Fintech has grown rapidly in recent years to address the expanding demand for better experiences in personal finance management and payments, merchant payments and payments-as-a-service, cross-border payments and exchange, professional services and payroll management, and financial services related to real estate, rent and property management. Here we look at how businesses can benefit from embedded finance.
As demand for fintech has expanded, so have fintech investment and fintech companies. Crunchbase reports that the fintech sector has grown more than tenfold in the last decade. CB Insights says more than 20% of venture dollars went into fintech startups globally in 2021, when year-over-year global fintech funding more than doubled to exceed $130 billion. And Statista estimates that there were 10,755 fintech startups in the Americas; 9,323 in the Europe, Middle East and Africa (EMEA) region; and 6,268 in the Asia Pacific as of November 2021.
Going forward, Bain & Company estimates that the transaction value of embedded finance, which it defines as the integration of value-added financial services into software offerings, will surge $7 trillion in 2026, at which point it will account for 10% of U.S. financial transactions.
And it’s not just financial specialists driving the embedded fintech trend. Any business can embed financial services to make it easier for customers to buy its products and services. Shopify highlights the power of integrated payments. The majority of the $36-billion software company’s revenues now come from payments, and its payments revenues are still growing.
At this moment, in which businesses are focused on making more out of less, introducing fintech apps and embedded payments products is a great way to generate more money from the same customers.
But the ongoing fintech boom would not be possible without technological advancements that have made it significantly faster and more affordable to build and ship fintech products and services. So, what are those technological advancements? What do they mean for fintech startups and other companies that want to leverage fintech to create new value for their businesses and their customers? And what should organizations consider and do in planning their fintech futures?
Let’s take a look.
Adopt payments-as-a-service, which makes getting into fintech far easier
Five or 10 years ago it wasn’t impossible to build fintech applications. But it was far from easy.
Back then building a fintech app was akin to climbing Mount Everest. You had to build your own payment solution and understand how the banking system, KYB (know your business) and KYC (know your customer) compliance processes, and payments all work. So, if you were willing to spend an arm and a leg to build the infrastructure and three to seven years in development, you could attempt that climb. But it was not a real option for the vast majority of organizations.
But now that payments-as-a-service exists, getting into fintech is orders of magnitude easier. You can quickly and easily get the infrastructure that you need. You don’t have to spend a decade learning how the banking system, payments and other aspects of fintech work. APIs provide ease of integration, flexible fund flows and scalability. And if you use Sila’s payment-as-a-service, you also benefit from built-in compliance tools.
Use API platforms to take a customer-first approach to building and selling fintech products
Banks and wealth managers have traditionally built static financial products and tried to educate customers on why they needed to buy them. Fintech turned that approach on its head.
Now, available API platforms make it easy to build anything you can imagine. So, the question is not whether you can build a certain financial product. The question is what you want to build and whether there are enough customers who want and need that particular fintech product.
Because there is lots of competition in financial services, getting consumers to use your product is harder than ever. But the user experience of fintech products tends to be better than those built by banks, which traditionally have offered a wider breadth of capabilities that may not be as user friendly.
What mattered in the past was your ability to navigate regulatory environments and access to the financial system. What matters now is how well you understand your customers and what they want.
Understand that you will likely need dedicated digital wallet APIs to hold, move, split and store money
Different APIs provide different functionality. You can use APIs to embed payments, enable money transfers or money holding, or bring other fintech capabilities into your product.
However, it’s not always obvious to application builders within companies – who often think of payments like objects in a computer program – that they will need digital wallet APIs. But storing, moving, holding and splitting money are simply not possible without a sophisticated ledger and a digital wallet API. So if your business is planning to introduce fintech capabilities, keep in mind that you’re probably going to require a digital wallet API. Building a fintech application without a digital wallet API is like manufacturing a car without a chassis.
Digital wallets can help with merchant payment services, making it easier for customers to buy your products. They make it easier to use shared online accounts. They can be used to automate and split payments for monthly electrical, phone and water bills. They can also help consumers save more of their money, and allow businesses to increase customer engagement and personalization, support loyalty programs and otherwise add value for their consumers.
Leverage other APIs to confirm identity, support push payments and address compliance
Businesses also often employ secure APIs to enable Automated Clearing House (ACH) transfers and bank account linking and to address KYC compliance. That way, when a user accesses their digital wallet, their identity is confirmed. Just another benefit of embedded finance.
Some businesses also opt to leverage virtual accounts, which are the next step up from digital wallets. Virtual accounts differ from digital wallets in that they have dedicated routing and account numbers. That makes it easier to receive, hold and process payments from third-party accounts. For example, virtual accounts are useful when you want somebody to be able to receive money that is initiated as a push payment by somebody else who sends it via an ACH transfer or wire.
And KYB and KYC APIs are an absolute must. The financial services industry is a heavily regulated sector. Law requires that you know your business and know your customer. The goal is to protect financial service organizations from money laundering and other financial crimes. Employing KYB and KYC APIs enable you to comply with these rules as efficiently as possible, and recommended for embedded finance.
Be prepared for fraud and work with a trusted partner to formulate a plan to address it
While the ACH payment system has seen incremental improvements in the form of same-day ACH and slight increases in speed, ACH hasn’t fundamentally changed in decades. However, the volume of ACH transactions has seen massive growth. ACH volume was up 8.7% in 2021, and the ACH Network in the third quarter of 2022 processed 7.6 billion payments.
As transaction volumes have increased, fraud has surged. The instinct of most folks who build fintech applications is to remove friction to make things easier on end users. But if you manage to build a truly frictionless experience, you may find that you are inundated by fraud.
Understand that effective fraud management involves striking the right balance between reducing your risk and delivering an acceptable customer experience. Be aware that asking and verifying an SSN, date of birth, name and address will not adequately solve all your fraud problems. Do everything that you can to understand your users and confirm that they are the human beings you think they are. Keep in mind that there’s no one-size-fits-all approach to combating fraud. Look for a partner that can help you identify the most effective fraud management solutions for your business. And put fraud controls in place early, because within months, weeks or maybe even hours of launching your business, you are going to get hit by fraud. Just another benefit to leveraging embedded finance.
Rent the infrastructure and expertise that you need to expand your business opportunities
What we’re seeing now with payments-as-a-service in fintech parallels what Amazon did with AWS. Before AWS, you could run your own data center and handle all of the security and other operational details. But it was more complicated, expensive and time-intensive to take the do-it-yourself approach. Now you can just sign up for AWS, and if you need additional functionality, you can add it, and if you don’t need it anymore, you can just unsubscribe from it.
Likewise, entrepreneurs who want to launch fintechs, and businesses that want to introduce fintech services and embed payments into their existing offerings, now can rent the infrastructure and expertise that they need to get started, keep technology up to date without all the overhead, and stay compliant.
The implications are enormous.
Bain Capital Ventures calls fintech the “fourth platform,” which it says is “much more exciting than the internet, the cloud and mobile.” BCV writes: “As measured by revenue or profits, the financial functions that are now migrating into the technology stack are much bigger.” This is how businesses can benefit from embedded finance.