerce players are best positioned to offer such wallets and expand their services across other sectors (e.g. payments for utilities, fines, etc.)

4. SME Tools: Offering banking services through platforms SMEs already use, such as accounting or payroll software, can extend banking services to a broader customer base. Quickbooks’ integration with several banks is an apt example of this.

5. Ecosystems – support the active creation of an ecosystem and support the participants to manage and grow their businesses (e.g. support matching the supply and the demand).

Financial and Non-Financial Benefits

• Increased Revenue Streams: Embedded finance opens new revenue avenues by monetizing services in creative ways, expected to contribute up to 20% of banks’ revenue by 2025;

• Customer Acquisition and Retention: Offering financial services on popular platforms can enhance customer reach and engagement, reducing acquisition costs by up to 50%;

• Competitive Differentiation: Embedded finance can help banks stand apart, a critical need in a market where 84% of customers consider seamless service a crucial factor in staying loyal;

• Improved Customer Experience: By providing services where customers already spend time, banks can offer a frictionless, high-value experience.

Pre-requisites for Success

• Technology Infrastructure: A robust and adaptable technology infrastructure is essential, involving ability to launch fast new or adjusted products and related front and back-office journeys, investment in APIs, cloud computing, and data analytics;

• Regulatory Compliance: Adherence to financial regulations and maintaining security and privacy is critical. Open Banking regulation in the EU, which encourages data sharing via APIs, is a primary facilitator;

• Partnerships: Successful embedded finance requires strategic partnerships, not only with tech providers but also with platforms where services will be embedded. Also, the partnership has to be supported by an agile operating model (i.e. ability to launch fast channels, products, journeys and related methodologies);

• Customer Understanding: Truly comprehending customer needs and behaviours is vital to offer relevant and engaging embedded finance options.

As Romanian banks navigate the rapidly changing financial landscape, embracing embedded finance can provide a strategic advantage. The journey may pose challenges, but the potential rewards – from increased revenue to improved customer satisfaction – are substantial. The future of banking is becoming increasingly integrated, and Romanian banks have a unique opportunity to lead the way.

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