Embedded finance is rapidly changing how, and where, people and businesses make payments. In fact, many people are using embedded finance without thinking about it (or perhaps not even knowing what it is).
McKinsey defines embedded finance as “the placing of a financial product in a nonfinancial customer experience, journey, or platform.” This is not a new concept: For example, retailers and airlines have long offered private-label credit cards, while financing for domestic goods and automobile loans have proved to be lucrative for appliance retailers and auto dealers alike.
But now, the global proliferation of smartphones and other technologies is better equipping companies to include financial services directly within their core business. That has accounted for embedded finance ringing up $20 billion in revenues in the United States during 2021, according to McKinsey — and the upswing isn’t expected to stop any time soon, with predictions showing that the market could double in size within the next three to five years.
From automated transactions to more secure rates, discover how embedded payments may shape the FX ecosystem moving forward.
Banking on brand recognition
“Brands are becoming banks themselves without needing to get banks involved,” outlined Scott Johnson, VP, Program Management at Convera.
However, he added that there will be growing pains along the journey to increased and improved embedded payments.
“What makes FX payments hard is that the cost of payments is unknown until you get to the point of making the payment. If you have a 10,000-euro payment, you don’t know how much that’s going to cost until you get to the point of execution,” said Johnson. “That’s a problem the industry has to solve.”
As more businesses utilize instruments like forward contracts to lock in a budget rate, there may be new opportunities for automated embedded finance solutions. As Johnson outlined, “They can have rules that say: As long as we have available forward capacity in our portfolio, go ahead and initiate the payments.”
This also applies to education payments through fast-growing education technology (edtech) platforms, which can ease friction for international tuition and other expenses. Customizable plans on these platforms could be set up for recurring payments and potentially at pre-determined rates.
Challenges for the next frontier
There are additional challenges for embedded payments, particularly for those made internationally — the “next frontier,” according to Convera’s Johnson. These transactions include varying costs and compliance issues as well as settlement times in various markets.
And as with any digital transaction, there are cybersecurity and privacy risks. KPMG notes that as businesses integrate APIs across numerous partners, they will need to beef up security for systems and data.
As this nascent marketplace grows, many participants (such as retailers or manufacturers) may not be able to meet all of these challenges on their own without partners in the fintech or traditional banking world. Partnerships will not only help shape the platforms’ offerings but can help assure these non-bank distributors of embedded finance that they have robust security and compliance measures.
While the technology continues to accelerate and mature, trustworthy partners with a track record of expertise will have a first-mover advantage as they integrate and embed more services into their payment platform.
Ready to learn more about the latest in cross-border payments? Sign up for Currency Convo and get currency news, FX guidance, and market insights from our team of experts.
Plus, dive deeper into the trends shaping cross-border payments with our podcast, Converge.
