Fintech companies saw their best year ever in terms of venture capital funding in 2021. Banks are evolving their fintech engagement strategies and some are embracing the new world of embedded finance. 

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Ongoing concerns around Covid-19, rising inflation and heightening tensions between major countries have not dampened the ability of fintechs to attract capital. According to research company Forrester, fintech funding shot up more than 200% in 2021.

However, the pandemic also led to hundreds of fintech acquisitions and failures in the six quarters from the second quarter of 2020 to the third quarter of 2021. Out of this consolidation trend, Forrester believes that fintech ecosystems have strengthened in the past two years.

In its report ‘The State of Fintech, 2022’, Forrester identifies the major trends in the global fintech space. For example, payments continues to be the hottest area of fintech, according to its research. In the third quarter of 2021, payments infrastructure was the most prized area of fintech investment – as measured by funding volume.

The report looks at how incumbents are responding to fintech disruption through a range of strategies: ignoring, investing, acquiring, partnering, copying, building their own fintech brands and/or nurturing the wider fintech ecosystem.

In the April issue of The Banker, Europe editor Burhan Khadbai explores the strategies European banks are employing to leverage fintechs in their drive to digitally transform. Most are no longer ignoring fintechs; instead, they are engaging through a mixture of approaches including investing, acquiring, partnering and nurturing. Interestingly, co-creation is an emerging trend that some banks, such as BNP Paribas, are embracing.

In her April feature, Liz Lumley looks at another emerging trend: embedded finance and banking-as-a-service. As the Forrester report said, financial products and capabilities will increasingly be embedded in an array of platforms and woven into connected devices. Many of the newer players in the embedded finance market predict a massive growth of the sector. For example, Rob Straathof, CEO of Liberis, which offers an embedded finance platform that allows businesses to offer a suite of banking services to their customers, said that embedded finance will “dominate every single bit of financial services” within 10 years.

It is also a growing area for banks, effectively opening up new revenue streams. I spoke to Ken Gavrity, head of enterprise payments and analytics for KeyBank, who said that embedded finance is one of the biggest growth areas for the regional US lender. To explain the concept, he used the example of a dentist who has been using software within their business for patient records, lab orders and scheduling. The next step is “patient engagement”, according to Mr Gavrity.

“In addition to getting an SMS to remind the customer of the appointment and providing digital registration, instead of waiting at the desk to pay, the customer receives an SMS to pay the amount with the credit card on file as they walk out of the office,” he explained. “Next is the marketing, such as prompting them to schedule their six-month appointment now.”

KeyBank is working with health technology platform, Rectangle Health, which sits on top of other dominant dental platforms. “It’s a simple integration layer that an office manager can turn on in a few minutes, and KeyBank is one of the payment rails that is embedded inside Rectangle Health’s platform,” said Mr Gavrity. “The bank now serves approximately 260 customers of Rectangle Health, as well as helps to distribute Rectangle Health’s platform to KeyBank’s existing customer set.”

While the dental sector is one example, he said that the software platforms are forming quickly and focusing on industry vertical by industry vertical. “We’re building a very modern engagement model with these technology companies to help them figure out how to embed [payments in their platforms],” he added.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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