What Is Embedded Finance?

Embedded finance is the term for integrating banking and other financial services into nonfinancial apps and services. Companies are merging banking, lending, insurance, and investment services with their customer offerings through application programming interfaces (APIs) linked to financial partners.

Embedded finance is, in a sense, nothing new: Buy now, pay later (BNPL) is based on invisible third-party loans given at the point of sale. However, with APIs and smartphones ubiquitous, consumers get their banking services wherever they are, while companies can gain greater loyalty and more revenue streams from their customers.

To help us understand the shift marked by embedded finance, we contacted Joris Hensen, founder and co-lead, and Brigitte Kötting, communications manager at Deutsche Bank's (DB) API program. They have published academic work on the practice while helping to lead its use at one of Europe's largest banks. "Embedded finance has great potential to empower 'unbanked,' target groups," even though, they told us via email, noting there still needs to be widescale use cases for this. "Whether it's offering banking services through mobile wallets or providing microfinance options, e.g., within agricultural supply chains—embedded finance can help ... foster [r] economic growth."

Understanding Embedded Finance

Embedded finance puts checking and savings accounts, loans, insurance, debit cards, savings, and investment tools into the platforms of companies that typically don’t deal in finance. This results from partnerships with technology partners and traditional financial institutions.

Inserting financial products or services into nonfinancial company transactions isn’t new. For example, many car companies began offering direct-to-consumer auto loans and financing options decades ago, and store-branded charge cards for department stores and other retailers are as old as mass-market credit services. However, embedded finance has gained prominence, first as a term in the mid- to late 2010s and then through changes in fintech and retailing apps. These include competition from innovative players, evolving customer expectations, the unbundling of traditional banking functions for many, the prominence of APIs and software as a service (SaaS) models, and the pursuit of new market opportunities.

By enabling nonfinancial companies to incorporate financial services directly and seamlessly into their platforms and connect with fintech and banks through APIs, proponents of embedded finance say it’s a significant departure from both the conventional fintech model and traditional banking practices. If so, it would have profound implications for the future of banking and the fintech industry, underscoring a significant shift in how financial services are delivered and experienced. To do that, it would need to be different from the following:

1. An app-based analog to car dealers that offer direct-to-consumer loans or sign up customers for third-party financial institutions. Companies have long done this so that customers could cover the costs of new autos or other products, many using branded cards. These transactions might help purchases and keep customer loyalty, but they supplement the primary transactions between a customer and a business.
2. It’ll also need to be different from the leveraging of APIs and smartphones by fintech firms to offer more efficient and cost-effective ways for consumers to get credit, transfer money, and invest in the stock market.

The point is captured by thinking of banking and other financial services as offered less by independent entities with separate locations and different apps than as part of one consumer experience. Let’s turn to how it works and some examples to see how embedded finance could be a new phase beyond its predecessors.

How Embedded Finance Works

Four fundamental shifts are driving the emergence of embedded finance:

1. Shift to ecommerce: The digitalization of commerce has paved the way for embedded finance, as businesses integrate financial services within their digital platforms as part of a single customer experience. Ecommerce merchants offer BNPL financing, branded credit cards, and rewards programs in their checkout flows to boost sales. On-demand platforms like ride-hailing apps and freelance marketplaces also provide digital wallets, payments, and wealth management tools to attract producers and consumers.
2. Advances in technological integration: With the rapid development of fintech and APIs, integrating financial services into nonfinancial platforms has become more workable and scalable. Digital onboarding, electronic Know Your Client, and real-time data connections make authenticated transactions prompt and far easier for the customer. APIs enable SaaS and subscription services to incorporate flexible payment options, in-app invoicing, and lines of credit for business users.
3. Changes in consumer expectations: Consumers are increasingly comfortable using nontraditional providers for financial services, driven by a desire for convenience and streamlined experiences. The ubiquity of smartphones, fintech apps, ecommerce, and digital banking has helped bring about these changes in attitude.
4. Reaching the underserved: Those not served by traditional banks and other financial institutions have been a complex problem. Some argue that embedding finance into everyday transactions could democratize finance and expand access to financial products. Others imagine behavioral economic approaches where embedding insurance options right into, say, a ride-sharing transaction and making other choices easier could help those who may not have the time or knowledge to seek out such services separately.

