What is embedded finance? What businesses need to know to capitalize on this new trend.

Any company — not just fintechs — can now offer financial services and embedded banking products on their platform.
Headshot of Mark Vermeersch
Mark Vermeersch
Vice President of Strategy & Business Development
,
December 7, 2021
Embedded Finance mobile app and services

If you’ve ever opted to pay for an item in installments online, added insurance to a purchase at checkout, or accessed your bank account from within your accounting software, then you’ve interacted with embedded finance. These types of conveniences are becoming table stakes for customer experience. With the right tools, any company — not just those already involved with finance — can offer them. 

Regardless of a company’s core offering, there are new options that will allow them to incorporate financial services into their existing product. That can be as simple as building their own payment option, or it could be a bigger investment like opening a neobank to pay employees or contractors. 

Let’s dig into this ​​tech and finance trend. We’ll explore how embedded finance works and what it could mean for your business. We’ll also look at embedded banking, a major subcategory of embedded finance that unleashes the power of banking tools and bank account access in non-financial services. Your banking as a service (BaaS) provider can help you make all these features available to your customers.

What is embedded finance?

Embedded finance generally refers to the inclusion or “embedding” of financial or banking tools in non-fintech and non-bank applications. For example, when a company like Target or Starbucks adds a “wallet” to its app that allows the user to add their card information for purchases, that is considered embedded finance. When a non-finance company offers its own payment option, such as its own branded debit or credit card, that is also embedded finance. It’s the wave of the future, according to Brett King, fintech influencer and founder of Moven, a neobank based in New York.

“The companies that win will be those that make it just as easy as possible for people or other players to work with them. And in that respect, the ability to make a payment, the ability to collect payments, the ability to access credit, all of that needs to be as frictionless as possible in the 21st century,” King says.

Embedded finance is a subcategory of the fintech industry, which refers to the intersection of finance and technology. Analyst firm Juniper Research estimates the embedded finance market will be worth $138 billion by 2026. Some analysts like Bain Capital partner Matthew Harris predict the market will be worth trillions of dollars by 2030.

Like all forms of fintech, embedded finance relies on APIs to work. An API, or application programming interface, is software that acts as an intermediary between other pieces of software. When it comes to embedded finance, APIs help connect businesses to banks and fintechs so that they can embed financial offerings to enhance or expand their core product. 

Examples of embedded finance

Embedded finance tools are varied, just like the larger fintech market. Here are some examples of common and emerging examples. 

  • Embedded payments: When you buy something from a business or retailer’s app, you are using embedded payments. These features are especially common in consumer apps. For example, when you ride in an Uber, you pay the driver via an embedded payments feature in the Uber app. If Uber did not use embedded payments, you might instead pay your driver in cash or by using a separate, non-embedded payment app like Venmo. Embedded payments are also extremely common among retailers. Any modern e-commerce site will allow you to pay for your items on their website or in their app using an embedded feature. 
  • Closed-loop payments: Closed-loop payments are a subset of embedded payments finance and services. In a closed-loop system, you store funds with the retailer or use a retailer-branded card. For example, the Starbucks app allows users to transfer cash to the app. When transferred, the funds can only be used for purchases from Starbucks. Starbucks incentivizes use of its closed-loop payments system by offering rewards. Brands can offer rewards in closed-loop systems because they are generating revenue through their embedded finance offering, which helps to offset the processing costs.
  • Embedded banking: The phrase “embedded banking” is sometimes used interchangeably with “embedded finance.” In truth, trusted finance apps and features are generally integrated on some level with a bank. But embedded banking can refer more specifically to situations where an app embeds bank accounts in their offering, without themselves becoming a neobank. Examples are Treasury Prime partners Bench and ZenBusiness, which works with bank affiliate LendingClub Bank to offer bank accounts at a discount to customers. 
  • Embedded lending: Embedded lenders like Affirm and Afterpay allow buyers to pay for purchases in installments. These companies partner with retailers, allowing those companies to offer loans or installment plans at checkout. 
  • Embedded insurance: One newer use for embedded finance is embedded insurance, where companies offer their own insurance policy for their products. An example is Tesla, which offers a competitive insurance policy for its car buyers. 

