Beyond the buzz of embedded payments lies embedded finance. This emerging market encompasses embedded financial solutions such as banking, lending and insurance - all driven by the promise of reduced costs, operational efficiency and enriched customer experiences.
However, although this trend is making waves in our global ecosystem, some are concerned about the future. For instance, who gets disintermediated as the embedded finance journey evolves? And what does this trend mean for our industry as a whole?
Leaders in Payments podcast host Greg Myers sat down with Maast Chief Revenue Officer Ernie Moran to discuss the convergence of software and financial services, the potential for enriched customer experiences (and revenue streams), the opportunity for innovation and the future of embedded solutions. Will traditional companies stay relevant? Or will we need to reevaluate what it means to play a role in payments?
We’ve highlighted a portion of their conversation below. Listen to the full podcast here.
Greg Myers: Embedded payments have been all the buzz for several years. But, I want to look beyond payments at the broader embedded finance ecosystem. From your point of view, what is embedded finance?
Ernie Moran: Embedded finance is everything to do with the flow of money. It’s when banks or other financial service providers help software providers, or other organizations, offer a suite of financial products as features in their software. Normally, this requires multiple providers to deliver payment acceptance, bank accounts, debit cards and other financial products. Unfortunately, that leads to numerous relationships, complex integrations and ultimately clunky customer experiences.
I spoke to a partner recently who was onboarding a customer. They said that every day they uncovered a new integration. The customer was paying over 9% in fees because vendor A was taking a piece of the sale and vendor B was taking a piece down the line, etc. There’s a better way, and the trick is to have the right solution.
The most efficient models typically follow three steps. The software provider enrolls the business owner and signs them up with their software. Then, [the embedded solutions provider] begins identifying or looking for signs the business owner needs additional services like business checking, payment acceptance or loans.
The key is making the services the business owners need readily and easily available right within the platform. That end-to-end financial services strategy can help you create value for your customers by making the right products available at the right time. By making those products easy to consume, customers will have more services at lower costs and spend less time switching between platforms.
Myers: Although some software companies have started integrating products beyond payments, those solutions still aren’t as common as payment acceptance. When do you think more comprehensive embedded finance solutions will begin to take off in the marketplace?
Moran: It’s great news that some companies are already adopting these solutions, but it’s only just getting started. Forbes projects that the market will see roughly $230 billion in revenue by 2025 - a 10x increase from 2022. So, it’s growing. From this point forward, I see the market starting to accelerate at a pretty quick pace.
The opportunity is massive for software providers to enhance their platforms with valuable features, attract new customers, increase revenue per customer and deepen those relationships. Payment processing and embedded payments - they are proven paths to success. Other embedded finance offerings, like banking, can also increase value and create new revenue streams.
If a software company isn’t already considering these opportunities, it’s time to dive in.
Myers: To me, banking is a broad term. What’s the next step for these companies? Is it credit cards? Debit or deposit products? Insurance? What’s the next set of products that will get more attention?
Moran: The short answer is: it’s going to be very vertical-specific.
The long answer is this: software providers capture a piece of the revenue from payments that flow through their systems. But where do those payments flow to? To a bank account. They get no monetization from that bank account - they can only monetize that service as it flows through their systems.
So, the answer becomes providing business checking accounts as well. With that functionality, you can monetize the payments that flow through your embedded payments function and the payments that flow into the checking account you’ve provided to your customer. That’s going to be a game-changer. It’s difficult right now, but soon, business customers will look for their software provider to give them that extra service.
From there, it’s a launching point for other financial services. Once you have payments and banking, lending, insurance and accounting all become easier. Once data gets mixed up in this, the information you can utilize as a provider becomes powerful. So the launching point for me is “value storage” or business checking account functionality.
Myers: Data is such a powerful component of embedded finance, but we don’t talk much about it. With enough high-quality data, you can make intelligent decisions about what products to offer, when to offer them and under what terms. Capturing data is a huge part of success in embedded finance.
Moran: It really is. Just like in so many other industries, data is key. With enough data (and the capability to de-risk your offers,) you can get better economics for your services. Take lending as an example - with the right data, you can offer better terms because you have the knowledge to highlight customers you’re more likely to see a return with.
Myers: What does the embedded product trend mean for independent sales organizations (ISOs)?
Moran: I’m glad you brought that up. Just like how embedded finance helps software providers focus on what they do best in their industry vertical, embedded finance will help ISOs focus on their core business and deepen those relationships. Every successful ISO I’ve ever worked with is a relationship company. They get to know the industry better than most. The smartest ISOs are already recognizing that they can distribute a wider array of solutions by partnering with embedded finance providers.
Myers: How often have you heard the phrase, “The death of the ISO”? To me, it doesn’t seem like they’ve gone anywhere. Still, how might ISOs get disintermediated?
Moran: To me, you can place the death of the ISO right up there with the death of cash. We’ve been talking about it for decades now, and it hasn’t happened. ISOs have a critical role going forward. They already specialize in payments; the most brilliant people in the industry are in the ISO space. Before long, they’ll be embedded finance product specialists too.
The ones I know are brilliant individuals who understand the industry and understand those vertical intricacies. They take advantage of that knowledge to provide value to customers who traditional payments providers don’t have the level of expertise to serve anymore.
Between their trusting relationships with business owners and understanding their industries' unique needs, ISOs will remain relevant far into the future. Will they get disintermediated? No - they actually have a real opportunity here to provide even more value to their existing market.
Myers: What do you think this trend towards embedded finance means to the overall payments industry?
Moran: I’ve been in traditional payments for a long time, so I’ve seen it from practically the beginning. I would say to the traditional payments provider out there, that this trend means innovate or get left behind. The value to a software provider of true embedded finance is so compelling that there’s absolutely no room for organizations focused on selling traditional payment services.
At the same time, it also means a tremendous opportunity for the payments industry to lead this new era of embedded finance. What I like about embedded finance overall is what it means to the business customer. It’s a seamless, white labeled experience under the software providers’ brand that can help increase operational efficiencies, lower costs and do other things that add value to business customers. Embedded finance is a tremendous opportunity across the payments and finance spectrum in this traditional payments industry.