Exploring the new Financial Frontier in Fintech

March 13, 2024

The role of Data Spaces in Converging Composable Banking and Embedded Finance

The vision of an integrated future

In the ever-evolving world of financial services, traditional banking models are being redefined by the imperative for flexibility and personalization. Composable banking has emerged as the response to financial institutions’ urgent need to integrate non-proprietary services swiftly, aligning their offerings dynamically with the evolving demands of customers. Simultaneously, the concept of Embedded Finance recognizes the necessity of incorporating financial services into sectors not traditionally associated with finance, signaling a paradigm shift in the financial industry’s approach to customer-centricity.

The convergence of composable banking and embedded finance suggests a shared underlying principle – the seamless integration of data and services across diverse business domains. This article delves into the intricate relationship between these two concepts, emphasizing the importance of streamlined integration, governance, and trust in the exchange of services and data for applications that embeds financial services. DataSpaces, as conceived by the actual EU strategy, act as the unifying thread, providing a secure and regulated environment for the exchange of data and services, thus ensuring the successful implementation of composable banking and embedded financial services.

Strategic Pathways

Integration of external financial services goes beyond mere technological considerations. It delves into the realms of governance, contractual relationships, and trust – elements that are vital for the successful integration of services that provide value to customer relationships. To achieve rapid integration and offer unparalleled value, organizations that serves customers must embark on extensive research, formalize relationships through contracts, and meticulously plan and execute the integration process.

Businesses seeking to integrate financial services into their offerings must collaborate with financial institutions capable of making the required services available. This involves navigating complex contracts, formalizing relationships, and ensuring ongoing integration and maintenance. At the heart of these exchanges lies the critical need for presenting services and data, coupled with the necessity for trust and certainty in their exchange for proper valuation and exploitation.

It is at this crucial juncture that the concept of DataSpace becomes pivotal. DataSpace is the term used, especially within the European Union, to denote sectoral virtual spaces. These spaces facilitate data and service exchanges in the data economy in a governed, safe, and regulatory-compliant manner.

DataSpaces and FIDA (PSD3) in Financial Services

DataSpaces are the way to provide a virtual space where participants are identified with certainty, data sovereignty is guaranteed, and exchanges can be traced and correctly remunerated. An essential element is the development of a sectoral vocabulary within individual DataSpaces, ensuring that the exchange of data occurs without ambiguity and without the need for burdensome term remapping activities. This is achieved through the adoption of a lingua franca – a shared semantic definition and data syntax accepted by all participants.

Moreover, DataSpaces emphasize interoperability, enabling the inclusion of data and services belonging to other businesses into the financial world and vice versa. This interoperability facilitates the integration of non-financial companies into financial services, contributing to a more interconnected and versatile financial ecosystem.

DataSpaces emerge as enablers for the integration needs outlined by composable banking and embedded finance. By facilitating technical integrations, promoting flexibility, and ensuring competitiveness,

The European Union has taken substantial steps toward realizing the potential of DataSpaces, notably within the Financial Services sector. The “legislative proposal for a framework for financial data access” (FIDA), completed on 01/11/2023, aims to govern the exchange of financial data within the DataSpace. This framework, presented by the EU DataSpace Commission Working Group, represents a significant milestone in interventions within the financial sector’s DataSpace.

The FAME Project: convergence of Embedded Finance and DataSpaces.

The European FAME project (Federated decentralized trusted dAta Marketplace for Embedded finance) fits nicely and precisely in this context. FAME project aims to deliver a DataSpace implementation for business organizations and content providers to exploit the full potential of financial services and composable banking to empower embedded finance applications. FAME federates end users and organizations providing the services and data they need while being aligned with the evolving regulatory landscape of data economy fostered by the EU. With a focus on decentralization and federation FAME emphasizes the monetization of “Data Assets,” addressing the pressing need for exchanging machine learning (ML), artificial intelligence (AI), and analytics services to support the seamless creation of embedded finance applications.

The convergence of composable banking, embedded finance, and DataSpaces signifies a unified approach to financial innovation. As exemplified by the FAME project, this integration not only enhances the technical aspects of data exchange but also aligns with the broader regulatory landscape, ensuring a harmonized and effective financial ecosystem that benefits both financial and non-financial entities. The ongoing evolution of value-added data definitions within FAME reflects a commitment to staying abreast of technological advancements and regulatory shifts, further solidifying its role as a cornerstone in the transformative journey of the financial industry.

Author: Antonio Sottosanti (GFT)