As we pass the halfway mark through 2023, embedded finance still reigns as one of the biggest talking points across financial services sector. I recently had the opportunity to interview Sam Kilmer, Managing Director at Cornerstone Advisors, to ask him about where the industry stands with embedded finance, and what we can expect next. Among the topics Kilmer addresses are:

• What does embedded finance mean, and how does it differ from embedded banking?
• How can banks leveraging third party technologies maintain control of the customer experience?
• How should firms prioritize spending on embedded technologies?
• Will leveraging embedded finance become tablestakes?
• What is the future of embedded finance?

Embedded finance maintains applications across the fintech sector, and Sam Kilmer has a unique perspective on the topic. He also offers up his favorite embedded finance success story. Check out the full interview below.

Photo by Pixabay

If you missed the keynote address from Sam Everington, CEO of Engine by Starling Bank at FinovateEurope earlier this year, here are some highlights that will make you feel as if you were in the room.

During his address titled, “From payments to core platforms: How can banks leverage data and technology to meet changing customer,” Everington relayed his experience at Starling Bank, detailing how the newcomer has remained competitive by using customer data in context to not only create a better user experience, but also cut costs.

Everington discussed the shifting expectations of consumers, who now anticipate a digital-first experience similar to those offered by big tech companies. Additionally, because customers seek fair, reasonably priced, and affordable services, in today’s current cost of living crisis, it is key that banks keep their costs low in order to retain consumers’ appetites.

Cost, in fact, was a big part of Everington’s keynote. He emphasized the potential cost savings for banks by increasing the use of technology and enhancing user experiences. He acknowledged that in the banking sector, technology is often viewed as a cost center and technology investments are primarily driven by cost reduction.

“In banks especially, technology and technology investment decisions are all about the business case,” Everington said. “Technology is a cost center to be controlled, and technology investment is by and large a cost reduction exercise.”

In his keynote, Everington identified real-time and flexible systems as essential elements needed to meet customers’ ever-changing financial situations, which can fluctuate multiple times a day. Banks need to proactively understand their customers, be aware of the products and services they hold, and respond promptly to any changes.

To address these needs, Starling Bank developed Engine, a technology platform that supports their operations. Engine offers flexibility, comprehensiveness, scalability, and reliability. These features not only enhance the customer experience but also ensure compliance with U.K. regulations.

Ultimately, Everington emphasized the importance of banks having an innovative platform that allows them to adapt and meet the evolving needs of their customers.

Photo by Yan Krukau

Jonathan Alloy is a seasoned financial services professional with years of experience in the sector. He formerly served as Vice President of Design Thinking at Credit Suisse, where he was responsible for driving innovation and fostering a culture of human-centered design across the organization. Today, he is Vice President for Customer Experience and Innovation Consulting at Publicis Sapient.

Last fall, Jonathan Alloy and Steven Ramirez, CEO of Beyond the Arc, sat down to discuss the current state of digital banking. Here are some highlights from their conversation.

When it comes to partnerships, how does a fintech work with a bank to get a solution in front of customers?

Jonathan Alloy: Fintechs, or any new entrant into the banking industry, really need to understand that banks have two separate departments at the highest level. There’s a group that likes risk– that’s the front office, the people who take deposits, make loans, and trade securities– they thrive on correctly evaluating risk.

The back office, by contrast, thrives on minimizing risk. They’re looking for reasons to say no to protect the bank’s integrity, its reputation, its cybersecurity, and its trust with customers. They’re going to say no to things, even if they’re innovative, because it violates a policy that they’re incentivized by the bank to uphold. Maybe [the solution being offered] is only available in the cloud and the bank only allows things that are on-prem. That’s a very common example. So when you’re developing a solution, you have to understand the risk profile of who in the bank has the authority to say yes.

What is it about digital banking that excites you?

Alloy: I think the biggest opportunity right now in some ways remains where it was 20 years ago. [This opportunity] is increasingly being where the customer is. This enables us to deliver financial services when, where, and how they want to consume, not just how we want to provide it. And that’s an important distinction.

Whether [you deliver] through mobile payments, through white labeling, whatever the case may be– it’s a matter of getting out in front of the traditional banking silos, breaking down the walls we have internally, and getting it out in the world to understand it from [the customer’s] point of view.

When we look at the world through the eyes of how customers want to make purchases, payments, take out loans, and invest for retirement, we’re going to learn things that we don’t get if we stay in our silos.

Any tips for banks that want to think like a customer?

