If you picked up an embedded finance whitepaper 12 months ago, it would have been about how companies were embedding financial services into their products to create exciting new customer experiences. Soon we would be doing our banking via TikTok and taking out insurance policies from our dishwashers.
OK, that’s a slight exaggeration. But the embedded finance use cases we spoke about a year ago were visionary customer-facing applications. Then, 12 months of high inflation and interest rate hikes re-focussed people’s minds. Now companies are using embedded finance to solve the thorny payment and banking problems they face – particularly in back-office functions. Embedded finance is coming to the operations team.
Embedded finance, behind the scenes
Before we get into that, I should probably elaborate on what we mean when we talk about embedded finance. At its broadest, embedded finance is about taking financial services – accounts, payments, insurance and lending – and bringing them into a non-finance setting via an API (Application Programming Interface).
At OpenPayd, our focus is on embedded accounts and payments specifically. Our clients use those services to help them improve their operations and deliver a better experience to their end users. To bring that to life, consider one process that eats up hours of time for an operations team: payment reconciliation.
The story of payments over the last 50 years has been about the huge growth in new ways to pay. Legacy methods like cash and cheques now sit alongside card payments, bank transfers, direct debits, payment initiation via Open Banking and even crypto. We have more ways to pay than ever before.
What hasn’t kept up with the growth in payment methods is a business’s ability to process and reconcile all those payments easily. Businesses face a torrent of incoming and outgoing payments from users, even if they only rely on one or two key payment methods. A digital platform with millions of underlying users – like a food delivery app, online marketplace or crypto exchange – will have hundreds of thousands of incoming and outgoing payments every month and usually handles them all through one master account. 99% of the time it’s clear where those payments need to go. But for a platform operating at that scale, even a 1% error rate is a huge problem.
Fixing this problem falls to the operations team. They’re the people tasked with tracking down missed payments, ensuring client balances are correct, and meeting any regulatory requirements that come with holding those balances.
Every time a payment arrives into the master client account with incorrect or missing information, the operations team will have to find out which customer the payment belongs to. They’ll be opening investigations with service providers, downloading and reviewing transaction statements and contacting the affected customers for proof of payment. All this takes time and complicates the process of settling the payment.
Embedded for the people
At this point, you’re probably wondering where embedded finance fits in. So here goes: The root problem that our frazzled operations team is facing is that they don’t have a central method for tracking payments that’s accurate down to the level of an individual user. This is where an embedded account infrastructure comes in handy.
What this looks like in practice is a set of named virtual IBANs that an embedded finance provider (like OpenPayd) issues for every underlying customer. This gives the customer unique account information, in their name, that every incoming and outgoing payment is routed through. If required, we then use webhooks to ensure every payment that passes through the vIBAN is automatically added or subtracted from the customer’s balance in the company platform.
Because the account information is unique to each customer, there’s now no need for reference information with the payment – and nothing that could be entered incorrectly. Every payment is automatically reconciled as it arrives into the business.
It’s use cases like this – the unseen but incredibly painful parts of payments and banking – where embedded finance will have the greatest impact on businesses, and their bottom-line.
It’s finance, but not as you know it
So far, everything I’ve discussed has been operational, but fixing these issues behind the scenes has a huge impact for the end user. It doesn’t matter how good a user interface is; if a customer’s payment goes missing for days, that’s a terrible customer experience. If it takes a round of back-and-forth with the operations team to find a missing payment, that’s a terrible customer experience. And if they receive a payment meant for another user, again that’s a terrible user experience.
Fixing these issues at the source is the only way to ease this burden on customers and staff. And the only way to do that is with embedded accounts and payments.
Originally published by The Paypers in the Embedded Finance and Banking-as-a-Service Report 2023.