What Is Embedded Finance & Why Should CFOs Care?

What is embedded finance?

Simply put, embedded finance describes the delivery of third-party banking or financial services—such as loans, installment plans, merchant cards, or one-touch payment options—directly to customers through a non-financial company’s own sales or payment system. As such, buyers can take advantage of payment options or other conveniences at the point of sale rather than needing to first visit a bank branch or use a separate application or web service.

For example, for large purchases (e.g., car, high-end electronics) both e-commerce sites and brick and mortar stores commonly offer corresponding insurance plans. And rather than building their own insurance department and management platform from scratch, these businesses instead seamlessly integrate insurance products from an outside provider within their own checkout processes.

Why should you care about embedded finance?

Embedded financial services are becoming increasingly commonplace, with 90% of small firms even identifying them as “critical to their operations” in a study published by PYMNTS.com. These capabilities offer a significant competitive advantage, delivering smoother payments while providing individual consumers with more choices to create a personalized buying experience. 

In fact, respondents of all sizes in that same study indicated that embedded finance was the second-most important consideration behind data analytics when evaluating investment in new software or financial systems. This makes sense since those businesses that were leveraging embedded finance reported a 25% – 50% increase in sales after implementation.

Embedded finance vs. banking-as-a-service (BaaS)

It’s rather easy to confuse these two concepts since they are rather closely connected. But while embedded finance describes a specific banking product (e.g., a loan) or service that a seller may provide to its customers, BaaS describes the methodology or infrastructure that is used by the bank or fintech to make this happen.

More simply: embedded finance is the part of the financial offering that the end customer sees, while BaaS is what they don’t.

Examples of embedded finance

Given the variety of products and services offered by banks, financial institutions, fintechs, and insurance companies, creating an exhaustive list of embedded finance examples would be incredibly complicated. However, most—if not all of these capabilities fall into one of the following categories:

Embedded banking

For embedded banking, envision providing your customers with not only your typical products or services but also access to any financial product that they would traditionally turn to a bank to receive (e.g., checking account, credit card). Perhaps the most prevalent examples are merchant-branded credit cards with accompanying loyalty rewards, such as those offered by Apple or Amazon. With these cards, consumers can pay for purchases within the corresponding stores and beyond, but neither Apple nor Amazon need to maintain these credit services, instead relying on Goldman Sachs and JP Morgan Chase, respectively.

Embedded lending

Businesses don’t always have sufficient cash flow to make a necessary purchase, traditionally leaving them to seek outside financing through either a bank loan or a credit card. However, in recent years, buy now, pay later (BNPL) offerings have become commonplace. So much so, that many sellers now surface BNPL services from fintechs, like Klarna or Afterpay within their checkout processes.

Embedded payments

Embedded payments exist to create a frictionless buying experience that requires as little effort from the customer as possible. Again, Apple and Amazon offer two great examples. Using Apple Pay, consumers can load an existing credit card onto their Apple iPhone, thereby eliminating the need to carry the physical card to complete a purchase. And with Amazon 1-Click, shoppers can load a credit card onto their account and then authorize instant payments for purchases, replacing more traditional, multi-step checkout processes with a single click.

Embedded investing

Traditionally, individuals would need to possess their own investment account or work closely with a brokerage to participate in the stock market. But embedded investing democratizes this access, allowing financial platforms, like PayPal or Acorns, to bundle the ability to buy, sell, or trade in investment and crypto markets alongside their more well-known payment services.

Embedded insurance

One common example you’ve likely seen is the ability to purchase trip insurance through online travel agencies, like Expedia. Again, rather than maintaining its own insurance business, Expedia instead coordinates through a network of partners like AIG and battleface insurance services to offer this coverage during checkout.

Benefits of embedded finance for providers and consumers

Whatever advantages you experience from embracing an embedded finance strategy will depend heavily on which partners you choose to work with. But commonly, it should let you:

• Simplify checkout: Rather than needing to coordinate payments through middle parties or multiple websites, customers can conduct their transactions and all other functions from a single interface, saving them time and effort.
• Boost sales conversion: When customers experience a frictionless buying experience, they are much less likely to abandon their cart, meaning greater revenue for your business.
• Enhance security: Given that these banks, fintechs, and related companies all operate within highly regulated industries, you can benefit from their mandatory anti-fraud and data security measures without any additional effort on your part.
• Establish competitive advantages: When you can offer consumers more than just your products or services—such as access to larger pools of operating capital—you place your business in a much more favorable position within the market.
• Create new revenue streams: Banks and other financial businesses often struggle to develop new lines of business, but by coordinating their services through merchants and other third parties, they can open new points of distribution.

Risks and challenges of embedded finance

Perhaps the largest concern for banks and vendors participating in embedded finance solutions is tied to the uncertainty of future regulations. Given that the market is still emerging, lawmakers have not caught up to the technology, and when they do, it’s unclear what security, privacy, or other burdens they may impose on all related parties. This lack of certainty creates a reluctance to invest too heavily in these opportunities.

At the same time, while embedded finance services offer a great deal of convenience to the end customer, sellers and financial institutions need to engage in a great deal of collaboration and invest in integration tools to keep these multi-business operations running smoothly. In addition, with some processes in the workflow being controlled by another party, participating businesses may also struggle to access the data necessary to react to process bottlenecks, develop improvements, or even build competent risk profiles.

Finally, from the perspective of the customer, both the product or service being purchased and the associated embedded financial services will be viewed as a unified solution. So, if they run into a problem or have a negative experience, they’ll likely blame all parties involved rather than just the one at fault.

Market drivers and trends for embedded finance

With application programming interfaces (APIs) and codeless software development kits (SDKs) becoming increasingly more available, you can expect to see a steady increase in the number of embedded finance solutions on the market. As such, businesses will need to be much more intentional and aggressive when choosing their financial partners as their offerings become bundled into larger financial packages and face broader competition.

Perhaps one of the most influential—and difficult to prepare for—embedded finance trends will be the upcoming yet unknown regulations that we’ve already mentioned. And given this ambiguity, organizations would be wise to prioritize flexibility rather than locking into rigid partnerships, infrastructures, or contracts.

Embrace embedded finance with Invoiced by Flywire

Ultimately, embedded finance offers a tremendous opportunity to support a broader set of payment types and terms, providing your business with a distinct advantage in the marketplace. And our Accounts Receivable Automation software can fit seamlessly into whatever payment experience you’re looking to create. 

Beyond our automated invoicing workflows, we offer broad integration support, open API access, and customizable, self-service payment portals that let your customers control how and when they pay. At the same time, our solution leverages the global payment capabilities of Flywire software to support transactions, taxes, and fees in 140 currencies.

So if you’d like to see how simple collecting and processing payments from your customers can be, schedule a demo today.