Embedded finance is one of the best ways for a fintech, or any business, to deepen customer relationships and grow its revenue. Available for a variety of financial applications such as financing, spend management, and even investing, it offers businesses the ability to create more flexible and interactive banking experiences. By integrating financial products into existing software and applications, embedded finance empowers companies to offer more holistic product experiences that better serve their customers.
But how can fintechs and other innovative software businesses take advantage of the growing embedded finance market?
In this article, we dive into the basics of embedded finance, how it works, and why card issuing may be the best first step into this exciting new frontier.
What is Embedded Finance?
Embedded finance is the offering of a financial service or product by a non-financial company or organization. It’s designed to help the consumer get more done within a single digital environment, whether it’s a mobile app, software platform, or e-commerce website.
Companies currently add embedded financial services through partnerships with a financial service provider specializing in this type of technology. The tech partner helps the company build out the service from within their existing app or site or possibly even a new one.
Types of Embedded Finance
Embedded finance creates a seamless engagement for the customer for various financial tasks. Some of the most common categories include the following:
- Payments at checkout
- Credit and debit card issuing
- Financing, including Buy Now, Pay Later (BNPL)
- Insurance, such as trip protection or extended product coverage
- Investment services to help customers manage their portfolios
As embedded finance gains popularity, even companies far removed from banking could offer these options within their software, app, or website experience.
What Does Embedded Finance Look Like?
From the consumer perspective, embedded finance often resembles a typical shopping experience. While doing regular business with a brand, consumers are given opportunities to conduct financial transactions, sign up for services, or use a banking tool. Customers don’t have to leave the original site or app they are engaged with, which is why it’s considered “embedded.”
Here’s an example: A customer of an online retailer uses the retailer’s e-commerce app and gets to the payment screen to complete their purchase. In addition to seeing a place to enter a credit card or other payment info, they see a button embedded in the checkout screen to pay later for their purchase. This begins their journey into signing up for customer financing, which happens right within the app.
The application, approval, and credit card issuing process occurs while the customer is in the checkout phase. Once approved, the customer can complete their purchase with the new line of credit in the same shopping session and never have to pop back and forth between the retailer and a finance company.
How Does Embedded Finance Work?
While the customer side of things appears seamless, there is a lot happening behind the scenes. The developers of a company’s app or website must partner with the finance company or a trusted tech partner to build the infrastructure for the embedded application. This may be done with an API that’s easier to integrate into a company’s existing UI than building from scratch would be.
The embedded tech is also more flexible and scalable, so when the company adds new financial services or functionality, it can build on what already works.
For example, Lithic’s card-issuing API becomes the building block for moving money or issuing payment cards from within a company’s app. Companies with or without a finance background work with Lithic to ensure a smooth card issuing process as customer needs and technology requirements change.
Card Issuing as Embedded Finance
Card issuing is a fast-growing area of embedded finance. A card issuer is a company that provides payment cards to its customers. This company can be a bank, fintech, or a non-financial institution.
Through card programs, these companies can use embedded technology to offer the following types of payment cards to their customers - from right inside their own service or product:
- Debit cards
- Credit cards
- Prepaid cards
- Virtual cards
Card issuers work with a few partners to get their programs up and running. These partners are:
- An issuer processor – This entity is an upgrade from legacy card processors, as it processes transactions and helps issuers get their card products to a wider market.
- A bank – Also called the sponsor bank, this entity monitors the issuer's program for compliance and facilitates money movement.
- A card manufacturer – This entity manufactures and designs the physical cards the issuer wants to deliver to its customers.
The issuer processor is one of the most critical pieces of the puzzle that issuers must solve. Issuer processors solve infrastructure and product development challenges, guiding issuers through the complex payments world.
They also connect card issuers to payment networks like Visa, Mastercard, and UnionPay, effectively acting as a gateway to the payment landscape from the issuer's perspective.
Any company that wants to issue cards must also establish a relationship with a sponsor bank. The bank facilitates money movement and helps the card issuer comply with various regulations, such as anti-money laundering and data protection laws.
Signing the dotted line with a sponsor bank can be a lengthy process, but it is worth the effort. Since this can be a big responsibility, partnering with a company like Lithic may make sense to reduce the initial burden of creating a card program. With Lithic, sometimes even smaller companies and those unfamiliar with card programs can get into the market if their use case is a fit and they have a good amount of funding. Working with an issuer processor will help newer embedded finance leaders understand what they must demonstrate to a bank to get their card-issuing program up and running.
Note that while a bank will help you (the card issuer) remain compliant, you will still have to install compliance controls to monitor your program.
Once you land a sponsor bank, you’ll be ready to build out your card program. A good issuer processor acts as a partner to your card program, helping you figure out:
- Issuing infrastructure
- Transaction processing and reconciliation
- Card product differentiation
- Compliance and fraud prevention
- Reporting
- Physical card issuance (in partnership with card manufacturers)
Once these pieces are in place, you're ready to begin issuing cards to your customers and working with an embedded finance partner, like Lithic, you’ll be able to create that in-app experience.
How Embedded Finance Aids Company Growth
Embedded finance is predicted to grow exponentially over the next few years. Experts estimate a $124 billion market value by 2025, making up around a quarter of small business banking.
But what about right now?
At Lithic, we’re seeing a swath of tech companies embedding card issuing into their products — from platforms offering milestone-based advances to construction professionals to online travel agents issuing smart virtual cards to book airline and cruise tickets.
Card issuing through embedded technology is a powerful growth tool that can help companies tap into a number of benefits, such as the following:
- Capture interchange revenue. Cards fulfill a customer’s lifestyle need, allowing them to carry out day-to-day financial tasks (like paying for expenses or automated billing payments). Each payment provides companies with interchange revenue (fees that merchants pay when a customer uses their card) from transactions that customers would have otherwise made outside of the company’s ecosystem.
- Gain better control. Card issuing allows businesses to tailor their card program to their needs, giving them more control over how cards are used and decreasing the risk of fraud. Cards can be single-use, merchant-locked, geographically bound, or configured to fit almost any spending rule you can imagine.
- Better serve customers. When surveyed about what financial services they wanted to see from a digital service provider, small and medium enterprises (SMEs) cited credit cards as their number one pick (64%). This was followed by accounts (60%) and debit cards (50%). This shows that SMEs are warm to the idea of embedded technology and may even prefer service providers that bring these opportunities to them first.
- Develop better products. Cards also capture extensive user behavior data, giving tech companies a powerful foundation to build new products. This can help them better understand customer needs and build accordingly. The right partner can help you integrate features like expense management, payroll, insurance, accounts payable/receivable, group purchasing, loans, buy-now-pay-later, and more into one platform.
- Increase customer retention. Companies that prioritize existing customers and increase their net retention rate (NRR) tend to do better than companies that overlook this metric. Fortunately, cards are a natural fit for loyalty programs and special offers that reward customers and keep them around for the long term. When looking for innovative ways to thank a customer, card issuing with built-in perks should be at the top of the list.
Vertical SaaS companies can use embedded card payments and issuing technologies to grow their market share by winning over customers from adjacent software platforms and point-of-sale solutions.
Ready to Grow Through Embedded Finance?
While embedded finance is relatively new, consumers have come to expect at least some form of embedded finance when they shop or work. By creating better, more seamless product experiences with integrated payment functionality, this technology helps businesses in any industry grow revenue and build customer loyalty. Working with the right embedded finance partner is key to capitalizing on the benefits and staying compliant with current finance regulations.
Curious to learn how a developer-first issuer processor can help you launch a card program from within your app or website and differentiate your product in the market? Chat with a payments expert today.