Payments: The frontrunners of the embedded finance revolution?

Our Thinking

Posted on January 25, 2022
Payments: The frontrunners of the embedded finance revolution?
Embedded payments is the starting point for embedded finance. With better payments infrastructure, you can speed up payment processing times, create more customer-centric financial services and many more..
OpenPayd Editorial Team
OpenPayd Editorial Team
January 25, 2022

It’s time we nailed our colours to the mast: payments will be the core driver of embedded finance. Yes, banking, lending and insurance will all undergo huge transformations, but payments will be doing the legwork in this new era of finance.

In fact, according to our research, they’re already way out in front.

What are embedded payments?

Embedded payments are described as a payment system which is fully integrated into a business’s ecosystem, with the user not taken to, or even shown, any third party when they’re making a payment.

This means businesses with no financial experience or licensing can still have a complex payment solution, while still controlling the customer experience and with reduced friction in the payment flow.

Payments are already dominating the adoption of embedded finance. In our 2021 report into embedded finance, just 4% of businesses were already offering it to their customers, but 96% were planning on offering it within five years. While embedded banking was close behind with 94%, embedded lending and embedded insurance (both 69%) are lagging behind.

Why are embedded payments so popular?

In a word, it’s all about the customer. Our embedded finance study found the biggest reasons for considering embedded finance were:

Increasing customer touchpoints with the brand (88% of respondents): Adding a financial component allows a business to change the way a customer interacts with it. For example, a coffee shop may choose to use embedded payments for loyalty purposes – when customers pay through their app, they are given offers and rewards.

Now, a customer does not only interact with that coffee shop’s brand when they walk in, they have an app which they see whenever they open their phone. Perhaps it links to other apps they have for financial management or healthcare. The shop’s brand is now far more prominent in the customer’s day-to-day life.

Retaining the front-end customer experience (75% of respondents): When payments are not embedded, the flow is always at least somewhat dependent on the payment provider. Any friction that is created on their end, which is even more common for complex payment flows such as marketplaces and platforms, has to just be accepted.

However, by embedding payments, users are not taken to any third party in order to complete a payment, or even shown a payment screen with a different logo. Everything can be branded according to the company’s requirements and the flow can be owned, and designed, by them.

Financial advantages (cross-selling and cross-border payments – 60%): While it may not yet be fully appreciated, there are huge savings to be made using embedded payments. By creating virtual IBANs for all user accounts, funds can be transferred between currencies without the usual high FX costs. Through cutting out the middleman, every single cross-border transaction becomes cheaper.

For us, this is the crux of why payments will be at centre stage during the embedded finance boom. There are many businesses which might benefit from banking, lending and insurance possibilities, but every business needs to be paid. Creating a smoother, user-friendly payment flow, which also cuts costs, is something all companies can benefit from.

Examples of how embedded payments are addressing specific pain points

Clearly embedded payments have huge potential for businesses to make incremental improvements to their offering, which for many is the focus in the short-term. But the responses we saw in our survey are just the beginning. The bigger promise for embedded payments is the chance to tackle some of the larger, thornier problems that companies face. Problems like cashflow.

Let’s imagine your business is an app for restaurant food delivery. On a busy night, a typical restaurant you work with is doing 60 covers in the restaurant. Everyone pays in cash, so that money is in the till before the night is over.

But they also do 100 orders via your food delivery app. Before they can get paid, you need to get the money from those that placed orders, reconcile with your delivery drivers, before then reconciling and paying every single restaurant on the platform. So how long does it take the restaurant to receive that evening’s takings? Days? Weeks? Months?

While they’re waiting, they still need to pay suppliers, rent, staff – all of their day-to-day costs. This is a huge factor when restaurants are judging the value of the service you provide and competitor platforms they could be using.

In fact, it doesn’t matter if you’re working with restaurants, contract drivers for a ride-hailing app or freelancers. Cash flow is king in the gig-economy.

However, if you can help restaurants, drivers or freelancers with their cash flow, the value you bring skyrockets. Suddenly you are in a far better position to build a long-lasting partnership with them.

Embedded payments is the starting point: with better payments infrastructure, you can speed up payment processing times, simplify the reconciliation process, and begin to ease some of the cash flow challenges your partners are facing.

And embedded payments is just the beginning. If you’re serious about tackling cash flow as a pain-point for your vendors, you need to think holistically. Maybe you start to issue bank accounts? Maybe you offer lending facilities against their cash flow through your platform? Maybe you embed accounting tools and integrations so it’s easier for suppliers to model their future cash flow and understand their financial position.

Embedded payments is already in motion. It’s the first cab off the ranks. But following in behind will be a wave of further embedded financial services that companies can deploy to solve very specific problems for their suppliers and customers.

If you want to understand the potential of embedded payments, you just need to remember two things. Firstly, any business that accepts online payments can benefit from embedded payments. Secondly, many other aspects of embedded finance do not happen without embedded payments.

These two factors are why we believe payments are the trailblazers. They are what will transform the offerings of thousands of businesses and act as a springboard for further advancements in finance and embedded finance.

No one yet knows exactly how the embedded finance revolution will unfold in the coming months and years. But we certainly know where it starts.