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From open banking to embedded finance: The essential factors for a successful digital transformation
Abstract
Consumers’ needs have changed significantly in recent years, and so have their expectations of financial services. Not only does a large part of their life take place online, but digital apps and products are also integrated into everyday situations. Instead of offering isolated products on a website, companies therefore began to address consumers right at their ‘point of need’ — on e-commerce platforms, in apps from mobility service providers or on comparison portals. Banks can adopt this approach by embedding financial services into the products of non-bank companies, thus offering seamless processes and an increased level of convenience to their clients. Open banking is what provides the foundation for this concept of ‘embedded finance’, by allowing third parties to access banking data via technical interfaces — so-called application programming interfaces (APIs). In 2015, Deutsche Bank decided to take advantage of the opportunities offered by open banking. Through an API programme, the bank enables its partners and customers to integrate banking data as well as financial products and services into their own applications and products. Thus, partners can offer financial services to their customers directly at the point of need. The work of Deutsche Bank’s API Program has provided valuable insights into how banks can successfully open up and even take the next steps towards embedded finance. This paper looks at Deutsche Bank’s experience with open banking and the possibilities and opportunities for embedded finance and presents best practice examples for the necessary internal transformation of financial institutions.
... User experience is a crucial element in the success of a digital platform (Ramasundaram et al., 2023). Embedded finance has the potential to enhance this experience by providing a more efficient and easier transaction process (Hensen & Kötting, 2022). For example, in an e-commerce application, users can make payments without having to switch applications or enter payment information manually. ...
... Collaboration between industries is an important factor in the successful implementation of embedded finance (Hensen & Kötting, 2022). Non-financial companies must collaborate effectively with banks and other financial service providers to ensure seamless integration and regulatory compliance. ...
... Embedded financing refers to the integration of financial services into a nonfinancial platform, which provides users with seamless access to banking, payment, loan, or insurance services within the digital environment they already use (Hensen & Kötting, 2022). This integration leverages APIs and data analytics to enable companies to embed financial products directly into their existing platforms, thereby increasing user convenience and operational efficiency (Fonna, 2019). ...
Penelitian ini mengeksplorasi dampak embedded finance terhadap strategi pemasaran digital, pengalaman pengguna, dan loyalitas pelanggan. Dengan menggunakan metode tinjauan pustaka sistematis (SLR), penelitian ini menganalisis bagaimana integrasi layanan keuangan ke dalam platform non-keuangan memengaruhi ketiga aspek tersebut. Hasilnya menunjukkan bahwa embedded finance meningkatkan efektivitas kampanye pemasaran dengan memanfaatkan data untuk meningkatkan relevansi, yang tercermin dalam peningkatan konversi hingga 20%. Selain itu, integrasi ini meningkatkan pengalaman pengguna dengan mengurangi gesekan transaksi dan meningkatkan kepuasan, yang dapat meningkatkan loyalitas pelanggan hingga lima kali lipat. Penelitian ini juga menemukan bahwa program loyalitas berbasis embedded financial dapat meningkatkan retensi pelanggan hingga 30%, meskipun ada tantangan dalam hal keamanan data. Temuan ini menekankan perlunya strategi pemasaran yang inovatif dan praktik keamanan data yang ketat untuk sepenuhnya memanfaatkan potensi embedded finance. Integrasi layanan keuangan ke dalam platform non-keuangan memungkinkan perusahaan untuk mengumpulkan dan menganalisis data pengguna secara lebih mendalam untuk menciptakan strategi pemasaran yang lebih personal dan efektif. Namun, seiring bertambahnya data yang dikumpulkan, risiko kebocoran data dan pelanggaran privasi juga meningkat, sehingga perusahaan harus memastikan sistem keamanan yang kuat dan kepatuhan terhadap peraturan untuk melindungi data pengguna. Secara keseluruhan, penelitian ini memberikan wawasan yang komprehensif tentang manfaat dan tantangan keuangan tertanam dalam konteks pemasaran digital serta pentingnya menyeimbangkan inovasi dan keamanan.
