An introduction to embedded finance

They can connect and save the preferred payment method to use it for 1-click transactions. It enhances user experience, reduces bounce rates, and stimulates more frequent purchases and loyalty. A common example of embedded finance payments is the Starbucks app that saves customers’ debit or credit cards for future transactions.

• The opportunity for financial services to expand into previously non-financial areas is unprecedented—and still in the very early stages.
• Embedded finance began as technology to merge software and commerce business models.
• Third-party embedded finance providers like Unit use Plaid to safely and securely gain access to the financial data they need to create and fund new accounts, plus gain deeper insights into things like balances and transactions.
• Compared to other age groups, the 18-to-24 cohort seems particularly motivated by in-app savings features such as store coupons and retailer deals or offers.
• When users are about to pay for the product or service, they see a prompt offering insurance as an add-on.

Profit pools will increasingly favor platforms and enablers using superior technology, algorithms, and more contextual data to target the most creditworthy customers. In the future, only unprofitable or higher-risk consumers may default to traditional channels. Regardless of how banks grade loans, they won’t see the valuable lending opportunities. Yet despite the rapid growth of embedded financial services, there has not been much quantitative exploration of the industry’s dynamics.

The Emerging API Economy

When you work with a financial-service provider to build a financial product into your offering, that’s embedded finance. Platforms use banking as a service as a way to offer, for example, branded payment cards. There has been an increased focus in the last few years on money laundering and other financial crimes. Regulators want financial institutions to apply anti-money laundering (AML) laws just as rigorously when embedded payments trends they provide banking capabilities to third parties in embedded payment partnerships. Any business that offers embedded banking should also be able to offer a branded debit card, whether that be for consumers, employees, or even vendors and contractors. The Lyft debit card (mentioned in section one), is a perfect example as it’s linked to the embedded bank accounts that Lyft exclusively offers to its drivers.

When we ask our bank partners what software their business clients are using, they respond with the Big 4 (Oracle, Sage, Microsoft, SAP), but that doesn’t give us the full picture of what specific systems their clients are working with. Sage, for example, offers various solutions for the different market segments (Sage X3 or 300 for Enterprise, Sage Intacct for Mid-Market, Sage 50 for SMB, etc). We must ask which solutions for which market segments should be prioritized.The ERP landscape is shifting as technology solutions are moving from legacy on-premise solutions to native-cloud applications. Gartner predicts that “by 2022, 75% of all databases will be deployed or migrated to a cloud platform, with only 5% ever considered for repatriation on on-premises. In North America, the Big 4 players we mentioned are the most dominant, but as we move across the globe we see different solutions varying by location. In Europe, SAP and Sage have a larger influence and we see the emergence of different ERP solutions like Asseco Solutions.

Why Banks Should Prioritize Providing Integrated Solutions For Small Business Clients

The digitization of commerce and business management has massively expanded opportunities to embed finance in nonfinancial customer experiences. As much as 33 percent of global card spending—۵۰ percent in the US—now takes place online,2McKinsey Global Payments Map, 2022. With a large portion of small and midsize companies in the US relying on software solutions for managing their business.3McKinsey Merchant Acquiring Survey, 2022. In addition, as digital natives came of age, they expanded the pool of consumers and businesses open to receiving all their financial services via digital platforms. Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items. Now embedded finance is taking hold online, as e-commerce retailers are offering banking services directly on their websites without re-directing customers to a bank.

For most banks with proprietary distribution, embedded finance represents a significant cannibalization risk. However, banks with limited footprints or localized relationships, such as community banks and regional banks, may see it as an attractive way to expand their revenue base. Some may be comfortable with growing deposits and earning revenues relatively passively, at least early on, but many will look for opportunities to differentiate themselves and boost revenues through more advanced products and support. Embedded finance providers are tasked with navigating complex regulatory environments on international and national levels. The exact framework that the business has to comply with depends on the characteristics of the embedded finance service. When it comes to embedded financial services, there is no one-size fits all regulatory environment.

Enablers’ goal: making things easy

Interestingly, this age group rates large tech less favorably than the 55-plus demographic. Given these findings, we can assume that healthcare and some other domains will increase their share in the fintech market. So get ready to see more unexpected combinations of standard services with embedded fintech. This platform enables merchants using Shopify to tap into fast funding for payroll, inventory, or marketing. Since Shopify relies on the existing data about applicants, they don’t need to go through lengthy application processes. The funding is granted in days, and businesses return it as a percentage of their future sales.

More than a third of respondents would consider using generative AI for financial advice and/or planning services, an unusually high figure for a capability that was little known to the general public less than a year earlier. Many of those interested have reported positive experiences with gen AI in nonfinancial settings and trust the technology to provide sound financial advice and/or believe it can provide better returns than traditional advisors. By layering in financial services when other businesses in your market niche don’t, you enhance your market position.

Working Capital Management

‍Innovation was where embedded banking came in for Treasury Prime partner Tuvoli. The company’s platform allows private aircraft brokers to source itineraries and arrange ancillary services for their high-net-worth clients. Flight operators can also invoice brokers for the trips and receive funds from them. Tuvoli facilitates speedy payment between all parties by having them set up bank accounts on the platform. The payment process used to take up to 30 days to finalize, but can now be initiated instantly and completed within hours after the conclusion of a flight. Although some financial institutions operate with channel partners, many are accustomed to serving end customers directly.

But, historically, companies integrated elements of the supply chain from within their industry. A bank could develop a BaaS platform itself from scratch, and most of the early entrants in the space did just that because alternatives didn’t exist at the time. You can find more questions and information by going to treasuryprime.com/blog/10-questions.

Our solutions at work

They can use an embedded banking strategy to innovate and interact with customers in new ways, ultimately contributing to increased engagement and retention, growth at a lower cost of customer acquisition, and expansion into new target segments. Third-party embedded finance providers like Unit use Plaid to safely and securely gain access to the financial data they need to create and fund new accounts, plus gain deeper insights into things like balances and transactions. It’s as if Plaid turns on the stream of user-permissioned financial data to these companies, then they transform it into embedded finance products and services. Because it tells you where consumer expectations for your product are heading. Soon, they will expect to access financial products in non-bank mobile apps and online platforms as well.

This financial transformation will continue to gain strength across nearly every sector as more companies adopt embedded finance and as consumers become more comfortable with these services. Using Plaid Transfer, companies can seamlessly offer embedded payments by authorizing customers, analyzing risk, and moving money with a single API. Convenience is one of the main reasons consumers are willing to adopt embedded finance.

Large tech firms narrow the consumer trust gap with banks

In fact, 88% percent of companies that implement embedded finance report increased customer engagement, and 85% say it helps them acquire new customers. The winners will likely provide a full suite of services, including some regulatory oversight, compliance, origination, and fulfillment. Enablers that take the hassle out of embedded finance for platforms through easy integrations and great servicing should hold the upper hand. They can choose a high-volume, self-service model, or a higher-touch operation across fewer, bigger platforms. And they may concentrate on specific sectors with large or growing addressable markets, where they can scale up and steadily improve the user experience.

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