Embedded Finance

Feb 28, 2023

Top 3 Challenges of Embedded Finance: Expert Tips on How To Overcome Them

Explore the three challenges of embedded finance and learn the best ways to ensure data security, customer risk detection and overcome stakeholders' resistance.

Subscribe to our newsletter

This listicle is adapted from our latest series on A Beginner’s Guide to EmFi. To learn more about the different categories of EmFi used across industries and understand the main barriers to implementing this new model, check out the full article here.

EmFi has transformed the financial industry. It has allowed businesses to integrate financial services into non-financial products in four categories - embedded banking, lending, payments and insurance. The integration has created a more convenient and streamlined customer experience, making it more popular and beneficial for businesses and customers. However, despite its benefits and popularity, EmFi has its challenges. Three, in particular, stand out: data security, customer risk detection and stakeholders' resistance to change. 

In this article, we dive into these significant challenges of EmFi and discover how credolab's solutions as a behavioural data analytics platform can help businesses overcome them.

1. Data security:

Data security is one major challenge in EmFi that needs to be addressed. Integrating financial services into non-financial products through enablers such as Banking-as-a-Service (BaaS) or Application Programming Interfaces (APIs) leads businesses to gain access and customer insights, becoming privy to sensitive financial information. However, this enhanced accessibility makes them a prime target for cybercriminals, increasing the risk of cyberattacks such as system and data security breaches and compromised data confidentiality. Hence, ensuring controlled and well-maintained security and privacy is vital to protect sensitive financial information, including personal data. 

Even though data security is essential in the EmFi scene, many businesses must implement more measures to protect their data and sensitive information, especially customers' personal and financial data. However, in the absence of sufficient expertise in handling sensitive data or an adequate infrastructure to detect and prevent cyberattacks, businesses may continue to struggle and become even more vulnerable to cyberattacks.

A rise in cybercrime is no secret in today's world. However, this emphasises businesses' need to take proactive measures to ensure data security. In the EmFi scene, a data breach may have devastating consequences if one overlooks adequate security measures. For example, IBM reported that the average data breach cost $3.86 million in 2022, and 25% of those breaches occurred due to human error. Furthermore, 83% of organisations have suffered more than one data breach. From these startling statistics, it is clear that a data breach poses an imminent threat to data security in EmFi.

Undoubtedly, businesses should be prepared to detect, counter, and prevent data breaches to avoid devastating consequences, including reputational damage, financial loss, and even legal consequences.

Tips to improve data security measures:

With cyberattacks on the rise, being prepared is the bare minimum. Now, the best approach for businesses is to be proactive in their approach to data security. It is imperative to follow protocols and regulations such as ISO 27001 to ensure personal data security and minimise any chances of a data or system breach Furthermore, EmFi customers expect clear application navigation, data protection, and security due to large amounts of data processing. 

Here are three practical and proactive approaches that can improve overall cybersecurity and enhance data security measures:

  1. Educate employees and conduct regular data security training

To ensure data protection and security, employees should have adequate, advanced, up-to-date knowledge and awareness. The ultimate goal is to build intrinsic values of understanding and respect for data security, which becomes ingrained in every employee without a second thought. 

Human error is always possible regardless of how strong a security measure is. For example, one common cyberattack is phishing, where criminals pretend to be someone else to obtain private and sensitive data like passwords and bank account numbers. As a result, educating and reinforcing employees' data security capabilities provides a simple solution - nipping any room for human error in the bud. 

  1. Use Artificial Intelligence (AI) and Machine Learning (ML)-based solutions

Businesses should strengthen network security by imposing multi-factor authentications and biometrics on all employees. For example, enabling two-factor authentications is cost-free and effective in quickly improving any data security measure. Although there is hesitancy behind using it, such as the hassle of passing through another authentication layer, it can easily add an additional layer of defence.

Businesses should also invest in AI and ML solutions that leverage advanced algorithms to analyse devices logging into a network (including smartphones and web devices), specifically for predictive analytics and behavioural analysis. For example, by leveraging credolab's solutions, businesses can detect potential risks, assess how many times a particular device or IP address attempts to access the network, and limit the risk of a data breach before it occurs, ensuring data security and improved privacy for their customers.

