Embedded finance: The new frontier for financial sector leadership

Offering opportunities and creating challenges for incumbents and new entrants alike, one trend that is disrupting banking and payments in a big way is embedded finance. Put simply, embedded finance is the incorporation of financial functions into non-financial settings. For example, this could be a Buy Now, Pay Later lending proposition on a shopping platform like Amazon, or a carmaker providing insurance deals to customers when they purchase a new automobile.

Dr. Lee Schlenker, Professor of Business Analytics and Digital Transformation and a principal consultant of the Business Analytics Institute, explains his view that the benefits of embedded finance are dictated by where a business sits in the market.

“For retail organizations, Embedded Finance opens up a range of sales possibilities and economic benefits tied to each commercial transaction. For Fintech operators, Embedded Finance offers a much larger market to grow partnerships and ecosystems across various industries and verticals. For traditional retail banks, Embedded Finance provides a strategic opportunity to dis-intermediate retail industries in monetizing their knowledge of consumer spending patterns,” he argues. Ultimately, according to Dr. Schlenker, the “transactional data produced by embedded banking provides unique insights into the reality of each customer journey” across the entire ecosystem.

From consumer to commercial, how embedded finance stands to benefit all business sectors

A key outcome of embedded finance is the removal of the need to leave a merchant platform to complete a payment. This produces a range of benefits to both parties in the transaction. From the customer’s perspective, embedded finance delivers a fast, simple, and seamless purchasing experience. For the business, improved customer convenience leads to enhanced loyalty and repeat purchases.

Additionally, embedded finance functionality is as useful in consumer settings as it is in commercial ones. From a business-to-business (B2B) perspective, DoorDash is embracing embedded functionality by furnishing its drivers with a payment card on which to receive their pay. Another innovator in this space is Square, which has developed a range of payments products to support small and medium-sized businesses that need to accept payments for products and services provided. Meanwhile, global commerce company Shopify provides loans and bank accounts to its users. By owning part of their users’ banking experiences through embedded finance, these brands are deepening their knowledge of customer communities to provide a more tailored, seamless relationship.

In the business-to-consumer (B2C) space, embedded finance has taken off in a big way in the hospitality sector, among others. Perhaps accelerated by physical distancing rules imposed during the coronavirus pandemic, many restaurants are now encouraging customers to use their smartphones to scan a QR code at their table. This code can take diners to an online food and drinks menu, allowing them to complete an order and payment within a single platform. Customers are often also encouraged to download the restaurant’s app, in order to make the repeat visits even more seamless. Coffee shop chain Starbucks is one example here, with its app allocating loyalty points at each purchase. Common to all of these experiences is the absence of a need to use cash, a physical card, or to tap in bank account details to make or receive payments.

Additionally, embedded finance is proving to be an enabling concept in the world of cryptocurrency, making digital currencies accessible to more people. Cryptocurrency platform Coinbase is a good example of an innovator that is providing the tools to trade and share cryptocurrencies. One way the business is doing this is through its Wallet app extension, which customers can plug into their web browser to enable a seamless crypto transaction experience from a range of devices.

The role of traditional banks in this brave new world

Incumbent banks, which have faced unprecedented competition in the financial sector on the back of the fintech revolution, have an opportunity through embedded finance to define a new, potentially more impactful role for themselves. Capitalizing on customer trust and their banking licenses, these long-established financial institutions could be important partners to Banking as a Service (BaaS) providers, calling on their dependable infrastructure to underpin embedded payment propositions.

This will become more obvious to banks as they bring ever more digitization into their core platforms and collaborate with a wider array of technology specialists in the financial ecosystem — driven by open banking rules. The benefit to banks is access to more customers, as well as data and insights that can be used to inform relevant products and services.

Meanwhile, tech companies stand to benefit from partnerships with banks, by removing the need to apply for a banking license and letting banks carry the regulatory compliance burden. Google Plex is one example of this: The service will incorporate a checking account into the Google Pay wallet through partnerships between Google and 11 banking or credit union entities. This means Google Pay users will be invited to set up an account with one of the banking providers, placing banks in a new commercial digital space curated by the Silicon Valley tech giant.

Going behind the scenes to deliver seamless experiences

Marqeta may have a crucial role to play in embedded finance too. Its modern card issuing and payment processing platform can be a core component in the embedded finance ecosystem. Marqeta is able to assist both banks and fintechs to power their embedded propositions with speed, flexibility, and control, using fully-documented open APIs to connect payments and digital banking functionality to partner sites, whether for consumer goods, expense reimbursements, or salary deposits onto virtual cards.

And that is one of the most exciting things about embedded finance: It doesn’t matter what vertical you operate in, it provides an opportunity for better customer experiences and solid business growth.

[* The views and opinions of third parties summarized in this blog post do not necessarily reflect the views or opinions of Marqeta.]