What is Embedded Finance?
Embedded payments are part of a bigger umbrella term called “embedded finance” that is defined as “the integration of financial services into non-financial websites, mobile apps, and business processes.” Simply put, software companies partner with banks and technology providers to extend a seamless experience to customers on their platform.
Embedded financial services include payment acceptance, bank accounts, lending, insurance, payroll, and more. This article focuses on embedded payment solutions, often the first rung on the embedded finance ladder for software companies interested in marketing integrated financial services to their customers.
What are Embedded Payments?
The most familiar example of embedded payments is Uber. Consumers order and pay for a ride without leaving the Uber app. The act of paying becomes invisible to the customer. More broadly, most embedded payment solutions allow businesses to securely store customers’ cards on file for future purchases, recurring payments and subscriptions, which eliminates the need to enter payment details for each purchase.
The rise of digitally-connected experiences happening online and in apps blurs the boundaries of which entity—software company or payment services provider—is responsible for accepting and routing payment transactions. Independent Software Vendors (ISVs) connect their software to a payment gateway or platform, market payments as a feature in their software, and earn a share of the transaction revenue.
Most embedded payment examples take place online and in apps. However, about 80% of retail purchases are conducted in person. Enabling in-person payment acceptance requires an understanding of terminal features, integration and connectivity methods, and data security impacts. Digital invoices streamline accounts receivable processes and improve cash flow.
To drive efficiencies, partner with an embedded payments provider like PayJunction that offers integrated omnichannel payments so that your customers gain a consolidated view of all payment activity through one source.
How do Embedded Payments Work?
The growth of embedded payments is fueled by an abundance of third-party providers with API tools that make it easy for developers to add new features to their software.
Not all embedded finance or embedded payment solutions are alike. In fact, there are multiple commercial and technical models that have emerged to support various business scenarios. Jumping into the deep end of the pool too soon could backfire, causing you to lose focus on your core software, alienate customers and waste time and money. It’s important to understand the differences so that you can choose the model best aligned with your maturity, resources, and customer profiles.
Registered Payment Facilitator (PayFac): Platforms like Square, Stripe, Shopify, Etsy and Uber have the funding, scale and resources to become a registered Payment Facilitator, which is a service provider that is sponsored by an acquirer to facilitate transactions on behalf of submerchants. Payment Facilitators must undergo a comprehensive risk and financial review. A registered PayFac handles everything from underwriting to card brand compliance, risk and funding for their sub-merchants. ISVs that register as a PayFac typically make more margin but are liable for all fraud and write-offs on their platform. It can take more than six months to get up and running, and the costs can really add up.
PayFac-as-a-Service (PFaaS): This is a hybrid PayFac model where registered Payment Facilitators extend the use of their platform to ISVs who want to embed payments as features in their core software. The PFaaS provider handles all of the risk, compliance and underwriting on behalf of the ISV. ISVs own the merchant relationships and are typically responsible for all customer-facing activities, from sales and marketing to pricing and support. This means that the software company must become an expert in merchant services, answering customers’ questions about everything from technical features, rates and downgrades to declined transactions, chargebacks and ACH reject codes. Without in-house sales and support expertise, ISVs may experience low up-take for embedded payments, which could hurt revenue projections and profits. Worse, inadequate customer service could damage their reputation and risk losing business for their core software.
Full-Service Partnership: A full-service partnership program provides ISVs, developers and their customers a robust embedded payment solution backed by turnkey, high-touch services. Modern APIs create a superior developer experience, allowing ISVs to quickly and easily integrate payments with their software. Many software companies don’t have sufficient time, money and resources to internally develop the tools and expertise necessary to upsell and support specific add-on features like payments. A full service partner like PayJunction takes care of everything from pre-sales demos and marketing campaigns, to pricing, onboarding, deployment, terminal setup and live customer support. ISVs maximize merchant payment adoption and generate a valuable revenue stream without the overhead associated with PayFac models.
What are the Benefits of Embedded Payments?
Embedded payment solutions create a unified platform that allows payment information to automatically flow directly from a point-of-sale system, website, or back-office software while streamlining end-of-day processes and reporting. The result is increased productivity, a better customer experience, and more time to devote to core areas of your business.
Benefits for Software Providers
- Differentiate Your Software: Offering integrated payments reduces an essential point of friction in a business owner’s decision criteria when considering software providers.
- Monetize Payments: ISVs can earn significant revenue by working with a high-touch payment provider like PayJunction that helps maximize adoption rates.
