What is embedded finance and how is it changing businesses?

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Posted on July 24, 2023
What is embedded finance and how is it changing businesses?
Embedded finance is shifting how we experience financial services, and it may be more relevant to your business than you think.
OpenPayd Editorial Team
OpenPayd Editorial Team
July 24, 2023

Have you ever gone to a party to find everyone talking about something – a new TV show, a chilling true crime podcast, a hilarious cat video – and felt the pang of frustration from having not seen it? Not being able to get excited about the shared buzz?

While it’s no Game of Thrones, embedded finance is having a similar effect for many business leaders. For many, it’s something they know of, but have questions about the details. In our 2021 research into embedded finance, 91% of respondents had heard of embedded finance, but were unsure exactly what it meant.

With this article, we wanted to dispel some of the confusion with our own definition we use at OpenPayd. But if you have any questions, don’t be afraid to get in touch!

What is embedded finance?

Embedded finance is the integration of financial services directly into a business’s products and services, via API. This enables both financial and non-financial businesses to offer services like payments, banking, lending and insurance without becoming regulated as financial entities or building any financial infrastructure themselves.

Which financial services can be embedded?

When we talk about embedded finance, we’re usually lumping together four main underlying categories: embedded payments, embedded banking, embedded lending and embedded insurance.

Embedded payments: This enables a business to keep payments fully within their own ecosystem. This prevents the need for external payment screens and payment flows that you have no control over. Whether topping up accounts on a platform, sending money abroad, withdrawing funds to a bank account or initiating any other kind of payment, everything occurs within your product ecosystem.

It is not just base-level payment processing that businesses can embed, but the very best solutions that are available today. Now, businesses can embed access to real-time payment rails, giving them the ability to process transactions instantly.

Payments can also be embedded into both front-end product environments and back-end systems, so whether a business is looking to offer a new customer feature or streamline their back office operations, embedded finance can help.

Embedded banking: Banking and account infrastructure is no longer the reserve of established financial institutions. If your customers would benefit from banking functionality, such as having their own accounts in which money can be stored and transferred, these can be created more or less instantly.

Using account infrastructure like virtual IBANs, businesses can create hundreds of thousands of accounts, with the ability to receive and send funds in multiple currencies. This alleviates the need for manual reconciliation and frees up time for operations and finance teams. Funds that are sent to a virtual IBAN can even be automatically ‘swept’ to a master account, while keeping the balance the same for the customer. The business benefits from removing reconciliation and human error, but also keeps all of their funds in one central account.

Embedded lending: Many businesses and individuals require lending as part of the purchasing journey, but will never actually be offered that functionality at the point of purchase. Like insurance, lending is typically done separately from a purchase. But if they could access funds from a brand they trust and enjoy engaging with, at the point of need, that is a much more attractive proposition. Embedded lending allows businesses to offer lending services and reap the rewards of an additional revenue stream, without taking on the credit risk.

Embedded insurance: Insurance is something people want for many items – electronics, jewellery, clothing – but often, we end up wishing we had bothered doing it only once it’s too late. By embedding insurance into the buying journey, businesses can offer customers the chance to insure their goods at the point of purchase, without a long application process with a third party slowing things down.

What is involved in delivering an embedded finance project?

Any embedded finance project will have four main layers.

The bottom layer is financial licences. If you want to provide any kind of financial service, such as card issuing, FX, accounts or payments, the service will need to be licensed by an underlying regulator. Becoming licensed is a process that will take months if not years, for companies that look to build financial services themselves. On the other hand, an embedded finance infrastructure provider will have already acquired the underlying licences for the services they offer to their clients..

Then there’s choosing your payment rails. The way in which funds enter and leave your business, and the speed and cost associated with it, will be down to the rails you use. Faster Payments and SEPA Instant, for example, allow for payments to be made in real-time in the UK and Europe respectively. SWIFT is used to process transactions all over the world. There are many different options, and embedded finance gives your business the opportunity to access the payment rails you need to provide the best experience for your customers.

With licences and payment rails sorted, you know you can now legally accept funds in the places you want to operate in a fast and secure way. Now you can bring in Banking-as-a-Service (BaaS), enabling you to get creative with the services you offer. This could be branded debit cards, personalised savings accounts, instant bank transfers and more. Instead of having to work with a new partner whenever you want a new service, you can pick and choose which services you need at the point of integration, and alter as you grow.