Alloy: The number one best thing I could encourage everybody to do is go shopping yourself. So you’re CEOs, your CXOs, your executive team, your management team, your middle managers, your front line employees– everybody should be required to go out, and from another bank that’s not you, as well as you, sign up for a new checking account, get a debit card and a credit card, take out a loan, buy a car– whatever your personal financial needs are. Think about, “was this experience enjoyable or tolerable?” In most cases, what we find, is that for most people, banking is barely tolerable. So when somebody comes along with an innovative new idea or a new approach that makes it just that much more better, they’re going to win great[er] share.

Hear more from Jonathan Alloy in the full conversation.

Photo by Andrew Neel

The U.S. is still in the early stages of implementing open banking, but the conversation is well underway. Kurt Lin, CEO and co-founder of Pinwheel, is an industry expert who has spent his career building infrastructure to enable innovators to build the future of the financial system. In a recent interview, he discussed how the role of the Consumer Financial Protection Bureau (CFPB) has evolved and how recent regulations may bring open banking to the U.S.

How has the role of the CFPB evolved and how will these changes impact consumers?

Kurt Lin: As the fintech space continues to evolve, so does the CFPB. Amid the industry’s boom in recent years, the CFPB has taken the stage as the primary regulator of the sector, supervising and creating regulation at pace with innovation. The CFPB remains dialed into consumer abuses and works to uproot long-accepted but malignant practices such as overdraft fees and depositor fees, along with creating new regulations for emerging technologies. 

Much as we are working to create a fairer financial system at Pinwheel, the CFPB is working to do the same, as is further signaled by recent remarks given by Director Chopra. The latest guidelines indicate that the CFPB is pushing for a world where consumers have more control over their data, leading to increased agency and choice over their primary financial institutions. 

What major regulatory changes are coming that will impact banks and fintechs?

Lin: The CFPB is further codifying Section 1033 of the Dodd-Frank Act to promote open finance. A few examples of initiatives we can expect to see this year: 

Increasing consumers’ ownership over their financial data. Income and employment data is arguably the most important part of someone’s financial life, but the amount of regulation around portability, security, and ownership, doesn’t match up to the significance of this type of information. Under new regulation, we expect things like Direct Deposit Switching (DDS) to become the norm. DDS is at the core of open banking. Income starts at the direct deposit, and having more control over that information and the flow of funds is critical for consumers to remove the immense friction that prevents them from quickly setting up or moving their direct deposits. 

Subsequently, as consumers will have more control over their data, we expect an improvement in how we evaluate creditworthiness and underwrite loans. As it stands, income still isn’t a key factor in a traditional credit score. However, a recent study we just conducted found that over 80% of consumers are comfortable sharing their income and payroll data. That’s a pretty clear signal that the general population is aware that it will be advantageous for them to control and share this information to access better financial products. 

After last year’s FTX scandal, it is very apparent that crypto regulations are coming. What do you envision new crypto regulations will look like? 

Lin: Crypto is not my main domain, however, I have a few thoughts:

There’s a lot of talk about things like regulations to require crypto exchanges to have proof of reserves, etc. to create more transparency and trust in the ecosystem.  

While it’s productive to see this dialogue, there is still a lot of work to be done around establishing clear guidance. For example, what are the right standards, how should this be audited, how do you get visibility into what the true liabilities are, etc.  

I don’t expect clear or immediate action, but I expect increased scrutiny of the ecosystem, particularly around centralized exchanges. This increased scrutiny will also include market participants taking an even more active role in building new tools to better monitor behavior on-chain and using those tools to inform future regulations.  

Are there any areas in fintech and/or banking that you see lacking regulation or oversight?

Lin: Speaking broadly about this topic as a whole, it can be extremely slow to enact new policies such as these. In the meantime, we’re excited about helping to cultivate an open banking-like structure by furthering our partnerships with payroll providers. This is something we’re hyper-focused on this year, which will help more broadly unlock consumer-permissioned income data. This has two benefits: it will give consumers more control over their financial info and enable banks and fintechs to use this data to build more robust offerings.

Photo by Leyre Labarga on Unsplash

Lenders have always faced some level of uncertainty, but the past few years have truly put the industry to the test. While many have enhanced their systems with new enabling technologies, there are still a number of uncertainties– including inflated income due to Covid relief funds and increased spending power thanks to a student loan repayment pause– that create confusion in the underwriting process.

We spoke with PayNearMe’s Senior Director of Sales Jill Bohlken for some insight into how today’s lending environment has changed and what we can expect to see going forward into this year.

Describe the current lending environment and how it has changed over the past few years.

