It should come as no surprise that there has been a boom period for embedded finance solutions in the wake of the COVID-19 pandemic, and its presence is still being felt across multiple industries looking to implement their own payment systems. 

Alan Irwin, VP of Product and Solutions, Europe at Global Payments, discusses the rise of embedded payments and its benefits for businesses and consumers alike. 

Embedded finance has been changing the financial services landscape for a while now, by eliminating the need for traditional intermediaries. The term encompasses many types of products and services such as deposits, issuing and lending, and payments. 

What makes the next generation of embedded finance so powerful is the integration of products into digital interfaces that consumers interact with daily, enabling them to move money from within non-banking apps or softwares. 

Alan Irwin / credit: Global Payments
Alan Irwin / credit: Global Payments

At the same time, from ride-sharing apps offering instant payments, to merchants offering buy now, pay later options, more and more businesses are taking ownership of the payment process because it has an outsized impact on the customer experience.

Payments are by far the largest element of embedded finance in terms of revenue and growth opportunities for merchants. According to research by EY, the volume of payments through embedded channels reached US$2.5t in 2021 and is expected to reach US$6.5t by 2025. 

The pandemic was a big driver of this growth, pushing millions of consumers to rely on embedded payments, where they can make a purchase without leaving a website, social media channel, or mobile app. 

For businesses too, multiple customer touchpoints are good candidates for embedded payments: customer loyalty apps, digital wallets, accounting software, and shopping cart platforms, among others. Integrating embedded payments across these channels simplifies the payment process and presents opportunities for advanced data analytics and revenue generation. 

As a result, embedded payments are exploding across commerce and in unexpected industries. Here are some of the ways in which businesses are tapping into the transformative potential of embedded payments. 

A shift in customer experience

The rise of embedded payments is partly in response to the changing dynamics of consumer behaviour. Modern consumers, especially the digitally native generations, are now accustomed to the convenience of one-stop-shop platforms and expect a seamless and integrated approach to financial services. 

Embedded payments meet these expectations by offering financial services within the natural flow of consumers’ daily activities. Whether it’s making purchases online, subscribing to services, or engaging in the gig economy, embedded payments eliminate the need for customers to switch between platforms, ensuring that financial transactions are no longer a separate step, but an intrinsic part of an effortless user journey.

Reducing cart abandonment

Today, businesses are focusing purely on customer experience as a means of increasing customer loyalty and slashing cart abandonment rates in the process. Currently, 69.57% of online shopping carts are abandoned. Embedded payments are one way for businesses to lower this rate.

Taking out a credit card and manually entering the number is a friction point that can cause consumers to abandon a digital purchase. Embedded payments make this process easier by connecting and saving a payment method for later use at the click of a button. The Starbucks app, for example, saves credit or debit card information for one-click payments while customers earn points for using the app.

Merchants are now seeing greater use of card data storage and tokenisation to further reduce cart abandonment rates as they allow consumers to store their card details for future use, making their next purchase at the ecommerce store much faster.

credit: Shutterstock
credit: Shutterstock

Improving security

Providing an embedded payments experience goes hand-in-hand with ensuring that consumers feel safe at the checkout, especially with soaring cybercrime. 

When companies use the redirect method, customers get forwarded to another website or app to process their payment via a third party. Often the customers’ card details are not automatically saved, adding yet another touchpoint to their payment journey. 

Also, it’s at this stage that customers experience additional errors or security issues, which can lead them to believe their details won’t be secure resulting in them abandoning the payment altogether.  

Therefore, reducing site changes as much as possible and using clear branding to ensure customers are aware that they’re still on the same site is key to instilling a sense of security. 

Similarly, real-time data validation built into the payment form can prevent bad data from being entered in the first place, such as an invalid expiry date or security code, as well as restrict bad actors from spamming through card data en masse.

Reaching underserved communities

One of the effects the pandemic had on the financial industry is that it forced businesses, consumers, and financial institutions to imagine what a cashless society would look like. 

Unable to touch PIN pads, let alone handle cash, many merchants permanently stopped accepting notes and coins. This trend continued after the pandemic ended, leaving the unbanked without the same access to the things they need, or want, to buy. The dwindling of cash acceptance has provided financial institutions and businesses with an opportunity to present themselves as a problem-solver to the unbanked.

Embedded payment solutions from merchants, such as peer-to-peer payment services or buy now, pay later provide a cash alternative avenue for purchasing goods and services than cash. Banks have also followed suit with their own set of helpful tools and services such as online bill pay, transfers, and loan applications. 

To add to this, embedded finance providers can also analyse alternative data sources, including cross-border sources, open banking data, and non-traditional sources like utility bills, to build a comprehensive picture of an individual’s creditworthiness.

In conclusion

The evolution of embedded finance technology has been fuelled by fundamental changes in consumer and merchant behaviour. Ultimately, consumers want financial products and services that are built into the technologies that touch their daily activities. 

As a result, embedded finance has become the solution by offering both banks and non financial services brands the ability to provide a frictionless and integrated customer experience.