Instant Payments & Embedded Finance

A recent Juniper Research study predicts that the global revenue from embedded payments will reach $59 billion in 2027 from $32 billion in 2023 at a growth rate of 84%. The study also predicts growth of integrated payments will eventually erode the dominance of cards within eCommerce.

Such a shift will be a game changer in how banks, credit unions, fintechs, and even e-commerce platforms operate. Therefore, embedded payments present an opportunity for financial institutions to rethink their traditional product portfolios. However, before taking the plunge into these new waters of opportunity, it’s important to first have a foundational understanding of what embedded payments are and the benefits they offer.

Defining Embedded Payments

Embedded payments are transactional functionalities within a bank that have been exposed to upstream applications, such as a mobile app, that enables the user to complete a payment. This results in a more frictionless payment experience for the consumer, as embedded payments make it much easier to connect and save a payment method for future transactions. The Starbucks app is an excellent example of this. It allows users to save their payment information so they can earn rewards and make purchases within the Starbucks app.

Other examples include:

- Apple Pay users can quickly make purchases without needing to pull out a credit card to enter information for each transaction.

- Telsa now offers an insurance program that enables vehicle buyers to have coverage, eliminating the need to contact and buy through an insurance agent or insurance website.

- Uber analyzed payment data to develop a driver support program to aid those low on cash to buy fuel.

Key Decisions for Financial Service Providers

According to McKinsey research, more than half (55%) of the revenue from embedded finance goes to balance sheet providers, or traditional financial institutions. Payment processors and product providers who owned the customer relationship have also benefitted. In other words, embedded payments present a wealth of potential for an entire ecosystem of providers.

Given the market potential, many financial service providers are expected to compete for embedded finance business. However, the most successful organizations will be the ones that differentiate themselves from the competition.

McKinsey suggests the following options for differentiation:

First consider product breadth. Start attracting customers with checking, deposits or another product, then grow the relationship from there with more complex product offerings.

Also consider product depth. It may be worthwhile to develop deep expertise and a competitive advantage in a specific product or service area, such as SBA lending, and focus on that product depth when building your embedded finance business.

Lastly, think through program management support. Become an expert in a certain area of embedded finance, such as embedded payments servicing, sales and risk management, then offer these services to those who lack this expertise. “The ability to provide distributors with this kind of program management is likely to be a key source of differentiation in the long run,” McKinsey says.

Embedded payments offer a range of opportunities for financial institutions, with tremendous growth expected over the next few years. To maximize these benefits and growth opportunities, financial institutions should strategize their entrance into this emerging market and work with a technology partner that ensures you have the right tools in place to reap the rewards.