Embedded payments are a type of
embedded finance, whereby financial services are extended within non-financial contexts. In such a scenario, the business-to-customer (B2C) firm stands as an intermediary between the customer and the financial institution (FI) – meaning the bank is (superficially)
removed from the banking process.
While this is not a new concept (think car dealers offering financing or airlines providing credit cards), embedded finance is in the
news today because it has undergone a significant transformation in recent years; especially within the retail space.
According to Global Market Insights, the embedded finance market shot to $58 billion by 2022 (partly as a result of the pandemic-induced lockdowns and the wave of digitisation
that followed) and is estimated to clock-in a 29% compound annual growth rate (CAGR) until 2032 – by which point it could exceed $730 billion.
In this instalment of Finextra’s
Explainer series, we consider how embedded payments work technologically; the benefits to businesses, payment service providers (PSPs), and end-users; as well as some real-world examples.
Embedded payments: A closer look…
Embedded payments herald the total integration of payments processing; directly within a business’ platform or application. This can encapsulate ride-sharing apps such as Uber or Bolt that allow payments to be executed directly from the platform; online
marketplaces where consumers buy items from various vendors without being redirected to separate gateways; or even social media sites that offer in-app purchases.
Embedded payments represent efficiency and seamlessness for end-users; an opportunity to streamline the payments experience for businesses; and access to new revenue streams and markets for FIs.
In this space also exist providers of buy-now-pay-later (BNPL) schemes, such as Klarna, Afterpay, Klarna, Zip, Zilch, ClearPay and Affirm. They enable customers to spread their payment across several instalments, with zero interest. BNPL providers make their
money by charging the retailer a fee – with boosted sales as compensation. According to Bloomberg Quicktake, the
value of the global BNPL payments market was $120 billion in 2021. By 2026, it is expected to hit $576 billion.
How do embedded payments work?
Implementation specifics can vary based on the platform and the payment gateway in question. Generally speaking, however, the B2C firm looks to integrate a payment gateway into its platform so that it becomes a payment facilitator (payfac) and an intermediary
between the app and the end-user’s bank.
The transaction information itself is securely transmitted via application programming interfaces (APIs). The
API – a kind of digital waiter – acts as a bridge between the platform and the customer’s bank; transporting the relevant data to request (then deliver) the payments service. Oftentimes, the
user’s card details will be saved within the B2C application – allowing this entire process to happen rapidly, at the push of a button.
Due to the costs and risks that can come with building out payfac architecture, B2C platforms are increasingly turning to payfac-as-a-service – which offers the benefits of embedded payments but in a way that is cheaper and quicker to deploy.
What are the benefits of embedded payments?
So, why should B2Cs and FIs team up to deliver embedded payments anyway? Here are five key benefits:
- Improved user experience
Being redirected to external sites to pay is a considerable pain point for consumers. By processing payments directly within a website or mobile app, the user experience is greatly improved.
- Increased conversion rates
Embedded payments have been shown to reduce cart abandonment rates as well as increase the chance of users completing their purchase. For retailers, this means more sales; for PSPs this means more revenue from fees.
- Enhanced brand control
Businesses retain control over their customer journey – thus galvanising brand perception and loyalty.
- Better analytics
Over time, embedded payments can produce a wealth of
actionable data. By analysing this information, B2Cs can gain a greater understanding of customers’ purchasing habits – thereby supporting product development and even fraud detection capability.
- New and greater revenue streams
Embedded payments can help B2Cs and FIs drive existing revenues and access new markets, respectively. This is achieved by providing more convenient checkout experiences; boosting conversion rates; and differentiating services.
The B2B space and beyond
Embedded payments mark a shift toward a more user-friendly approach to financial transactions – enabling B2Cs to extend seamless payment experiences within existing platforms, and FIs to generate further revenue streams by accessing new markets.
In the coming five years, the world of embedded finance will continue to evolve – particularly in the wake of the third
Payments Services Directive (PSD3) – and find even greater use cases within the wide-open B2B market.