Payments Briefing: The opportunities and challenges of embedded payments
- This week, we talk about embedded payments: why they matter, where they are headed, and the opportunities and challenges they present for banks and incumbent FIs.
- We also discuss BNPL for business, and the ways in which it’s different from its B2C counterpart.
As businesses look to provide their customers with more personalized experiences in a post-pandemic economy, embedded payments are starting to become a core part of the value proposition for many companies.
A recent report by Ernst & Young identified seven factors that are shaping today’s payments landscape: open banking, embedded payments, digital wallets and super apps, real-time payments, BNPL, digital currencies, and cross-border payments.
In today’s briefing, let’s zoom in on the topic of embedded payments: why they matter, where they are headed, and the opportunities and challenges they present for banks and incumbent FIs.
Embedded finance is expected to reach a global value of $7 trillion by 2030. Embedded payments constitute the largest subsector within embedded finance, and their market value is estimated to be around 60% to 70% that of embedded finance. By 2030, nearly three-fourths of global digital consumer payments are expected to be conducted using platforms owned by non-financial services players.
Embedded payments are associated with business models where non-financial services companies – like Uber or Shopify – offer payments functionality to their users. Typically, they help businesses to provide more value to their customers. For example, Uber offering payments-related services to its drivers helps to keep them within its ecosystem for longer.
Embedded payments solutions started off with the goal to offer a better checkout experience for customers and provide more options on the merchants’ side. Now, payments providers are increasingly offering more platform capabilities. For example, Stripe currently enables Shopify to offer payments processing, money accounts and payment cards to help its merchant customers better manage their businesses. For firms like Shopify, embedded payments mean that the payment process no longer stands out as a separate step for their customers – making for an overall smoother experience.
Further opportunities are also present in B2B2C and B2B2B segments that could result in new ways to directly or indirectly engage with customers. Payments services for online sellers are typically priced at 3% of the value sold, creating uplift for the platforms that offer it as an embedded service. Additionally, payments for gig economy and service workers, ranging from basic embedded wallets to instant payouts, generate revenue for different types of platforms. For example, Uber charges $0.50 for every instant payout requested by a driver.
“Embedded financial products are increasingly being considered to enable platform business models to evolve additional revenue streams, and to capitalize on the opportunity the BaaS evolution brings,” said Roelant Prins, COO at Adyen. “The embedded payments proposition should encompass bank accounts, business financing, and card issuing – making sure platform merchants have full control of their payments flow from onboarding to issuing to payouts.”
However, the growth of embedded payments also means that banks may have more competition to deal with. Businesses that previously needed to partner with a bank to accept payments can now get it directly from marketplaces and platforms. Competing with them for payments is challenging, as many banks currently don’t offer the same integrated payments experience.
I spoke with Alla Gancz, EY’s UK payments consulting leader, who told me that embedded payments are expected to scale and become more “invisible” as non-financial services providers continue to integrate payments into their offerings, driven by the rise of e-commerce, platforms and marketplaces. She added that the idea behind invisible payments is to eliminate the need to provide any additional credentials for authentication. Instead, the payments system will automatically recognize and authenticate the customer, often with biometric data. This means that consumers will be barely aware that a transaction is taking place at all – the payment will just take place as a part of their interaction.
For example, checkout-free stores use invisible payments to provide a “just walk out” shopping experience. In the automotive sector, cars are being embedded with in-vehicle commerce to allow drivers to pay directly for services such as fuel, parking, vehicle repair, insurance, and more from the car touchscreen. Consumer spend over connected car e-commerce is expected to reach $525 billion by 2030.
So far, there are no specific standards or definitions for what counts as invisible payments, as retailers and financial institutions are still in the process of finding new ways for customers to make easier and quicker transactions. However, the increased adoption of API services is creating new opportunities across many parts of the payments ecosystem.
Does B2B BNPL have the potential to emerge as the next top fintech trend?
Buy now, pay later solutions have soared in popularity in recent years, with global consumer-facing BNPL solutions growing tenfold to $132 billion in 2021. The B2B version, however, has been a more silent player.
The proliferation of the B2C model would suggest that it is only natural for businesses to put on their thinking cap and expand this payment option to business buyers – but will it taste the same level of demand and success?
