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How Embedded Finance is Changing the Payment System?

Evolution of Payment System
In the last decades, payment processing has been organized around the usage of payment plastic cards and POS terminals. In many countries, inserting or rolling a card through the POS terminal was recognized as one of the most trusted and comfortable methods of payment. However, as time flies, the financial world is changing, revealing the following problems of the system:

  1. Complexity and Price. POS terminal payments involved numerous parties: the manufacturers of devices, the vendors of the software, the specialists of the bank services, payment systems, as well as certification and verification centers. In other words, the POS terminal had to be designed and made in China, then certified in the special centers, introduced within each country individually, cleared, and finally sold. Of course, it was a long, complex, and expensive process, the price of which
    was clearly reflected in the tariff line of the trading companies by the payment systems and the banks.

  2. Changes in the Customer Behavior. A large part of the population became digitally savvy and open to trying and using new payment technologies. The new generations of customers are seeking holistic, simple, direct, and embedded experiences.

  3. Covid-19. The pandemic of Covid-19 has contributed to the changes in customer behavior since people wished to minimize face-to-face interactions for health security purposes and understood the comfort of buying online.

  4. High Ecologic Cost. The average plastic payment card takes around 400 years to break down and even after that it remains harmful to the environment. According to statistics, each year it takes around 30,000 tons of PVC to produce payment cards. Moreover, the majority of these cards are not recycled, but usually, they end up as plastic waste in the environment.
  5. Problematic Access to Banking Services of Different Socio-Economic Categories. According to statistics of 2021, 1.7 billion people around the world don’t have bank accounts. It can be explained by the fact that they do not have the access to ATMs and banks, and they are not financially capable.

  6. Deregulation of the financial market and the appearance of new legislation. The adoption of open banking and PSD2 are encouraging the universal access and development of banking APIs. The necessity to comply with these new requirements is driving the business financial institutions to benefit from tech builds.

  7. Rapid growth in digital payment technologies. The appearance of alternative financial payment solutions provided people the possibility to choose and understand what is more comfortable, and pleasant to use. Many people comprehended that plastic payment cards no longer meet their financial needs, as good as available alternatives.     

All these reasons worked in synergy, leading to the fact that in 2021, the global plastic cards market lost $3 billion.

How is the Plastic Card System Trying to Survive?
The traditional banking sphere is aware of the irreversible changes in the financial sphere that are taking place. Therefore, they are constantly trying to develop a range of innovations: implementation of pay pass technology, creation of cards without a number, vertical cards, cards with built-in fingerprints, or environmental cards (made of recyclable materials). All these changes are made to increase the pleasure of the buyer from using the card. However, despite being technological, expensive, and stylish, the cards would at a certain moment be perceived as retro.

The financial institutions are also trying to reduce the costs and to increase the profitability of payment card acquisition, however, it is difficult for them to stand the competition of digital and embedded banking competitors.

Embedded Finance: The Trend to Follow
The appearance of the digital terminal (SoftPOS), QR codes, as well as the adoption of PCI SSC CPOC, allowed accepting card payments without using the POS terminal at all. It is enough for the seller to have a smartphone to accept the payments. Besides, acquiring is no longer controlled solely by the state and no longer the service that banks provide exclusively to merchants. Access to processing and receiving payments is becoming more and more like access to gas, electricity, and water, meaning that it is much easier to use it, compared to the past. The appearance of smartphones and their active usage by the people has changed the market of financial services. According to statistics, in 2016 there were only 3.668 billion smartphone users (49.40% of the global population), while today in 2022, this amount has almost doubled, reaching 6.648 billion of people (83.72% of the world’s population). In contrast, only 19.28% of the global population on average own a credit card, and only 44.4% of the global population on average own a debit card. A simple comparison demonstrates that the amount of people who own a smartphone is larger than the number of people owning a payment plastic card. With the smartphone, there is no need to have a card, no need to have a chip, and no need to enter a pin, since the manufacturers of smartphones have developed the tools to make the safe authentification procedure (for example, by head shape or fingerprint). In many cases, the card is transformed into a digital token or QR code inside watches or key chains. It is possible to state that these are very serious consequences since e-commerce has been traditionally built around filling the payment form and entering the card details. However, if there is no card, it is necessary to enter just the one-time password, since the payment information is already in the popular payment systems (for example, in Google Pay or Apple Pay). The sellers do everything possible to make a one-touch purchase an everyday reality. Besides, a token or QR codes are more environmentally friendly than any card. The results are clearly visible and felt every day by people regardless of their social status or geographical location. Even street musicians ask for money through digital banking tools. They portray well the transformation of the financial system. In other words, it is possible to see the trend of plastic extermination. It is not fast, however it is already happening at different fronts.

The conditions depicted above have paved the way for the evolution in this sphere, leading to the emergence of fintech and embedded finance companies, which today are successfully functioning on the global financial market. Incorporation of embedded finance payment solutions is popular since it can help:

    •  to reach a better customer experience;
    •  to improve brand reputation;
    • to grow  revenue streams;
    • to improve ROI;
    • to increase industry expertise;
    • to decrease transaction costs;
    • to automate and digitalize the offering;
    • to optimize operational excellence.

The following basic statistics demonstrate that non-financial institutions are capturing the global financial market, changing the rules of the game.

    • Alipay (900 million active users)
    • WeChat Pay (800 million active users);
    • Apple Pay (441 million active users);
    • Google Pay (100 million active users)
    • Klarna (90 million active users);
    • WhatsApp Pay (40 million active users)
    • Amazon Pay (33 million active users);
    • AfterPay (16 million active users);
    • Affirm (7 million active users);
    • Stripe (3,1 million active users).
    • Finastra (9,000 customers);
    • Temenos (3000 firms across the globe, including 41 world top banks, processing the client interactions of more than 1.2 billion people);
    • Treezor (100+ customers with 2 million payment cards issued);
    • Monzo (5 million+ customers).

What is the Future of the Financial System?
Embedded finance is already changing the global financial market and the rules according to which it functions. Any company can become a banker these days. It is estimated that by 2030, embedded finance would be worth US$ 7.2 trillion. In addition, this field is expected to deliver an additional 720.78 billion EUR in revenues for European brands in the following five years. Besides, according to the Embedded Finance Research Report survey,73% of surveyed companies are going to embed financial services in the following two years. In this context, theMcKinsey report demonstrates the future of embedded finance in the following way: “Today, companies of all types and levels of maturity – including retailers, telcos, big techs and software companies, car manufacturers, insurance providers, and logistics firms – are considering and preparing to launch embedded financial services to serve business and consumer segments”. The examples of IKEAWalmartMercedes-BenzStarbucks, and many other companies from different sectors prove it.

It is expected that national biometric databases will be developed, which would allow the cheap and convenient process of authentication of people through fingerprints or cameras (which is already very popular in China). The new players in the financial market will not displace banks, however, they will occupy a valuable part of the market. Still, people like simple solutions. Fifteen different wallets and tokens in the mobile device definitely do not look simple and easy.

Of course, POS terminals and classic acquiring will not disappear tomorrow. The payment industry is conservative, and new payment methods, despite their convenience and variety, will be implemented for decades. But the direction of the movement is unquestionable. It is also possible to assume the considerable increase in the competition and the entry of new players into the e-wallets market. However, the development of the digital economy, сhanges in customer behavior, as well as entry of non-financial institutions into the financial market have changed the situation.


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Maksym Popov

Maksym Popov


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30 Nov 2022



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