Finally, you embed these services. This is the part the customer sees – their new financial features all with your own branding and design. The licences, payment rails and BaaS are all sat underneath, how you choose to embed them is completely up to you. Integration is achieved via an API and can take just a few weeks.

Embedded finance in action

Embedded finance is not just about adding new features for non-financial businesses, but also improving the underlying payments infrastructure of financial and non-financial businesses alike. Here are two real-world examples of what this looks like that we have worked on at OpenPayd:

Caxton: Caxton is a fintech giant that processes over $1bn a year in remittance payments. For them, embedded finance wasn’t about adding more for their customers, but improving their own back office.

By assigning each of their customers with a virtual IBAN, all payments could be reconciled automatically, eliminating human error and saving their Ops team hours of painstaking work. They were able to spend more time focusing on growth with a persistent pain point alleviated.

Bitfinex: Anybody who has ever got into the world of crypto will be able to tell you about Bitfinex. The world’s fifth largest crypto exchange, Bitfinex handles fiat payments in the billions from all over the world.

But in Europe, those payments were slow – and the crypto world hates slow. European customers were waiting days for bank transfers to clear, a level of customer experience Bitfinex were not happy with. So, they partnered with OpenPayd and we were able to offer them new payment rails – particularly SEPA Instant. This made all their European fiat payments occur in real-time and drastically enhanced their offering.

Why are companies embedding financial services?

All four areas of embedded finance have their own benefits. But given that payments and banking are our bread-and-butter at OpenPayd, we’re focusing on what they can deliver.

Firstly, businesses can enjoy a far more streamlined approach to their payment and finance operations. Embedded account infrastructure can alleviate the need for businesses to reconcile incoming payments from their customers, for example. Instead, all parties are assigned a virtual IBAN, allowing them to receive funds directly and not rely on any referencing information. While the end user would not notice any difference in the service, Ops teams have more time available to focus on growing your business, and the possibility of human error is eliminated.

Then there are the possibilities it brings to customer experience. No matter what product or service your business offers, being able to keep control of your payment flows enables you to create a better journey for your customers. No external payment screens or clunky information capture forms, from start to finish the financial element works within your design.

Embedding financial services also helps businesses expand their offering. If a remittance service wants to offer more countries and territories that customers can send money to, it can embed a more comprehensive FX solution or account infrastructure from a provider licensed in the relevant international markets . It may want to embed a solution which has access to a greater number of payment rails, increasing the speed of transactions.

It would be impossible to list all the benefits of embedded finance, because what it really brings is flexibility. Businesses have the opportunity to use financial services to their own competitive advantage and this will be seen in thousands of different ways.

The future of embedded finance

Make no mistake, embedded finance is no fad. It is estimated to be worth $7.2tr by 2030, with over 92% of businesses planning to roll it out within five years. More and more businesses are exploring how embedded finance can reshape their business.

Embedded Finance Market Size is estimated to be worth $7.2tr by 2030, with over 92% of businesses planning to roll it out within five years.

This is by no means a top-down approach – businesses are responding to customer demands. A recent EY study of changing consumer views revealed that 63% of consumers would “highly value” open banking and embedded finance solutions that connect and personalise their experiences across third-party ecosystems.

Then, it snowballs. As more customers demand it, more businesses will provide it. Our own research into embedded finance found that 70% of business leaders would roll out embedded finance projects faster if there was an increased customer demand for embedded financial services.

In other words, the race has already begun. The vast majority of businesses are planning to offer it, consumers want it, and the more consumers want it, the faster businesses want to offer it. Those not currently exploring embedded finance may find themselves at risk of being left behind by competitors.

Some parts of the fintech ecosystem have been guilty of throwing out grandiose statements about ‘revolutions’ and the next big thing to change the world. But there is a genuine cause for excitement around embedded finance – and the research shows that it’s coming from businesses and consumers as well as providers.

The way we experience financial services is likely to change in ways we can’t predict right now. Some will work, some will not. But businesses now have the opportunity to improve their services and operations in so many ways, whether that be through new features or streamlining operations behind the scenes.

From multinational FX giants to your local fish and chip shop, the future of finance is being built – and embedded – right now.