Embedded Finance builds a bridge between finance and the real economy

Of Sven Doerfel, Senior Director of Product Management at Checkout.com

History teaches us that when finance becomes too divorced from the service and support it owes to the real economy, significant problems follow. While few expect an impending banking disaster like 2008, today’s jitters are a timely nudge to look at how financial innovation can truly serve and empower businesses and customers over the long term.

It is my view that embedded financial services represent a radical and new type of partnership between finance – mostly fintech – and the real economy. It’s a partnership that future-proofs businesses for the rapidly changing digital economy because it’s built on leading new payment technology, and because it serves the needs and high expectations of consumers around the world. But crucially, it is also a partnership that strengthens income streams, cash controls and liquidity management, which will ensure that businesses thrive through today’s market adversity. Here’s how sellers can lay the right foundation in place to succeed in these areas.

Transform payment costs into income streams

While much has been made of the opportunity for banks and fintechs, the truly innovative and important point is the performance and revenue opportunities it provides to the merchants and businesses that make up the real economy. The embedded finance sector is expected to be worth $7.2 trillion globally by 2030, with revenues of $121 billion by 2029 in the UK and Europe, an increase of 187% from 2022. Bain and Co defines embedded finance as traditionally non-financial brands ” which provides an adjacent financial services, for which they take a certain degree of financial ownership.”

By offering financial services within their platform, merchants can take a share of the revenue that would otherwise go to traditional financial institutions as a cost of business. But democratizing financial services business models is neither fantasy nor magic trick. It is a logical realization of the enormous partnership opportunity of modern fintech.

Take brokerage fees as a good example. Traditionally, merchants have had to pay interchange fees as a necessary cost of payments. Embedded finance in the form of payment card issuing programs not only has the power to remove these costs for businesses, but to actively allow merchants and businesses to take a cut of the interchange fee on each transaction.

Visibility and control Turbocharge Cash Management

For any business to fall short of liquidity and cash flow it can become a matter of existential threat. Yet 70% of payments and finance leaders report that due to disjointed technology and transaction data, there is a disconnect between their payments, finance and disbursement functions so significantly that it is hurting their company’s financial performance.

Taking the example of modern card-issuing programs: physical, virtual or hybrid payment cards issued by a business in partnership with an issuing vendor will increasingly replace traditional business cards, legacy spending software and even change.

By integrating payment processing and financing into their products, services and back-end operations, businesses gain new levels of visibility and control over their end-to-end cash flow while reducing the time and costs associated with traditional payment processing, invoicing and disbursements. By collaborating with issuing partners who also provide payment collection services, even greater efficiency is achieved. That’s because it removes the need for bulky pre-financing, by transferring purchased funds directly to issued cards in real time.

This is especially important in times of economic uncertainty, supply chain disruptions and rising interest rates, all of which make it more difficult, and even more important, to manage cash flow and spend carefully.

In addition to streamlining liquidity management, this form of embedded finance allows corporate finance teams to set much more tailored spending controls and to exercise significantly better fraud protection over corporate spend. The tangible results are a far more predictable set of business costs, limiting fraud and reducing significant man-hours, thanks to unified, real-time cash controls across the enterprise.

Anything your bank can do, your brand can do better

Perhaps one of the most interesting aspects of embedded finance is its potential to democratize access to financial services and improve financial inclusion. By building financial services into daily activities and platforms, individuals, SMEs and micro-entrepreneurs can easily access and use financial services without having to go through the traditional banking system. For example, a small business owner may be able to apply for a loan directly through their e-commerce platform, or a gig economy worker may access their earnings in real time through a ride-sharing app that has a built-in payment function, virtual card or digital wallet.

This matters because, in today’s digital economy, people all over the world are increasingly free to move fluidly between being consumers and ‘producers’. As experts expect up to 70% of online shopping to take place in the market economy, modern businesses must adapt. The key to this shift is the ability to serve a two-sided market where individuals worldwide can be both consumer and supplier – in the form of micro-entrepreneurship. Importantly, in both capacities they are the “customer”. And customer loyalty will be the battlefield where much of the digital economy is fought and won in the years to come.

In today’s challenging economic climate, many businesses feel compelled to think about cutting costs instead of increasing revenue. By looking under the hood of the payments economy and working with a partner who can unlock the business model, merchants are poised to achieve both.