Author

Dan Brightmore

Published

7 January 2025

Estimated Read time

5Mins

Alex Mifsud, CEO of Embedded Finance platform Weavr, on the outlook for Banking-as-a-Service (BaaS)

If any FinTech trend is painfully making its way through the archetypical Gartner hype cycle, it is Banking-as-a-Service or BaaS. At its core, BaaS is an API-driven platform enabling third-parties to develop financial products that make use of the banking and payments capabilities, and the regulatory permissions, of financial institutions that offer it.

This means non-regulated businesses can, in effect, make financial services available to customers without having a banking or financial licence themselves. The bank gets to monetise their licence efficiently, while FinTechs bring ingenuity, market insight and usually, superior digital experiences to customers. It sounds wonderful in concept, but the reality is far more complex. The recent collapse of Synapse, a prominent BaaS provider, as well as the sheer number of regulator interventions across many developed world economies, has highlighted critical vulnerabilities in the BaaS model.

The BaaS Model

While no one, including regulators, seems to be denying the opportunity to create customer value, it is increasingly evident that the BaaS model as it has developed over the past five years will not survive in its present form. There are several evolutionary directions that are being talked about for BaaS, even if not yet established. Here, I would like to present a specific variant. The European regulatory model not only makes this possible, but also presents a strong win-win opportunity for banks to collaborate with non-bank financial institutions like e-money institutions and payment institutions (I’ll use the acronym “EMI” to mean either of these). In this model, banks get access to the benefits of BaaS with minimal exposure to the now-better-understood risks. Moreover, EMIs get access to the powerful capabilities and economics that are the sole preserve of banks as deposit-taking institutions.

These collaborations – in effect, a multi-tier approach to BaaS – should offer safer exposure to Embedded Finance for banks. And richer capabilities available to embedders, and ultimately, end-customers.

Antipattern Matching

Recent announcements that Clearbank, a digitally-savvy clearing bank now promoting itself as an embedded finance platform, has hit profitability is a welcome tonic to investors despairing of the stream of bad news hitting BaaS players in the US and Europe. Even JP Morgan, one of the most respected global banks, has shown that size is no obstacle to ambitious, or even radical, innovation, as it also offers Embedded Finance. And at the other end of the size scale, Griffin announced earlier this year that, having secured a banking licence specifically to offer BaaS and embedded finance, it is now ready to start operating.

In the face of the mentioned challenges that EMI BaaS players have faced with regulators in Europe, some in the investment community have been proclaiming that, to do BaaS effectively, a financial institution needs to have a banking licence. An e-money or payment institution licence simply won’t cut it.

While such pattern matching and extrapolation is understandable, it is not necessarily correct, so let’s look at an alternative view: both EMIs and banks are viable financial institutions to support Embedded Finance, but each have strengths and weaknesses. Better still, by working together in a multi-tiered configuration, each type of financial institution can play to its strengths enabling the combination to deliver high capability, highly adaptive delivery models of Embedded Finance.

Banks doing Embedded Finance

While a banking licence does confer specific advantages – mainly, that deposit-taking provides one of the most attractive financing models for financial institutions to raise funds for lending – there are also disadvantages to being a bank compared to being an EMI. In the UK, for instance, banks need to hold more capital than EMIs, and perhaps more importantly, banks are supervised by both the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA), the latter of which does not supervise EMIs.

Navigating innovative operating models like Embedded Finance with two regulators can create greater risk aversion and therefore slow down or even discourage the experimentation that is required to find the right risk-value formula that works. We know from recent experience that getting the balance right between great customer value and sustainable compliant operations can be a delicate balance.

The Benefits

One way to square the circle is for banks to provide wholesale financial services to EMIs which then serve end customers on their own licences in turn. While this doesn’t completely insulate the bank from censure in the event that the rules are broken – for instance, if money laundering occurs – it does place the biggest share of the burden of the customer on-boarding and monitoring compliance on the EMI. Given that EMIs were created initially to support money-related activities for a digital world, it may be easier for them by working with a single regulator to achieve the right balance. It also allows large banks with cumbersome on-boarding processes designed for large corporations to get access, via the EMI, to a community of small and medium sized business customers that, in aggregate, represent meaningful business volumes for the bank.

There is a strong win-win in this kind of bank-EMI collaboration, especially for banks which are used to dealing with other financial institutions as customers. EMIs, in turn, can source a range of wholesale financial services from multiple banks: foreign exchange from one, and lending capacity from one or more others.

A New Pattern: Multi-Tiered Banking with BaaS

The future of BaaS lies in collaboration. A multi-tiered banking model allows institutions to combine their strengths strategically. Such a model not only optimises the use of resources but also enhances the value proposition of BaaS by incorporating the strengths of various financial entities. EMIs, with their ability to offer commercial cards, credit lines, and foreign exchange services, reduce the risk for larger institutions and open doors for broader innovation.

  • Embedded Finance

Author

Dan Brightmore

Published

19 December 2024

Estimated Read time

5Mins

Benjamin Avraham, CEO and Founder at Okoora – the creators of Automated Business Currency Management, on Embedded Finance in global trade and the challenges of FX risk in global expansion

Embedded Finance is rapidly emerging as a transformative force in cross-border payments, reshaping how businesses handle transactions across borders. By making payments more efficient and accessible, it is becoming a key tool for companies navigating the complexities of global trade. While the concept isn’t entirely new, its adoption has accelerated, with the sector projected to generate an estimated $230 billion in revenue by 2025.

  • Embedded Finance is poised to reshape cross-border payments. It offers innovative solutions to address inefficiencies and create experiences with reduced friction for businesses and consumers alike. 
  • A key trend is the integration of multi-currency wallets. These enable real-time currency conversion and support localised payment methods tailored to specific regions. This not only reduces transaction delays but also enhances accessibility for global users. At the same time, embedded risk management tools are gaining traction. These provide businesses with automated FX hedging options and predictive analytics to better manage currency volatility.
  • Super apps with embedded cross-border capabilities are becoming more prevalent. These offer all-in-one solutions for payments, investments, and FX management. These apps are especially impactful in promoting financial inclusion, allowing underserved markets to access cross-border payment systems with ease. 

