And embedded financing offers funding and loans to consumers without having to fill out a loan application. The most common embedded finance offerings include banking, lending, insurance, payments, and branded credit cards. The tiny moment between after customers finalize their order and having to actually pay is crucial. The standard options either require people to enter their credit card information, open an e-banking application, or even dig into their wallets for cash. These hasty processes might contribute to customers having second thoughts about proceeding with their orders. With embedded payments, a customer can simply tap a few buttons in a purchasing app with an embedded payment program.
Embedded finance is not just limited to ecommerce stores as other businesses, such as Software as a Service providers, are also increasingly adopting embedded finance. With embedded finance, businesses can offer credit to their customers without needing to go through a bank. While there are different forms of embedded finance, the basic definition of embedded finance is that it’s the integration of finance into non-finance companies. It encompasses financial tools and services provided by non-finance companies, which financial institutes traditionally provide. In the future, embedded finance solutions will enable companies to have more customers and more revenue with less cost, Chang said. Using new technology also means fintechs don’t have to maintain large and complex IT systems so they can usually be relied on for more competitive pricing than incumbent providers of financial services.
What is Embedded Finance? (& Why It Matters)
Embedded finance accelerates this alignment by blurring the lines between ordering and payment. Merchants using embedded payments can deliver a one-click, no-pay experience that transforms customer relationships and builds priceless brand loyalty. B2B payments are business services that enable customers to send digital invoices, which can be paid using an embedded finance option. We do not include bank-provided cash management or treasury solutions in our definition. Although competition will continue to compress providers’ margins, the revenues for platforms and enablers should still increase from $2 billion to $11 billion within banking and cards. Leading embedded payment solutions come with bank-grade security and more.
For companies wishing to join the embedded finance revolution, the time to start building is now. According to Plaid and Accenture’s research report, there are four central ways that embedded finance could alter the way both financial and non-financial companies conduct business. Providing a better customer experience gives your profit margins a boost, reducing abandoned shopping cart rates by eliminating some of the barriers that might prevent a customer from completing their transaction. When customers reach the checkout, they’re much more conscious of the money being spent if they’re required to input their card information or ACH details.
Although embedded payments might seem straightforward, there’s a very high burden of responsibility for merchants. When you aren’t using a third-party provider, everything from PCI compliance to storing customer data securely is on your shoulders. Because embedded payments decentralize the often-stressful checkout experience within ecommerce, it removes much of the friction involved with making digital purchases. In the era of mobile shopping and on-the-go transactions, this is an invaluable tool to get conversions over the line that you could lose otherwise.
There’s no need for your business to bring the processing in-house – instead, everything is handled through the provider. Embedded payments let you skip the added steps, instead providing a single, clickable button on your app or website. The customer chooses the payment method of their choice, such as Klarna or PayPal, and clicks the embedded link to finish the transaction. Not only does this deepen the software provider’s relationships with these customers, it helps them offer a better experience.
Customers are more likely to make on-the-spot decisions, which means fewer abandoned carts and higher conversion rates. For example, some of our ISV clients prefer to work as referral partners where they integrate with our payment gateway and refer merchants to set up accounts within our platform. On the other end of the spectrum, we help ISVs become full payment facilitators https://globalcloudteam.com/ where they take on the underwriting risk, compliance funding, and so on. When we look at the applications of embedded payments, it’s easy to see the benefits. Experts anticipate that embedded payments will be valued at over $138 billion by 2026, with the majority of growth happening in Europe. Increasingly, banks and traditional lenders are offering more of these solutions.
The Future Of Embedded Payments: What The Consumer-Centric Approach Means For Banks And Businesses
Having a certain share of nonbanked customers unconditionally processed through a real-time credit decisioning engine will challenge most banks’ tolerance for risk. Banks and regulators will have to get comfortable with platforms and enablers making credit decisions that may affect traditional balance sheets, based on real-time and contextual data held outside of the bank. In the US, B2B payments accounted for $27.5 trillion in transaction value in 2021, with accounts payable and accounts receivable (AP/AR) services representing around 90% of the value. B2B embedded payments have not penetrated as deeply as consumer embedded payments, in part because of a heavy reliance on checks and ACH payments relative to other payment methods, such as eCheck and virtual cards. Consumer payments account for more than 60% of all embedded finance transactions. In 2021, US customers spent $1.7 trillion via embedded payments, generating $12 billion in net revenue, based on an aggregate take rate of around 75 basis points .
By leveraging different embedded financing solutions, businesses can drive more sales regardless of size and niche. With embedded insurance, it’s no longer necessary to meet with an insurance agent to get coverage for an upcoming trip or a new car purchase. Some companies have embedded the insurance application process into the checkout experience.
Embedded Payments: The Premium Way for Software Platforms to Offer Payments
It wasn’t until eBay started working with PayPal that the site started enabling online payments. Providing a faster, smoother checkout experience with increased rewards helps bring this loyalty back up to previous levels. Let’s say that you’re on your lunch break and browsing for a new pair of sneakers. After comparing several brands, models, and sizing charts, you finally come upon the perfect pair. You head to the checkout – only to be confronted with a bunch of fields to fill out for your chosen payment method.
The embedded payments definition can also be applied to a wider banking services context. For example, online marketplaces and retailers bring banking services into their customer rewards programs. A department store might link its own rewards app to its store credit card.
It allows them to retain the payment processing fees as their own revenue, rather than handing it over to a third party. In many cases, this recurring revenue stream leads to investor interest and higher valuations. Independent Software Vendors , Software as a Service , and platforms everywhere are tapping into consumer demand in unexpected ways that require advanced payment solutions. Finding a partner that can handle end-to-end capability, this is what will take you from a complicated environment in which you’re balancing multiple demands to a more streamlined and balanced world. A partner that handles all your payment and processing services with the benefits of digital technology without the complexity is crucial.
