How embedded finance is transforming the customer experience

Customer expectations have changed. Today, they expect seamless access to financial services—quickly and within the platforms they already use daily. This is where embedded finance comes in: a model that allows non-financial companies to offer payments, loans, or insurance without requiring users to interact with a traditional bank.

For banks, this presents a major challenge. While embedded finance can strengthen customer relationships and open new business opportunities, it also shifts the role of banks within the financial ecosystem. Adapting to this model isn’t optional—it’s a necessary evolution to remain relevant.

In this article, we’ll explore what embedded finance is, how it’s transforming the customer experience, and the strategies traditional banks can adopt to leverage its potential without losing their position in the market.

What is embedded finance?

Embedded finance enables any company to offer financial products within its platform, eliminating the need for users to engage with a traditional bank. An online store can provide installment payments, a mobility app can offer digital accounts to its drivers, and a marketplace can include insurance as part of a product purchase. Everything happens within the same ecosystem, ensuring a seamless customer experience.

It’s important not to confuse embedded finance with other related models:

• Banking as a Service (BaaS) is the infrastructure that makes embedded finance possible. Through APIs, banks or BaaS providers deliver financial services to non-banking companies, which then integrate them into their own user experience.
• Open Banking focuses on sharing banking data. With user consent, third parties can access account information to offer new financial services. However, it doesn’t embed products into other platforms—it simply facilitates connections between banks and fintechs to develop tailored solutions.
• Open Finance is an evolution of Open Banking that expands access to financial data beyond bank accounts. It includes information on insurance, investments, and pensions, allowing companies to create more comprehensive and personalized services.

How embedded finance impacts the customer experience

In the past, opening an account, applying for a loan, or purchasing insurance required visiting a bank or navigating multiple platforms. Now, these services can be managed directly from the apps and websites customers already use daily.

This model has transformed the way users interact with financial services, significantly enhancing their experience:

• Fewer disruptions in the purchasing or sign-up process: Users can access payments, financing, or insurance without switching platforms.
• Faster financial management: Loan approvals, account openings, and payment authorizations happen in real time.
• More personalized experiences: Financial services are tailored to user needs based on their behavior within the platform.
• Greater access to options without extra paperwork: Customers can compare and sign up for financial products without registering with multiple institutions.

By seamlessly integrating these services, embedded finance has raised customer expectations. Users now demand frictionless financial solutions that align with their digital habits.

Embedded finance: Risk or opportunity for traditional banks?

Like any major shift in the industry, embedded finance presents both opportunities and challenges for traditional banks. It’s not a black-and-white scenario—its impact will depend on how each institution responds to market changes. The key lies in flexibility and adaptability, qualities that customers already expect from the services they use.

Challenges

Here are the main challenges embedded finance poses for traditional banking:

• Loss of direct customer relationships: As banking services become integrated into third-party platforms, banks risk reduced interaction with users, limiting their ability to build loyalty and differentiate themselves.
• Becoming just an infrastructure provider: Without a clear strategy, banks may be relegated to a secondary role, providing only technology and financial backing while other players control the customer experience.
• Increased competitive pressure: Companies from sectors like e-commerce, technology, and marketplaces are capturing a growing share of financial services by offering integrated solutions. Traditional banks must find ways to compete and add value beyond their core products.
• Regulatory compliance and security: Embedding financial services into external platforms comes with stricter regulatory requirements. Ensuring compliance and protecting customer data is essential for maintaining trust and preventing fraud.
• Risk of commoditization: If banks serve only as back-end infrastructure for other platforms, their brand relevance may decline, reducing their influence in the financial market.