- Deepen Customer Relationships: Integrated payments create a seamless experience for an ISV’s business clients and end customers, which drives loyalty and referrals.
- Remain Secure and Simplify Compliance: Securing payment data across the entire payments lifecycle builds trust with customers. ISVs reduce the scope of sensitive data and simplify PCI compliance by working with a payments provider that operates as PCI Level 1 compliant provider.
Benefits for Business Owners
- Increase Operational Efficiencies: Embedded payments speed up the checkout process and reduce human error, freeing staff to focus on higher-value tasks.
- Streamline Processes: Payment transactions flow seamlessly through the software used every day to manage their business.
- Improve the Customer Experience: Customers appreciate the faster checkout when making payments in-person, online or via invoices and subscriptions.
- Gain Deeper insights: Integrated payments eliminate the need to combine information and reports from multiple systems. Business owners see company performance and customer purchase behaviors across channels, departments, and locations.
Why are Embedded Payments Important?
Deepening relationships with business clients is vital to a software company’s success. Happy customers generate more lifetime value and the revenue earned from payments can be invested back into the ISV’s core software so they can continue to add enhancements that attract new business and drive scale.
Consumers have grown accustomed to the ease of paying for goods and services without fumbling between apps or opening their physical wallets to remove a credit or debit card. Embedded payments allow for the simple tap of a digital wallet, or the ability to securely store payment credentials for future purchases. As more consumers adopt digital payments, they may expect to pay anywhere with their phone or wearable, and not have their physical wallet on hand as a backup. That could result in lost sales and lost customers for businesses that haven’t modernized the payment experience.
It has become increasingly important for business-to-business (B2B) companies to extend their clients an easier way to buy online or digitally pay for invoices. A finance manager should have access to business tools that extend the same level of efficiency that they experience as a consumer. As more companies switch to paying with commercial cards, the amount that suppliers pay in transaction fees rises. For businesses that accept a lot of purchasing or government cards, qualifying for Level 3 Interchange rates can produce significant savings. Software providers that extend this feature to customers can stand out by helping their customers reduce the cost of payment acceptance.
The Growth of Embedded Finance and Payments
Embedded finance has created quite a buzz in banking and fintech circles, and for good reason. It is estimated that revenue from embedded financial services will reach $230 billion by 2025, a 10-fold increase from $22.5 billion in 2020.
Increased demand for seamless payment experiences has fueled the growth of embedded payments by extending convenience to buyers and sellers. The embedded payments industry is expanding at a rapid pace, with revenues expected to grow from $43 billion in 2021 to $138 billion in 2026. With an estimated CAGR of 23.1%, its revenues will reach $380 billion by 2029.
The Future of Embedded Payments
How we pay will continue to evolve and become much more invisible with the rising adoption of digital wallets and apps that store payment credentials. Consumers expect payment to be universal, frictionless, secure and trusted. Everyone involved in the food chain expects the movement of money to be quick, secure, and accurate.
While nobody can definitively predict the future, there are some trends that will propel near universal adoption of embedded payments in many elements of our lives:
- Wearables: The ability to tap and pay from a smartwatch fitness tracker is common at retailers and quick service restaurants. Expect transit systems, kiosks and other unattended devices to embed contactless payment acceptance.
- Internet of Things (IoT): The rise of connected devices, appliances, cars will make purchasing and paying by voice a common form of commerce.
- Gaming and Virtual Reality: Digital gaming platforms currently allow users to exchange real money. In the future, they may facilitate payments from gamers to embedded “virtual retailers” operated by real brands.
How PayJunction Can Help
Payment acceptance is different from functions of core software such as sales, inventory or staff scheduling. Selling and supporting omnichannel payments requires specialized knowledge. Our embedded payments model is a 3-way partnership—PayJunction, software provider, merchant—where we team up with ISVs to deliver best-in-class software and services that better serve the needs of customers.
The ISV partner team at PayJunction invests in your success and supports you and your customers throughout the entire customer journey. A partner that provides you with a dedicated single point of contact will help you achieve your goals.
- Shift the heavy lifting of payments to a partner vested in your success. You’ll maximize adoption rates and revenue.
- Embed payments across all channels: in-person, online, curbside, via invoices and recurring payment plans
- Work with a partner that offers high-touch, partner-supported marketing programs to help win new business and increase existing customer attachment rates.
Choose a partner that has an outstanding reputation as an ethical provider with award-winning support to build confidence and trust with current and future customers.