... Deutsche Bank then decided to organize a hackathon in 2016, inviting developers to test the interfaces of the bank and propose new applications. Reflecting on the importance of the event, Hensen and Kötting (2022) argue that '[ : : : ] the hackathon also showed the bank's internal decision makers on an emotional and social level what topics like "openess," "Application Production Interfacebased business models" or "digital ecosystem" really mean. An abstract and often purely technical idea had suddenly turned into an experience full of personal encounters and stimulating discussions.' ...
Drawing inspiration from Oliver Williamson’s work, we employ a ‘discriminating alignment’ approach to explain how established organizations select and govern external sources of innovation. Our framework integrates ‘standard’ governance mechanisms, such as licensing and joint ventures, with ‘emerging’ mechanisms, such as hackathons and accelerators. First, we classify governance mechanisms into three types – market scanning, opportunity support, and opportunity control – based on four attributes: the degree of reallocation of decision rights, the degree of pooling of property rights, set-up costs, and ex post adaptation costs. We then argue that two key variables – uncertainty and technological distance – jointly help determine the choice of the appropriate mechanism for transactions involving entrepreneurial opportunities. By developing a comprehensive taxonomy of arrangements linked to the governance of external innovations, this study offers propositions that identify the drivers of ‘efficient alignment’ between transactions attributes and organizational choices in entrepreneurial contexts.
... PSD2 will be a catalyst for unprecedented customer-oriented change, as banks and FinTechs leverage PSD2 opportunities to amend their operating, business, and revenue models [8]. Open banking, enabled by APIs, provides the foundation for the concept of "embedded finance," where banks can embed their financial services into the products of non-bank companies, offering seamless processes and increased convenience to customers [9]. The shift in the Japanese financial industry towards open APIs, which is expected to be a powerful trigger for a value chain revolution in the banking and financial services industry [10]. ...
API-first banking is a novel approach to banking in the rapidly changing financial services industry, with a focus on using Application Programming Interfaces (APIs) to improve customer journey analytics and customer experience. Regulatory requirements, growing fintech competition, and banks' need to adapt to the digital revolution are the main motivators. API-first banking is now a revolutionary model that fundamentally changes how customer data is collected, analyzed, and responded to. This paper examines how customer journey analytics evolved in API-first banking architectures, illustrating how the shift from traditional banking architectures to API-based systems enabled it to gain unprecedented insights into customer behavior and preferences. With analysis of real-world deployments at multiple banking institutions, we demonstrate how API-first approaches facilitate real-time journey mapping, predictive analytics, and tailored service delivery at scale. We also reveal key technical and organizational barriers to API-first analytics adoption, including data governance complexity and cross-functional alignment necessities. This research contributes to the current body of knowledge on digital banking revolution through the presentation of a comprehensive framework for understanding how API-first approaches are revolutionizing customer journey analytics and shaping the future of banking services. This research paper aims to examine the revolution of customer journey analytics in the context of API-first banking, looking at how banks are leveraging data and technology to enhance their understanding and delivery of services to customers.
... Bu örnekler arasında, küresel bankacılık lisansı, küresel ağ, çoklu ödeme yetenekleri, geniş bilanço ve çeşitlilik içeren bir iş gibi küresel ayak izine sahip bir gömülü finans sağlayıcısıyla çalışması gerektiğini öne sürüyorlar. Hensen ve Kötting (2022), açık bankacık sisteminin, bankaların finansal hizmetlerini banka dışı şirketlerin ürünlerine yerleştirmesine olanak tanıyan temeli attığını ileri sürmektedirler. Hoffman (2022), gömülü finansın küçük ve orta ölçekli işletmelere (KOBİ'ler) daha fazla finansman ve küresel ticaret finansmanına ulaşmalarına fırsat sağlayacağını vurgulamıştır. ...