Platforms have the chance to maximize retention and unlock new revenue streams for relatively low costs. Those that own distribution will be able to offer unprecedented convenience to end users, sparking large new revenue streams. We estimate that PoS enablers today take a healthy 9% to 11% of the credit value. This is still significant, especially when compared with the transaction returns of BNPL, but PoS has higher servicing costs as a consequence of the business model. Below, we look at some different kinds of embedded finance, with a few practical examples to help explain further. There’s a lot to cover, so in this first blog in our series on the topic, we take a look at how and why embedded finance is a game-changer.
Frictionless checkout with invisible payments
A banking as a service provider can connect fintechs with the right partners, providing an API interface for integration. The most important qualities to look for in a BaaS provider are transparency and expertise. Seek a provider with deep finance industry connections, and that will allow you to contact your bank partner directly. In sum, Starbucks has created an entire closed-loop ecosystem of embedded services that Best Upcoming Embedded Payment Trends draw the customer deeper into the brand experience. Effectively creating its own currency is possible because Starbucks customers are habitual purchasers of their products and exhibit high levels of brand loyalty. By creating seamless user experiences that integrate multiple touchpoints, merchants can increase engagement with their unique services, which in turn boosts average order value and customer loyalty.
88% percent of companies that implement embedded finance report increased engagement, and 85% say that it helps them acquire new customers. It’s obvious that fintechs aren’t the only ones looking for access to financial services anymore—however, the technology has historically been inaccessible, even between leading financial institutions themselves. The IDC report states that 73% of financial institutions around the world have technology infrastructures for payments that are ill-equipped to handle payments for 2021 and beyond. Having spent the last 20 years immersed in the world of financial and payables processes, my career has almost come full circle.
How businesses can leverage embedded finance to streamline access to financial services
Fortunately, new technology allows you to incorporate your payments into the loan application process, ensuring borrowers get the seamless shopping experience they are looking for. According to Finaria, expect the global digital payments industry to grow by 40% in the next two years. Recent global events have propelled embedded payment infrastructure to the forefront. Consumers today expect a simple and easy experience in everything they do. This includes paying, payment methods have to keep pace with the rest of their digital life, or they will look somewhere else. Case in point, requiring a customer to “leave” the lending process to verify information or having them step through a time-consuming paper-based Know Your Customer process to apply for a loan creates friction.
- In sum, the merchants who see themselves as enablers of a wide spectrum of digital services are going to be the winners of this new era of embedded experiences.
- This is where the fusion of embedded payments and deferred payment plans such as Buy Now, Pay Later is a powerful value proposition for customers.
- The embedded functionality allows businesses/merchants to accept online payments and reconcile transactions directly within their software rather than having to log into a separate third-party site or physical terminal.
- Tom is a fintech industry writer who creates whitepapers and articles for Plaid.
- After comparing several brands, models, and sizing charts, you finally come upon the perfect pair.
- Thanks to powerful APIs, paired with intuitive front-end, embedded finance makes the financing services offered at the point-of-service seamless.
Studies show customers spend a little extra at checkout through BNPL, and platforms benefit through increased conversion with bigger basket sizes. Platforms may in time begin to renege on the current model, in which BNPL payers charge merchants and assume the risk of collection. Epos Now, Lightspeed, SKIDATA, and Zenoti explain how embedded payments can help you manage your own funding flows, deliver speedy payouts, and earn revenue on each transaction. Increase the transparency and visibility of transactions with the transaction data from all parties in the lending process. This means better visibility into cash flow, all the way down to the accounting level.
By tapping into the payment charged by merchants, lenders can add a small but significant share of stable revenue to their books. Additionally, they enable lenders to charge processing fees and enter into revenue-sharing agreements. Further to this, it provides the ability for lenders to deliver their services more cost-effectively, adding more to the bottom line.
Banking as a Service (BaaS)
With embedded payments, consumers don’t even need to be aware of the transaction if they don’t want to be. This makes shoppers much less inhibited when making low-cost purchases that don’t put a major dent in their account balance. The Starbucks rewards app offers a great example of how embedding payment processing, loyalty rewards, and even consumer lending within one interface leads to enhanced consumer participation.
Embedded Payments, BNPL and POS Lending
Retailers, marketplaces and other non-financial services companies have started to offer traditional banking services within their customer loyalty apps or websites in a strategy known as embedded banking. For example, Walgreens now offers a credit card linked to the myWalgreens reward app. Customers use it just like any credit card, but they also gain access to members-only Walgreens sales and cash rewards and more streamlined checkouts. Together, extra rewards and the ease of the embedding banking experience can increase customer loyalty and buying to levels you couldn’t achieve with rewards programs alone. As of 2021, US consumers and businesses spent $3.60 trillion on their debit cards and $3.55 trillion on their credit cards. Between 3% and 4% of these transactions for debit cards, and less than 1% for credit cards, were conducted using embedded banking offerings.
What Are Embedded Payments?
This allows them to connect with other data sources, process information more quickly and offer a much better user experience to customers. The B2B customer experience has recently begun to see a similar level of attention as as the consumer experience. Providing frictionless B2B process is an opportunity for businesses not only to grow revenue but to differentiate themselves in the market. The primary benefit of embedded finance is that is makes customer spending easier and therefore promotes increased sales and revenue growth. This is very convenient for its customers who would otherwise have to pay relatively high rates from traditional insurance providers.