Next-Generation Core Systems and BaaS Empower Embedded Finance

Embedded finance is enabled by BaaS, which is the infrastructure and underlying pipes that provision a bank’s product and functional stack in a composable way through APIs and third parties. These pieces can then be assembled and curated to offer existing bank products, create new products, or collaborate with a wider variety of stakeholders.

There are significant potential benefits to banks. Embedded finance enables rapid customer acquisition and deposit growth by offering products to third party customers. This can be either in a home market to customers of a non-FS partner or as a new market entry strategy. Revenue grows through shared information interchange, deposit growth, or fees associated with services like permissioned data access.

Celent is even seeing financial institutions insourcing capabilities from other banks (e.g., ID verification, payments). However, many banks have glaring technology gaps in their core platforms, which make engaging in embedded finance either difficult or impossible. Capturing this opportunity will require core modernization. Celent sees a few areas where incumbent core platforms struggle to deliver BaaS or embedded finance.

Expensive to make changes or create new products: Legacy platforms have long timelines to create or release new products, and it’s often expensive. Even small changes can take months.

Limited composability or API support: Older technology will struggle to provide granular composability necessary for embedding new product propositions into third party channels. Many don’t provide enough public API support.

No access to real time data or support for payments: Third parties leveraging embedded finance will require real time event-based interactions with the core. Monolithic, batch-based systems of the past are unable to handle or support these requests.

Difficult to scale: Legacy cores can have a difficult time handling an influx of new customers or transactions. The time to scale with traditional infrastructure is a major barrier.

Banks looking to offer embedded finance need to begin exploring more modern core platforms that can support BaaS. Figure below shows that banks need a core that is deployed in the cloud (i.e., cloud native), can support SaaS-based platform delivery, can deploy capabilities (either from the core vendor or ecosystem providers) as discrete services, and can operate in real time.

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