Embedded Finance - The future of frictionless payments and seamless customer experiences

The global payments landscape is undergoing a transformative shift with embedded finance at the core. Embedded finance is revolutionizing the way we interact with money. Imagine paying for your coffee order without ever leaving your favorite coffee app. Or booking a flight and paying for it in a single click.

Embedded finance integrates financial services, including payments, directly into non-financial platforms and applications that people love and use daily, eliminating an additional step and simplifying transactions. Financial institutions (Fis) are more about being embedded into a customer's everyday journey as opposed to just expanding the payment capability, fostering deeper loyalty, and driving new growth.

This article dives into the potential of embedded finance in payments and explores how FIs can how to leverage this trend to stay competitive and relevant in today's digital economy.

1. Enhanced Payment Journeys: Building Loyalty Through Frictionless Experiences

One of the largest benefits of embedded finance in payments is frictionless, integrated payment journeys. Embedded payments allow users to complete transactions directly in applications without frequently switching between payment gateways, entering payment details, or navigating other websites. The enhanced payment journey makes for much more substantial user retention, satisfaction, and brand loyalty.

According to McKinsey, 75% of users will choose embedded payments mainly because of convenience. By reducing friction, financial institutions can help partners improve user experience, which in turn would drive higher transaction volumes.

Let’s look at some real-world examples

1. Ride-hailing:  Embedded payments allows one to pay for an Uber ride without switching apps? By seamlessly integrating payments into the ride-hailing app, users can enjoy a frictionless experience.
2. E-commerce: Embedded finance enables customers to save their payment information to speed up one-click purchases eliminating any additional step in the completion of a transaction and the checkout process.
3. Subscription services: embedded finance simplifies subscription management, from streaming your favorite shows to regular grocery deliveries. Automating payments and setting reminders ensures a smooth experience for both users and businesses.

FIs can help partners get ahead of their customers’ needs by developing embedded finance solutions specifically tailored to industry needs.

2. Industry-specific solutions: Tailor-made payments for individual industry needs

Embedded finance allows FIs to serve the unique payment needs of various industries through customized offerings. It is not about embedding payment functionality but building experiences and payment options exactly tailored to the specific requirements of an industry. 

Let’s look at some examples:

• HealthCare: A patient can get consultation services settled, dispense drugs and even secure follow up consultation services-all through their health care management app. This helps save the patient’s time and energy, making the entire experience seamless. It also ensures that the process is fast and minimizes administrative workload for healthcare professionals.
• Retail: BNPL (Buy Now, Pay Later) options on e-commerce platforms have changed the retail scene completely. Initially pioneered by companies like Affirm and Afterpay, BNPLs BNPL allows customers to purchase high-value items by splitting payments into installments. Financial institutions partner with merchants to integrate BNPL options into their platforms, streamlining the process for both consumers and merchants:
   - For customers: BNPL offers speed and flexibility, enabling them to buy desired products without immediate full payment.
  - For the merchant: BNPL increases sales by attracting more customers and boosting average order values.

• Travel: By embedding financial services in the travel platforms,  customers can pay for flight tickets, hotels, insurance, and even currency conversion within a single interface. FIs can partner with travel-booking sites to develop embedding payment solutions with flexible pay options, insurance products, and multi-currency support. This streamlined approach simplifies the travel booking process for customers while unlocking new revenue streams for both financial institutions and travel providers.

Finance will be fully integrated into an industry-specific workflow in the context of that industry's unique needs and requirements for its customers. This transforms financial institutions from a service providers into a seamless, integral part of industry operations, eliciting loyalty and trust from both business users and end customers.

3. Revenue from API Monetization: New Sources of Income

The second most important benefit of embedded finance is API monetization. APIs enable third-party platforms to offer payment capabilities through their services. This is when financial institutions open fresh streams of revenue. To this end, financial institutions can charge third-party businesses access to these payment services through a subscription or a per-transaction fee, or tiered usage models.

Let’s look at some API Monetization Models.

• Subscription-based access: In this model, some financial institutions charge a subscription fee to partners to access their APIs, where the FI earns a fee based on periodic usage of the FI's payment capabilities. It's a great model for sites that make regular payments-ecommerce sites, because they know how much money to expect.
• Per-Transaction Fees: A more conventional monetization model based on the number of transactions, where they charge them on a pay-as-go basis. It's well-suited for industries with variable transaction volumes, such as event booking, where fees are only incurred at purchase.
• Tiered Models: Financial institutions can provide tiered API access for businesses whose demand is not steady. It scales in cost according to the volume. This kind of structure is good for big platforms like SaaS providers, where companies start at a lower tier and scale up as their needs grow.

