The introduction of open banking has given fintech firms the opportunity to reshape the global finance sector, putting access to financial services at people's fingertips via their smartphones and computers with user-friendly apps and websites.
One of the most significant changes in traditional banking in our lifetime, the open banking directive obliges banks to share data via application programming interfaces (APIs). As a result, banks no longer have exclusive rights over data management and approved fintech companies can plug into people's accounts and offer them a range of services.
The European Parliament adopted the revised Payment Services Directive (PSD2) in October 2015 to promote open banking. Now established and spreading across the globe, open banking has facilitated the rise of embedded finance – but is this a safe way to enhance the consumer experience or does it carry hidden risks?
Embedded finance can galvanise markets and boost sales while making life easier for shoppers.
"Financial services and fintech is all about easy access, convenience, transparency, affordability and being able to delight your customers," says Nameer Khan, chairman of MENA Fintech Association (MFTA). This inclusive, not-for-profit association fosters an open dialogue for the Middle East and North Africa fintech community. "It's making finance invisible; it's embedded in everything we do."
Fundamentally, embedded finance is the integration of financial services – such as lending or payment processing – within a non-financial company's offering. Embedded finance can take multiple forms: embedded credit, payment and even insurance.
Car manufacturer Tesla offers embedded insurance to all customers buying a Tesla so they can drive their new vehicle straight out of the showroom, fully covered, without any additional paperwork to complete. Taxi service Uber offers embedded payment, accessing users' bank details (with their consent) so they don't need to key in their credit card details every time they book a ride.
Embedded credit – also known as embedded lending – allows consumers to buy now, pay later (BNPL). One of the market leaders in providing this form of embedded credit is Swedish fintech company Klarna. Available across parts of Europe and the United States, Klarna provides short-term, point-of-sale loans for purchases across its portfolio of registered retailers with its' pay-in-four' plan, allowing shoppers to divide their balance into four instalments to be paid fortnightly.
Risks and benefits
Companies like Klarna stimulate sales for their registered retailers while making it easier for consumers to afford items by splitting payments over time. Klarna doesn't charge interest on its pay-in-four financing model. However, users incur a fee for late payment. Longer repayment terms are available with some of Klarna's retailers. Interest rates vary by retailer, rising to 25%. Some BNPL service providers charge even more.
Dubbed 'digital loan sharks', fintech companies in some parts of the world have made headlines for applying exorbitant interest rates and employing heavy-handed tactics to recover debts, leading to a call for stricter regulations.
While any consumer can potentially spiral into debt, those most at risk are often in developing countries and in dire need with limited access to traditional banking. Like in any data-sharing application, BNPL service users are also at risk of identity fraud. However, when correctly regulated, banks and fintech firms have shown they can align to create a safe and beneficial retail experience for consumers.
Sharif El-Badawi, CEO of venture capital firm Dubai Future District Fund, is optimistic regarding the future of fintech startups. "Banks meeting halfway with these startups is really providing us – as consumers and businesses – the most value when the partnership is at its peak, so we get the safety and security of a bank and the user experience, and bells and whistles, from the startup," says El-Badawi. "The extensibility of those two working together, I think, is the happy moment for us as consumers."
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