The Challenge of FX Risk in Global Expansion

For businesses aiming to expand globally and remain competitive, understanding and managing foreign exchange (FX) risk is paramount. Currency volatility, intricate markets, and hidden costs remain significant hurdles for companies operating internationally. Moreover, the solution lies in leveraging embedded currency risk management, which integrates FX tools directly into business workflows to streamline and mitigate these challenges.

Historically, small and medium-sized businesses (SMBs) have relied on traditional banks for cross-border payment services. However, slow, opaque, and cumbersome banking processes often fail to meet the modern demands for a frictionless experience. SMBs today require more than just service providers—they need trusted partners who truly understand their unique needs and can deliver tailored solutions. Embedded Finance levels the playing field by giving SMBs access to financial tools previously reserved for larger corporations, empowering them to compete effectively in global trade.

On a parallel track, larger players such as payment institutions, corporates, and banks are increasingly recognizing the potential of embedded finance to unlock new market opportunities and enhance the financial ecosystem. According to a recent report by Publicis Salient, embedded finance revenues are expected to grow by 40% annually in the coming years, underlining its critical role in the evolution of global financial services. This is encouraging organizations without in-house capabilities to actively seek partnerships with fintech providers to deliver integrated, relevant, and accessible financial services, while also creating new revenue streams.

Key features of Embedded Finance for Cross-Border Transactions

As businesses continue to navigate the complexities of cross-border transactions, Embedded Finance offers an array of powerful features that streamline processes, enhance efficiency, and mitigate risks. By integrating financial tools directly into business systems, companies can improve operations, reduce costs, and gain greater control over their international payments and currency management.

Below are the key features that make Embedded Finance a game-changer for businesses engaged in global trade:

Streamlining Payments

Frictionless Transactions: Embedded finance integrates payment processing directly into business systems, enabling businesses to send and receive funds across borders without needing separate third-party platforms.

Localised Payment Methods: It supports local payment systems, ensuring businesses can transact with customers and partners in their preferred currencies and payment formats.

FX Risk Management

Automated Hedging: Embedded tools can automatically hedge against currency fluctuations, reducing financial exposure and safeguarding profit margins.

Predictive Analytics: Advanced analytics help businesses anticipate and respond to currency market threats and opportunities.

Reducing Costs & Delays

Lower Fees: By bypassing traditional banking intermediaries, embedded finance platforms often reduce transaction costs.

Faster Settlements: Transactions are processed more quickly, enabling businesses to manage cash flow and working capital more efficiently.

Enhancing Transparency

Clearer Pricing: Embedded finance platforms provide real-time insights into exchange rates and transaction costs, ensuring businesses have full visibility into cross-border payment processes.

Regulatory Compliance: Built-in compliance tools streamline adherence to local regulations, reducing administrative burdens and risks of non-compliance.

Access to Financing

Embedded Credit & Loans: Businesses can access trade financing or working capital loans directly within platforms, supporting growth and smoothing cash flow challenges during cross-border trade.

Supply Chain Support: Financing solutions embedded in procurement platforms help businesses manage large international purchases with ease.

Simplifying Tax & Regulatory Compliance

Automated Tax Calculations: Embedded tools help businesses calculate duties, taxes, and other levies for cross-border transactions.

Built-in Compliance Checks: Solutions automatically ensure compliance with local and international regulations, saving time and reducing risks.

The road ahead for Embedded Finance

The evolution of embedded finance holds the potential to unlock new market opportunities and enhance the global financial ecosystem. Through strong collaboration among fintech companies, regulators, and technology providers, the industry can pave the way for embedded finance to deliver  highly relevant financial services in an accessible manner to  meet the needs of businesses globally.

About Okoora

Okoora is a leading fintech provider, offering businesses worldwide the financial infrastructure needed to scale their international operations. Recognized by CNBC and Statista as one of the world’s top 250 fintechs, the company’s automated platform, API, and embedded finance solutions empower businesses to collect and send payments, manage multi-currency accounts, and hedge FX risks. Okoora enables seamless operations in over 100 currencies and 180 countries.

  • Embedded Finance

Author

Lucian Daia

Published

23 October 2024

Estimated Read time

5Mins

Lucian Daia, CTO at Zitec, on the rise of embedded finance driving customer loyalty across financial services

The frenzy of Christmas and Halloween marketing is already in full swing, with date reveals of Christmas market returns to pumpkin patch locations. Retailers are gearing up to execute their strategies as the Golden Quarter approaches. This year, however, retailers have another string to their bow, another key message to snag a customer: ‘Buy Now, Pay Later’ (BNPL).

Business is booming in the BNPL game, with the market quadrupling in size since 2020. It is expected to hit a record level of £30bn in 2024. The payment option is fast becoming a staple in the digital wallets of millions for the major retail milestones of the year.

Halloween is the first major retail moment in the run-up to the festive season as Britain settles back into its winter routine. However, the rise of BNPL points to consumer behaviour that’s fast evolving and anything but predictable.

But BNPL is just one piece of the puzzle. The Financial Conduct Authority (FCA) estimates that it’s likely more than half of UK adults are now using digital wallets. Furthermore, it’s expected to comprise half of all e-commerce spend (£203.5 billion) by 2027. Instant payments are also a growing part of the payment mix, with the innovation expected to represent 10.8% of overall payments by 2028. Retailers must navigate a wave of new technologies that are redefining check-out and payment processes.

Allowing new payment innovations like BNPL

Retailers sink or swim based on the customer experience they deliver. From the rise of omnichannel strategies to speedy same-day deliveries, click and collect options, and attention-grabbing immersive experiences… There’s no shortage of initiatives to drum up customer loyalty. Now, payment solutions are part of the equation. Embedded Finance is front and centre of this change, integrating financial services (like loans, insurance, debit cards etc.) into businesses that don’t usually handle finance.

Application Programming Interfaces (APIs) offer a “Plug and Play” type functionality. Retailers can offer seamless payment solutions like BNPL or digital wallets directly on their systems. This integration keeps shoppers on the site and reduces the tiresome friction of third-party pop-up systems. Moreover, it offers features like zero-interest point-of-sale loans or app-based rewards. Of course, it allows them to check-out as easily and as quickly as possible too.

Bye-bye Velcro

Bye-bye Velcro, hello snazzy digital wallet that holds payment cards and bank account details all in one place. Digital wallets have become essential components of modern payments and offer a convenient and less risky way for shoppers to buy their items.

