Embedded Finance: Why we are at an inflection point

A large majority of Americans own smartphones, and nearly two-thirds of those consumers make purchases using their devices. It’s clear that the U.S. consumer market of the future is going to center around embedded digital experiences, with financial functionality incorporated into commercial apps and websites.

In fact, that future is already here. Innovators have created seamless platform-based purchase functionality across a range of commerce settings that is prompting many consumers to leave physical wallets on the shelf. This is because the virtual equivalent is not only much more convenient, but also allows them to engage in real-time interactions with their finance providers, thanks to open API and webhook technology.

Indeed, modern consumers have been gently shepherded toward this simplified way of shopping by tech giants like Amazon and Apple, which have evolved their experiences in such a way that payment details are almost absent from the purchasing process. Alongside this, digital wallets such as Google Pay, Apple Pay, and Samsung Pay have improved contactless experiences in-store and have become ever-present across devices for online purchases. This has created an expectation among large swaths of the public that embedded financial experiences should be the norm. Indeed, this expectation is now driving change across retail, insurance, travel, and even automobile purchases, to name a few.

Will Embedded Finance enable companies to increase customer lifetime value?

Embedded finance should be part of any modern business’ customer lifetime value strategy because it enables brands to deploy technologies that allow a wide range of functions at the point of transaction. Companies can increase their customer lifetime value (CLV) by providing additional financial services while maintaining or evening lowering their cost of acquisition (CAC), due to a quicker sale from a more valuable offering. With incentives like these underpinning business strategy, no rock will be left unturned in the financial services space. Examples include sending change to savings accounts or investments, or presenting insurance propositions for big ticket purchases. In short, embedded finance allows businesses to diversify propositions and income streams, creating revenue resilience and lasting customer relationships.

The regulation to power the global growth of Embedded Finance

Increasingly adopted around the world, open banking rules that require incumbent financial institutions to share customer data with third parties are underpinning the growth of embedded finance. But there’s a long way to go, as different geographical jurisdictions have adopted different frameworks. For example, some regions are yet to define which businesses are able to access financial data. Furthermore, rules that determine when and how a customer must be authenticated to participate in financial transactions are uneven globally.

The rules will likely get ironed out over time, and new dominant players will emerge. The question is, will they be tech businesses, banks, or both? One of the goals for many payments innovators right now is to rapidly deliver Embedded Finance functionality and develop industry best practices that will help define future laws, some of which will likely center on customer data and privacy.

Insights that fuel better Embedded Finance experiences

User or customer profiles are a critical part of successful digital innovation. Deployed correctly, they can help businesses position more relevant products and services in front of target audiences, while nudging people to make better, more financially sustainable purchasing decisions.

It’s vital then that payments innovators have access to transaction data in real time, something made possible by API technology. When used in partnership with machine learning, financial companies can present customers with the right product, and the most appropriate payment method at the optimum time.

Customer data is also allowing new lending propositions to bypass traditional underwriters and pull information about a person’s financial behavior across a range of sources. This, in turn, can lead to faster credit decisions and frictionless purchasing experiences — without the need to leave a merchant’s platform. Marqeta partners in the Buy now, Pay later space, such as Twisto and Afterpay do exactly that: They give consumers broader payment options at the point of purchase.

Consumer shopping and transaction behavior is clearly evolving rapidly, and this makes embedded finance a current imperative for merchants, marketplaces, and banks alike.