Open Banking: Igniting the Rise of Embedded Finance

Open banking is a huge focus in the financial sector today. So much so, decision-makers and leaders in finance from across Europe are gathering in London next month for an event dedicated to this area of innovation: the Open Banking Expo.

One key discussion point at this event is the relationship between Open Banking and Embedded Finance - how one led to the other and what success looks like for both. The two are, without a doubt, inter-connected and it all circles back to the importance of data sharing. Open banking essentially laid the groundwork for embedded finance, but what does this look like in practice, particularly for embedded insurance use cases?

Connecting the dots

According to the World Economic Forum, over 130 million people worldwide are expected to be using open banking services by the end of this year. Much of this was made possible by PSD2 (the revised Payment Services Directive) - which supported open banking by easing data transfer. At the same time, we’re seeing a surge in embedded finance, which is expected to grow by 148% over the next five years, while predicted revenues will exceed $228bn by 2028 thanks to advances in technology.

While connected, the two trends are different. Open banking involves sharing financial data between financial institutions and service providers using Application Programming Interfaces (APIs), whereas embedded finance integrates financial services directly into non-financial platforms and apps, in order for services to become more accessible to users. 

The key benefit that links these two solutions is that open banking allows organisations like fintech startups, for example, to access customer’s financial data (with their permission). It is this data that makes it possible for embedded services to become more relevant and bespoke. This in turn benefits those platforms embedding finance, now able to offer tailored services from insurance to lending or payment processing. And this variety provides end-customers with a more compelling value proposition. Everyone wins.

Market analysts anticipated that open banking would spur competition in the financial industry by empowering new entrants to introduce innovative products and services. While certain regions, like the UK, may be trailing behind other parts of the world have had more success. Increased competition is proving to drive the development of more user-focused and cost-effective financial solutions. Fortunately,  open banking standards are not confined to a single country or region - it’s a global trend. This reach means embedded finance solutions will be able to grow internationally by harnessing the power of open banking.

The reality for embedded insurance 

Along with helping fintechs to diversify their offerings, open banking APIs also allow platforms like travel providers or online retailers to seamlessly integrate financial services. 

Take embedded insurance, for example. Since the Coronavirus outbreak in 2020, the tourism industry is booming again. However, today’s tourists want more flexibility and require more short-term, ‘on-demand’ insurance for when they book last-minute deals. And when they’re away, they want to feel protected in case the worst happens, so they can relax on a holiday without cancellations leaving them out of pocket. By embedding insurance, customers can purchase travel insurance packages through their travel provider - whether that’s a package holiday website, or an airline site - without leaving the brand’s platform. This results in a far smoother and more convenient user journey, all made possible with APIs.  

What’s more, data gathered via these APIs can help service providers understand their customer’s financial behaviour, needs and preferences, as well as their risk profile. Such analysis allows embedded insurance platforms to make informed decisions and tailor their offerings to individual users. 

While insurtechs can easily use APIs within their own products, insurance incumbents who are still on their digital transformation journeys will find them less easy to integrate. Incumbents tend to have more brand equity, long-earned customer trust and the infrastructure to bring solutions to a wide customer pool compared to new insurtechs, however they often don't have the technology stack to support APIs. To ensure customers can reap the benefits of personalised and convenient embedded insurance solutions, collaboration between traditional insurers and innovative insurtechs is a must.

Collaboration is a key focus at the Open Banking Expo and remains a priority for many insurtechs and incumbents across the industry. While open banking has been pivotal in laying the groundwork for embedded finance, supplying the essential data, infrastructure, and regulatory framework that non-financial businesses need to make seamless integrations possible, the reality is that we must work together to ensure that the next evolution of benefits, like embedded insurance, are realised.