Gone are the days of searching for physical cards under stashes of files or keying in repetitive digits on a keyboard. Digital wallets also offer a reduced risk of fraud because of advanced encryption and tokenisation technologies. Beyond security, digital wallets provide retailers with valuable consumer insights.

For instance, if a customer buys a Halloween costume and decorations, retailers can use this data to target them with personalised offers. Such as a discount on     themed candy bowls or matching spooky accessories. This level of personalisation is make or break for retailers today. Customers are setting a higher bar than ever for personalised content, offers and experiences that meet their needs and interests.

Speeding up cash flow with BNPL

Another innovation retailers need to have on their radar is instant payments. Unlike traditional systems that mean transactions can take hours or even days to complete, instant payments ensure funds are transferred within seconds.

For retailers, especially those operating on thin margins or managing high transaction volumes, the speed at which funds are made available can be make or break. The quick availability of cash means retailers can better manage their finances, buy new stock and address operational costs at pace.

Contrary to common belief, Brits don’t love queuing; in fact, they hate it. Faster payment options in-store have been pivotal in giving customers the speedy experience they demand so they can get on with their day. Quick transactions not only improve cash flow and reduce delays but enhance the customer experience. Making it ideal for those who’ve left their shopping too late, or forgotten an item on their list. As a result, customers walk away with the right impression.

Ditch the lines and pay with a tap

Retailers should be equipped with mobile point-of-sale (mPOS) systems that allow customers to make payments through their smartphones or other mobile devices, cutting down on wait times and speeding up the checkout process.

Retailers also stand to benefit from digital receipts, detailed sales reports, and real-time inventory management from having this system in place. This efficient processing not only improves cash flow but also provides valuable data for managing stock levels and customer preferences.

Beyond the Golden-Quarter

As retailers prepare for the Golden Quarter and beyond, understanding and leveraging FinTech payment innovations can seriously pay dividends. By adopting technologies such as embedded finance, digital wallets, instant payments, and mobile payments, retailers can improve their operational efficiency, enhance customer experiences, and position themselves for future growth in a digital-first world. Indeed, in recent years marked by economic shocks, huge tech advancements – especially with AI – and increasingly unpredictable consumer behaviour, it is crucial for retailers to stay ahead of payment options.

Providing consumers with flexibility, choices, and ultimately, ways to manage their outgoings and spread the cost will be key. Retailers will need to take a view on which innovations align best with the changing expectations of their customers and who they partner with to help them remain competitive.

  • Embedded Finance

Author

Philipp Buschmann

Published

30 September 2024

Estimated Read time

5Mins

Philipp Buschmann, co-founder and CEO of AAZZUR on how the customer becomes the investor with Embedded Finance at the heart of the wealth management revolution

Wealth management has traditionally been a game for the well-off. It often requires large sums of money just to get started. For decades, the idea of “investing” conjured up images of Wall Street brokers managing hefty portfolios for a small group of elite individuals. But, thanks to Embedded Finance, times are changing and the barriers to investing are coming down. The technology is reshaping how people handle their money. Here’s what it can do for you.

Tackling the investment problem

Historically, investing hasn’t been easy. Most brokers require a significant minimum deposit to open an account, often in the thousands. Fees and commissions on trades can add up quickly, and if you don’t have a large amount of capital, these costs can erode your profits. For many, these hurdles were enough to keep them from even thinking about investing. It simply didn’t feel like something for “ordinary” people with average incomes.

Even with the rise of online brokers, the stock market has remained intimidating to a lot of people, many of whom felt like they lacked the knowledge or resources to get involved.

On top of the classical challenges we must also discuss the upcoming wealth transfer. The next generation of users have no interest in sitting with wealth managers; at the same time they don’t have the knowhow to trade or invest.

Imagine being able to not only excite your customers but empower them as well. That’s what embedded finance solutions promise. As companies strive towards more inclusive messaging, adopting embedded finance tools has never been more valuable. One of the great perks is that it doesn’t require a complete overhaul of IT infrastructure, instead, it involves a seamless experience that even junior employees can understand and implement.

Embracing the solution with Embedded Finance

I’ve said it’s easy – but how easy? Embedded finance works by bridging the gap between traditional financial systems and the average consumer. By integrating financial services directly into everyday apps and platforms, it makes it possible for people to start investing without even realising they’re doing it. Monzo is an example of it in action. They used embedded finance solutions to enable customers to invest directly in the bank during its fundraising rounds. They raised millions by allowing users of the app to seamlessly invest and become shareholders, a great example of how “the customer becomes the investor”.

Think about how your business manages its money. You most likely use an app to track accounts and make payments. This is no different to customer budgeting, and it’s a window of opportunity for you to tap into. That app can offer you the ability to automatically invest any leftover money at the end of the month into a diversified portfolio. Customers don’t need to download a separate app or set up an account with a brokerage firm. Everything is integrated into the website they’re shopping on. This is the beauty of embedded finance – it makes financial services a natural part of your daily life.

For younger people just starting out on lower salaries and learning how to invest sensibly, there has never been a greater time to be innovative and branch out into financial services.

The second vector for investment is to centre it around a new social frame. Investment’s can be around supporting your ideals, for the environment, or for technologies sake. This means that there are apps/club/activities that can become another home for investment. The same way country clubs aren’t just for food, golf and banter. Embedded finance opens the door for classically aligned companies and charities to think about expanding their business model. I could imagine Greenpeace offering embedded investing. So, could the country club co-invest in art that is displayed (but also invested) in.

Equalising opportunity with Embedded Finance

Embedded finance allows financial services to be delivered in a more personalised, user-friendly way. Apps can now provide personalised investment recommendations based on a user’s spending habits, savings goals, and risk tolerance. And thanks to automation, these services are becoming more affordable and scalable. Instead of paying for an expensive financial advisor, users can rely on AI-driven tools to offer similar advice for a fraction of the cost, or even for free. Wealthfront does this by offering automated financial planning and investment management with AI-driven recommendations and tax optimisation strategies.

GoHenry is another example of a company taking the initiative and embracing its solutions. They allow customers to invest in the company using the Crowdcube platform. People can invest in as little as they want and become shareholders with ease. As a result, loyalty is enhanced and capital surges.

Another example is fractional investing. In the past, buying a single share of a company like Amazon or Tesla might have been out of reach for someone with limited funds. However, this no longer has to be the case as companies like Robinhood allow customers to invest in big stocks like Tesla for as little as £1, making it possible for anyone to grow their wealth without having to stretch themselves and get into debt.