  1. Install encryptions to protect sensitive data

In order to thwart cybercriminals, all stored data, ongoing communications, and devices with data access must be encrypted. Unencrypted data and devices are easily accessible and viewable by anyone with malicious intent, making them vulnerable to data breaches. Encrypting data, especially personal and financial data, creates stronger defences against determined cybercriminals. It makes any data they access unviewable and, therefore, protected. 

Take an even more proactive approach and apply end-to-end encryption for messages and encrypted formats when storing sensitive data to strengthen data security within businesses further.

Businesses must prioritise data security when implementing Emfi services such as embedded banking, lending, insurance, and payments.

To ensure data security and protection, adhere to protocols and regulations, implement expert tips and leverage behavioural data through AI and ML solutions like credolab. As a result, potential risks and fraud can be prevented, and businesses and customers can easily protect themselves from potential cyberattacks, especially data breaches.

2. Customer Risk Detection:

It has been established that EmFi has revolutionised the financial industry by enabling easy access to financial services, but it also comes with challenges. This brings us to our second major challenge - customer risk assessment. Businesses in the EmFi sector are responsible for ensuring seamless customer experience while managing risks, maintaining data security, and preventing fraud.

In A Beginner's Guide to EmFi: Part 1 Introduction to Embedded Finance, we learnt that EmFi benefits both customers and businesses as it removes various problems faced by current or prospective customers while simultaneously creating new growth and retention opportunities. However, a lack of expertise, strategy, and resources is among these businesses' most common challenges. 

Business owners in the EmFi sectors are often new to the financial industry. They may need to gain the same level of experience and knowledge in risk management as their counterparts in traditional financial institutions. Furthermore, these businesses may require more sophisticated tools and resources to detect real-time customer risk. As a result, they face more roadblocks in customer risk detection than traditional and more established financial institutions. 

In the past decade, fraud losses from payments have tripled from $9.84 billion in 2011 to $32.39 billion in 2020. Furthermore, payment fraud is expected to increase through 2022, with a projected cost of $40.62 billion. Based on Fraud Risk Management surveys, organisations could lose up to 7% of their annual turnover to fraud, and only a small portion is recovered. 

A successful business within the EmFi sector must be able to detect customer risk effectively. By implementing a robust customer risk detection strategy, businesses can reduce non-payment risk, prevent fraud, and improve customer experience and satisfaction. Additionally, behavioural analytics and other advanced techniques can provide businesses with valuable insight into who their customers are so that they can tailor their products and services in a much more granular and relevant way.

"Artificial Intelligence (AI) and Machine Learning (ML) algorithms supporting banking, lending, and credit risk assessment will play an increasingly significant role in who has access to financial services by 2023. Therefore, banks can increase revenues, provide unique multichannel experiences and accelerate innovation cycles."
By Peter Barcak, Founder and CEO of credolab (extracted from The case for optimism: encouraging fintech trends in 2023

Tips to improve your customer risk detection:

Managing risk, maintaining data security and preventing fraud requires effective customer risk detection. However, this can be challenging due to a lack of expertise, resources, and sophisticated risk detection strategies among non-financial players. Here are some approaches businesses can adopt to detect customer risk more efficiently and effectively.

  1. Collect and analyse data from various sources: 

Businesses in the EmFi sector should not limit themselves to traditional data. Instead, they need to collect data from as many sources as possible and combine those with alternative data to gain a more comprehensive view of their customer's financial history, affordability, and behaviour. Combining alternative data sources can help businesses detect fraud, improve predictive rates, maximise returns, and reduce unforeseen risks.

  1. Create a scoring model that works best for you: 

Use a scoring model that combines automation with various data sources to provide lenders with a holistic assessment of customer behaviour and flexibility. With the emergence of new data sources, ML and AI, combining traditional and alternative data to create a scoring model has become possible. Combining these concepts also contributes to a better understanding of human behaviours, leading to more accurate and reliable models.

  1. Adopt a proactive approach towards fraud detection: 

Undetected first-party fraud during the loan application stage can often result in a payment default. Hence, to avoid being blindsided by any cyber, risk or fraud attacks, a strong fraud prevention strategy and fraud detection tools are now not only expected but crucial to protecting your business. In this two-part series, learn more about fraud types, characteristics, and how new and innovative tools enhance fraud detection.

There is no doubt that EmFi offers businesses and customers alike a variety of opportunities. Nevertheless, there are challenges associated with it that must be addressed, and one of the most critical challenges is creating effective customer risk detection. 

