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FinTech has disrupted traditional finance and continues to pave the path forward when it comes to digital finance. The pressure to digitize and keep up with consumer demands has strained many payments companies due to their legacy infrastructures. FinTech provides both support and competition. The ability to outsource digital solutions can make it easier for banks and other payments companies to innovate quickly and dedicate their resources to what they know best.
Embedded FinTech is growing as marketplaces and vertical SaaS solutions increasingly look to facilitate payments within their platforms. It enables customers to make and receive payments within the platform’s digital ecosystem rather than navigating to another site to complete a transaction.
The What: What Does Embedded FinTech Really Mean?
With so many digital banking products on the market, it can be hard to distinguish between FinTech and embedded FinTech. Embedded FinTech takes place within a platform that is not FinTech itself, such as an e-commerce marketplace or rideshare app. Users of these apps need to make payments in order to obtain services, but the service provider cannot support the transaction on its own: it needs the embedded FinTech.
Another identifier of embedded FinTech is that the payment happens within the original application, creating a native user experience. This ensures that customers don’t need to leave the original site in order to complete the transaction, which makes for a much smoother experience. It can also help foster trust with the customer as they will feel more secure if they can bypass unknown or unfamiliar payment sites.
Lastly, embedded FinTech utilizes the contextual data provided by the original platform to help improve the customer experience. Customers engaging with the platform are constantly revealing insights about their behavior, their interests, and their payment history. By utilizing this existing information, payment transactions can be streamlined and may even eliminate the need for account creation.
The Why: Why Should Platforms Care?
For FinTech providers, facilitating digital payments for existing companies is key to expanding their customer base. For the platforms, these integrations are a prime opportunity to add value to their service. Customers want their online journeys to be as simple and streamlined as possible, so completing a transaction entirely within an app is a big benefit. The more convenient a purchase, the more likely the consumer will stay loyal; the greater the customer retention, the greater the lifetime value to the company.
Embedded FinTech is also much more cost-effective. Existing customers usually have more data stored in the platform, which makes underwriting and transaction approval less risky. Lastly, platforms can charge better rates with embedded FinTech. The customers are already invested in the provider and so may be willing to pay a premium for the convenience of staying with one application.
The How: How Can Payment Platforms Utilize It?
For many providers, it’s not a question of “if” they should utilize embedded FinTech — it’s a question of when and how. There are three main ways to approach this:
1. New Proprietary Payment Methods
If possible, launching an entirely new payment method can be ideal as it removes the need to use traditional credit or debit. A proprietary payment method also supports purchases outside of the platform, which helps to build loyalty between customers and product. Successful examples of this include Alipay and WeChat Pay, which have managed to dominate local payments over the more traditional card network.
2. Closed-Loop Payment Ecosystems
Sometimes it can be more beneficial to build a closed-loop payment ecosystem. In this context, customers use a traditional payment method to load money into their accounts on the platform. This account balance can then be used for quick and easy payments, removing friction from smaller, recurring transactions. Over time, this account will collect useful customer data for the platform while offering convenience to the consumer.
3. In-House Payment Acceptance
The challenge for smaller businesses is that they require a substantial customer base before they can pass banks’ underwriting standards. If they cannot pass, they cannot process their own payment transactions. In these cases, a PayFac can be a valuable partner as it assumes the risk for many smaller accounts by grouping them together into one master account. If a platform can offer these services en masse and embed them into other platforms, it can become a lucrative revenue channel.
When it comes to embedded FinTech, the possibilities are limitless. This area is ripe for innovation and we expect to see new solutions and experiences emerge that push the envelope.
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