What does the future hold?

As embedded finance continues to evolve, we can anticipate even more innovations in the world of micro-investing and wealth management. The lines between financial services and everyday life will continue to blur, making it easier than ever for people to manage their money, invest, and build wealth – all without needing a financial background or a large amount of capital.

Philipp Buschmann is co-Founder and CEO at AAZZUR, a one-stop-shop for smart embedded finance experience.  Recognised as a rising star in the FinTech space, AAZZUR’s mission is to build profitable banking whilst at the same time empowering consumers to have access to better informed financial choices.

Philipp is a serial entrepreneur with extensive experience of working in Challenger Banking, Financial Services, IT and Energy across the world.  He took one of his business’s public – Ignis Petroleum was publicly listed in the US and Germany. 

Having started as a developer in Financial Services, Philipp has first-hand experience of the banking revolution from both a technology and financial perspective. His interest in behavioural economics helped inspire AAZZUR’s revolutionary work on customer centricity in banking.

Philipp holds an MBA from the London Business School. He is passionate about entrepreneurship and loves exchanging ideas, insights and discussing FinTech’s future.  He has spoken at major Fintech events including Money 20/20, MoneyLive, Finovate, Fintech Matters, and the Future of Retail Banking.

  • Embedded Finance

Author

Adam Edwards

Published

23 September 2024

Estimated Read time

5Mins

Adam Edwards, Product and Growth Director at Satago on how embedded finance is helping drive digitisation for the B2B financial space

Small and Medium Enterprises (SMEs) are at the heart of the UK economy. They contribute significantly to local employment and revenue across a wide array of sectors. However, the current economic landscape and consistently high inflation are inhibiting them from reaching their full potential.  

Three key challenges which prevent SMEs from investing in growth are tight cash flow, poor access to capital and the late payments crisis. With over £32 billion in late payments plaguing them, SMEs need longer-term, meaningful policy action from the government, alongside better Working Capital solutions. 

Investing in Embedded Finance

With a growing SME market needing better support than ever from lenders, banks are rapidly investing in IT adoption. Particularly, Embedded Finance tools, to better serve this sector. Indeed, analysts have forecast a staggering 148% growth in the Embedded Finance market. It is predicted to reach a revenue of $228 billion by 2028.  

Banks have been quick to offer flexibility to consumers in the business-to-consumer (B2C) Embedded Finance space. Offering lots of options for flexible finance in response to high demand. However, the business-to-business (B2B) market has in many ways been slower.  

There are certainly challenges here – but the opportunities are huge for the lenders that get this right to go on and serve the SME space. So, what can the B2B space learn from how Embedded Finance has succeeded in the B2C sector? And what are some of the benefits and new challenges that this investment could pose?  

The role of Embedded Finance in supporting SMEs and founders 

Embedded Finance emerges as an innovative approach to bolster SME support. It integrates financial services directly into non-financial platforms. This integration empowers SMEs to seamlessly access critical financial services. These include instant credit, streamlined payments processing, and optimised cash flow management. This enhances operational efficiency and financial resilience. 

When we look at B2C financial services, we can see traditional banks working hard to catch up with challenger banks. These competitors have presented consumers with entirely new means to access digital banking, improve their visibility on financial information, and manage their funds and savings with secure API access.  

This has forced traditional banks to digitise quickly in the B2C space to remain competitive and keep up with customer expectations. Embedded tools have become a key part of this. While the B2B financial services industry hasn’t traditionally faced the same level of market pressure to innovate – this is now starting to change. We will start to see the impact in a couple of ways.  

I predict we will begin to see rapid growth in the number of partnerships between FinTech companies and B2B lenders. Where banks such as Barclays have already been partnering with the likes of Amazon on the consumer side for a long time to offer flexible payment capabilities, we will see a lot more similar partnerships starting to take place in the B2B space, to support the growing SME market. As a result, I anticipate a rise in the number of online marketplaces dedicated to the B2B lending space. We will also see increasingly niche market areas – such as agriculture and dedicated equipment manufacturers, for example.  

The opportunities and challenges with Embedded Finance

There are several opportunities to be capitalised on via Embedded Finance in the B2B space. Lenders that have been held back by legacy systems in the past will now be able to offer a more flexible suite of digital finance options to customers, especially SMEs. SMEs, which may be run by a single founder or a small group of stakeholders, are likely to be used to an agile structure. They can take big decisions quickly and will be keen to be able to flexibly access financial tools. Through integration with expert providers, lenders can also benefit from new origination channels and access new pools of customers for bank accounts, financial consultancy and more.  

For the fintech partners and integrators, including those providing white-labelled products to banks, there’s a chance to take advantage of the trust customers have in their banking providers. And the lenders’ brand reputations can increase their own revenue and future opportunities for sale.  

Meanwhile, SMEs are set to reap the benefits of being able to offer better user and payment experiences to their own customers further up chain. They too, will benefit from better cash flow management, improved financial visibility and increased flexibility via different working capital tools. Just like consumers are able to – all of which will be facilitated by better digital tools.  

However, it is worth acknowledging that as the B2B space grows, heightened concerns around fraud risk associated with financial transactions are also likely to emerge. Going forwards, we’ll see more analytics and artificial intelligence built into Embedded Finance. This will feed into underwriting models and support fraud checks. With more complex transactions and shared financial data via Embedded Finance partnerships, the risks of non-compliance could become more perilous. Therefore, there are certainly challenges ahead.   

A competition for innovation in the B2B space 

For SMEs to thrive, sustained and reliable access to cash flow is essential. Collaborative efforts between the government and the financial services industry are critical. Establishing robust regulatory frameworks and fostering innovation in Working Capital solutions will be vital. 

The Embedded Finance market in over the next year and beyond can expect to see significant emphasis on B2B players, such as banks and corporate lenders. They are looking to catch up with the consumer market and serve SME customers with the most secure – and flexible – lending options.   

Consumers have realised the benefits of seamless, digital financial services for themselves. We’ll now see demand growing as SMEs expect the same innovation and experience when it comes to their B2B financing. Lenders and banks that want to satisfy this growing pool of customers hungry for flexibility and sustainable lending support, will need to be willing to evolve and digitise, or risk missing out on the competition.   