In order to significantly improve risk assessment, it is most advantageous to use ML algorithms and AI. Furthermore, businesses should collect and analyse data from various sources, develop a scoring model that includes all the inputs collected, and institute proactive fraud detection practices to stay ahead of the criminals. As a result, they can prevent fraud, reduce non-payment risk, and create a positive customer experience. 

3. Stakeholder's Resistance to Change:

In an age where digital services continue to grow, EmFi is becoming increasingly popular for financial service providers to meet the needs of their customers. For example, the global embedded lending market is projected to reach $199 million by 2029 due to increased online shopping and consumer financing. 

‍Growth, however, can bring change, which may be difficult for some stakeholders. Furthermore, in some cases, the adoption of EmFi may be challenged by stakeholders who are reluctant to change. 

Stakeholders may resist change due to corporate culture, job loss fears, or a lack of awareness of EmFi's benefits. Despite these reasons, they must be made aware of the benefits of EmFi. In fact, as reported in a Tearsheet article, the latest survey by FIS indicated that most senior executives believe that EmFi will be one of the top 4 trends affecting how they do business. However, 31% of the financial institutions’ executives interviewed are concerned that EmFi would change their sales and distribution models, while 29% of non-financial institutions’ executives are worried that EmFi would increase their operating costs.

 Moreover, banks and other established financial institutions looking to offer EmFi, often take longer to adopt new technologies because integrating innovations into legacy systems can be more complex and challenging to implement changes. The adoption of EmFi is further slowed by lengthy information security assessments, data governance, and data due diligence processes, which exacerbate this resistance. 

Overcoming stakeholder resistance to EmFi is essential for businesses to thrive in today's ever-changing landscape. Adopting EmFi and adding it to current systems can lead to multiple benefits, including cost reduction, improved customer experience, and increased profitability. Furthermore, digital natives will make up 58% of the workplace in the next decade, and customers and businesses will use digital platforms for all financial transactions. Embracing change and implementing EmFi is essential to avoid business stagnation or even failure in the long term, as these businesses would no longer be able to cater to the needs of their customers.

Tips for overcoming stakeholder resistance:

Overcoming stakeholder resistance may take time, but it is essential to a successful EmFi implementation. Here are some ways to accomplish it:

  1. Build a culture of innovation: 

A culture of innovation can be created by educating stakeholders about how EmFi works and emphasising its benefits. By fostering an environment that encourages creativity, risk-taking, and continuous improvement, businesses can become more receptive to exploring and eventually implementing new technologies and approaches to financial services, for instance, exploring the best ways to implement alternative data insights.

  1. Work with accredited businesses that fulfil proper risk mitigation protocols: 

Through this approach, personal data is kept secure, protocols are adhered to, and regulations are followed. As a result, stakeholders can be assured that information security assessments, data governance, and data due diligence processes are being followed.

Although EmFi has encountered resistance from some stakeholders, EmFi's benefits must be acknowledged in financial services. The success of a business over the long term can be attributed to its willingness to embrace change, particularly in implementing EmFi. 

The most effective way to overcome stakeholder resistance is to create a culture of innovation and partner with accredited businesses that follow risk mitigation protocols. As a result, businesses can improve customer experience, reduce costs, and increase profits by exploring and adapting new financial services technologies and approaches.


In conclusion, EmFi is transforming the financial industry rapidly by providing businesses and customers with a more convenient and streamlined experience. To ensure success, businesses must prioritise and navigate the unique challenges when implementing Emfi services, such as embedded banking, lending, insurance, and payments.

A successful EmFi implementation is built on enhanced data security, efficient customer risk assessment, and overcoming stakeholders' resistance to change. With the knowledge gained on overcoming the challenges with the right tools and strategies, there is no doubt that businesses in the EmFi sector can thrive and drive innovation in the financial industry.

Interested in learning how our products can help you? Request a free demo, or drop us your questions here.

Access data insights solutions that deliver growth - Fraud detection | Credit scoring | Marketing segmentation. Helps you say "YES" more confidently to more customers!

Learn more about credolab's products and possibilities with our features through our Blog section, and feel free to share our content with your team!

Follow us on social or get in touch today: Book a meeting | Blog | LinkedIn | Twitter | Contact Us