What is Embedded Finance?

Historically, financial services have been offered solely by traditional providers such as banks and insurance companies. But a new crop of providers is increasingly offering simpler and more intuitive ways for consumers and businesses alike to access a variety of services.

Embedded finance is a trend in which nontraditional providers like software companies are offering financial services within their own platforms. A commonly cited example is that of Uber, which has embedded payments into its ride-hailing app so they are handled automatically without the need for the consumer to take separate steps to pay for the ride.

As PaymentFacilitator previously reported, many software companies are embedding payments by becoming payment facilitators, but the trend doesn’t stop at payments. For example, many larger PFs have embraced consumer and business lending as a next step to meeting the needs of their customers.

In some cases, consumers are offered the option of essentially applying for loans at the time of a purchase. PayPal just introduced its latest consumer credit solution in the U.K. Its “Pay in 3” solution enables retailers to offer their shoppers the option of paying in three installments. PayPal pays the merchant the total purchase amount up front and sets up automatic repayment of the last two installments.

But the loans aren’t only offered at the time of purchase. In August, Square began testing short-term consumer loans offered through its peer-to-peer Cash App.

In addition to consumer credit, some larger payment facilitators are offering loans to their merchant customers through products such as Shopify Capital, which offer a variety of financing products. In January, Shopify grew its offering with new starter loans of $200. Its sellers pay the loans back as a percentage of their sales.

With a deep understanding of their merchants’ payment activity, payment facilitators are well suited to offer quick financing options without requiring credit checks or asking for other financial data. And because they are already involved in the flow of funding, it is easier for them to recover loan payments as well.

Beyond payments and lending, there is also room for companies to embed other financial products. Car share memberships often include insurance offerings, for example. And Square’s Cash App also allows users to buy and sell stock through Cash App Investing.

Embedded finance is consumer-driven – companies are using the concept to meet specific needs and use cases, rather than approaching it from the perspective of being a software company that wants to get into banking.

While not every software company has the need or the resources to embed financial services in their platform, doing so can offer some distinct advantages to those for whom it makes sense.

Providers that embed financial services into their platform benefit from new revenue streams – payment processing fees, for example. But they also benefit by increasing the everyday value they provide to their customers, building loyalty and deepening relationships.