What are the challenges to API-led embedded finance?

Embedded finance is one of the most sought-after services, but what are the challenges? Read more here.

 

Data-sharing is crucial to the success of embedded financial services, enabled by Open Banking. The following challenges around data-sharing and the use of APIs have restricted progress and the industry must work to improve them to see embedded finance thrive.

Consumer Trust

A key factor in the success and uptake of applications of embedded finance is the consideration and nurturing of consumer trust.

Given the significant power of APIs to transfer high volumes of complex data, methods of customer acquisition involving more sophisticated consumption of personal data will need to be tempered with a focus on the user experience, putting the user at the centre of control over their data usage.

Data privacy is a core concern when creating embedded finance ecosystems. With proper risk mitigation protocols and certifications such as ISO27001 to ensure the highest standards of data protection, end-users are offered a level of comfort in that their personal information is protected to the same standard as banks.

Mainstream knowledge

Another potential issue when it comes to uptake from end users is understanding and comprehension. Some customers already struggle to understand the limits and implications of Open Banking, with queries implying that some customers felt that by authenticating Open Banking permissions, they would allow third party access to an account.

With the increased complexity of the scope of embedded finance-based applications and user journeys, it will be key to provide simple and comprehensive explanations of what users are signing up to, and more importantly why they should do it.

Legacy technology in need of reform

In spite of the revolutionary capabilities brought about by Open Banking, uptake has been fairly disappointing, with the OBIE Annual Report suggesting that only 3m UK customers were using Open Banking enabled products at the start of 2021. Account switching remains low, echoing the findings of the Woodhurst report conducted in 2020.

In addition to a lack of understanding and consumer friendly deployment, promise of Open Banking has failed to meet expectations due to continued inertia on account of the large incumbents in a full opening up of their technical capabilities as per the spirit of Open Banking regulation. This may be a result of banks seeing the democratisation of access to user data as a threat to their bottom line, especially following the relative success of the neobanking platforms such as Monzo and Starling.

When looking at the more functional challenges around the application of embedded finance, it’s not enough to have optimised APIs if the data is insufficient in quality and scope. For example, pre-filling the notoriously lengthy mortgage application could make a huge difference to how people think and feel about applying for credit, however, in reality the benefits of APIs would not be realised if the data available is patchy or ill-suited to the needs of the mortgage provider in order to make an assessment of creditworthiness.

Finally, it’s important to take the persistent issue of legacy technology into account. While for nimble fintechs, building out sophisticated APIs and improving the malleability of technical architecture can be comparatively easy, for large financial institutions there are significant technical, regulatory, compliance and financial hurdles to do so.

Ultimately, the vast majority of wealth, and data, is held with institutional banks. To achieve the fluid flow of data required for embedded finance, a significant buy-in from financial institutions is required.

 

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