With the looming threat of a recession, the tech industry has switched to survival mode. Companies are shifting all their attention to cutting costs, improving efficiency and adding value for existing customers.
This means sectors and technologies that address the pain points of founders (especially in a time of economic uncertainty) have much to gain. Embedded finance is one — promising to boost both unit economics and customer retention.
Defined as the seamless integration of financial services or tools such as credit cards, wallets or reward cards, within the products or services of a non-financial business, embedded finance — which has seen massive growth in the last few years — is expected to exceed a market cap of $7tn globally by 2026.
Is embedded finance the service your startup needs right now? We ask the experts.
Integral to payment processing
First, just how resilient is embedded finance? Dealroom data shows that the sector attracted $3.1bn in funding in 2021, three times as much as it did in 2020.
Denise Johansson, cofounder and co-CEO of card issuing and payment processing company Enfuce, says that embedded payments will remain unaffected by the downturn and continue to grow.
“Embedded payments, in particular, is resilient simply because of its nature — it’s all about getting the payment process seamlessly integrated into an existing service,” she tells Sifted. “Every existing service that consumers or businesses are using is processing money, and that's where embedded payments are integral, and that's why it’s going to be the future.”
Adam Davis, associate partner at management consulting firm Bain & Company’s fintech practice, agrees, adding he thinks we are just at the beginning of a “huge wave” of embedded finance.
Every existing service that consumers or businesses are using is processing money, and that's where embedded payments are integral, and that's why it’s going to be the future
However, while regulation is becoming clearer — like with the second version of the EU’s Payment Services Directive (PSD2), which seeks to improve consumer protection, boost competition and reinforce security in the payments market — Davis says more clarity will be needed if the full potential of embedded finance is to be realised.
“The only thing that will slow embedded finance companies down is technical enablement — how quickly can it run, how much regulation is placed on this process and third-party distribution from a regulatory perspective,” he says. “And from a consumer perspective, there's AML, compliance, onboarding and technical stuff, but in reality, consumer demand is there.”
Unit economics and value propositions
In times of increased economic uncertainty, streamlining products to reduce costs while adding value to product offerings for customer retention can be tricky for businesses. Johansson says that embedded finance can help reduce the cost of processing a huge number of transactions regularly, thereby benefitting the overall unit economics of the company.
Hassle-free embedded payments are also a value add for products regardless of the macroeconomic conditions. Johansson emphasises that embedding payments can be key for customer retention as it can help fix issues like customers leaving midway through the payment process due to it being too complex, time-consuming or asking for too many personal details.
“As a consumer I want the buying process to be as easy as possible, without compromising my feeling of trust and security,” she says. “And embedded payments also can give more insights to the customer, helping you control your spending.”
Consumers prefer to procure financial products from brands and providers that they trust — and those providers don't necessarily have to be banks
Increasing your startup’s product value using the existing team can also help retain cash and prevent layoffs. For example, embedding payments into the invoicing process can improve accounting or business management software — and significantly reduce time spent reconciling payments and invoices.
“Consumers prefer to procure financial products from brands and providers that they trust — and those providers don't necessarily have to be banks,” says Davis. “I don't think there's any bigger threat to customer primacy from an incumbent banking perspective than embedded finance that I've ever seen.”
Shifting consumer behaviours
For Davis embedded finance is essentially the digitisation of the offline process of purchasing a product or service.
“That's why volume has increased significantly, it's because more and more products and industries have been digitised,” he says. “But it’s still very nascent.”
He says the market opportunity for embedded finance comes from the high customisation and ease of use it provides customers with, and the chunky consumer data that businesses can obtain from using it.
During a downturn, when businesses and consumers are struggling, the one thing that you want to have is the ability to contextually understand your customers’ issues in real time and serve them better — which is exactly what embedded finance is trying to do
“During a downturn, when businesses and consumers are struggling, the one thing that you want to have is the ability to contextually understand your customers’ issues in real time and serve them better — which is exactly what embedded finance is trying to do,” Davis says.
The versatility of embedded payment services also makes it an attractive investment as it can be tailored to suit the various needs of the businesses and customers. Johansson says that with more and more customers opting for paying in instalments or renting instead of one-time payments and purchases, embedded finance will grow further.
“I believe that change will come through us consumers,” she says. “For the next generation of consumers, purchasing will be more of a service, like renting — they might sign up for renting a new wardrobe from a service provider and then return it. And this shift in consumer behaviour is where embedded payments will really take off.”