Integrating financial services into your digital offerings can open up a range of possibilities for your business. Whether it’s adding payment functionality to a retail application or providing detailed financial analysis within a business-to-business (B2B) interface, the benefits—including greater engagement, additional revenue streams, and an environment that supports customer and enterprise use cases—extend far beyond convenience. According to Statista, embedded finance attracted more than $4.2 billion in venture capital funding in 2021 alone, illustrating the strong pull of these benefits.
Weaving financial functions into a software application in a way that yields maximum benefits while minimizing risks and liabilities requires a mix of strategy and precision. You’ll need to consider factors such as regulation compliance, data security, and how to design a customer experience that remains intuitive and sticky despite the increasing complexity that new financial features bring. Here’s what you need to know about how to embed financial services into your business.
What’s in this article?
- What is embedded finance?
- Types of embedded finance
- How does embedded finance work?
- Benefits of embedding financial services
- How to embed financial services
What is embedded finance?
Embedded finance is the integration of financial services within nonfinancial platforms or applications. It enables businesses that are not otherwise involved in the financial sector to offer services such as payments, lending, or insurance within their own digital interfaces. Application programming interfaces (APIs) and software development kits (SDKs) facilitate this process, creating a more integrated experience that doesn’t require the customer to switch between multiple platforms or apps.
The embedded finance model facilitates direct access to financial functionalities, broadening the scope and reach of financial services. It also paves the way for new business models and revenue streams for businesses that incorporate these services into their platforms.
Types of embedded finance
There are several types of embedded financial services, each offering different functionalities within nonfinancial platforms or applications.
Payment processing: Allows for immediate transactions without redirecting customers to third-party services. Businesses can incorporate payment gateways or point-of-sale systems into their digital interfaces.
Lending services: Facilitates instant loans or credit extensions. For example, ecommerce platforms might offer “buy now, pay later” options during the checkout process.
Insurance offerings: Enables businesses to offer customized insurance packages to customers. This might include travel insurance within a flight-booking app or product insurance within an ecommerce portal.
Investment services: Allows customers to invest in stocks, bonds, or other financial instruments. A content platform geared toward financial news might offer the ability to invest in relevant stocks within the app.
Personal finance management: Incorporates budgeting and expense-tracking features. Businesses can integrate these features into a variety of platforms, such as utilities management applications.
Digital wallets: Provides a storage mechanism for digital currency, making it easy for customers to manage their money within a single app or platform.
Peer-to-peer transfers: Enables direct money transfers between customers. This feature is common in social networking or messenger apps and makes sending money as straightforward as sending a message.
Foreign exchange services: Offers real-time currency conversion and allows customers to hold multiple currencies. These services are beneficial for platforms with a global customer base.
Banking-as-a-service (BaaS): Extends traditional banking functionalities, such as account creation and management, to other platforms. Apps that aim to be an all-in-one solution for customers’ financial needs often use this model.
Regulatory compliance services: Assists businesses in adhering to legal requirements related to financial services, such as anti-money laundering (AML) and know your customer (KYC) checks.
Billing and subscription management: Automates recurring payments for subscription-based services, making it easier for businesses to manage revenue and for customers to maintain their subscriptions.
Each type of embedded finance serves specific needs, and businesses can tailor those functions to fit their own objectives—by using them independently or combining them for a more holistic financial service offering.
How does embedded finance work?
Embedded finance uses APIs and SDKs, which serve as conduits between financial service providers and the businesses that want to incorporate these services. These APIs and SDKs function as building blocks that developers use to integrate a specific financial function into their platform. Because APIs and SDKs are modular, businesses can choose which financial services—payment processing, lending, insurance, etc.—to include.
Here are the key operational elements of embedded finance:
API integration: Businesses integrate APIs from financial service providers. APIs offer a direct link to the desired financial service without requiring an intermediary platform.
Data exchange: Once integrated, these APIs facilitate the transfer of information between the financial institution and the nonfinancial platform. For example, if a customer enters their payment data on an ecommerce site, that information will be transmitted to a payment processor via an API to confirm and complete the transaction.
User experience: Customers interact with the financial service through the host platform’s interface. For example, when a customer on an ecommerce platform chooses to pay with a digital wallet, the site prompts them to authorize the payment within that same interface—without rerouting them to an external site.
Service customization: Businesses can tailor the financial services to match their specific requirements or those of their customer base. Whether this means selecting specific lending criteria or customizing the type of insurance the business offers, the goal is to provide a tailored financial solution that matches the platform’s broader offerings.
Revenue models: Businesses can monetize these embedded services through different models, such as transaction fees or revenue sharing agreements with the financial service providers.
Regulatory adherence: Typically, the financial service provider manages compliance with financial regulations, allowing the host platform to focus on its core functionalities.
Real-time operations: Most embedded finance functionalities work in real time. This offers customers the ability to receive instant loan approval or immediate payment confirmation, for example.
