Podcast: IBM studies embedded finance

Whitney McDonald 0:05
Hello and welcome to The Buzz a bank automation news podcast. My name is Whitney McDonald and I’m the editor of bank automation News. Today is November 14 2023. Joining me is Shanker Ramamurthy. He is global managing partner and banking at IBM. During his time at IBM he has served as general manager of strategy and market development, CTO and general manager of strategy and solutions and global Managing Partner of strategy and analytics. He is here to discuss how FIS can approach embedded finance in order to maintain competitiveness in the industry. Thanks for being here.

Shanker Ramamurthy 0:37
Hey, thank you Whitney. My name is Shanker Ramamurthy. I’m the Global managing partner for banking and financial markets in IBM consulting. IBM consulting is an over $20 billion plus consulting practice worldwide, and banking and financial markets. It’s a substantial part of what we do. I’m really looking forward to this discussion with me.

Whitney McDonald 1:02
Great, well, thank you again, for being here. We can kind of get right into things with setting the scene here. Maybe you can tell me where we stand today on embedded finance and where embedded finance is headed.

Shanker Ramamurthy 1:14
Good question. So we recently completed a major study between the IBM Institute for Business Value and bi on the banking industry, architecture network.org. And the paper was recently released, it’s called embedded finance creating the everywhere everyday bank. And for this particular study, we spoke to over 12,000 plus consumers across 12 countries. And in all age groups. We interviewed over 1000 banking executives across 32 countries and banks really with assets in excess of $10 billion. For the purposes of this study, we defined embedded finance as the integration of financial products and solutions within the customers journey of non financial services organizations, thereby eliminating friction and enriching the overall experience. So CIO Stated simply, it’s about embedding financial services products into the workflow of other ecosystems. And there were five key takeaways, really interesting and compelling study, five key takeaways. Embedded finance is essential for modern banking strategies. And over 70% of the banking executives we spoke with, talked about embedded finance as either core or complementary to the business strategy. second takeaway, ecosystem based business models are rising, and financial institutions are increasingly investing in the platform economy. And we can get into some of the data if you’d like, as we go. Yeah, that would be great. And bank executives priorities, really, when we when we actually aligned their thinking with that of the customers, the 12,000 customers, it showed that there is kind of a bit of a disconnect between the priorities that bank executives are focused on in the embedded finance space, versus customer expectations and demands consumer expectations and demands. And the last two takeaways, genuinely, it’s clear from the study that monolithic architectures and processes are hindering banks ambitions in the space. And last, but not least, privacy and security concerns and challenges are legitimately so slowing innovation across the open banking ecosystem in the embedded finance space. Let me just pause. Yes,

Whitney McDonald 3:58
thank you so much for going through all of those takeaways in the data. We can definitely get into that. Maybe before we do that we could maybe just talk about why it’s necessaries why it’s necessary for FIS to have a seat at the embedded finance table. Maybe from a competitive perspective,

Shanker Ramamurthy 4:15
a great question. Effectively, what’s happening is the combination of fintechs and what we call tech firms. These are the large technology enterprises backing into financial services between the fintechs and the tech fence. They’re going after some of the most profitable parts of the banking franchise, and they’re backing into financial services, areas like payments, and other products, which are particularly profitable for financial institutions. I mean, this is a trend that started in Asia PAC going back more than a decade ago with the likes of Alibaba and Tencent, but a trend that’s kind of playing its way around the world, whether it be in the US context, the likes of Amazon or or Shopify or, or square, and others, they’re all providing a range of financial services capabilities that are backing into financial services. And of course, regulations like open banking are also opening up financial services to other participants.

Whitney McDonald 5:29
We will definitely get into the open banking to maybe this could be a good chance to talk through some of that data that you were talking about, as we get into a little bit deeper discussion on how financial institutions can really execute on embedded finance, maybe talking through some of those strategies or priorities that you did see in that report? Yeah,

Shanker Ramamurthy 5:49
sure. Maybe the first point I would want to make is that, you know, I did say something like 70% of the financial institutions are saying that embedded finance is at the core context to their strategy. When you double click on that, something like 20% of the financial institutions are already live with embedded finance initiatives around the world, and another 51% are in the process of implementing now. So that’s about that’s how you get to that 70%. It turns out that only 10% of the financial institutions from that universe have actually achieved the, their objectives. And turns out that for that 10%, it took them on average about six years. So this is not a one and done it. There’s a meaningful learning curve for financial institutions. And it takes about six years or so for them to fully achieve their objectives. Which in itself is interesting. It’s a long term game. It’s not a one or two quarter game.

Whitney McDonald 6:56
Now, you mentioned the open banking regulation. So maybe we can get into that how the CFPB is latest open banking regulation does fit into embedded finance, does this create a more level playing field that FIS have been asking for? How does this all kind of fit into the embedded finance puzzle? Yeah,

Shanker Ramamurthy 7:14
great question. So the CFPB with its new open banking rule. Now, by the way, this role is, you know, is still being worked through with comments and submissions being accepted until the end of this year 20. December, the expectation is that the bureau anticipates finalizing the rule by the fall of 2024. And, and when I look at the timeline, they’re initially going to apply to the largest financial institutions, the ones with, you know, assets in excess of $500 billion, if you’re a depository institution, and over 10 billion in revenue for non depository institutions. And then over a period of four years, it’s going to play out in that even the smallest depository institution will have to comply. So the meaningful amount of time in which this is, you know, this is going to play out, and this is kind of a long awaited, you know, program and it’s gonna apply to everyone, right, financial institutions, card issuers, digital wallets, and any other kind of consumer facing entity that holds, you know, consumer financial data. And the and the regulation is mandating that a consumers financial data will be shared with authorized third parties at the consumers request. So so it is going to open up the Financial Services landscape, you know, more so to everyone, you know, beyond financial institutions. And it’s also going to intensify competition between financial institutions in that they can reach in and access data, you know, for customers got more than one financial, in a banking relationship with more than one financial institution, that that data is going to be shared. Now. This is a regulation that’s played out in every other part of the world. It’s playing out here in the US as well. This is one more reason why financial institutions have to get into embedded finance, because it’s, it’s, it’s increasing competition. And it’s reducing the barriers for non financial services players to get access to financial information.

