Why Embedded Finance Represents a Much-Needed Partnership Between Financial Services and the Real Economy
By Sven Doerfel, Senior Director of Product Management at Checkout.com
History teaches us that when finance becomes too divorced from the service and support it owes to the real economy, significant trouble follows. While few anticipate an imminent banking catastrophe akin to 2008, today’s nervous ripples are a timely nudge to look at how financial innovation can truly serve and empower businesses and customers for the long term.
It is my view that embedded financial services represent a radical and new kind of partnership between finance – mostly fintechs – and the real economy. It is a partnership that future-proofs businesses for the fast-changing digital economy because it is built on leading-edge new payments technology, and because it serves the needs and high expectations of consumers worldwide. But crucially it is also a partnership that shores up the revenue streams, cash controls and liquidity management, which will ensure businesses thrive through today’s market adversity. Here’s how merchants can lay the right foundations in places to be successful in these areas.
Transforming Payments Costs Into Revenue Streams
While much has been made of the opportunity for banks and for fintechs, the really innovative and important point is the performance and revenue opportunities it affords the merchants and businesses that make up the real economy. The embedded finance sector is expected to be worth $7.2 trillion globally by 2030 with revenues reaching $121 billion by 2029 in the UK and Europe, a 187% increase from 2022. Bain and Co defines embedded finance as traditionally non-financial brands “providing an adjacent financial service, for which they take some degree of economic ownership.”
By providing financial services within their platform, merchants can capture a share of the revenue that would have otherwise gone to traditional financial institutions as a cost to the business. But democratising financial services’ business models is neither fantasy nor magic trick. It’s a logical realisation of the huge partnership opportunity of modern fintech.
Take interchange fees as a prime example. Traditionally merchants have had to shoulder interchange fees as a necessary cost of payments. Embedded finance in the form of payment card issuing programmes, has the power not only to remove these costs for businesses but to actively allow merchants and businesses to take a cut of the interchange fee on every transaction.
Visibility and Control Turbocharge Cash Management
For any business to be caught short on liquidity and cashflow can become a matter of existential threat. Yet, 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, so significant that it is harming their company’s financial performance.
Sticking with the example of modern card issuing programmes: physical, virtual or hybrid payments cards issued by a business in partnership with an issuing provider are increasingly coming to replace traditional corporate cards, legacy expenses software and even petty cash.
By integrating payment processing and financing into their products, services and back-end operations, companies gain new levels of visibility and control over their end-to-end cashflow while reducing the time and costs associated with traditional payment processing, invoicing and disbursements. By working with issuing partners who also provide payment-acquiring services, even greater efficiencies are achieved. That’s because it removes the need for clunky pre-funding, by flowing acquired funds directly into issued cards in real time.
This is all particularly important during times of economic uncertainty, supply chain disruptions and rising interest rates all of which make it harder, and yet more important, to manage cashflow and spend meticulously.
As well as streamlining cash management this form of embedded finance is allowing corporate finance teams to set much more tailored spend controls and to exert significantly better fraud protection over corporate spend. The tangible results are a far more predictable set of corporate costs, clamping down on fraud, and slashing significant man-hours, thanks to joined-up, real-time cash controls across the entire enterprise.
Anything Your Bank Can Do, Your Brand Can Do Better
One of the most interesting things about embedded finance is perhaps its potential to democratise access to financial services and improve financial inclusion. By embedding financial services into everyday activities and platforms, individuals, SMEs and micro-entrepreneurs can easily access and use financial services without having to go through the traditional banking system. For example, a small business owner may be able to apply for a loan directly through their e-commerce platform, or a gig economy worker may be able to access their earnings in real-time through a ride-sharing app which has an embedded payments feature, virtual card or digital wallet.
This matters because, in today’s digital economy, people across the world are increasingly free to move fluidly between being consumers and ‘producers’. As experts anticipate that up to 70% of online commerce will be conducted in the marketplace economy, modern businesses are having to adapt. Key to this shift is the ability to serve a two-sided market where individuals the world over may be both consumer and supplier – in the form of microentrepreneurship. Importantly, in both capacities, they are ‘the customer’. And customer loyalty will be the battleground on which much of the digital economy is fought and won in years to come.
In today’s challenging economic climate, many businesses feel forced to think of cutting costs rather than powering revenue. By looking under the hood of the payments economy and working with a partner who can unlock its business model, merchants are set to achieve both.
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