The seamless integration of financial services and payments into non-financial platforms opens new revenue streams and is expected to become a $250 billion market over the next decade. However, the required sharing of sensitive data raises compliance and security concerns.
Banks have experience dealing with strict and evolving regulations, but externalizing services requires digital expertise. Robust infrastructures must be put in place to address data security concerns, implement seamless KYC/AML processes, establish fair lending practices, and effectively manage financial fraud risks. This ensures a smooth implementation of embedded finance for both banks and third-party providers.
Obstacles that prevent innovation
Primarily, banks worry about data governance and incurring additional financial and reputational risk. Top of mind is:
- Legacy systems – Outdated, monolithic systems lack the API capability necessary to integrate with external platforms and applications. Inadequate security features increase the risk of data breaches when externalizing services. Antiquated systems and processes need to be updated to provide a smooth customer experience and enhance risk mitigation.
- Regulatory frameworks – Especially as banks work with external partners, they must adhere to complex guidelines to avoid noncompliance, fines, and reputational damage. They need to establish clear compliance policies and conduct thorough training to ensure regulatory adherence.
- Data security – Sensitive customer data must be protected from unauthorized access and potential breaches. Banks need to be transparent about the monetization of personal data and establish effective governance of inflows where they are joint data controllers with third-party providers and operate a shared risk model. This includes being confident in the operational resilience of embedded finance partners.
- KYC/AML – It’s essential to verify customer identities and detect suspicious transactions to avoid compliance issues and reputational risks. Advanced identity verification and authentication tools and continuous monitoring are even more valuable when offering services through third parties.
- Fair lending practices – Implementing embedded finance means banks must guarantee equal opportunities for all customers without any discriminatory practices in the platforms with which they integrate. Clear guidelines and monitoring practices using data analytics must be established to avoid bias in lending.
- Risk and fraud management – Fraudulent activity and financial risk are top of mind at banks and become increasingly worrisome when dealing with third parties. AI-powered mitigation systems need to be in place to identify patterns and detect suspicious behavior to proactively guard against fraud that puts the bank and its customers at risk.
Build a compliant infrastructure
A compliant infrastructure ensures the seamless integration of financial services within a third-party platform while protecting customer data and meeting regulatory requirements. Banks should conduct comprehensive risk assessments to locate potential points of failure and susceptibility to fraud, data breaches, and unauthorized access. Robust security measures including encryption, multi-factor authentication, and real-time monitoring are proactive steps in establishing and maintaining security and compliance.
Policies and guidelines should be developed with experts in the legal and regulatory framework required. They must outline rules for accessing data, define handling procedures of customer data, and establish ways to report suspicious activity. As the regulatory landscape continues to evolve, the compliance framework needs to adjust accordingly to ensure embedded services meet industry standards.
Team with IT experts
A collaborative approach between banks and IT providers, backed by cutting-edge technology, streamlines compliance. Finding the right partner provides the technical expertise to:
Build architecture in compliance with SOC2 and other compliance standards, such as PCI and DSS
Implement robust data encryption and secure storage solutions
Leverage AI-powered fraud detection and prevention systems
Continuously audit and monitor transactions
SoftServe builds compliant solution architecture in accordance with Trust Services Criteria (TSCs) including security, availability, processing integrity, confidentiality, and privacy. We are experienced in building and implementing digital banking solutions for unique proprietary or legacy core banking systems, applying industry-specific best practices.
Our agnostic consulting approach helps find the appropriate technology stack for your business and regulatory needs — whether the solution requires third-party services integration or is being built from scratch.