The future of payments: Instant becomes embedded

The craving for instant is feeding a surge toward embedded finance: financial services on the customer’s terms, from anywhere and at any time. Today, banks are not needed and according to Curt Chadha, head of international retail payments at Raiffeisen Bank International, embedded finance is synonymous with “seamless” services and the “experience becomes the decisive factor,” rather than the financial service itself.

This is an excerpt from Finextra Research report 'The Future of Payments 2021', which is exclusively available on the EBAday digital platform. Register here for EBAday to access the full report.

Further exemplified by McKinsey, in order to “meet the rising demand for embedded finance, financial institutions are increasingly offering banking as a service (BaaS) – bundled offerings, often white-labelled or cobranded services, that nonbanks can use to serve their customers. Making it work will require new technologies and capabilities, because BaaS is usually distributed to clients via APIs and requires strong risk and compliance management of the embedded finance partner.”

The article continues to state that “if end users begin adopting embedded finance in significant numbers, banks may have little choice but to launch BaaS business lines. The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks.”

The advantages are evident. The integration of financial services into non-financial programmes is already happening today and initiatives like Apple Pay and Google Pay are proving to be popular. More recently, buy now, pay later (BNPL) programmes and QR code purchases have helped create this seamless experience, removing friction from transactions and increasing the possibility of a customer completing a purchase.

Cailly explores this introduction of frictionless journeys for customers, “starting with online search and ideation to the actual purchase and aftersales. Embedded finance is a powerful driver of conversions for any retailer as it provides clients with several financing or insurance options, which can make the difference to encourage the client to finalise the purchase.”

However, questions continue to arise around the survival of initiatives like BNPL or integrated banking. Schäfer believes that while instant payments can offer banks with the opportunity to improve profitability, “one increasingly intriguing option is to integrate instant payments with a range of financing options. This is an area where fintechs and bigtechs have also shown an interest in participating in the payments space.”

This combination of instant payments and alternative financing options is at the crux of the definition of embedded finance. As Schäfer explains, in the consumer world, many customers may wish to delay payment and with a credit facility built into their payment method, the consumer can buy on the spot, but be debited later.

“This offers customers much-appreciated flexibility – giving them, for instance, the option to buy something they don’t currently have the cash for - but will have in a few weeks - without going into an overdraft. Again, this also represents a convenience for retail customers: deferring payment means they don’t have to input their credit card details. This can yield visible benefits for the business too – removing a potential barrier at check-out and thereby increasing conversion rates,” Schäfer adds.

Aligning instant payments with Europe’s convoluted range of payments standards and schemes is crucial to the future of payments. Cailly states that “fintechs have already evolved into embedded finance, and so have incumbent players. This trend will continue to accelerate as embedded finance is one of the ways to gain intimacy with consumers. Embedded finance is giving customers the means to reach purchase the goods they desire.”

Chadha shares Cailly’s view and says that embedded finance is “already happening with several startups and new market entrants driving interesting innovations: at point of sale (POS), in-app and web. We believe BNPL is here to stay. Traditional players can compete, but they need to change focus. The focus needs to be much more on customer experience, simplicity, and clarity.”

What does the future of payments hold? With the proliferation of instant payments and open banking, BaaS and API banking could become as ubiquitous as online or mobile banking, a channel that must be maintained and evolved for retail and corporate customers.