Financial institutions get direct sources of revenue while expanding their customer base by partnering with fintech companies and other non-banking enterprises through embracing API monetization. This means that FIs will be able to tap into new users in a scalable and flexible manner while growing revenue and strengthening positions within digital ecosystems.

4. Monetizing Data for More Personalized Offers: Be Where Your Customers Are

Embedded finance creates rich data at the point of interaction, an opportunity for FIs to deliver highly personalized financial solutions. Leveraging data analytics or machine learning to real-time behavior patterns enables FIs to deploy personalized offerings. 

Here are a few use cases:

• Instant Credit Offers: Embedded finance can, at the time of high-value purchase, provide instant credit offers at the point of sale, especially while a customer is making a purchase, for example, a heavy-duty home appliance, furniture, and so on. It may show a low-interest instalment loan option to the customer, increasing the chances of purchase.
• Hyper-Targeted Rewards: FIs may use spending analytics to provide targeted rewards. For instance, If the spend data shows that a customer is buying from a specific isle at a grocery store, then a bank can offer cashback points at the store.  Another example is discounts on streaming services for customers who pay for subscriptions most often.
• Dynamic Product Recommendations: Embedded finance enables dynamic product recommendations for instance savings accounts, insurance, retirement plans, or any other kind of product, that is tailored to user's spending, income patterns, or life events. Relevant offers at the right time make for satisfied customers and pave the way for greater cross-selling opportunities.

Customer Loyalty – the key benefit

The true power of embedded finance lies not just in engaging customers, but in fostering loyalty.  It adds significant value to the customer experience as customers get essential financial services in a timely and relevant manner. All this does is enhance the brand's affinity and expand market share.

5. Regulation as a service: Easy compliance for a partner

Embedded finance also presents new challenges in terms of compliance. In such transactions, where parties operate through non-banking applications, they may be new to financial regulations, meaning the compliance requirements associated with them. Financial institutions can use this as a platform for offering compliance as a service, thereby allowing them to guide their partners to overcome the complexities of regulations in those areas.

Tackling key compliance domains

• AML: Embedded finance solutions can automatically screen transactions to spot suspicious activity, allowing third-party platforms to stay on the right side of the AML regulation without having to develop an in-house solution.
• KYC: FIs can integrate KYC compliance into their APIs so that a non-banking platform may be able to verify identities at the time of user onboarding. This becomes more relevant to fintech and e-commerce platforms that handle frequent transactions.
• GDPR and Data Privacy: Financial institutions can directly integrate data privacy measures into their payment solutions, thus ensuring compliance with GDPR and other data protection regulations. This provides an additional layer of data security to partners, reassuring customers that their information is handled securely.

Compliance as an embedded service from FIs makes them very valuable partners to non-banking platforms, thereby reducing regulatory risk for them and enabling them to focus on growth and customer engagement.

6. Security in Embedded Finance

As embedded finance expands the digital landscape, security becomes paramount. Financial institutions (FIs) and technology providers must prioritize robust security measures to safeguard user data and transactions.

To mitigate risks:

• Strong Encryption: Encryption of sensitive data both at rest and in transit.
• Robust Authentication: Two factor or Multi-factor authentication (MFA) is essential to verify user identity.
• Advanced Fraud Detection: AI-powered tools to proactively identify and prevent fraudulent activities.
• Regular Security Audits: Continuous monitoring and testing that ensure system integrity.
• Compliance with Standards: Adherence to industry standards like PCI DSS and GDPR guarantees security best practices.
• Secure API Design: APIs are built with strong authentication, authorization, and rate limiting to prevent misuse.

The following steps can ensure users are protected:

• Secure Transactions: Advanced security protocols safeguard every transaction.
• Data Privacy: User data is treated with utmost confidentiality and privacy.
• Regular Security Updates: Systems are constantly updated to address vulnerabilities.
• Transparent Security Practices: Clear communication with users that builds trust.

Conclusion: Building the Future of Finance in a Digital-First World

Embedding finance in payments isn't just a technical upgrade but a paradigm shift on how financial institutions are working with their customers and partners. This shift enables a connected digital economy that comes with benefits including:

• Improved customer journeys,
• Tailored domain-specific solutions,
• API monetization,
• Personalized financial product offerings, and
• Compliance-as-a-service. 

FI have a strategic opportunity to stay relevant in a rapidly growing digital world. It creates new revenue streams, strengthens customer loyalty, and even provides a competitive edge by differentiating from traditional banking services. 

The Future of Embedded Finance

To fully realize the potential of embedded finance, FIs need to concentrate on scalable, adaptable, and secure solutions that satisfy the changing needs of users. As we move forward, future innovations, such as IoT integration, biometric payments, and AI-driven recommendations, will further propel the industry forward. By leading in embedded finance, financial institutions can not only meet but exceed the expectations of their digital-first customers, ensuring sustainable growth in the payments industry.