For Hensen and Kötting, "Embedded finance is [to be] understood as a transformation of the bank as such...This is ultimately where the biggest transformation takes place: the customization of banking services to the needs of a partner or the requirements of a product. In the end, only fundamental flexibilization will support these developments and make it possible to meet upcoming regulatory requirements, such as the EU's planned Open Finance Framework."

Examples of Embedded Finance

Embedded finance, a rapidly evolving practice, is reshaping how businesses integrate financial services into their operations. Here’s an overview of some of the ways that it’s being used.

Embedded Banking

Embedded banking seamlessly integrates banking services into nonfinancial companies’ platforms. For instance, Shopify’s (SHOP) Shopify Balance provides business banking and card services within its platform, streamlining financial management for ecommerce businesses. Uber (UBER) has also developed an embedded banking ecosystem, offering its drivers instant earnings deposits and specialized debit cards.

Hensen and Kötting walked us through how Deutsche Bank is implementing these practices throughout its services. "Our embedded finance initiative initially focussed on the account opening processes for Deutsche Bank's brands," they said.

Deutsche Bank first standardized its systems across the organization. In their Wealth Management division, they created an investment API that family offices can integrate with their software. For small and medium-sized business customers, they now offer db Smart Access. "With this product, they can easily integrate their business account into their IT landscape," they said. "We have received a lot of valuable feedback and suggestions for new functions that we are working on right now. After all, that is also part of embedded finance: taking feedback into account and learning how we can further expand our portfolio."

Embedded Payments

Embedded payments integrate this process into a platform or app, making transactions more convenient for users. For example, Uber and Lyft (LYFT) have simplified the payment process by allowing users to complete transactions within the app and integrating themselves into apps like PayPal and Venmo​. In addition, Housecall Pro has launched business expense cards for home service professionals, offering financial management from their software platform​​.

​Similarly, the Starbucks (SBUX) app enables customers to order and pay via their phones while earning reward points​​.

Branded Payment Systems

Companies use branded cards to simplify payments, such as the PayPal (PYPL) cash card, which provides immediate access to PayPal account balances. These differ from traditional store-branded charge cards, as they not only earn loyalty rewards but also draw directly from stockpiled balances held via the app. Conversely, Amazon.com (AMZN) lets customers use the JPMorgan Chase & Co. (JPM) rewards program to pay for purchases on its site.

​These cards often carry the branding of the company and can be used just like regular debit or credit cards for transactions at other companies, offering a more integrated financial experience for users.

Embedded Lending

Embedded lending offers immediate loan options at the point of sale, enhancing the customer’s purchasing power. Popular examples include BNPL services like Klarna and Afterpay, which let consumers split online purchases into smaller monthly payments​.

Embedded Investing

Financial platforms like Robinhood (HOOD), Cash App, and Acorns integrate investment services into their apps so that users can buy, sell, and exchange stocks or crypto without a separate investment account or advisor.​

​This approach democratizes and clarifies investing for average consumers by embedding it into platforms they already use for other financial services.

Embedded Insurance

Embedded insurance streamlines the process of purchasing insurance by combining it with the purchase of a product or service. For instance, Tesla (TSLA) offers an insurance program that customers can buy when buying a vehicle​.

​Airlines and online travel companies like Expedia (EXPE), Booking Holdings (BKNG), and Hotels.com also provide travel insurance during the booking process, making it more convenient for customers.

Embedded Finance Companies

There are three primary categories of companies enabling embedded financial services: technology providers; banking (balance sheet) firms; and embedded finance distributors.

