📌 Why doubling down on embedded finance won't solve the fintech fracture
AI case studies: July 2024 | How AI is transforming the world?
New email: Why doubling down on embedded finance won't solve the fintech fracture
Hey there, Yael!
Embedded finance relies on a network of partners. Weaknesses in a single partner's security can expose the entire ecosystem to cyberattacks. Choosing partners with strong security practices is crucial.
Embedded finance integrates financial services into non-financial platforms.
This creates more points of entry for attackers. Traditional financial institutions may have robust security, but the new partners they integrate with might have weaker defenses.
Sharing financial data across multiple platforms increases the exposure to data breaches. Strict data governance and robust security protocols are needed to prevent unauthorized access and ensure customer privacy.
The challenge is also about regulations still catching up with embedded finance. This lack of clarity can make it difficult for companies to implement adequate security measures.
What to expect?
While embedded finance offers exciting opportunities, it won't necessarily bridge the gap (fracture) within the fintech industry. Here's why:
Focus on convenience over inclusion: Embedded finance integrates financial services seamlessly, but it might not reach the underbanked or those who lack access to smartphones or digital platforms. This could exacerbate the existing gap in financial inclusion.
Power imbalances persist: Large tech companies and established financial institutions have an advantage in embedded finance due to their resources and customer base. Smaller fintechs could struggle to compete and be squeezed out.
Data privacy concerns: Embedded finance relies on sharing customer data across platforms. This raises concerns about data privacy and potential misuse, especially if regulations haven't caught up. This could erode trust in the entire fintech ecosystem.
Standardization issues: The lack of standardized practices and regulations in embedded finance can create confusion and fragmentation. This could hinder smooth operation and innovation within the fintech space.
Focus on specific products: Embedded finance might prioritize offering specific financial products within a particular platform, neglecting the need for a holistic approach to financial well-being. This could limit the overall impact of fintech in empowering users.
So, while embedded finance has its merits, it's just one piece of the puzzle.
Addressing the fintech fracture might require a broader approach that focuses on financial inclusion, fosters collaboration among different players, and prioritizes robust data privacy frameworks.
So, what is important now?
Embedded finance presents a unique challenge for fintechs when it comes to cyber threats, and it's largely due to the emphasis on consumer duty.
Expanded responsibility: In traditional fintech, the focus might be on securing local platforms. Embedded finance broadens that scope. Businesses are now responsible for ensuring the security of the entire ecosystem, including the partners integrated with it. This requires significant investment in security assessments and ongoing monitoring.
Data sharing and accountability: Sharing financial data across multiple platforms increases the attack surface and potential points of vulnerability. Regulatory frameworks around embedded finance often place the onus on the initial provider (often the fintech) for data breaches, even if they occur on a partner's platform. This can lead to hefty fines and reputational damage.
Transparency and user trust: The consumer duty focus in embedded finance demands a high degree of transparency with users about data usage and security practices. Any security lapses can erode user trust, not just in your individual platform but in the entire embedded finance experience. This makes proactive security measures even more critical.
Cost-benefit analysis: Implementing robust security measures across an interconnected ecosystem comes at a cost. Balancing this cost with the potential benefits and ensuring it translates into a profitable business model for the fintech can be a challenge.
While these factors create a demanding environment, they're not insurmountable. Here are some ways fintech in embedded finance can navigate the cyber threat landscape:
Prioritize security by design: Build security into your platform and partnerships from the ground up. Conduct thorough security assessments of potential partners before integration.
Implement robust data governance: Establish clear protocols for data handling and access control across the ecosystem. Regularly monitor and audit data security practices.
Transparency and user education: Be upfront with users about data usage and security measures in place. Educate them on potential risks and how to protect themselves.
Collaboration is key: Work with regulators and other industry players to establish best practices and standardized security frameworks for embedded finance.
By taking a proactive approach to cybersecurity, embedded finance fintechs can not only fulfill their consumer duty but also build a more secure and trusted ecosystem for everyone involved.
The things to know
While offering convenience, embedded finance creates a complex web of financial services across various platforms.
This interconnectedness broadens cybercriminals' attack surface and heightens data breach risk.
More robust security measures are needed throughout the ecosystem, from thoroughly vetting partners to robust data governance practices.
By prioritizing security and fostering a culture of awareness, electronic money institutions (EMIs) and other participants in embedded finance can mitigate these threats and build a more trusted environment for everyone involved.
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