The introduction of open banking has given fintech companies the opportunity to reshape the global financial industry, putting access to financial services at the fingertips of people through their smartphones and computers with user-friendly apps and websites.
One of the biggest changes to traditional banking in our lifetime, the Open Banking Directive requires banks to share data through application programming interfaces (APIs). As a result, banks no longer have exclusive data management rights, and licensed fintech companies can connect to people’s accounts and offer a range of services.
The European Parliament adopted the revised Payment Services Directive (PSD2) in October 2015 to promote open banking. Now established and widespread around the world, open banking has facilitated the rise of integrated finance – but is it a surefire way to improve the consumer experience or does it come with hidden risks?
Integrated finance can galvanize markets and boost sales while making life easier for buyers.
“Financial services and fintech are synonymous with easy access, convenience, transparency, affordability and the ability to delight your customers,” says Nameer Khan, President of the MENA Fintech Association (MFTA). This inclusive non-profit association promotes open dialogue for the fintech community in the Middle East and North Africa. “It makes finance invisible; it’s embedded in everything we do.”
Fundamentally, integrated finance is the integration of financial services – such as loan or payment processing – within a non-financial company’s offering. Embedded finance can take several forms: embedded credit, payment and even insurance.
Automaker Tesla offers built-in insurance for all customers who buy a Tesla so they can drive their new vehicle straight from the showroom, fully covered, with no additional paperwork to fill out. The Uber taxi service offers integrated payment, accessing users’ bank details (with their consent) so they don’t need to enter their credit card details each 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 integrated credit is Swedish fintech Klarna. Available in parts of Europe and the United States, Klarna offers short-term point-of-sale loans for purchases across its portfolio of registered retailers with its “pay-in-four” plan, allowing shoppers to split their balance in four instalments. to be paid fortnightly.
Risks and Benefits
Companies like Klarna are boosting sales for their registered retailers while making it easier for consumers to purchase items by spreading payments over time. Klarna does not charge interest on its four-way financing model. However, users incur charges for late payment. Longer refund times are available at select Klarna retailers. Interest rates vary by retailer, reaching 25%. Some BNPL service providers charge even more.
Dubbed “digital loan sharks”, fintech companies in some parts of the world have made headlines for charging exorbitant interest rates and using heavy-handed tactics to collect debts, leading to a call for more regulations. strict.
While any consumer can potentially go into debt, those most at risk are often found in needy developing countries with limited access to traditional banking services. As in any data sharing application, users of the BNPL service are also exposed to the risk of identity theft. However, when properly regulated, banks and fintech companies 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 about the future of fintech startups. “Banks meeting halfway with these startups really provide us – as consumers and businesses – with the greatest value when the partnership is at its peak, so we get the safety and security of a bank and the user experience, as well as the bells and whistles, of startup,” says El-Badawi. “The scalability of these two people working together, I think, is the happy moment for us as consumers.”
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