Satago is a leading fintech that enables lenders and corporates to streamline operations, boost revenue, and enhance their business customer experiences. This is achieved through cloud-native Working Capital and Cash Flow solutions, powered by real-time data, Open Banking, and API technology. 

  • Embedded Finance

Author

Dan Brightmore

Published

9 September 2024

Estimated Read time

5Mins

Nada Ali Redha, Founder of PLIM Finance, on flexibility, consolidation, and the evolution of digital payments

Embedded finance, the integration of financial services into non-financial platforms, is no longer a niche trend. It has become a defining characteristic of modern commerce. Consumers are increasingly drawn to the convenience and flexibility it offers, leading businesses across industries to adopt embedded finance solutions. The rise of these platforms, combined with shifting consumer expectations, presents both opportunities and challenges for traditional banks and fintech players.

Customer-centricity with Embedded Finance

At the heart of this transformation is a desire for simplicity. Consumers are opting for solutions that allow them to bypass the inconvenient processes associated with traditional banking. They are avoiding excessive paperwork, account opening delays, or hidden charges. Instead, they are drawn to platforms that offer seamless integration of services. Enabling them to make purchases, manage their finances, and access credit without ever leaving the ecosystem of their preferred brands.

E-commerce giants like Amazon have been quick to recognise this trend, embedding financial services directly into their platforms. This allows them to offer a one-stop solution that caters to all their customers’ needs, from browsing products to making payments or accessing credit options. The appeal is clear: customers stay within the same digital environment, enjoying a frictionless experience that saves them time and effort. This development, however, raises the stakes for standalone payment providers like PayPal and Klarna, as they are increasingly excluded from these in-house ecosystems.

Shifting financial services

For legacy banking providers, this shift presents a major challenge. Traditionally, these institutions have relied on their extensive networks, trusted brands, and regulatory backing to maintain a dominant position in the financial landscape. But as businesses integrate financial services directly into their offerings, banks are no longer the first point of contact for many consumers. A growing number of businesses are bypassing traditional banks altogether, embedding payment and lending options at the point of purchase or within their own apps. This trend highlights a fundamental shift in how consumers interact with financial services, often without even realising it.

In response, payment providers and fintechs must find innovative ways to remain competitive. One potential strategy is for these companies to develop their own marketplaces. By creating an ecosystem of services that includes not only payments, providers can capture more customer loyalty and engagement. This would enable fintechs and payment solution companies to offer a holistic, embedded finance solution. Rather than relying on external platforms or partnerships.

PLIM Finance

A case study for this would be PLIM Finance’s marketplace, which offers a highly customised experience. PLIM connects consumers with their desired services in a way that prioritises personalisation and convenience. As a platform built with user-centric design at its core, it allows consumers to search for treatments based on location, type, and specific clinics, giving them the ability to make informed decisions effortlessly. This is achieved through a search engine that filters results to suit each individual’s exact needs. Enhancing the user experience by eliminating irrelevant options for a streamlined experience. PLIM’s marketplace also encourages partners to create detailed profiles, showcasing their services, reviews, and credentials, which enhances visibility and attracts new clients. By fostering a direct connection between consumers and clinics, PLIM’s marketplace stands out in the embedded finance space. Ensuring a seamless, personalised customer experience​ that is simple and easy-to-use.

Strategic partnerships

Another potential strategy is deeper collaboration with external partners. By integrating their services into a wide range of businesses, payment providers can continue to capture market share. Without needing to create their own consumer-facing platforms. Strategic partnerships can expand the reach of these payment solutions, allowing them to tap into user bases they might otherwise miss. For example, smaller or mid-sized businesses may benefit from embedding a well-established payment solution into their website or app rather than developing their own in-house system.

However, not every provider will be able to meet the demands of this rapidly changing landscape on their own. As the embedded finance space continues to mature, industry consolidation becomes a very real possibility. Larger players may acquire smaller fintech companies. Integrating their innovative solutions into existing platforms can offer a more comprehensive suite of services. This would mirror the broader trend in the tech sector, where big players often absorb disruptive startups to maintain their competitive edge. Consolidation offers both challenges and opportunities. While smaller companies risk losing their independence, they also gain access to the resources and customer base of their new parent companies.

Evolving financial landscape

This evolving landscape is also occurring at a time of significant economic uncertainty. Financial stress often pushes consumers to reevaluate their spending and financial habits, with many looking for greater control over their cash flows. This is where embedded finance stands out. The flexibility it offers allows consumers to manage their money more efficiently, whether through payment deferrals, buy-now-pay-later (BNPL) options, or quick access to credit. These features are particularly valuable when budgets are tight or income is uncertain.

Moreover, embedded finance solutions empower consumers by giving them more control over how they manage their transactions. For example, BNPL options give individuals the freedom to split payments over time, making larger purchases easier to manage without the immediate financial burden. This level of control resonates with modern consumers, who increasingly seek transparent, flexible financial solutions that can be tailored to their personal circumstances.

For businesses, this presents an opportunity to strengthen customer loyalty by offering embedded finance services that align with consumer needs. By removing barriers to purchasing, businesses can enhance the customer experience, which, in turn, can drive increased sales and long-term engagement. As a result, companies that adopt embedded finance solutions can gain a competitive edge, particularly in sectors like e-commerce, where convenience is king.

Conclusion

In conclusion, embedded finance represents a fundamental shift in how consumers interact with financial services. As more businesses adopt these solutions, traditional banking institutions and standalone payment providers will need to adapt or risk being left behind. Whether through developing their own marketplaces, forging deeper collaborations, or pursuing mergers and acquisitions, the financial services landscape is poised for continued transformation. Embedded finance, with its focus on flexibility and convenience, is likely to become an integral part of the future of commerce—benefiting both consumers and businesses alike.

  • Embedded Finance

Author

Dan Brightmore

Published

30 August 2024

Estimated Read time

5Mins

The automotive industry is transforming vehicles into mobile banking centres with the introduction of embedded finance. This allows drivers to…

The automotive industry is transforming vehicles into mobile banking centres with the introduction of embedded finance. This allows drivers to seamlessly pay for fuel, tolls, parking, and electric car charges without leaving their cars.

Embedded banking or embedded finance is a technology that is used on many websites for easy transactions. It integrates financial services like payments, accounts, or lending into non-financial products or services. That technology can also be brought into your car.

