Embedded finance: A revolution of convenienceand value creation
By Ivo Gueorguiev, co-founder, Paynetics
Traditional banking boundaries are fading away. The delivery of payment services are no longer exclusive to financial institutions. Businesses across various sectors are teaming up with licensed payment service providers to tap into a new way of delivering maximum value and convenience to customers. Welcome to embedded finance.
While embedded finance has been present in retail for a few years, the rapid growth of technology has paved the way for unconventional partnerships. Take Uber offering debit cards to drivers and Apple aiding consumers in splitting purchases, or Xbox introducing a new Mastercard with Barclays in September – a new dawn of payments is upon us.
The integration of financial services, including lending, payment processing, and insurance, offers significant opportunities across sectors, yet uncertainty persists. A recent survey of UK banking and finance executives by our partner Weavr revealed that 99% identified uncertainties in executing embedded finance strategies. While many businesses are still in the early stages of product and partnership development, shifting from a ‘wait and see’ approach to embedded finance to an active, front-footed one is crucial.
Unlocking advantages through embedded finance
Embedded finance may sound complex but its core meaning is simple – it’s the integration of financial services into non-financial platforms. There are big benefits for consumers (a smoother, simpler customer journey, better financial options such as BNPL) and there are huge opportunities for banks and merchants too. Banks gain access to new customers and merchants can not only entice consumers with a superior, frictionless experience but help businesses improve their own access to financial products and services to simplify financial management, reduce costs and boost efficiency.
Embedded finance can also support with invoice automation, account reconciliation and expense tracking, to save businesses precious time and crack down on damaging errors. Then there’s the data that can be generated and harnessed through embedded finance. These new payment solutions can provide critical customer insights to help identify trends and mould business strategy, as well as help with internal forecasting, budget creation and goal tracking. Embedded finance offers a rich source of data that helps businesses make smarter, informed decisions in a volatile economic climate.
Such business opportunities come with an eye-watering valuation: EY estimates that the market size of global embedded finance across the entire value chain will grow from $264 billion in 2021 to $606 billion in 2025, more than doubling across 4 years. But these big numbers aren’t just for the big players. Businesses of every size – from SMEs through to large corporations – have the ability to incorporate embedded finance and start reaping the rewards.
Guiding through regulatory compliance
One of the barriers to enjoying the benefits of embedded finance is often concern around regulation and compliance. While treating these areas seriously is paramount, it would be a mistake to let fears around financial procedure get in the way of progress.
Working with an established embedded finance partner can take away many of these compliance worries, as good providers will ensure they have strict systems in place to maintain compliance and abide by the latest regulations. Regular internal audits are also crucial to check the continued strength of these and should cover Know Your Customer and Know Your Business Checks, transaction monitoring systems, Anti-Money Laundering compliance systems and the handling and storage of personal data. But external audits should be conducted too – such as a Strong Customer Authentication audit to fulfil requirements under the EU’s PSD2 directive
Another important part of maintaining compliance revolves around properly securing software. One way to shore up security involves running regular external penetration tests, to spot and patch weaknesses before they can be exploited by others. Then there’s the tactic of employing tokenisation modules (so only tokens and not personally identifiable information are used in a transaction) and incorporating Software Development Kits to streamline API integration and reduce the risk of pitfalls that come with manual handling.
Maximising strategic partnerships
As discussed, choosing the right embedded finance partner is crucial for success. While collaborating with a bank, as seen with Xbox and Barclays, is an option, merchants have various partners to consider – each with services that may better suit their needs.
An ideal partner should offer a complete set of payment features, eliminating the need to engage with multiple parties. Compliance remains essential and beyond this, partners must exhibit technological and operational capabilities that can seamlessly scale. Simple integration and sophisticated security should be decisive factors.
Embedded finance, a rapidly expanding and exciting domain, extends its benefits beyond industry giants. Businesses of all sizes can leverage the opportunity to enhance customer experiences and redefine value through integrated payment solutions.
