Embedded Finance

Though payment disputes may put them at odds sometimes, merchants and consumers really want the same things: security, convenience, and a satisfying exchange of money for goods or services. When conflicts do arise, they’re often instigated by outside factors like fraud or technological issues.

One way for merchants to avoid these issues is to directly provide the services that might otherwise involve third parties. Merchant-provided offerings that involve things like payments and financing are often referred to as “embedded finance” solutions. What is embedded finance, and how can merchants use it to strengthen their customer relationships and avoid disputes?

Banking hasn’t always been an industry noted for great openness and transparency, but thanks to consumer demand—and in some regions, explicit regulation—open banking is becoming more widely available.

What this means is that small, independent companies can be given access to financial data that allows them to create innovative and competitive consumer technologies.

This includes not only dedicated fintech startups, but also retailers and other established companies that aren’t primarily known for providing financial services.

While the concept of embedded finance isn’t new, the technological advances have massively expanded the possibilities, and a simple API connection is all any merchant’s website or app needs to implement them. While embedding financial services into your online store is not something to be undertaken lightly, every merchant should be aware of the benefits (and challenges) of offering embedded finance solutions to their customers.

What Is Embedded Finance?

Embedded finance is a term that describes any fully-integrated financial service provided by a company that is not considered to be a bank or financial institution. The driving concept behind it is that customers won’t need to use a third-party bank, lender, or payment platform to access the funds they want to spend, because embedded finance solutions allow the merchant to offer them all of the payment and financing options they require, just at the moment they need it most.

There is no limit to the range of services that merchants can provide through embedded finance. In theory, merchants can offer sufficient tools and resources to become their customer’s de facto bank.

Most merchants aren’t quite that ambitious, but prefer to see embedded finance as a way to build strong customer loyalty by providing in-house solutions for the services their customers are most interested in utilizing.

What Are Some Good Examples of Embedded Finance?

The poster child for embedded finance is, perhaps, the closed-loop store card. These cards, issued by department stores, big-box retailers, gas stations, airlines, and other merchants that see a lot of repeat business, function just like regular credit or debit cards, but they aren’t on the Visa or Mastercard network and only work at the issuing company’s own stores.

For merchants who don’t really want to become credit card issuers on the side, there are plenty of other possibilities for embedded finance:

Insurance

Car rental insurance is another classic example of embedded finance from the pre-digital era, but modern companies like Tesla and Uber have also embraced the idea of selling insurance directly to their customers. It’s a popular add-on for event venues and ticket sellers, too.

Digital Wallets

E-commerce retailers don’t have much reason to send their customers a piece of plastic, but you can offer them all of the benefits and convenience of a store card with way less overhead by creating closed-loop digital wallets. If you produce wearable products, you can integrate digital wallets with them for added convenience.

Loyalty Programs

Since most consumers are not going around thinking to themselves, “I wish I had more things to keep track of,” you sometimes have to incentivize them to sign up for things like closed-loop digital wallets.

Loyalty programs are ideal for this—give your customers points and rewards when they use your embedded finance solutions. The customers have positive experiences, your retention numbers go up, everybody wins.

Payment Plans

Buy Now Pay Later plans have made a big comeback in recent years, and many retailers offer them directly instead of going through providers like Klarna or Afterpay. Instead of running a credit check, merchants can use customer data and risk-based analytics to make instantaneous approval decisions.

Integrated Payments

Have you ever wished you could pay your gas bill by giving a verbal command to your smart thermostat? With embedded payments, it is certainly possible. Integrated payment options give you lots of control over the structure, timing, and feel of your checkout process, and you can also use them for faster, more convenient payout options for refunds, gig worker payouts, and other situations where the money needs to flow in the user’s direction.

What Are the Benefits of Embedded Finance?

The most compelling reason to look into embedded finance is that consumers appreciate it when companies offer them affordable, convenient services that address their actual needs.

According to one study, 85% of companies that started offering embedded finance solutions were successful in acquiring new customers, with similar percentages reported for increased engagement levels.

Embedded finance encourages your customers to think of your brand as more helpful, more resourceful, and more attentive to their needs. It can also be a revenue generator.

While it’s good practice to keep the cost of your services affordable (the whole point, after all, is to keep your customers on your site, not wandering off looking for a third party to undercut your prices), it is fair to charge reasonable fees. The customer data you can obtain through these services is valuable, too.

Embedded Finance and Chargebacks

Another nice perk of embedded finance is that every transaction that takes place outside of traditional credit card networks is one more transaction that can never turn into a chargeback. However, that doesn’t mean you get to stop dealing with customer disputes.

If you’re going to encourage your customers to use in-house payment systems, you need to provide a fair and accessible process for them to report issues and receive a prompt and satisfying resolution. Otherwise, they’ll stick to using their own banks and third-party payment platforms.

Embedded finance holds a lot of promise, but merchants should expect to put a significant amount of work into implementing it and managing it for optimal results. Listening to your customers and analyzing their data will give you the best sense of where to focus your efforts.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions, or requests for advice to: win@chargebackgurus.com