It turns banking into a part of driving, creating an efficient experience for drivers. With this new system, drivers can easily manage all of these payments automatically making for seamless transactions.

Benefits of Using Embedded Banking

Built-in banking does more than just make payments easier. It can also help drivers choose the right car based on how they drive. For example, if someone often drives long distances, the system might suggest a fuel-efficient car. If another driver drives mostly around town, a smaller car might be recommended. This intelligent system can make buying a new car easier and more personal.

Insurance companies can also benefit from this technology. They can see how people drive and adjust their premiums accordingly. For example, a cheaper insurance premium may be given to a driver with a clean driving record. On the other hand, a driver who has a history of speeding or traffic accidents may get a more expensive premium. This makes insurance fairer and more personalised to each driver.

Car companies that are the first to add built-in banking will have a big advantage. Buyers will want to buy cars with this new and convenient feature, giving these companies an edge. In addition, this technology allows car companies and banks to increase revenue. They could offer special deals or services to drivers who make frequent use of the in-car payment system.

Enhanced Financing Options

Embedded finance simplifies vehicle financing by integrating financial services into the car-buying process. Furthermore, customers can apply for and manage loans directly through their vehicle’s interface, with loan options personalised to their financial profile and driving habits. This innovation improves user experience by making payments, financing, and insurance easier and more secure.

Embedded banking turns cars into mobile banking hubs, leveraging data from modern vehicles to customise financial products. Moreover, insurance premiums can adjust based on driving behaviour, financing can match vehicle usage, and payments for charging or tolls can be automated, enhancing efficiency and customer satisfaction.

Seamless Transactions

Embedded finance simplifies transactions by allowing drivers to pay for services like fuel, tolls, and parking directly through their vehicle’s system. This integration eliminates the need for physical payment methods, making the driving experience smoother and more convenient.

In the automotive industry, embedded finance also transforms how customers handle car purchases and financing. By integrating banking, lending, and insurance services into the vehicle’s interface, automotive companies can offer a more seamless and convenient experience. Using APIs from specialised providers, this approach opens new revenue streams and enhances overall customer satisfaction.

Increased Sales

Automotive companies that adopt embedded finance technologies can experience a significant boost in sales and revenue. By offering integrated financial services, car manufacturers can attract customers looking for modern, convenient solutions.

According to McKinsey, embedded finance can boost sales by increasing conversions, average purchase amounts, and customer loyalty. Research by RBC Capital Markets shows that buy now, pay later (BNPL) options can raise checkout conversion rates by 20-30 percent and lead to higher spending per transaction.

A major global retailer has found that customers using their embedded lending services spend 20 percent more. However, the solution must be easy to use; otherwise, abandonment rates can be high.

The Collaboration of Industries for Embedded Banking

This new technology also encourages teamwork between different industries. For it to work well, car companies, technology companies, and banks need to work closely together. They need to create strong security measures to protect users from potential online threats. This collaboration is important to ensure that the system is secure and reliable.

By connecting cars and financial services, embedded banking will accelerate innovation. It will help create a future where driving and banking are connected. This will lead to a more efficient and customer-friendly world.

New Technology Leaders

Mercedes-Benz is already leading the way with this technology through its partnership with Mastercard. In Germany, Mercedes-Benz customers can start the fueling process from their car and pay with their fingerprints. This is the first time in-car payments have been used at gas stations.

When a driver arrives at a connected service station, the Mercedes Me Fuel & Pay service starts automatically. The driver selects the gas pump, and the system calculates the cost. Payment is made with a fingerprint. After refuelling, the invoice appears on the screen and is emailed to the driver, allowing them to leave without visiting the checkout.

Future Prospects

This new technology will help both the automotive and banking industries. It makes life easier for drivers and promises to change the way we drive by enabling easy payments on the go.

Once all car companies start using built-in banking, the current system of driving will change forever. This technology will turn cars into more than just vehicles to get from one place to another; they will become smart, connected hubs that make life easier for drivers. The future of driving begins with the implementation of embedded finance.

  • Embedded Finance

Author

Dan Brightmore

Published

21 August 2024

Estimated Read time

3Mins

Alloy, the identity risk management company trusted by over 600 leading banks, credit unions and fintech companies, has released its…

Alloy, the identity risk management company trusted by over 600 leading banks, credit unions and fintech companies, has released its 2024 State of Embedded Finance Report.

The Report examines the year’s top trends in embedded finance risk management and compliance. Alloy surveyed more than 50 professionals at financial institutions operating bank sponsorship programs in the United States to learn how their businesses are responding to compliance challenges.

The Report is being published at a time when sponsor banks in the US are facing  increased regulatory scrutiny. A reported 25.6% of the FDIC’s formal enforcement actions have been directed at sponsor banks since the beginning of 2024.

Alloy’s report found that while embedded finance programs drive significant revenue (over 50%) for sponsor banks, a majority (80%) of respondents reported that meeting embedded finance compliance requirements as a sponsor bank is challenging in the current environment.

“Running a sponsor bank program is inherently complex because you have banks who are highly regulated working with companies that are often new, fast-growing, and creating entirely new ways for consumers to interact with money,” said Tommy Nicholas, CEO and co-founder of Alloy.

“Despite the challenge, we’re already seeing sponsor banks respond to regulatory developments by investing in better controls, training, and adding to their compliance tech stack.”

State of Embedded Finance Report 2024

Here are five of the key findings from Alloy’s State of Embedded Finance Report:

1. Over half of sponsor banks’ deposits and revenue come from embedded finance partnerships.

Partnerships between banks and fintechs are a cost-efficient approach to catalyze growth through increased deposits, seamless UI, and accelerated innovation.

2. As regulatory scrutiny grows, embedded finance partnerships are becoming harder to maintain.

The embedded finance boom resulted in many banks testing the waters of bank sponsorship programs. As the complexity of managing these programs grows, we may see sponsor banks with less sophisticated embedded finance programs and tech stacks leave the space entirely.

3. Respondents cite reputational damage as the top consequence of compliance violations.

Reputational damage often results in increased regulatory scrutiny, including more frequent examinations and document requests. This heightened oversight can strain resources and pose ongoing operational challenges.

4. 90% of financial institutions face challenges when meeting compliance requirements as a sponsor bank.