Jill Bohlken: In one word, the current lending environment is unpredictable. A number of converging market forces are causing some uncertainty among lenders, merchants, and borrowers alike.

We have consumer prices continuing to rise, leading to less disposable income and more borrowing by consumers to cover costs. According to the New York Fed’s Q3 report, households last year increased debt at the fastest pace in 15 years, and credit card balances collectively rose more than 15%.

Meanwhile, seven interest rate increases led to lower margins for lenders at the same time they face increased competition to attract new customers.

External forces like supply chain disruptions continue to inhibit some lending markets, such as auto. And emerging trends such as longer loan terms (upwards of seven years for an auto loan) and instant financing carry increased risk of delinquency, prompting lenders to build reserves and reduce overhead to cover themselves in case of default.

Can you discuss any notable trends or changes in consumer borrowing behavior that you have observed?

Bohlken: Last year, the economy saw unprecedented demand for goods and services driven by a surplus of Covid relief funds combined with a shortage of supply. More recently, we’ve seen loan demand start to normalize due to inflation and higher interest rates. For billers, managing risk and delinquency is always a priority. According to Experian, 60-day delinquencies for new car loans sat at 0.48% by Q3, with used car loans at 1.17%.

A more positive trend was the rise in online loan applications completed exclusively by web and mobile devices. This self-service innovation improved the speed of transactions and accelerated loan approvals, not to mention making the experience more convenient for consumers.

What tools, data, or technologies can help lenders mitigate the risk of default before extending a loan?

Bohlken: The expanding use of artificial intelligence and machine learning to analyze large swaths of data and produce actionable insights is by far the most exciting tool lenders should pursue. Payments platforms can feed a data warehouse to store transaction data in one place, then apply machine learning models to either an individual client’s data or aggregated industry data to create smarter risk models.

For instance, AI can be used to analyze cohorts of customers using hundreds of data points (zip code, income level, credit score, etc.) and assign the group a risk score. AI can even bring in data from government sources, such as unemployment and GDP reports to shed light on risk further. This research helps lenders determine how and where to find high-probability, low-risk customers and adjust their risk analysis and marketing spend accordingly.

How about once the loan has already been extended?

Bohlken: A payments provider can help lenders prevent late or missed payments using a number of tools and strategies, such as sending payment reminders by text, email, or push notification. The provider can offer a wide range of payment channels to allow customers flexibility in how they pay. In cases of chronic late payment, the provider can intervene with offers to help avoid default, such as flexible repayment plans.

What’s especially exciting is that AI and ML now make these strategies even more effective. For example, AI can be trained to constantly scan payments behavior to identify customers who have multiple late payments, then automatically initiate a series of engagement messages that move the customer toward payment. AI can also automate solutions to common payment problems. For instance, if a customer has multiple ACH returns, AI can apply a business rule requiring them to pay with cash or card only.

These automated solutions save lenders both time and money. Not only does the AI circumvent many behaviors that could lead to default, but it also eliminates the time and labor of manually resolving payment problems.

Looking ahead in 2023, will lenders be more hesitant to extend loans to borrowers?

Bohlken: It’s hard to say with certainty, but demand does remain fervent. According to a recent Consumer Pulse study, one in four Americans plan to seek new credit or refinance in 2023. However, according to Experian, auto loan balances have grown by 7.6%, so lenders may want to shore against risk, adjusting the credit profiles of their customers and trimming back-office budgets to keep a higher level of reserves.

At the same time, lenders may lean into the adage, “a bird in the hand is worth two in the bush.” That means putting more emphasis on servicing existing portfolios and maximizing return by reducing delinquency, lowering the cost to collect, and improving operating efficiency through automation and optimization.

If lenders cut back on extending loans, where will the overflow in demand go? Will consumers turn to payday loans, or will alternative lenders be able (and willing) to fill loan demand?

Bohlken: In my interactions with many large lenders I have noticed that many are reducing their workforce, a way of battening down the hatches and right-sizing operations to suit the precarious lending environment.

In terms of consumer overflow, I see movement in several “alternative” types of loans, including buy-now-pay-later, which breaks payments for a large-ticket item into several payments; and buy-here-pay-here, which allows car dealerships to act as both seller and lender. Both these options appeal to customers who may have poor credit and/or limited options for securing traditional financing.

Payday loans, on the other hand, are losing their luster after almost a decade of bad press and heavy regulatory oversight. They still play a part in some consumer borrowing, but most consumers who can find alternatives will do so to avoid the heavy interest rates and fees.

Photo by Ann H