Opportunities

On the other hand, traditional banks can also benefit from embedded finance in several ways:

• New revenue streams: Instead of relying solely on traditional banking products, adopting an embedded finance model allows banks to generate income through usage fees, revenue-sharing agreements, or transaction-based fees.
• Optimization of existing assets: Banks can leverage their infrastructure, licenses, and risk management capabilities to scale operations without the need to develop their own end-user products.
• Strengthening their role in the financial ecosystem: Becoming the financial service provider for e-commerce platforms, mobility apps, or fintechs positions traditional banks as key players in the broader financial system.
• Access to new markets and expanded reach: By partnering with non-financial companies, banks can connect with previously unbanked customer segments or those who prefer more agile digital solutions.
• Personalization and strategic use of data: Embedded finance enables banks to collect insights on consumer spending and transaction behaviors across various platforms. This data can be used to offer more tailored financial services that align with customer needs.
• Reducing the risk of disruption: Instead of losing market share to fintechs and digital platforms, banks can integrate into this evolving ecosystem, adapting their business model while maintaining a strong presence beyond being just an infrastructure provider.

Use cases and examples of embedded finance in traditional banks

Some traditional banks have successfully adapted to this trend, using embedded finance to diversify their business, create new revenue streams, and stay competitive in an increasingly digital landscape:

• Citizens Bank: Its partnership with Apple enabled customers to access installment financing for iPhone purchases without directly engaging with a bank. The bank later expanded this offering to other e-commerce retailers, integrating installment payment options into digital shopping ecosystems and competing with fintechs specializing in consumer credit.
• HSBC: Integrated its services into enterprise platforms like Tradeshift, providing supply chain financing directly within the platform. Additionally, it partnered with FreightAmigo to offer embedded payment and financing solutions within supply chains, improving liquidity and efficiency for corporate clients.
• Cross River Bank: Supplies lending infrastructure to fintechs offering “Buy Now, Pay Later” (BNPL) options. Instead of competing with these companies, the bank acts as the financing provider and risk evaluator behind the scenes. This strategy has positioned it as a key partner for fintech lenders and digital payment platforms.

These cases illustrate how traditional banks can leverage embedded finance to expand their reach, diversify their business models, and provide more accessible services—without losing their relevance in the financial industry.

The hybrid model: How banks can replicate the embedded finance experience within their own ecosystem

Embedded finance has transformed how customers access financial products, allowing them to apply for payments, loans, or insurance without engaging with a traditional bank. However, some banks have taken a different approach—replicating this seamless experience within their own digital ecosystem.

This strategy, known as the hybrid model, enables banks to offer smooth and convenient user experiences without relying on external platforms. By doing so, they retain control over customer relationships and compete directly with fintechs and retailers that have integrated financial services into their platforms.

Here’s how your bank can implement a hybrid model.

Integrating financial products within the bank’s own platforms

Instead of distributing their products through third parties, banks can offer them directly within their mobile app or website, replicating the seamless experience of embedded finance.

• Example: American Express implemented “Plan It,” an installment payment system that allows customers to split purchases into fixed payments without relying on external fintechs.

Using internal BaaS infrastructure and APIs

Some banks have developed their own infrastructure to integrate advanced financial services without depending on third-party intermediaries.

• Example: KeyBank launched Laurel Road, a digital platform specializing in student loan refinancing, enabling customers to manage everything within the bank’s ecosystem.

Personalization based on bank-generated data

By analyzing customers’ financial behavior, banks can offer more relevant products and services without sharing data with external providers.

• Example: A bank could detect that a user regularly pays for streaming subscriptions and offer a credit card with tailored rewards for those services.

Through Next Best Action (NBA) technology from Latinia, banks can analyze real-time transactional data and trigger personalized recommendations at the right moment. This enables them to:

• Offer tailored financial products, increasing conversions and customer loyalty.
• Optimize customer communication with hyper-personalized messages sent at the most relevant time.
• Compete with fintechs and digital platforms while reinforcing the value of traditional banking.

This model allows traditional banks to leverage personalization without relying on third parties, ensuring customers receive offers and services that align with their needs at every stage of their financial journey.

Discover how Latinia can transform your bank’s customer interactions. Contact us today to learn more or request a demo of our powerful real-time messaging solutions.