Lack of control and audibility over fintech partners’ policy controls were cited as top challenges to meeting compliance requirements. Managing compliance across multiple jurisdictions and adapting to evolving regulatory changes were also top concerns.

5. 94% of respondents say they plan to invest in new compliance technology to help them manage their embedded finance partnerships.

As attention surrounding compliance missteps has grown over the past few years, there are new tech solutions available to help bridge the gap between sponsor banks and fintechs.

Download the Report

Respondents included 51 decision-makers from financial institutions operating bank sponsorship programs in the United States.

Surveys were conducted by The Harris Poll, a leading survey platform for over 60 years.

For further insights you can download the full report here

  • Embedded Finance

Author

Dan Brightmore

Published

13 August 2024

Estimated Read time

4Mins

Embedded finance is transforming e-commerce for the better. It enables online businesses to offer payment processing, lending, insurance, and other…

Embedded finance is transforming e-commerce for the better. It enables online businesses to offer payment processing, lending, insurance, and other financial services within their own platforms as a non-finance platform. The convenience and efficient shopping experience offered is changing the way people shop and how e-commerce businesses operate.

The companies that implemented embedded finance have seen significant growth in conversion rates of up to 12 percent, the average order value of up to 30 percent, and as much as a 7 percent incremental revenue. Brain & Company’s 2022 report also projected the embedded finance market value to grow to $7 trillion by 2030, indicating an increasing demand for this service. 

Embedded Finance benefits

Embedded finance offers integrated payment solutions for e-commerce businesses. Customers can access financing options at the point of sale without switching to other platforms. This seamless experience makes it easier for buyers to complete their purchases, ensuring revenues for the businesses.

This integration provides better access for financial products, especially digital banking. Commonly, digital bank accounts are easier to set up than their traditional counterparts. It allows non-banking populations can easily make their purchase in e-commerce platforms.

Embedded finance opens new sales and revenue stream opportunities for e-commerce businesses. They provide sellers with working capital loans based on sales data, enabling them to earn additional revenue through interest and fees. The integration also increases customer retention as they are less likely to switch to competitors. This leverage offers long-term success in a competitive market.

Personalisation is another embedded finance’s strong suit. E-commerce businesses can use the customer’s data from their platforms to offer financial products tailored to their needs, creating a better customer experience.

Accenture found that 63 percent of consumers are more likely to buy a financial product from non-financial platforms that they trust. This report emphasises the importance of personalised embedded finance in generating more financial product sales.

Case Study: Amazon

One of the e-commerce platforms that successfully uses embedded finance is Amazon. In 2007, it launched Amazon Pay, allowing users to make purchases on external sites using their Amazon account details. This move not only expanded Amazon’s revenue opportunities but also strengthened customer loyalty.

Over the years, Amazon has continued evolving its embedded finance offerings, including one-click payments, buy now pay later, and lending services. Their latest venture involves a cash advance program in partnership with fintech company Parafin, which provides select sellers easy access to capital without interest or collaterals.

Case Study: Shopify

Shopify also creates a good embedded finance ecosystem with its various financial products. The Canadian e-commerce platform launched Shopify Payments in 2013 to simplify payment. This was followed by Shopify Capital in 2016, a lending product now available in four countries. The latest addition is Shopify Balance, a financial product offering a bank account and a debit card for managing financial activities.

Shopify earns most of its revenue from “merchant solutions” rather than just e-commerce software. This segment, which includes financial and fulfilment services, is growing much faster than its SaaS offerings — 29 percent compared to 8 percent as of Q4 2022, according to the company’s financial report.

Future Outlook for Embedded Finance

The future of embedded finance seems promising, with experts projecting an increase in demand and market share. As customers expect better integrated financial solutions, many companies will continue to adopt this system.

Embedded finance will also continue evolving with new technological advancements like artificial intelligence (AI) and machine learning (ML). Both AI and ML are projected to play a significant role in increasing efficiency, security, and sales for embedded finance in the future.

To maximise the benefits of embedded finance, financial institutions and e-commerce businesses should collaborate to anticipate possible hurdles. Regulatory and compliance challenges are one of the complex issues that may hamper its development.

E-commerce platforms should also ensure their new sophisticated solutions are scalable. As new financial technology is adopted, the platforms should be capable of managing increasing transaction volumes without sacrificing performance or security.

  • Embedded Finance

Author

Harry Menear

Published

31 July 2024

Estimated Read time

3Mins

Drawn by increased flexibility and convenience, retailers are embracing embedded finance solutions in the hope of opening up new revenue streams.

Embedded finance is gaining significant traction among retailers. The term refers to the integration of financial services into non-financial applications and platforms. For example, an app that offers cashback on large purchases, or pay later features with zero interest. This new crop of digital tools is enabling retailers to strengthen customer relationships. 

Retailers can create a more convenient shopping experience by providing features like flexible payment options and personalised financial advice directly within their platforms. This approach not only builds customer loyalty but also opens doors to new revenue streams from integrated financial services. 

Enhancing Customer Shopping Experience

Embedded finance can keep customers engaged in the retail environment and enhance the customer shopping experience. By embedding payment options directly into their platforms, retailers can offer a faster and more convenient payment process. Customers do not need to leave the retail environment to complete a transaction.

One of the most significant benefits of embedded finance is the ability to offer point-of-sale financing. Customers can apply for funding at the time of purchase, rather than having to apply for credit separately. 

Referred to as BNPL (buy now and pay later), this feature makes purchasing decisions easier and more flexible. This flexibility is driving customer loyalty. A study by Vodeno found that 40% of respondents would only choose brands offering BNPL and similar financial technology features like cashback. This number jumps to 50% for young adults.

Increasing Sales

Research by Natwest and BCG shows promising results for businesses that adopt embedded finance. Retailers saw conversion rates jump by 12%, average order value increase by 30%, and revenue rise by 7%.

Embedded finance can be a strategic tool for maximising revenue. Instead of just processing transactions, retailers can offer additional financial services for a fee. For example, a procurement platform could charge for automated reconciliation. This will save businesses time and generate new income.

Successful Implementation and Future Innovations

Several retail companies have successfully implemented embedded finance. These include Amazon with its Amazon Pay. The feature allows customers to use their payment information stored on various platforms. Another example is Walmart‘s mobile app. This platform provides customers with a variety of financial services, from paying for their groceries to managing their Walmart MoneyCard.

