The role of financial institutions in embedded finance

For banks looking to strengthen relationships with their business clients, acting as a one-stop solution for all their payment needs can be a powerful way to do just that. Part of being a trusted, supportive partner in their business ventures means understanding and providing solutions for their customers.

The demands of today’s modern consumer involve faster, secure, seamless financial experiences – aka embedded payments. With the right partnership, financial institutions can help their merchant clients realize these new payment experiences in their own products, further strengthening the relationship between business and bank.

Embedded finance: What is it?

Most consumers have used an embedded payment service, whether they know it or not. From ordering ahead via the Starbucks’ app or using PayPal at checkout, embedded finance is becoming the digital norm.

Embedded finance covers a wide range of digital finance services. Economist Peterson K. Ozili defines embedded finance as “the incorporation of a financial service or product into the platform of a non-finance company, organization or institution.” Simply put, it’s a financial experience embedded into a typically non-financial one. The benefits of an embedded payments experience come down to convenience, accessibility and a streamlined experience.

Examples of embedded finance

Savvy financial leaders have likely heard of embedded finance in relation to companies like Apple, Amazon and TikTok – but for fintech innovators, the breadth of opportunities surrounding embedded finance are seemingly unlimited. Here are few use cases for this exciting financial technology:

Embedded payment

Making a payment in a digital, branded space is perhaps the most common version of embedded finance. Most major consumer brands leverage this technology, but non-retail businesses are jumping on this opportunity, too – take TikTok and Google Maps, for example. TikTok launched its own ecommerce platform – TikTok Shop – within the app, giving its users an integrated shopping experience. Google Maps now gives its users a convenient way to secure a parking spot before traveling, allowing them to pay for street parking ahead of time.

Embedded insurance

Embedded finance doesn’t stop with shopping experiences. Embedded insurance offers consumers protection for their purchase at the time of sale within one branded, seamless experience. One innovative example of this is Tesla. The electric car company now offers insurance to drivers purchasing their vehicles, completely bypassing the traditional car insurance experience.

Embedded lending

Lending is perhaps one of the biggest applications of embedded finance. In this instance, non-financial companies offer their customers loans directly. Due to the need for secure APIs, these non-banks must partner with financial institutions or banks to facilitate lending. A good example of embedded lending at work is Zillow. The real estate company expanded into this space when they introduced Zillow Home Loans in 2019.

Perhaps the most popular example of embedded lending is the Buy-Now-Pay-Later (BNPL) service. These short-term loans allow consumers to purchase a product immediately and pay it off over time. BNPL benefits both the seller and the buyer; the seller makes a sale that they might not have previously been able to due to limited funds, and buyers who remain in good standing with this mini loan can even see a bump in their credit score, according to a survey by Equifax.

Embedded banking

Embedded banking, also known as “banking as a service” or BaaS, offers consumers services that traditionally were only handled by financial institutions. For example, the ride share company Lyft offers both riders and drivers traditional banking options right within in their app. Lyft Cash gives riders the ability to preload their account, while Lyft Direct gives their drivers near-real time access to earned funds via a debit card and bank account powered by Payfare and Stride Bank.

Another notable example of embedded banking is the Apple Card. The company Apple introduced their credit card in 2019, allowing its customers to use their mobile phones as a payment device, digitally and physically.

Embedded investment

Embedded savings and investments are bringing wealth opportunities to the masses, thanks to accessible, approachable services. Platforms like Acorns and Robinhood take the place of an investment advisor, putting small amounts of the users’ funds into savings, then applying them to a diverse portfolio.

3 ways financial institutions can benefit from embedded finance

Financial institutions have access to what most companies don’t – APIs. Access to these secure interfaces allow financial institutions to cross-sell embedded finance solutions to their business clients. Independent software vendors, payment facilitators and other businesses operating in the digital space are all candidates for an embedded finance partnership.

1. Increase cross-sell opportunities

Whether you’re pursuing a new client or offering new services to existing ones, the more solutions you can provide to your business clients, the more you can cross sell, expanding the bank’s distribution footprint.

2. Gain a competitive edge

In addition to increased cross-sell opportunities, financial institutions could also gain a competitive advantage. Offering embedded finance solutions can help traditional financial institutions differentiate themselves from the competition.

3. Strengthen trust and loyalty

There’s also a lot to be said for the trust and loyalty that exists in the business-bank relationship. Building an embedded finance solution comes with a lot of risks and red tape, and many businesses simply do not have the resources to handle these hurdles. By relying on a trusted partner that understands their unique business needs, merchants can focus on running their own company rather than opening themselves up to risks that come with involving a third-party provider.

How financial institutions can offer embedded finance solutions

Offering and maintaining the platforms needed to embed finance into digital experiences comes with a lot of overhead and ongoing maintenance costs. Financial institutions can sidestep the headache of owning these interfaces by relying on experts with experience in facilitating this solution.

For example, financial institutions that partner with Deluxe can offer flexible, customizable and PCI-compliant code that can be seamlessly integrated into software, applications or wherever merchants need payment interfaced on their site. Plus, Deluxe’s proprietary script is customizable, allowing merchants to own the experience with their brand.

The embedded finance revolution has only just started, and for financial institutions looking to stay competitive in a marketplace flooding with non-bank entities, partnerships can go a long way. By leveraging relationships with trusted fintech companies like Deluxe to bring better solutions to business banking clients, financial institutions can claim their share of the embedded finance industry.