Descubre el futuro de las finanzas en América Latina y el Caribe

The future of finance in LatAm & the Caribbean

O futuro das finanças na América Latina e no Caribe



“Finding the right business model”: Banks keen to deploy embedded finance

Mar 6, 2023

By Antony Pinedo

Despite the excitement around embedded finance, the reality is there are still commercial, legal and legacy system challenges to be overcome

From marketplaces to fuel stations, multiple industries in Latin America are improving shopping experiences and conversions with the integration of embedded finance. However, technological, regulatory and commercial barriers are slowing the advance of this business model among the region’s banks.

Embedded finance is the incorporation of financial products and services into the digital channels of non-financial companies such as retailers and airlines, allowing them to add payment methods, credit origination or reward programs to their applications to draw more users and boost revenue.

But moving from theory to practice can require major efforts on various fronts, such as changing the corporate paradigm and modernizing institutions’ technological architecture.

“One of the major challenges is to find the right business model so that it’s favorable both for the information provider and the third party,” says Pablo Scoglio, product director of MODO, which operates both a payment track that can be integrated into mobile apps and a wallet backed by some 40 financial institutions in Argentina.

“We’re still in the exploratory stage as an ecosystem, just like the rest of the world,” he says, adding: “We need to overcome the barriers of legacy systems to be able to bring APIs to all available services.”

Though business expectations around embedded finance have the wind in their favor, there are two main barriers to greater adoption: one is high adaptation costs and the other is non-financial companies’ lack of awareness about the opportunities of integrating financial services.

According to a survey carried out by Galileo Financial Technologies and Juniper Research, cost is the main reason for not offering embedded finance services. The survey of 210 C-suite executives from B2B companies in six Latin American countries also found that 70% would prefer to offer integrated financial services from a non-bank provider.

a banking executive responsible for embedded projects told iupana his institution did not reach its targets in terms of income generated by alliances in 2022 and that his bosses have raised the bar even higher this year.


High expectations. Tricky execution

In Brazil, the region’s biggest economy, income from this business model is forecast to grow an average 27% per year to reach US$13.75 in 2029 from US$3.7 billion in 2022, according to the Research and Markets consultancy. Another study found that, thanks to the combination of embedded finance and open finance, Argentina’s fintech sector could grow 30% in the next two years, thanks to greater opportunities for lending, payment and investment verticals.

Industry officials say the potential of embedded finance lies in that it facilitates commercial operations in digital environments, adding multiple services to a single customer journey, which eliminates friction and increases end-user satisfaction.

Scoglio points out that the integration of MODO has provided value to supermarkets by expanding their range of accepted payment methods. For fuel retailers, meanwhile, it has significantly slowed the growth in  chargebacks, where a user disputes a transaction on their credit card, often due to a fraudulent consumption.

“At MODO, we guarantee that all our payments are made with cards where the identity of the person has been validated. We manage to do it perfectly because of our connection with the banks. No one can pay with MODO using someone else’s card,” Scoglio says.

However, to achieve their true potential, financial institutions will be forced —sooner rather than later— to invest in modernizing their banking cores.

Tory Jackson, the director of LatAm business strategy and development at Galileo, says companies outside the financial ecosystem need to be educated about embedded finance . “API-driven products are being made that are out-of-the-box and white-label,” and that can add something to their users’ experience, she says.

“At the core business of all businesses is the flow of money: the power to receive and send payments,” he adds.


Regulation needs push

Then there’s the impact of incipient regulation around data interconnection. Although open finance and embedded finance are not conceptually identical movements, regulators see an overlap since they both require the opening up and sharing customer financial data.

Some countries have advanced faster than others in this regard. Brazil, through its mandatory regulation of open finance, is already beginning to see concrete use cases that combine, for example, predictive finance with enterprise resource planning (ERP) systems.

However, countries such as Colombia are just taking their first steps in this direction and others, such as  Mexico, have made little progress.

Unnax, a Spanish fintech specialized in open finance technology, warns that delays in introducing regulation for open banking in Mexico has halted the growth of the ecosystem.

“It’s imperative this doesn’t take any longer—time is important. The more the application of this regulation is delayed, the easier it will be for companies to come and misuse this information that, in the end, distorts the reality and the capacity of open banking’s potential,” Unnax CEO Jordi Pérez told iupana.

“What needs to happen in Mexico is for this uncertainty to be resolved, for there to really be a framework” and one that can be improved along the way, he adds.

Unnax, which counts the Mexican credit bureau Círculo de Crédito among its clients, employs web scrapping to obtain and organize financial information that users have agreed to share. The CEO sees room for Mexico financial institutions to expand embedded finance.

“[The banks] have realized that they wanted to protect access to their data, that having access to the data of other entities helps gain greater visibility of that client’s ecosystem and creates enormous potential for  the cross-selling of services,” adds Pérez.

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