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 In the past, the only way a small business, start-up or a consumer could gain access to the financial system (open a deposit account, borrow money etc.) was by approaching a bank.  Today, however, they can do so directly through their e-commerce platform or their accounting system (Quickbooks, for example).  A slew of software companies partnered with individual banks and technology providers to yield a one-stop shopping experience: easy, convenient and seamless. This process is called “embedded finance”, where a technology company partners with various providers to offer a number of products and services beyond its core offering through its platform.  

Payments are the train station where banking, commerce and individual businesses intersect.  Payments in all their forms are an ideal candidate for embedded finance.  BNPL is a perfect example of this innovation.  From a pure process perspective, the financial aspect of the purchase transaction is appended to the purchase decision as a payment option.  That payment is not offered by the seller, nor by the platform through which they are selling (e.g. buying a pair of jeans from Amazon. Neither the jeans retailer nor Amazon own the financing option.  Rather, they partner with a third party (Klarna, for example), who “manufactures” the financial product, to enhance the likelihood of selling the product by offering zero-friction, real time, immediate financing.

In this example, the financial product is placed in a non-financial customer journey.  What’s different from the typical credit card payment feature, which is another instance of embedded finance, or an auto loan obtained at the car dealership, is the integration of financial products into the customer’s daily digital interface with a platform.  A small business posts its transactions into Quickbooks, and, in the process, can accept payments through the billing process, open other accounts etc.  Buying financial products is transformed into an extension of the non-financial experience, such as online shopping or even inventory management.   

 The intensified power of embedded finance was enabled by the transformation of the process of commerce itself.  Commerce and business management have both been on a rapid digitization journey that meaningfully expended the opportunities to sell financial products while engaging in non-financial transactions.

A good example of this transformation is the magnitude of online spending, now at 50% of all card transactions in the US.  In addition, technology has become indispensable in basic business management for many companies of all sizes, and the consumer journey toward digitized financial management is also well on its way.  

The emergence of companies such as Yodlee, Plaid and others further contributed to the applicability of embedded finance across the board, as behind-the-scenes, instantly available data is enriching banks’ data-based product offering opportunities to customers and prospects alike.

Also, digital natives are growing up, and their receptivity of digitized multi-faceted journeys is far greater than previous generations.  

Conceptually, embedded finance is a process by which non-financial sellers distribute financial products manufactured elsewhere.  In many ways this is no different from my example of the jeans, manufactured by Levi’s, but sold by Amazon. It expands the marketing opportunities of bank products well beyond the bank’s physical, even digital, footprint, and generates another source of fee income for the distributor, while increasing customer well-being.

The distribution of financial products is obviously not limited to banks and other financial product manufacturers.Traditional retails, software firms, telecom companies and others can all add a plethora of financial products to their product like at the right place of the customer journey.  They can help you open deposit accounts, issue all types of cards, market unsecured and secured lending and use money movement services you offer.  

This model has worked extremely efficiently for decades on specific products, which are now fully integrated into customer expectations.  Airlines sell co-branded credit cards to their flyers, for example.  They do not own the cards nor to they manage them, but they do benefit enormously financially from those card sales, both in terms of current revenue as well as future income through strengthened brand loyalty.

The payments space continues to expand across industries, dimensions and products. Why not repurpose the processes that allowed us to private label cards and sell banking as a service well beyond where we are today?  The environment is ripe for this next step – customers, distributors and banks are ready to take the next step.  This can be done on a massive scale by our largest banks, and on a local level by any banks in the USA.

FinTechs are at the ready to help you design and access embedded finance products.  Some focus on providing point solutions for specific types of financial products, while others offer distributors a variety of financial products (such as loans, deposits, money movement etc.).  These FinTech partners can reduce the importance of size as an inhibiting factor to market entry. 2023 is just beginning.  Consider the possibilities associated with expanding your payments presence in other distributors’ platforms.