Scalability: Because these services are built with modular APIs and SDKs, businesses can scale them up or down as needed, easily adding or removing services as the platform grows or as customer needs change.
Embedded finance offers a more integrated and interactive experience for the customer while also opening up business opportunities for traditional financial institutions and businesses in other sectors.
Benefits of embedding financial services
Embedding financial services into your platform offers a range of advantages. Here’s what you could gain from embedding financial services:
Increased stickiness and customer engagement: Providing financial services within your platform keeps customers engaged longer by minimizing their need to toggle between multiple apps or websites—and increasing the time they spend on your platform.
Revenue diversification: Adding financial services such as lending, investment advice, and payment processing allows your business to tap into additional revenue streams. This can reduce your dependency on a single income source and offer a buffer during economic downturns.
Granular customer data insights: The data that businesses gather from these financial transactions can be valuable for analytics, which can help develop more targeted marketing campaigns and tailor services to customer preferences more effectively.
Improved user experience: Integrating financial services means your platform can become a one-stop shop for many different needs. Over time, this convenience can lead to increased customer satisfaction and more loyal users.
Accelerated monetization: Often, offering financial services means charging transaction fees or commissions, which can contribute to your bottom line. These services also offer opportunities for subscription models that can lead to stable, recurring revenue.
Simplified transactions: Handling transactions within your platform can lead to more straightforward accounting and financial reporting by reducing the administrative burden associated with managing financial operations.
Customer trust and loyalty: Offering vetted financial services can elevate your brand’s reputation for providing customers with high-value services, which boosts trust and encourages long-term commitments to your platform.
Expanding market reach: Financial services appeal to a wide range of demographics and can help attract new customer segments. For instance, a retail shopping platform could also attract customers who are interested in personal finance or investments.
Reduced operational costs: Though there is an initial investment for setting up embedded financial services, their long-term operation can be cost-effective because automating financial services can reduce the time and money a business spends on administrative tasks.
Competitive differentiation: Many platforms offer similar core services, so adding financial elements can help yours stand out, giving you an edge in saturated markets.
Easier fund management: For businesses that want to manage pooled funds or handle complex financial operations, embedded financial services can simplify the process by offering solutions to automate these tasks.
Integrating financial services can allow businesses to elevate their offerings to a level once possible only for large financial institutions. The investment in these services often yields returns that far outweigh the costs, both in financial gains and customer loyalty.
How to embed financial services
From initial research to ongoing management, embedding financial services into your platform requires considerable effort. That said, providers such as Stripe have streamlined implementation to make it as simple as possible. Here’s a quick guide on how to embed financial services:
Step 1: Assess your needs and objectives
Before diving into the technical aspects, it’s important to have a clear vision of what you’re hoping to achieve. Do you want to offer your customers a more comprehensive experience? Are you seeking an additional revenue stream? Answering these questions will help narrow down the types of financial services that are most relevant to your goals.
Step 2: Market research and partner selection
Research potential financial service providers that offer the services you want to integrate. Examine factors such as reliability, reputation, and the range of services offered. After vetting providers, establish a partnership. (For more information about how Stripe enables embedded finance for businesses, go here.)
Step 3: Compliance and legalities
Though the financial service provider will manage legal compliance, you should still have a clear understanding of your legal obligations. Consult with legal professionals to review partnership agreements, customer terms, and data protection protocols.
Step 4: Technical integration
Technical implementation of financial services usually involves APIs or SDKs. Here’s how you might proceed for different types of services:
Payment processing: Integrate payment gateway APIs to handle transactions within your platform.
Lending services: Use APIs to assess customer eligibility for loans and facilitate the disbursement and repayment processes.
Insurance offerings: Embed insurance selection and claim-filing capabilities through third-party APIs.
Investment services: APIs can pull real-time financial data, enabling customers to make informed investment decisions without leaving your platform.
Personal finance management: You can implement budgeting and expense tracking features through a combination of APIs and in-house software development.
Step 5: User interface design
Work closely with designers to ensure your user interface is intuitive, and make sure financial features are easily accessible and do not disrupt the overall user experience.
Step 6: Testing
Conduct rigorous testing to find any bugs, security vulnerabilities, or user experience issues. This includes performance testing to assess how the new financial services affect the overall operation of your platform. Consider running a beta test with a smaller audience before a full-scale launch.
Step 7: Deployment and launch
Once you have tested everything thoroughly, deploy the new features to your live environment.
Step 8: Marketing and customer adoption
Promote the new features through your marketing channels. Educate your customer base about the benefits of these features and how to use them.
Step 9: Monitor and upgrade
After launch, continue to monitor performance, customer engagement, and financial metrics. Collect feedback for improvements.
Step 10: Scalability and future additions
The modular nature of APIs and SDKs allows you to scale or adjust services easily, and solutions from Stripe are specifically engineered to grow and shift with businesses. Regardless, it’s important to recalibrate your strategies around embedded finance periodically, even if the tools themselves are already scaling with your business.