Making embedded finance work: 3 questions to secure success

While the hype is enough to make any and every company think it’s easy to unleash a raft of payment options, is that true in practice? In this third article in our embedded finance series, we’re looking at some key considerations for creating a successful embedded finance strategy. The questions merchants need to ask about their businesses and their customers. And what a good embedded finance partner looks like.

Clarity of strategy

As history has taught us, jumping on the latest tech bandwagon just because it’s there and you can, is a recipe for disaster. Not falling foul of this basic tenet of business is even more vital when you’re dealing with payments and financial functionality. A great brand adding finance capabilities that either don’t hit the mark or don’t work as they should, is at best a waste of time and at worst a sure-fire way of losing customers. As with any change to business strategy, adopting embedded finance should be driven by customer need. Closely followed by an assessment of your ability to cater for that need.

1. Where’s the friction?

Whether in the customer’s journey or in the way you’re able to deliver what you want to deliver to them – what are the sticking points? Any successful idea is essentially a solution to a problem, and with embedded finance this involves not just the individual’s interaction with your brand, but areas of friction or need after they leave your environment. Can you solve one of those challenges by bolting on functionality and keeping customers within your ecosystem?

There’s also the issue of operational friction. In a highly regulated industry such as gaming, for instance, there are additional pressures that might affect the type of services you’re able to provide customers.

2. What’s your hook?

The benefits are great for those who find the right recipe. Companies have a significant amount of transactional data on their customers. This means being in a good position not only to target the right products at point of need, but also to create completely new revenue streams. An opportunity not lost on Tesla owner Elon Musk, who reckons the company’s foray into the insurance market could represent 30–40% of Tesla’s business in future.

Here are some questions it’s worth thinking about to frame your approach.

If you’re adding something on to existing services, what is it you currently provide that can be enhanced through embedding payments? Will it lend depth or diversity to your customer interactions and your brand? Can you provide a financial service that’s better and more convenient than your customers can get elsewhere?

If you’re launching with a new idea or platform, who are your customers and why will they use your business? The likelihood is it’s not a net new idea (few are), but you may well be providing a novel experience because of the combination of product and/or service plus payments options.

3. What’s your commercial strategy?

Understand the solution you’re providing – whether that’s to consumers or suppliers, or both. Putting in place the right operational constructs is a more time-consuming part of the journey than the technology piece of the puzzle. For example, in terms of compliance, knowing your responsibilities and establishing good practices. And in the case of security, deciding the appropriate layers and levels of checks. Again, the answers to these questions will be specific to your market.

Embedding your advantage

Embedding capabilities such as digital wallets into your service can give customers choice and solve some of the points of friction around transactions. Our recent Lost in Transaction survey shows that digital wallets are the third most used payment method after debit cards and credit cards, with a quarter of respondents saying they use digital wallets more than they did a year ago. This reflects the convenience and security they provide, which is why they’re attractive to consumers. But they’re also a win for merchants. With an embedded digital wallet, customers are more likely to complete their purchases because of the fact the process is so easy and overcomes the common frustrations of some other payment methods.

Digital wallets have additional advantages for merchants. They can be branded and therefore work to strengthen customer loyalty and brand awareness. And with access to consumer payment data, they give businesses a better understanding of customer preferences so they can hone their offerings and provide a more personalised experience.

A fit-for-purpose partner

Finding the right partner is going to be most merchants’ quickest route to embedding payments into their offerings. A provider that both understands the nuances of your industry and is able to complement your internal skill sets will be valuable in more ways than one. Not just in helping to overcome hurdles of tech and operational implementation, but in identifying potential embedded finance use cases and helping answer some of the critical questions that we’ve covered.

It’s worth considering how much help you’ll require overall. It can be as simple as getting the API keys and running with it – 5 minutes to operational payments provision is entirely achievable – but usually there’s more to it, especially in the longer term. No solution, embedded finance or otherwise, works truly out of the box, so a no-contact provider should be a no-go. But a good provider will make integration as easy as possible, with technical documentation, support, and integration guides to help your team.  And remember your payments needs, along with your integration requirements, will change. You may start out happy with a low-touch provider, but then favour a more consultative approach further down the line.  

Connections matter

On a basic level, you need to choose a payment provider that will be able to help you access the markets and geographies you’re targeting. So that means holding the correct licences, but also having robust relationships with regulators and strong connections with local partners.

You’ll also want a range of options when it comes to products. A wide selection of alternative payments methods that you can mix and match according to need. Look at the wider ecosystem that your provider can connect you with, too. Integration to specialist third-party financial services might not be something you think about straight away, but as your financial services proposition to consumers becomes more sophisticated, this type of integration could be important to your commercial strategy.

Also ensure you’re working with a partner that’s able to scale as you need it to. One with a responsive, agile infrastructure that can handle spiky workloads, which could be anything from high-volumes of transactions in response to a sales promotion, or the general seasonal cycles of a business.

Getting on the road

It’s clear that companies adopting embedded finance need to understand not just the nature of their offerings and shifting demands of their customers, but the expertise and tech stack of the providers they choose to work with. As with most new ways of operating, embedded finance involves both technical and strategic challenges, as well as expertise in bringing those elements together.

In reality, as we’ve seen, the tech is probably the easiest and fastest part to put in place. And that, essentially, is the beauty of embedded finance and where it stands today. It’s the simple bit. Bolt it on and you’re good to go. Just make sure you get the rest of your house in order first.

In our final piece, we’ll be looking at how embedded finance is playing out in different sectors – and where the greatest opportunities lie.