Technology Providers

These firms create the digital infrastructure that connects financial institutions and the companies embedding financial services. Here are the elements of what this takes:

• APIs and cloud platforms that allow for integrating financial tools into external environments. Examples include Synapse and Unit.
• Middleware firms that help manage integration and place core banking infrastructure on the back end. Railsr, Bond, and GreenDot are examples.
• Turnkey “stack” providers that offer embedded finance capabilities through a ready-made suite. Providers of stacks include DriveWealth, Solaris, and Treasury Prime.

By reducing the complexities of embedded finance through APIs and infrastructure, technology providers make it easier for nonfinancial companies without the staff or in-house know-how to offer these services.

Balance Sheet Providers

These regulated, licensed financial institutions originate core banking, credit, and insurance products and provide the underlying balance sheet that enables nonbanks to embed customized financial services. They also offer safekeeping and other banking services on behalf of end users. These include the following:

• Challenger banks that generate assets and liabilities on their balance sheet
• Banking-as-a-service, or open banking providers that rent out regulatory-compliant bank capabilities
• Specialized lenders that originate credit assets for embedding

Balance sheet providers bankroll and assume the risks for the financial products that technology companies then carry out with customized APIs and other tools for their distribution partners.

Embedded Finance Distributors

The following firms integrate financial services into customer offerings for distribution to the following:

Traditional retailers

Retailers embed finance to move beyond simple ecommerce transactions. For example, through its partners, Walmart (WMT) offers check cashing, bill pay, credit card, BNPL, and money transfer services in its stores and apps. Home Depot (HD) provides consumer credit cards for all its customers and professional credit lines for contractors as part of their purchases.

Software firms

SaaS companies can incorporate tailored financial tools for other businesses. Here are some examples:

• Invoicing, tax, and accounting tools are placed within enterprise resource planning and billing software platforms.
• Cash flow forecasting, payment reconciliation, and virtual cards are made part of expense management apps.
• Easy multipayment functions and flexible billing terms are embedded in project management tools.

Marketplaces and platforms

Transaction hubs for gig workers and digital matching embed access to wages, lending, wallet, and investing tools like these:

• Payment accounts and debit cards for income settlement, like Uber Money
• Microloans and advances against future earnings data for flexible liquidity
• Automated tax withholdings and holistic earnings data analytics dashboards

Telecom companies

Telecoms offer customers mobile financial services such as these:

• Airtime and data advances through prepaid balance overdrafts
• Microloans and nanoinsurance are bundled with mobile money capabilities.
• Fee-based wallet accounts, often with subsidies and discounts

Original equipment manufacturers

Product makers incorporate specialized financing programs into their internet-connected devices:

• Auto companies provide lease financing and insurance bundles with vehicles.
• Electronics makers embed warranty coverage and replacement device insurance as add-ons during product purchases that continue their relationship with the customer.

Pros and Cons of Embedded Finance

Benefits of Embedded Finance

In addition to providing new revenue streams and profit possibilities, embedded finance has features that can benefit both the provider and the consumer:

• Behavioral economic advantages: Nudge-like practices championed by behavioral economists aim to push customers toward more beneficial financial decisions. Embedding ways to make better, more informed, or easier choices (like adding insurance for a car) could improve financial decision-making for many.
• Covering more customer needs: Spanning financing, risk coverage, bank accounts, and money transfers lets companies act as a one-stop shop covering many customer financial needs customized to particular services and products.
• Enhancing security: Vetted financial technology partners specializing in payments, lending, and asset management already meet strict regulatory security requirements, reducing the risks that would come with managing everything in-house.
• Improving the user experience: Allowing users to remain within one ecosystem, streamlining identity checks, making payments faster, and getting the customer virtually out the door before they go elsewhere can improve convenience and save time.
• Increasing loyalty and engagement: Becoming the default financial services arm for customers beyond commercial transactions can cultivate trust and brand affinity and increase engagement. Businesses also can benefit from discounts from financial partners on bulk processing, which they can pass on to loyal customers.
• Increasing financial access: Financial services could become more efficient and cost-effective while reaching more people.
• More products to offer: Embedded finance allows retailers, platforms, SaaS firms, and other businesses to expand their portfolio of products to serve customers better in one place. Providing loans, insurance, and payments builds a “stickier” relationship beyond one-off transactions.
  

