The rise of banking as a service has led observers like A16z general partner Angela Strange to comment that in the not-too-distant future, “every company will be a fintech company.”
Through the decades, consumer brands have worked closely with banks like Capital One, Bank of America, Citi, and Barclays to offer credit or private label cards. Similarly, businesses used traditional banks to issue corporate cards for their employees or business expenses.
However, despite bearing the high cost of building card issuing infrastructure and spending enormous amounts of money keeping pace with regulations, banks generally didn’t stretch their card issuing platforms beyond traditional use cases: cards with low interest rates, cashback rewards or mileage programs, or prepaid debit cards for high risk cardholders. And, driven by the nature of these use cases, they also didn’t need to build developer-friendly APIs.
Enter the 21st century. With the digitalization of consumer and business applications, having APIs and opening up the payment flow have become imperative for modern card issuing. Companies are looking to customize their payment experiences and authorize, approve, or decline transactions at the point of sale.
Take DoorDash, for example. To enable their drivers to pay for individual orders while reducing the risk of fraud, DoorDash needed tight controls around each transaction. With transactions happening every second, each with a different amount and at a different restaurant, a traditional payment card would only be able to verify the identity of the driver (albeit only via PIN or signature).
Embedded finance creates a seamless experience.
A modern card issuing platform, on the other hand, could customize a payment card to authorize each transaction based on exact spend controls such as the merchant ID, the transaction amount, the geolocation of the driver, and even the digital identity of the cardholder by using facial recognition techniques or biometrics.
In business applications, accounts payable automation applications are embedding finance in their workflow to pay invoices and bills by using virtual cards. This creates a seamless experience, where the user of the software platform doesn’t have to work directly with the card, while the card provides an instant and robust way of making payments. These seamless and embedded payments can be further customized to only disburse funds after certain criteria are met, such as invoice date, amount, or only for certain payment terms such as installments.
To create a better user experience for customers and build a competitive advantage, many consumer and business application providers are shifting to modern platforms with open API architectures. These platforms open up the payment flow and allow applications to authorize transactions in real time and based on criteria and data unique to each application.
The ability to embed finance and define banking via modular and programmable interfaces has led to numerous innovations across payment industries such as Buy Now, Pay Later financing, expense cards with built-in controls, personalized rewards that can change dynamically, and more. And while paying with a bank-issued card will continue to be one way of payment, we expect that configuring payments within customer contexts and embedding finance will dominate the future of payments.
Learn more about modern card issuing platforms and how they have enabled embedded finance here.