B2B BNPL works along the lines of business credit – which has been around for as long as there has been writing, or likely longer – and could be better described as trade credit-as-a-service.
From an industry perspective, it is the use of a third-party platform or widget to automate the approval of credit from suppliers, distributors, or B2B marketplaces for a buyer that is typically a small business. The buyer gets to pay the purchase price in installments over a certain period, while the seller gets an upfront payment of the total selling price from the buyer’s financier.
Different companies define and deploy BNPL solutions differently, and not all are equal. For example, some business BNPL offerings are similar to the B2C payment frequency, in which payment for goods or services is typically broken up into four payments – with 30, 60, or 90 days to remit payment (net terms or paying on the invoice), while others allow the spreading of payments even longer.
However, there are significant differentiators between BNPL for consumers and businesses. The B2B world is more complex, transactions involve a larger number of stakeholders in a purchase that includes the procurement team, accounts payable department, and budget owner – and each has its own set of unique needs. This means that real-time invoice data must flow and integrate easily with ERP, CRM, accounting, and A/P systems.
B2C BNPL, like most consumer credit, is focused on giving individuals more ways to buy what they want, rather than what they need. Contrarily, B2B BNPL is focused on required business inputs and is viewed more as the automation of existing credit processes with slight innovation.
However, B2B BNPL brings its own set of challenges. Understanding its risks means realizing that many of the buyers in the space actually began their purchasing decision with an expectation to pay at checkout rather than an expectation of net terms.
A seller’s buyer identification and credit decisioning mechanism need to be easy, accurate, and immediate. Too much friction in the process will lead to cart abandonment and lost sales opportunities, while too little accuracy will lead to high losses through fraud or poor credit decisions. These risks are not new to the trade credit industry, but the speed at which they’re assessed is a new factor.
Additionally, as a B2B BNPL provider, onboarding and underwriting credit can be a difficult and time-consuming task that takes a provider away from its core business activities.
Moreover, with increased B2B customers acquired online, there has been a growing risk of B2B identity theft and other forms of digital fraud. Recent research shows that 98% of B2B businesses have been affected by financial losses due to successful fraud attacks in the last year.
Managing fraud and identity theft while capturing all potential sales requires a balancing act. Most organizations use multiple methods to create a variety of user journeys, depending on the number of fraud indicators that a user/merchant presents. A repeat buyer that has paid multiple times via direct debit is less likely to set off a warning than a user from a large corporation using a Gmail address, for example.
Since B2B purchases tend to be so large, a single default could be crippling to a supplier. Compared to B2C operations, the obligations companies have in B2B are far more varied, with added legal complexities, and more at stake if businesses miss payments.
Highlights from our recent coverage
Power of Payments Ep. 17: Breaking down B2B BNPL with Resolve’s Chris Tsai
Chris Tsai, co-founder and CEO at Resolve, joins host Ismail Umar on this week’s podcast. He talks about how Resolve’s product compares to that of consumer BNPL providers, how macroeconomic challenges are affecting firms in the space, and where B2B BNPL is headed in the coming years.
Tearsheet’s Money20/20 takeaways
Tearsheet is back from this year's Money 20/20, the biggest fintech event of the year. There was an excitement to be back in the world, meeting new people and making deals. However, the joy was mitigated by a reined-in exuberance and fear about what’s happening at the macro level outside the conference. As this year’s show is put to bed, Tearsheet explores the important trends that emerged from the event.
Data Snack: Cross-border payments prepare to digitize; cards and ATMs lose their sheen
Consumers and businesses alike now demand fast cross-border payments, but current systems can only go so far. Newer technologies like APIs, tokenization, and blockchain come with the promise of secure lines and instant settlements.
What we're reading
- Stripe to lay off 14% of its employees (Protocol)
- Block sees drop in Bitcoin revenue as consumer demand, crypto prices slump (CoinDesk)
- Amazon rolls out Venmo payments ahead of holiday shopping surge (Bloomberg)
- Papaya Global taps JPMorgan for international payroll disbursements (Finextra)
- Visa's spending growth slows as consumers are hit by inflation (American Banker)
- Citi unveils integrated payments and billing platform (PYMNTS)
- Marqeta pushes into banking for next growth phase (Reuters)
- BNY Mellon launches new payment platform Vaia for payee-choice disbursements (Yahoo Finance)