John Lewis has also integrated its financial services, offering customers credit cards, insurance, and personal loans directly through their retail platform. There’s also Tesco Bank, which provides a range of financial products, including savings accounts, loans, credit cards, and insurance products.

According to KBV research, the global embedded finance market is expected to reach $384.8 billion by 2029, reflecting a compound annual growth rate (CAGR) of 30%. Parallel to the growth, retailers will continue to innovate, offering more integrated financial services. These can include more sophisticated loyalty programmes, personalised financial advice, new payment options, and enhanced data analytics to better understand and serve customers.

Retailers must embrace these innovations to remain competitive and meet the ever-increasing expectations of modern shoppers. By integrating financial services into non-financial products or services, retailers not only create added value for customers but also increase customer loyalty. In addition, embedded finance also presents opportunities for retailers to increase profits.

  • Embedded Finance

Author

Dan Brightmore

Published

23 July 2024

Estimated Read time

3Mins

Small businesses are the backbone of the global economy. The World Trade Organisation reports that small and medium-sized enterprises (SMEs)…

Small businesses are the backbone of the global economy. The World Trade Organisation reports that small and medium-sized enterprises (SMEs) make up over 90 percent of all businesses, employ 60 to 70 percent of the workforce, and contribute 55 percent of GDP in developed economies. Despite their significance, they may face barriers to accessing financial services. Embedded finance services offer small businesses innovative solutions to traditional financial hurdles.

Embedded finance combines financial services with non-financial experiences. Technology companies partner with banking institutions to offer these services directly within their platforms. This means customers can access financial tools, like making payments or managing accounts, without leaving the platform.

Analysts at Global Market Insights predict the embedded finance market will reach a compound annual growth rate (CAGR) of over 29 percent between 2023 and 2032. A key driver of this growth is the increasing demand for faster and easier transactions.

Embedded finance allows businesses to offer sophisticated payment and banking services directly to their customers and suppliers. This removes many of the frictions associated with business-to-business (B2B) payments, especially as these transactions are typically made in real-time.

By embedding financial services into their offerings, businesses can increase customer loyalty, increase revenue opportunities, and become more competitive in the market. This integration allows customers to access various financial services without hassle, creating a seamless customer experience.

It also offers small businesses innovative solutions to traditional financial hurdles, such as cross-border commerce and evolving security and privacy requirements. Embedded finance also helps businesses provide services such as loans, insurance, debit cards, and investments through their platforms.

Access to credit

Getting credit remains a major challenge for many small and medium-sized businesses. A Goldman Sachs report found that 70% of small businesses struggle to access funding for daily operations, inventory management, and growth. According to the same report, this lack of financing hinders 76% of SMBs.

Embedded finance offers a potential solution. Businesses can integrate financing options, like credit cards, directly into their services. This provides much-needed financial flexibility for their small business customers. Improved cash flow for small businesses strengthens the partnership between both parties. The larger company becomes a key player in the small business’s growth journey.

Improved cash flow with Embedded Finance

Cash flow is a significant challenge for small businesses as many operate on thin margins. Embedded finance can help small businesses overcome that by integrating payment processes and real-time financial data into business operations.

For example, point-of-sale (POS) systems with embedded payment options allow businesses to receive funds instantly. Meanwhile, automated invoicing and payment reminders can reduce the time and effort required to chase down payment payments.

Enhanced Customer Experience

By integrating payment solutions directly into their platforms, businesses can offer features like one-click payments, installments, and digital wallets. This streamlines the checkout process and boosts customer satisfaction.

Loyalty programmes also become more attractive with embedded finance. Businesses can reward returning customers with discounts, cashback, or exclusive offers, strengthening brand loyalty and driving repeat business.

For example, Deliveroo’s ‘Deliver Money’ feature streamlines food delivery by enabling real-time payments. This eliminates the need for cash and waiting for change, speeding up transactions and creating a smooth checkout experience. Faster access to earnings empowers small businesses to fulfil orders quicker and potentially offer special promotions.

  • Embedded Finance

Author

Dan Brightmore

Published

11 July 2024

Estimated Read time

3Mins

Embedded finance refers to the integration of financial services into non-financial apps.

Embedded finance offers convenience, allowing users flexibility and greater accessibility.

It enhances flexibility by merging multiple services in one platform, allowing users to make purchases, pay bills, and perform peer-to-peer fund transfers in one place.

Despite the convenience it offers, adoption still faces challenges. This article discusses the main opportunities it brings and the challenges it faces.

Opportunities

The advent of embedded finance has brought about new opportunities; they are, among others, as follows:

Supporting growth of financial technology

Embedded finance is a significant booster for the growth of the financial technology sector. Traditional finance has struggled to reach traditionally unbanked communities. By making finances integrated into non-financial apps, these communities can now access financial services.

Promoting peer-to-peer transactions

While the integration of financial services into non-financial apps is important, one of embedded finance’s most important functions is facilitating seamless peer-to-peer transactions.

Increasing payment channels

Embedded finance allows companies and services to accept payment from more channels, allowing them to expand their reach.

Focus on customer experience

Embedded finance has an emphasised focus on customer experience. By integrating multiple financial services into one platform, customers can now access them with ease.

Challenges

As embedded financial services are still in their early stages of development, they face several challenges.

Complexity in integrating multiple services

Integrating multiple services entails some technical complexity.

Regulatory challenges

A platform integrating multiple financial services into one platform might have to navigate diverse regulatory challenges that bind to each service, not to mention the challenges that come from the partnerships with the service providers.

Risk management

By integrating multiple services into one platform users are at an increased risk of having their accounts and data compromised.

Notable Embedded Finance Platforms

Multiple successful embedded finance platforms have emerged in various countries. For example, there is Alipay in China, GoJek in Indonesia, Plaid in the U.S., and Adyen in the Netherlands.

These platforms all owe their success to the same factors. These are user trust, widespread adoption, security, innovation, and an extensive network of partners.

User trust stems from data security. Embedded finance platforms employ tools such as encryption and secure API designs and ensure security compliance to secure user data. Then, they also have extensive networks of partners, ensuring the comprehensiveness of their service offerings.

Due to the convenience they offer, embedded finance enjoys public support. It provides opportunities for companies and services to reach more users. That said, embedded financial services also face challenges such as cybersecurity.

  • Embedded Finance