Embedded finance: unlocking a billion-dollar sector

“Finance is not a mathematical puzzle,” wrote economist John Kay in his post-financial-crisis tome, “Other People’s Money”. Instead, Kay reminds us that “finance exists to serve households and businesses”.

The point may sound obvious or prosaic but it's one the financial services sector does well to remind itself of. Embedded finance, and what it represents in terms of the partnership between fintechs and the real economy, has advantages for several groups – not least merchants. Let’s talk about how to define embedded finance, why it’s on the rise and how merchants can benefit from the value created by it against the backdrop of challenging economic times.

What even is embedded finance?

Fundamentally, embedded finance refers to integrating financial services and products into non-financial products and services, such as mobile apps, social media platforms and ecommerce websites. This allows companies in non-financial sectors to offer financial services to their customers without having to build a financial infrastructure from scratch. 

For consumers this should result in faster and simpler payment methods that don’t compromise their security, as well as new revenue streams and customer engagement opportunities for these companies, while also making financial services more accessible to customers.

Why is embedded finance on the rise?

The embedded finance sector is expected to be worth US$7.2tn globally by 2030 with revenues reaching US$121bn by 2029 in the UK and Europe, a 187% increase from 2022. This explosion comes as consumers are no longer tied to banks for financial products, and are increasingly looking to brands they trust. Sectors like online travel, marketplaces and digital banking use payments to stay at the heart of their customers’ financial lives.

What are the benefits of embedded finance for merchants?

Let’s hone in on two benefits that aid businesses in thriving through today’s market adversity.

1. Cutting costs and unlocking new revenue streams

Through embedded finance, businesses avoid the costs and complexities of building and maintaining their own financial infrastructure. It also creates new revenue streams, of which merchants can capture a share, that would have otherwise gone to traditional financial institutions, as a cost to the business. Merchants can also increase customer engagement by offering financial services such as payments, lending and insurance directly from their website or app, creating additional revenue streams through this pathway.

2. Taking back control over cash management

70% of payments and treasury leaders report that, because of disjointed tech and transaction data, there is a disconnect between their payments, treasury and payouts functions. By integrating payment processing and financing into their products, services and back-end operations, businesses gain new levels of visibility and control over their cashflow while reducing the time and costs associated with traditional payment processing. This is all-important during times of economic uncertainty, as supply chain disruptions and rising interest rates make it harder, yet more important, to manage cashflow.

Enabling embedded finance using cards

Card issuing is an example of how embedded finance can enable merchants to provide seamless buying experiences. Let’s take a closer look at payment card issuing programmes.

Physical, virtual or hybrid payments cards issued by a business in partnership with an issuing provider are coming to replace traditional corporate cards and legacy expenses software.

Embedded cards lower transaction costs by removing interchange fee costs for businesses, and actively allow merchants to take a cut of the interchange fee on every transaction.

Partnering with card issuing services that provide payment-acquiring services also helps merchants take back control over their cash management, as they can remove the need for clunky pre-funding, by flowing acquired funds directly into issued cards in real-time.

Additionally, embedded cards create a one-stop issuing shop for merchants. Launching a card program with an issuing provider means merchants can achieve faster and optimised performance as they can provide for issuing, processing, management, compliance and reporting capabilities all integrated through a single API.

Powering your revenues, for the future

With the modern, impatient consumer, non-financial businesses should look to streamline the customer journey with one-stop, embedded finance solutions. By embedding financial services into accessible platforms that individuals, SMEs and micro-entrepreneurs can easily access, merchants provide a viable and friendly alternative to the traditional banking system, unlocking an array of customers and by extension, revenue streams.

Today’s challenging economic climate requires businesses to power their revenues for the real economy, and embedded finance does just that. 

About the author

Sven Doerfel is Senior Director of Product Management at Checkout.com, where he leads the development of card issuing. Prior to joining Checkout.com last year, Sven spent two years at SumUp focusing on online payments, risk and compliance products. He also spent 12 years leading product marketing at PayPal.