Bilgi teknolojileri geleneksel finansın sınırlarını yeniden beliremeye devam etmektedir. Teknolojideki gelişimler günlük hayatlarda olduğu gibi finans alanında da pek çok değişim yaratmaktadır. Bu değişimlerin hızlı ve yoğun olduğu alanlardan birisi ise bankacılık sektörüdür. Finansal Teknoloji (Fintech) ürünlerinden biri de neobankalardır. Bu bankalar, yeni nesil şubesiz bankacılık modelidir. Finansal yenilikçi döneminde, fintech yatırımları arasında gömülü bankalarda yerini almaktadır. Bankacılığın geleceğine etki eden elektronik ticaret (E-ticaret) ile finans hizmetlerin yönü değişmeye başlamıştır. Geleneksel bankalar aracılığıyla yapılabilen işlemler gömülü finans teknolojisi ile finans dışı sektörlerdeki şirketlerin ödeme kartı veya dijital cüzdanları ile de yapılabilmektedir. Çalışmanın amacı; piyasa katılımcılarına ve kullanıcılara yeni nesil finansal hizmetlerle ilgili pratik çıkarımlar ve neobankalar, fintech şirketleri, teknoloji şirketler, online platformları buluşturan gömülü finans hakkında farkındalık oluşturabilmektir. Ayrıca bu çalışmada, Türkiye'nin neobanka ve gömülü finans potansiyelini değerlendirmek amaçlanmaktadır.
Abstract: Information technologies continue to redefine the boundaries of traditional finance. Developments in technology create many changes in the field of finance as well as in daily life. One of the areas where these changes are rapid and intense is the banking sector. One of the Financial Technology (Fintech) products is neobanks. These banks are the new generation branchless banking model. In the financial innovation era, embedded banks take their place among fintech investments. The direction of financial services has begun to change with electronic commerce (E-commerce), which affects the future of banking. Transactions that can be made through traditional banks can also be made with payment cards or digital wallets of companies in non-financial sectors with embedded financial technology. Purpose of the study; The aim is to raise awareness among market participants and users about practical implications regarding new-generation financial services and embedded finance that brings together neobanks, fintech companies, technology companies and online platforms. Additionally, this study aims to evaluate Turkey's neobank and embedded finance potential.
... Experts point to two important reasons for the growing interest in alternative assets: historically low interest rates and trends in portfolio diversification. However, studies do not provide empirical evidence to support this conclusion (Farrow, 2020;Hensen and Kötting, 2022;Nugroho and Supangkat, 2023;Ramdani et al., 2020). ...
Financial markets have adopted measures aiming at strengthening insurance industry and digital financial assets. Efforts have also been made to strengthen the financial sector and expand lending opportunities in times of economic turmoil. The role of the central banks as a mega-regulator have played a crucial role in implementing coordinated policies and improving the stability of the financial sector. This review paper analyses 100 papers and proposes recommendations for policy makers. The results confirm the financial sector has shown positive performance indicators, and the capital market has become increasingly important along with non-credit financial institutions. However, the growing number of first-time investors in the capital market requires a renewed focus on consumer protection and financial literacy. In addition, the development of digital technologies has changed the landscape of financial services, forcing financial institutions to fight for continued customer loyalty.
... Recent studies, including those by (Mossavar Rahmani, 2023), and Martinez and Wong (2024), highlight the general benefits of DI in enhancing FE but often overlook how these effects specifically manifest in the digital wallet sector. Furthermore, while research by (Aldoseri et al., 2024) and (Hensen & Kötting, 2022) investigates FI in broad financial contexts, they do not delve into how digital wallet platforms can uniquely enhance financial inclusivity. Similarly, the work of (Hund et al., 2021) on OE in financial technology fails to address the specific operational challenges and efficiencies pertinent to digital wallets. ...
This study investigates the impact of digital innovations on financial excellence, with a focus on the mediating roles of financial inclusion and operational efficiency. Utilizing a quantitative research design, data were collected from 150 Gopay users through an online questionnaire. The analysis, conducted using SmartPLS, reveals that digital innovations significantly enhance financial excellence both directly and indirectly through financial inclusion and operational efficiency. The findings indicate that digital innovations positively influence financial inclusion and operational efficiency, which in turn contribute to improved financial outcomes and user satisfaction. This study underscores the importance of digital innovations in driving financial excellence by enhancing access to financial services and optimizing operational processes. The results suggest that financial platforms can achieve greater financial success by strategically investing in digital technologies that promote inclusivity and operational efficiency.
