Embedded finance can help banks create a true ecosystem, Temenos study shows

By Puja Sharma

As payments, technology and e-commerce disrupters cut banks out of the equation with embedded finance solutions, banks must harness emerging technologies to create their own digital ecosystems and remain at the centre of the banking universe, according to a study by Temenos.

Rise of Machines

In the last iteration of Economist Impact’s global banking survey, conducted in 2021, banks were facing a perfect storm as the pandemic accelerated consumer use of online banking, hastening the closure of bank branches and seemingly giving a strong advantage to digital-first competitors. With fintech start-ups, payment players, super-app platforms and tech giants continuing to take market share as they gained the ability to offer more traditional banking services, incumbent banks were compelled to reassess their priorities and business models

It is no surprise, then, that new technologies are expected to have the biggest impact on banks in the next five years, according to 63% of respondents in this year’s survey—a finding that has been consistent since 2019. “When the young generations, who were born with phones in their hands, become clients, they will have much more of a focus on the technology,” said Schuyler Weiss, CEO of Alpian, a Swiss neobank. “If you do not have modern technology, they will not bank with you, it doesn’t matter how long you’ve been around.

As ecosystems enable banks to play a larger part in consumers’ lives, what they stand for and how they operate will matter more. Companies across sectors are increasingly expected by customers and employees to operate according to clear values, and there is growing public attention directed towards the important role that banks can play in climate action.

Survey respondents recognise this, with evolving customer behaviour and demands for new banking products and services cited as the second biggest trend to affect the industry, after technology (34%). This is translating into banks offering more ESG and sustainable banking propositions to both retail and enterprise customers in the next five years (73%), as well as providing capital to environmentally friendly projects (74%) and taking capital away from carbon-intensive industries (64%).

More than one-third (37%) of banks report investing in low-carbon technologies and start-ups working on decarbonisation. As part of their own sustainability initiatives, 31% are implementing strategies to reduce emissions in their operations internally as well as their supply chain.

Collaboration with fintech firms and other technology providers is seen as key to accessing expertise in emerging technologies. Steve Dunn, head of innovation and fintech at Sumitomo Mitsui Banking Corporation, explains: “The way we see it is there are a lot of smarts out there, so how do we leverage that? How do we tap into technology we need, but we just don’t have access to? We see value in partnering with fintechs to accelerate our own go-to-market capabilities. It’s a key element of our innovation strategy.

Mick Fennell, Business Line Director at Temenos Payments noted, “The new battleground for banks is being fought over the future of the payments industry. The next generation is demanding a new level of sophistication when it comes to instant payments. Banks that want to thrive over the next decade need to be able to incorporate an offering that is instant, seamless and secure so they continue to operate as everyday payment providers to their customers and keep up to date with the expectations being set by the global technology giants.”

Key highlights:

• Around 40% of banks see tech giants as their biggest competitors in the next five years as the next generation of customers prefer one-stop-shop solutions when purchasing online—the new battleground between banks and other non-financial companies entering the payments market, according to the latest Economist Impact report by Temenos.
• The influence and threat of technology companies such as Google and Microsoft have increased sharply in the last three years – replacing global payment players such as PayPal as the biggest concern due to their one-stop-shop solutions when purchasing online, offering instant global contactless payments all on one interface as the next generation sees increased exposure to newer payment methods. Over a third of US consumers now find bank transfers too slow (35%) or too expensive (36%). Dissatisfaction is even higher among younger generations, with over half of millennials and 43% of Gen Z unhappy with the speed of bank transfers.
• Meanwhile, other competitors in the industry – such as the rise of Challenger Banks (Monzo, Tide etc) are now a falling concern for banks as they look to deepen their collaboration with fintech companies to stave off competition.
• Nearly half of all banks are looking to acquire majority stakes in fintech to consolidate their market offering and become the one-stop-shop solutions when purchasing online to increase access to technology and a suite of financial solutions, reducing overall market competition and creating a payment service offering that can rival large incumbent technology giants.