Settling the score on embedded finance: Dispelling misconceptions to score big for your business

Settling the score on embedded finance: Dispelling misconceptions to score big for your business

By Ivo Gueorguiev, co-founder of e-money institution Paynetics

The borders around banks are blurring. Payment services are no longer the prerogative of banks and businesses of every description in cooperation with licensed financial institutions, are starting to – quite literally – cash in. Though forms of embedded finance have previously existed in industries such as car sales (in auto loans) and retail (store credit cards), this new era is different. Thanks to the continual, rapid acceleration of digital technology and moves such as open banking, Uber can now offer its drivers debit cards, Apple can directly help consumers split up purchases and in September Xbox announced its new Mastercard in partnership with Barclays.

The integration of financial services, such as lending, payment processing and insurance, offers huge opportunities for every sector. Yet a lack of clarity still abounds. A recent study by our partner Weavr surveying UK banking and finance executives found that 99% identified at least one area of uncertainty about embedded finance strategy and how to execute it.

For most businesses, it’s still early days for product and partnership development and, beyond that, go-to-market activity. But as embedded finance expands and solutions mature, businesses who want to get ahead must shift their attitude from a back-footed stance of ‘wait and see’ to an active, front-footed approach. It’s time to settle the score once and for all and realise the full potential of embedded finance’s power.

The benefits of 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.

Navigating regulation and 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.

The power of partnerships

As discussed, choosing the right embedded finance partner is critical to success. An obvious choice would be working with a bank – such as Xbox teaming up with Barclays – but this isn’t the only option on the table. There are a range of other partners for merchants to choose from and whose services may suit them better. However, they need to make sure these partners can satisfy a range of important criteria.

We’ve seen how compliance is critical – it’s crucial any embedded finance partners have in-depth regulatory knowledge, as well as policies and procedures that are up to the highest standards. But a partner also needs to have technological and operational ability to scale with a business’ growth, so increased volumes don’t generate glitches and your development is supported, not hampered. Ease of integration and sophistication should be another deciding factor: financial solutions should fit seamlessly with merchants’ existing processes to avoid damaging disruption and confusion, and partners should be proactively adapting services to reflect market changes.

Additionally, it’s ideal if a partner can offer a complete set of payment features so businesses don’t have to bounce between multiple parties to get the solutions they need. A quick tip? Look for partners with dual-licensing, SWIFT and SEPA membership and membership of Visa and Mastercard for both card issuing and acquiring.

Embedded finance is a rapidly growing, exciting field and the advantages it offers aren’t just for the Apples, Ubers and Xboxes of the world. Businesses of every size have the opportunity to offer enhanced customer experiences, expand their horizons and hone their operations through integrated payment solutions. Don’t let old myths stand in the way of a new reality.