... These opportunities arise if banks open their systems to fintechs, allowing data aggregation to include new services and diversifying their offerings in one platform (Omarini, 2018). More specifically, the rise of open banking and API (Application Programming Interface) technologies paved the way for the upsurge of banking data accessibility to third parties through APIs (Hensen & Kötting, 2022). Open banking is often motivated by regulatory initiatives that promote competition and innovation, like the Revised Payment Service Directive (PSD2) in Europe, which mandates all banks to securely share customer data with third-party providers (Harrison, 2022). ...
The banking industry landscape is experiencing significant changes due to the emergence of fintechs, which offer innovative banking services that challenge traditional banks' market dominance. In response to these industry shifts, both banks and fintechs have embraced open banking. The fear of market loss and control has led traditional banks to adapt to this shift, while the desire to scale has motivated fintechs to participate in open banking collaboration. This study examines the transformation of the relationship between traditional banks and fintechs from rivals to collaborators through open banking; and explores the impact and implications of this collaboration on the banking industry.
Using the Multi-Level Perspective framework, the research examines the technical and social aspects of the transition in the banking sector. At the regime level, traditional banks represent the dominant system, while fintechs constitute the niche level with their emerging innovations. The study adopts a qualitative approach, using semi-structured interviews as primary data, and incorporates secondary data from external sources to provide a comprehensive understanding and validation of the primary findings.
The findings reveal that open banking collaboration is driven by factors including data access, regulatory expertise, and modern technologies that facilitate collaboration between banks and fintechs. Further, the research concluded that open banking collaborations benefit all parties involved. Banks gain access to fintech technologies and enhance operational efficiency and user experience. Fintechs scale their operations and leverage banking infrastructure to reach a broader audience. Moreover, consumers benefit from more cost-efficient and inclusive financial services and better agency over their financial data.
The research highlights the importance of regulations, specifically PSD2, in fostering and securing collaboration between banks and fintechs. These regulations create an environment of trust and encourage the adoption of open APIs for secure data sharing. Open banking also enables advanced data analytics techniques and the integration of modern technologies like machine learning, enhancing banking operations, fraud detection, and customer experiences.
However, challenges and risks need to be addressed. Banks should proactively develop strategies to cope with the evolving landscape without falling behind, and fintechs should balance their growth to maintain collaborative partnerships. Consumer awareness and understanding of open banking are essential to ensure widespread adoption.
In response to emerging financial technology (fintech) that might disrupt the banking industry, several financial institutions are undergoing digital transformation. Banks are increasingly integrating digital strategy into their business planning rather than adding it on. This research aims to identify the determinants that influence digital bank transformation. The research was conducted through a systematic literature review of 364 published papers using PRISMA and bibliometric approaches. This method is commonly used in various fields, including medicine, psychology, social sciences, and more, to provide a comprehensive and impartial summary of the current state of knowledge on a particular subject. The approach used in this systematic literature review method is the PRISMA approach. The results of the literature review show that there is an increasing trend of research related to digital banks from 2015 to 2023, which is in line with the trend of digitalization in the banking industry in both developed and developing countries. The analysis is deepened to see the important factors influencing digital bank transformation. The determinants in the digital bank transformation process include the level of digitalization, application user growth, IT investment, IT committee, cyber security, and ecosystem stocks. The results of this literature review will be a reference for further research related to digital banks, in line with the rapid digital transformation process in banking.
Financial technology (FinTech) has revolutionized the financial services industry, leading to the emergence of various financial innovations. Among these innovations, embedded finance has gained prominence as it integrates financial services into non-financial products and platforms. Additionally, the integration of artificial intelligence (AI) into financial processes has transformed how firms manage their financing and investment activities. This chapter provides an in-depth analysis of embedded finance and AI's impact on firm financing and investment strategies through case studies, highlighting the opportunities and challenges presented by these financial innovations.
