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Solutions Everywhere: The High Time of Embedded Finance

In a world that demands easier forms of payment, embedded finance is an excellent opportunity for companies to make the final moment of truth less burdensome for customers.

Embedded finance is an inescapable need in today’s marketplace. Now more than ever, companies need to invest in solutions that provide frictionless options for their customers at the point of purchase.

When the customer has chosen his or her products and enters the payment phase, they enter what A. G. Leafley, former CEO of Procter & Gamble, called “the moment of truth.” This is when companies do or die. Failure to provide seamless payment options may entail failure to provide a convenient experience for your customers. They may walk away, leaving you holding the bag.

But what exactly is embedded finance, and why is it so important to provide these seamless payment options? This is what we will address today in this article.

What does embedded finance stand for?

In a nutshell, we can define embedded finance like this:

Embedded finance is the integration of financial services into non-financial solutions. This helps companies to create easier-to-use tools for their clients, such as one-click payments, store-owned credit cards, and native payment programs or insurance plans.

Another way to look at embedded finance is the “bankization” of non-banking or non-financial institutions. At first glance, this may sound like more work for companies since they now have to provide in-house financial services that would otherwise be the responsibility of third-party financial service providers.

There’s a saying that goes like this: “Every company will eventually become a fintech.” What that means is that customers—and the future of the industry—expect financial solutions from your company.

Embedding finance to nurture customers

Let’s imagine that an online retailer wants to smoothie out its payment process. It wants to go beyond saddling Apple Pay or Google Pay to its platform (which are underused, according to a PYMNTS report). How can it go about that? How would you go about that, if this was your company?

The solution is to provide payment strategies that are adequate to the realities of the average American customer. That reality at the moment is one of scarcity, not of abundance.

Though consumer spending is at full throttle, enabling the U.S. GDP to spike at an annualized rate of 5% last quarter (more than double the quarter before that), Americans’ domestic finances are in dire straits.

The solution is to provide payment strategies that are adequate to the realities of the average American customer. That reality at the moment is one of scarcity, not of abundance.

Though consumer spending is at full throttle, enabling the U.S. GDP to spike at an annualized rate of 5% last quarter (more than double the quarter before that), Americans’ domestic finances are in dire straits. 

They’re pulling funds from 401(k)s like there’s no tomorrow. Credit card bills are at an all-time high—as are defaults. A CNBC story shows us that the credit card balance in the U.S. today is at a historically high $1.08 trillion. On top of that, the housing market is a pain to most Americans: 41% of the average U.S. monthly income goes to paying the principal and interest payments on median-priced homes.

It’s understandable that, when strapped for capital, customers need more comprehension on the part of companies. When companies put the customer front and center in their priorities, they thrive.

Embedded Finance as a Means of Financial Health

The first thing companies should understand when preparing to include embedded finance in their financial strategy is that payment begins when the customer meets you. In a troublesome financial environment, companies have to strategize how to offer buying options for their customers while building a trusting relationship.

This is an essential element because, as Peter Diamandis and Steve Kotler say in their book The Future Is Faster Than You Think, in the post-blockchain financial environment, companies have been able to take hold of their financial relationship with their customers without the need of a reliable infrastructure to move money around.

Trust is built into the system”, they argue.

Because that’s the expectation the customer has regarding you, they may not know that embedded finance is needed at the moment. Still, the market movement indicates that’s what companies need to do.

Customers want financial products and services that are built into their daily activities. This reveals how critical customer-centric solutions, especially concerning financial needs, are. We can back this up with the latest statistics on real-time problem-solving and customer-centrism.

CX Index research says that 90% of business leaders believe that customer-centrism should be front and center in their preoccupations;
A Zendesk survey indicates that 80% of leaders plan to increase customer service budgets over 2024;
→ Real-time support increases brand loyalty in the view of 63% of the companies Tidio interviewed;
→ Also, according to Tidio, failing to address problems in real-time makes companies 2 times less trustworthy.

Embedded finance vs. Banking as a service

How can companies offer embedded finance solutions, taking into account customer expectations and market movements?

There are some extraordinary examples we can look at right now. It seems that most solutions at this time center themselves on embedded banking, which sometimes makes it look like embedded finance is the same as embedded banking or banking as a service (BaaS). But it isn’t.

Embedded finance provides financial ease for customers across all financial points. Whereas BaaS centers itself on providing banking services—loans, checking accounts, balances, insurance, etc.—through non-banking institutions. This means saying that BaaS is subordinated to embedded finance.

However, it’s understandable why companies have centered their efforts on BaaS when moving to embedded finance services. Many American adults are underbanked. That is, even though they have a bank account, they have no means of access to banking and financial services such as smart payment options, digital credit cards, digital banking, and other tools.

The following numbers are courtesy of FDIC.

22% of American adults (63 million) are either unbanked or underbanked
→ 27% of African Americans are underbanked
→ 4.5% of U.S. households are unbanked—that is, no one in the house has a checking or a savings account
→ 21.7% of unbanked households answered that they “don’t have enough money to meet minimum balance requirements”

Examples of Embedded Finance Products

A successful example of this is Lyft, the ride-sharing app. It offers a checking account and an associated debit card to its drivers. In this account, drivers can get paid right after each ride, without having to wait for a lump sum payment. To improve on their capital, the funds in their Lyft account can be used through their Lyft debit card, getting cash back after each use.

Brazilian taxi-hailing app 99Taxi uses a similar strategy with their drivers—though in their case, it’s a credit card they offer. They also offer their users a loaning option. The company loans up to BRL 2,040 at monthly interest rates ranging from 6 to 10%. In a country with scorching interest rates such as Brazil, this is an example of how non-legacy non-banking institutes can offer banking services to customers who otherwise wouldn’t have access to these products.

Next up, payments are among the chief drivers for embedded finance adoption. SmartPay Rewards is at the forefront among companies. It’s a gas station and convenience store app working as an Automated Clearing House (ACH) that offers discounts and rewards in exchange for using its payment tool. ACH payments have lower deduction fees than credit cards. On the other hand, the stations and convenience stores win by being charged less, and customers win due to discounts and rewards predicated on brand loyalty.

Another amazing advantage of embedded finance is opening up investing opportunities to underbanked customers. If a few years ago you had to open an account with a legacy institution like Morgan Stanley or JPMorgan Chase, now with companies like Venmo and Paypal,  you can invest in crypto—or even traditional securities—with enhanced options. An example outside the U.S. is fintech unicorn Nubank, a digital bank. Its savings option is actually an investment made through the bank in one of many government bonds.

The Future of Finance Is Embedded

As you’ve read in this article, embedded finance ultimately means creating new revenue streams by offering your own financial services. From now on, every solution that companies develop will, at least, consider—if not rely on—how to incorporate these services to drive a new, embedded revenue model from day one.

We are at the dawn of a new era, not only within the industry but in how companies make use of money to drive relationships and loyalty, getting closer to their customers. Putting them front and center while offering them options on what to do with their money and providing ease of use can be the difference between success and failure.

To learn more about how embedded finance can help your company develop new revenue alternatives, as well as other financial services trends, download our 2024 Financial Services Trends Report.