Drawbacks to Embedded Finance

For businesses and consumers, there are risks like overextending their reach, integration complexities, changes to the relevant laws and regulations, liability for partners’ actions, data privacy concerns, increasing security vulnerabilities, and turning customers off by monetizing every possible interaction and further extending checkout time with more and more checkboxes and opt-outs if not managed right. Here are some further potential drawbacks:

• Behavioral economic pitfalls: While a benefit could be nudging consumers toward more informed choices—a digital version of replacing high-calorie snacks with healthier choices at the checkout counter—there is the potential for the opposite. As a seamless service, customers could make major financial decisions without even considering the ramifications—or realizing there are any.
• Complexity: Integrating with one or several financial services partners through APIs and ensuring reliable connections and data sharing across different systems open up further technology and operational risks. It expands the attack surface for hackers and could increase the potential for system outages, performance lags, and cyber breaches.
• Customer overload: Trying to build an all-encompassing financial experience across too many domains too fast can overwhelm customers and erode trust if promises on seamlessness are not fulfilled or it simply adds to the sense that a company you trust is now trying to get at your wallet in other ways through opt-outs, checkboxes, and the like just to make a purchase.
• Increased need for customer support: Financial services often require a high level of customer support. Companies new to this space may struggle to provide this, potentially damaging customer relationships.
• Loss of focus: Perhaps the biggest potential downside of embedded finance is simply losing focus. Expanding the value proposition of a company with embedded finance and ancillary services risks diluting the competitive advantages and distracting from what customers found valuable about their offerings to seek out their service in the first place.
• Security and privacy pitfalls: Collecting your users’ financial data for personalized services poses threats if sensitive personal information is compromised through a platform breach. Rigorous safeguards must be maintained across partners, though companies can find themselves the targets of sophisticated hacking operations. There are also emerging privacy regulations restricting the data that is shared among companies.
• Regulatory compliance: By embedding regulated financial activities like lending, payments, and investments, platforms inherit compliance rules for customer identification, data usage, privacy protection, transparency disclosures, equity access, and fair lending, even as a service distributor.
• Reliance on third parties: A company could be putting major contact points with customers largely in the hands of others. Relying on third-party fintechs or banks to provide embedded financial services creates the risk that they fail to deliver them well.
• Reputational risk: If a company’s embedded financial service fails or has a security breach, it could damage its reputation, even if the financial service is a small part of its overall business.
• Trust erosion: Companies might roll out these services with promises of increasing financial access or ease of use that end up feeling to customers less a benefit than a hassle.
  

The Bottom Line

Embedded finance could be a significant shift in the financial services landscape, seamlessly integrating financial products and services into nonfinancial environments. This integration allows companies traditionally outside the finance sector to offer banking, lending, insurance, and investment services directly through their platforms. Enabled by the use of APIs from specialized providers, embedded finance not only broadens product portfolios and enhances customer convenience but also opens new revenue streams for businesses. The trend signifies a departure from traditional banking and fintech models, embedding financial services into everyday consumer and business interactions. As a modern financial phenomenon, embedded finance is driven by the digitalization of commerce, advances in technological integration, and shifts in consumer behavior. Ecommerce, ride-hailing apps, and freelance marketplaces, for example, are embedding wallet, payment, and wealth management tools into their platforms. The rise of APIs and SaaS models has made these integrations feasible and caters to consumers comfortable with nontraditional financial service providers. The implications for the future of banking and fintech are profound, highlighting potentially a major transformation in the delivery and experience of financial services.