As transformações digitais no ecossistema financeiro, tem se mostrado desafiadoras, frente a premissa de atender as mudanças de comportamento dos clientes. O objetivo do estudo consiste em caracterizar o perfil da produção científica, nacional e internacional sobre as transformações digitais e open banking em modelos de negócios financeiros. Trata-se de uma pesquisa descritiva, de abordagem quantitativa, com análise bibliométrica. As buscas formam efetuadas no portal CAPES, nas bases de dados EBSCO, Science Direct, Web of Science e no Google acadêmico, período aberto até outubro de 2022, que resultou em 149 artigos. Nos resultados, constata-se que não há indícios de elitismo de autores, confirma, parcialmente, o pressuposto de produtividade. O primeiro estudo sobre o tema, é datado de 1983. Percebeu-se o interesse sobre a transformação digital nos negócios financeiros, fintech, regulação, tendências sobre novas tecnologias como aliadas aos processos que podem otimizar a experiência do cliente, mudança tecnológica do setor bancário, a partir de novos modelos de negócios, com atendimento por plataformas. Compete a academia estreitar o entendimento com novos estudos que apontem o impacto de tais mudanças no ecossistema de negócios a partir do open banking e da transformação digital.
The emergence of digital banking has presented the banking industry with benefits and challenges. Although digital banking services provide customers with increased convenience and accessibility around the clock, many still struggle to grasp their ever-changing nature. To address this, a study was conducted to identify the main factors influencing the adoption of digital banking in South Africa. The study used an e-readiness framework that combined the innovation diffusion theory and trust in technology with the technology readiness index to measure consumers’ adoption of digital banking channels. The researcher applied quantitative methodology to answer the research question. The snowball sample required respondents to answer the questionnaire and pass it on to others in the network with bank accounts and mobile phones; 338 responses were accepted. Structural equation modelling was employed to test the proposed hypotheses. This study discovered that the adoption of digital banking services is influenced positively by relative advantage, observability, optimism towards technology, innovativeness and insecurity. Therefore, banks should develop user-friendly platforms with online support to encourage the adoption of digital banking. Future research can use qualitative or mixed method approaches to investigate how customers’ perceptions and personalities influence the adoption of digital in emerging markets.
The main goal of this paper is to analyze the impact of FinTech innovations on financial services industry in South-East Europe. The paper summarizes existing knowledge of banking services in the FinTech era and pays special attention to decentralized and embedded finance. Qualitative exploratory research was conducted using in-depth semi-structured interviews. Participants were bankers selected based on their experiences in the banking sector. In this study, we identified the most important factors driving the success of FinTech innovations in the banking sector: legal framework, impact of FinTech innovations on financial market and regulators, protection of personal and institutional data, major changes that happened with the use of FinTech innovations, advantages and disadvantages of FinTech innovations, competition in terms of embedded finance, and decentralized finance. According to the study results, it is not clear whether the FinTech innovations will disrupt traditional ways of working in the banking sector or lead to improved modern ecosystems of financial services. The FinTech industry is attractive and promising, and financial sector will experience great changes in the future. Additionally, most of the participants think that banks and FinTech should cooperate and find solutions together—expertise in banks is enormous, and FinTech brings agility and flexibility.KeywordsBankingDigital transformationFinTechDecentralized finance (DEFI)Embedded finance
Purpose
This paper presents an overview of embedded finance. It identifies the applications, use case examples, benefits and challenges of embedded finance. The paper also analyzes global interest in embedded finance and compares it with interest in related finance concepts such as open finance, open banking, decentralized finance, financial innovation, Fintech and digital finance.
Design/methodology/approach
Granger causality test and two-stage least square regression were used to assess interest over time in embedded finance.
Findings
The empirical result show that interest in embedded finance increased significantly during the COVID-19 pandemic. The United States, the United Kingdom and India witnessed the highest interest in embedded finance compared to other countries. There is bi-directional Granger causality between interest in information about embedded finance and interest in information about financial innovation. There is uni-directional Granger causality between interest in information about embedded finance and interest in information about digital finance and open finance. The findings also reveal that interest in decentralized finance and open finance are significant determinants of interest in embedded finance. On the other hand, interest in embedded finance is a significant determinant of interest in digital finance, decentralized finance, Fintech and open banking. Also, interest in embedded finance is significantly correlated with interest in digital finance, decentralized finance, open banking and Fintech.
Originality/value
Presently, there is little academic interest in embedded finance despite the fact that embedded finance is part of the on-going digital finance revolution. This paper fills this gap in the literature by assessing the benefits, use case, challenges of embedded finance.
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