Whitney McDonald 9:46
Now, maybe it would be a good idea to talk through some examples of embedded finance and action, maybe some FIS that are ahead of the game or what embedded finance that you’re seeing in the space today.

Shanker Ramamurthy 9:59
Excellent. Question, I’d say, much of the most successful embedded finance initiatives actually have have been from, you know, what we call the growth markets. So if I and by the way, I started by talking about Asia PAC, some of the most compelling examples are really from Asia, Pac in Latin America, and so on, I’ll give you a couple, where we we as IBM have been very active IBM consulting have been very actively involved. The largest bank in India is called SBI, the State Bank of India, we’ve been working with them the last several years on their program called yono, you only need one, that’s a mobile, that’s a mobile based, you know, application. And, and effectively, what state bank of India have done through your now is they’ve created an online marketplace with over 100 partners in the ecosystem. So anything that you as a consumer might want to do related relating to electronic commerce, or, or travel or, or, or, or other, you know, things you might want to buy on the, you know, equalent of Walmart, you know, in India, you are able to through the yono app, access all those 100 Plus partners, and you as a consumer will get a better value proposition by going through the yono app to those 100 Plus partners, rather than approaching them directly. Now, what that did is it enabled state bank of India and yono to embed itself into a much broader range of workflows. Because people don’t wake up as an example, as a consumer, you don’t wake up in the morning saying, I want to use my credit card, you, you know, you wake up in the morning and say maybe I want to get myself a cup of coffee. And if you’re embedded in if a financial institution is embedded into that workflow, chances are, your products are going to be used by the consumer. So that was the journey that State Bank of India started on many moons ago, and their Chairman’s been up on stage, talking about how you know, has created Oh, well in excess of $40 billion of of incremental market capital State Bank of India, we’ve done similar work for, you know, other clients around the world, one of the more recent ones, is a piece of work we did for a Latin American bank. And this is about helping them embed themselves into the agri ecosystem, we created a platform working together with them. And whether it be advisory services, farm equipment, access to live Monday data, logistics, seed fertilizers, and so on weather patterns and a whole bunch of things that a farmer would would want to know, through this app that’s owned by this bank, your the farmer is able to get access to all these things. And as they do all these things, as they transition into needing financial services, this bank becomes the default for all the financial needs of the farmers. There’s similar work that we’ve done with DBS and Singapore, in multiple ecosystems. And you can, as you can see, this is a global phenomenon and a global trend, with extraordinary opportunity for financial institutions, to embed themselves into customer journeys, and drive a lot of economic value, both to the customer, and to the financial institution.

Whitney McDonald 13:48
Now, speaking of that opportunity, and thank you so much for providing those examples of embedded finance in use today. Those, those are great. So thank you so much for breaking those down. But speaking of that opportunity, maybe I can ask you to look ahead and give us kind of what’s ahead of us for the future of embedded finance, maybe what adoption might look like or what you’re seeing from a technology perspective, when it comes to embedded finance. And I mean, you can look into next year and the next five to 10 years, kind of however you want to take that future look.

Shanker Ramamurthy 14:22
Alright, so let me let me break it into maybe I’ll make three points. The first point is that we did we did notice a gap between consumer preferences and bank where banks are kind of focused on an embedded finance. And that’s going to kind of take care of itself over the coming years. So and what I mean by that on the first point is that banks are focused more on security and protection and new capabilities like buy now pay later, and peer to peer payment, while consumers are focused on areas like really good care. Customer Service, mobile wallet. And by the way, mobile wallet is going to be the capability for all sorts of other things, including digital currencies that are going to come in many countries over the next three to five years. And things like rewards. So it’s a bit of a disconnect between where banks that are investing in where consumers are really looking for capability that’s going to that’s going to take care of itself. The second point I’d make is, like I said, it’s a, it’s a six year journey, and about 10% of the banks are already there. 70% of the banks are on the journey. And we know for sure that those financial institutions are going to continue. And for the entire banking ecosystem, it’s going to create a lot of economic value. The third point I would make this kind of an important point is that a technology like generative AI, is going to accelerate the ability of financial institutions to provide greater and superior value, both in the context of embedded finance, but but also much, much more broadly. And so this is an area in which we as IBM are doing a lot a lot of work and up I’m, I’m, I’m sure you’re aware that we made announcements around technologies, like what’s an X, an investment and standards based, open generative AI technology, because we’re gonna live in what we call a multi model world, there are going to be multiple models that are going to be built. And when you think about embedded finance that requires consolidation of a lot of structured unstructured data, the ability to collaborate broadly across ecosystems, and partners requiring again, the need to traverse through multiple contracts, multiple documents, work with voice and text and other technologies. Generate to AI is going to be a profound and compelling technology is an area in which we’re making a lot of investment. And we know from the work we’re doing on the consulting side with our clients, that they are investing aggressively in it. So the combination of these exponential technologies, cloud, plus generative AI and ecosystems and partnerships, plus standards being either imposed by regulators, such as open banking, or collaboratively created through organizations like Biocon are going to provide an extraordinary capability for financial institutions to take advantage of embedded finance and drive a lot of value for the customers and for themselves over the next three to five years. Really exciting times ahead of us.

Whitney McDonald 18:12
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Transcribed by https://otter.ai