What embedded finance means for fintechs

Embedded finance offers different opportunities for different entities. For fintechs, it’s another way to sell your service. Rather than just operating as your own app, you can embed your tool in other relevant places such as e-commerce checkouts. 

As with other fintech business models, the best way to build an embedded fintech product is to work with a reputable, chartered bank and a trusted banking as a service (BaaS) provider that allows you to have a direct relationship with your bank. A close bank relationship opens doors for business growth, helps prevent problems, and makes it easier to overcome any challenges in building your company. The larger and more complex your fintech becomes, the greater your need for direct communication. 

What embedded finance means for non-fintech businesses

If you’re not a fintech, you may want to consider embedding fintech or financial capabilities into your app or service. If you offer services to other businesses, affiliating with a bank can help you offer them attractive perks such as discounted checking, or accounting based on their cash flow as reflected in their business bank accounts. If you develop your own embedded payments system or create a wallet for customers to use in your app, you can effectively own all sides of the transaction. That opens up opportunities to earn interchange revenue. 

To build your own payments system or wallet, or to affiliate with a bank, you will need to work with a BaaS or API banking provider to help you build out your service. The right BaaS provider will be well-integrated with systems of forward-thinking chartered banks that can serve as partners as you grow this new part of your business. While some see embedded finance as a way to take the bank out of the equation, the truth is that, to offer a strong feature or service that your customers can trust, you need to work with a bank that understands compliance needs unique to your company and can extend FDIC insurance to any accounts you may open. 

What embedded finance means for banks

Embedded finance, like other forms of fintech, is a great way for banks to reach new markets by working with digital-first, forward-looking companies. Banks are great at banking. They’re great at navigating all the complicated rules, regulations, and risks that come with lending and holding money. But the vast majority of banks are working with older software and systems, and they are still catching up to new technology. Most banks lack the capacity to build all the different niche use cases fintechs have created. 

Partnering with fintechs enables you to benefit from their innovations without having to invest in building new tools. You also have the option of affiliating with companies that may not want to build on your system, but that would benefit from offering accounts with your bank to their customers. 

The key thing to look for in your partners is transparency. Work with a transparent BaaS provider that will introduce you directly to your potential fintech partners, and work with fintechs that will communicate directly with you about what they are building. You still own the risks of that fintech’s operations. 

Where banking as a service (BaaS) comes in

Banking as a Service (BaaS) provides the tools that makes embedded finance possible. BaaS refers to software services that enable banks to provide digital services to customers or integrate with fintechs and other digital services. The best BaaS providers are transparent and, have deep relationships with banks and fintechs alike, and use nimble and modern API banking technology. 

Where to start with embedded finance

If you sell things, there’s a chance embedded finance can enhance your offerings. Your reasons for engaging with embedded finance will vary depending on your business model. Here are some questions that might help get you thinking:

  • Could my customers benefit from access to new bank accounts?
  • Would consumers be interested in earning rewards for their purchases from us?
  • How much interchange revenue could my business earn if we owned the whole transaction process?
  • Would consumers be more likely to buy from my business if they could pay in installments?
  • Would features from my fintech app be helpful if embedded in the apps and online stores of other companies?
  • Do customers need to purchase additional insurance in order to safely use my product or service? Would it be worthwhile for my business to play a part in selling those policies?

Treasury Prime has helped clients like Tuvoli and Wagestream achieve successful results by embedding banking services in their products. We are available to answer your questions about whether embedded finance may also work for you. 

Developers interested in using Treasury Prime’s tools can familiarize themselves with our offerings by visiting our Sandbox. To learn more about how Treasury Prime can help your bank or fintech grow through collaboration, get in touch with our team.


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