Temenos: Embedded Finance Reshapes the Banking Landscape

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The latest Economist Impact study, commissioned by Temenos and based on insights from 300 global banks, emphasizes the need for banks to embrace disruptive technologies and either build their own or actively engage in digital ecosystems to maintain their pivotal role in the banking sector.

Titled “Byte-sized banking: Can banks create a true ecosystem with embedded finance?” the report delves into the competition that banks face from payment companies, technology disruptors, and e-commerce entities that offer embedded finance solutions. The study underscores consumers’ increasing demands for more personalized and improved products and services, compelling banks to re-evaluate their roles and adapt accordingly.

Notably, 79% of survey participants agree that banking is poised to become intricately “embedded” in both consumers’ lives and businesses’ value chains. A significant number of banks (one in five) foresee their business models evolving to offer banking-as-a-service (BaaS) and enable embedded finance within their own offerings. Additionally, twice as many banks aspire to retain a consumer-facing experience and function as comprehensive digital ecosystems themselves.

Jonathan Birdwell, Economist Impact’s global head of policy and insights, emphasizes the influence of new technology and evolving customer demands as the primary factors set to impact the banking landscape in the next five years. The study highlights the importance of customer-centricity in driving banks to provide embedded ESG and sustainable banking solutions in the future.

According to Kanika Hope, Temenos’ chief strategy officer, banks must leverage expertise in cutting-edge technologies such as cloud and AI, while fostering collaborations with fintechs and tech companies to realize embedded finance capabilities and construct digital ecosystems. The study reflects a growing recognition within the industry that the public cloud is gaining traction, with 51% of respondents anticipating a shift away from traditional data centers within the next five years. Environmental concerns are also driving this transition, alongside business agility, efficiency, and security.

Furthermore, the research highlights the anticipated impact of new technologies, particularly AI, within the next five years. A significant 63% of respondents expect new technologies to exert a greater influence on banks compared to changing customer demands and regulatory shifts. Respondents believe that the utilization of AI, especially generative AI, will serve as a critical factor distinguishing winners from losers in the banking sector.

The study stresses the importance of collaboration with fintechs and other technology providers to leverage expertise in emerging technologies. As a result, surveyed banking executives foresee shifts in industry relationships, with 44% of respondents predicting banks acquiring majority stakes in fintechs and 32% anticipating market consolidation among challenger banks in the coming one to three years.

The comprehensive research, spanning various global regions and functions within the banking sector, highlights the critical trends shaping the industry’s evolution, underlining the need for proactive adaptation to the changing landscape.