This April, The Fintech Times is focusing on all things embedded finance, the integration of financial services into non-financial products and services. As the space rapidly develops, we look to highlight the latest developments, initiatives and challenges embedded finance has to offer and overcome across the globe.
Continuing our focus on e-commerce and the checkout experience, we now turn our attention to the potential implications of embedded finance for traditional payment processors. Can they overcome these challenges by adapting, and if so, how?
To find out, we reached out to industry leaders to find out their take on the topic.
Increased competition
Malte Huffmann, co-founder and co-CEO of Mondu, a B2B online payment solution provider, explains how payment processors need to adapt to combat increased competition created by embedded finance solutions.
“The rise of embedded finance in e-commerce checkouts has significant implications for traditional payment processors, primarily increased competition as merchants integrate payment services directly. To adapt, traditional payment processors are enhancing their APIs for seamless integration and forming strategic partnerships with e-commerce platforms.
“They’re also developing value-added services like fraud detection and data analytics to remain competitive. Additionally, the processors are moving towards providing embedded payment solutions themselves and forming strategic alliances with BNPL providers, thus maintaining relevance by innovating and improving the user experience (as well as creating potential revenue streams for themselves based on revenue-share models with the BNPL providers). They also focus on regulatory compliance to ensure secure and trustable transactions within the embedded finance ecosystem.”
The power of partnerships in payments
Sophia Goldberg, co-founder and CEO of Ansa, the payments platform for merchants, explains how embracing embedded finance may be the only way forward: “Payments aren’t necessarily black and white, and payment innovation is not zero-sum.
“Rather than viewing the shift we’re seeing in payment methods as a thread to processors, there is a growing sentiment within the industry that collaboration and adaptation are key to staying relevant.
“Many processors are exploring partnerships and delving into embedded payments to better serve merchants and consumers alike. At the end of the day, we need to build the right payment methods for the right payment type. Moreover, there’s a move towards flexibility – allowing merchants to handpick the payment tools that best suit their individual requirements and serve their business model. The trend, focused on flexibility, is forcing processors to reevaluate their approach and provide dynamic solutions that are friendly to merchants and drive conversion.
“For instance, BNPL (buy now, pay later) providers like Affirm and Klarna are actively encouraging merchants to incorporate their payment methods early in the customer journey. This strategically directs customers towards specific payment options, leading to larger basket sizes and better conversion rates. Adaptability from fintech providers not only ensures the ongoing relevance of payment processors but also cultivates a more resilient and dynamic e-commerce ecosystem.”
‘Catering to the growing demand for embedded finance’
Sophie Flynn, CFO and co-founder of Nucleus365, a London-headquartered payment institution, also explains the importance of adaptation to ensure survival: “The rise of embedded finance in e-commerce checkouts poses both challenges and opportunities for traditional payment processors.
“As merchants increasingly integrate finance-related services directly into the checkout experience, it disrupts the conventional payment processing model.
“Traditional payment providers are now compelled to adapt and evolve their offerings to stay relevant. Many are partnering with embedded finance providers or developing their own integrated solutions to maintain a presence in the e-commerce ecosystem. This shift allows them to offer a more seamless and comprehensive payment experience to merchants, catering to the growing demand for embedded finance.”
Investment in new tech is required
For James Booth, head of partnerships at PPRO, while adaption could prove costly, it is the only solution.
“As embedded finance becomes more prevalent in e-commerce checkouts, traditional payment service providers (PSPs) will struggle if they don’t evolve their offerings to include embedded APIs.
“These APIs are designed to integrate seamlessly with merchants’ e-commerce platforms, allowing for a more cohesive, embedded and personalised payment experience for their customers.
“This movement to more integrated payment experiences will result in increased costs to PSPs. However, to remain competitive, this is now becoming table stakes. PSPs must invest in the technologies necessary to help their merchants provide the right experience for their customers, or they will get left behind.”
Time for the ‘re-creation of the finance sector’?
Michael Pierce, VP of sales at Toqio, an embedded finance platform enabling companies to create and launch fully branded digital financial solutions, discusses the change in the financial landscape as we know it: “Incumbent banks have demonstrated their staying power and adaptability time and time again, mostly due to being able to leverage their size and relative dependability. Banks are finally recognising the need to adapt to changing customer expectations and digital transformation, especially as embedded finance matures and larger corporations embrace the concept.
“In a very real sense, large companies are becoming the new disruptors. Banks have actually started scaling back their innovation because of market speculation and the spectre of possible collapse. Competition will become even more significant as the nature of a disruptor changes from a fintech to an empowered corporate entity. The future of core banking is likely to strike a balance between fintech-driven companies and incumbents.
“While large financial institutions will endure, their role is evolving. Their strengths are assessment, management, and specialised services. We’re already seeing them pivot toward analysing data from a multitude of sources, diving into data lakes to provide genuinely useful risk assessments.
“Throughout this year we’re going to see a conscious and guided re-creation of the finance sector, a full terraforming of the terrain with the intention of creating something that flourishes, with incumbents, fintechs, and companies all seeking to find their niches in the ecosystem. It’s clear that corporate embedded finance will be a massive part of the upcoming shift.”
Merchants don’t need to rely on payment processors
Jean Boling, director of business development at Clearent, an embedded payments provider, also adds: “Embedded finance is the norm in specific verticals, like airline-specific credit cards, sales financing at appliance retailers, or car loan options at automotive dealerships.
“But changes in commerce and consumer behaviour are making embedded finance become more prevalent in other verticals, and traditional payment processors are now paying attention. Some payment companies are quickly getting on board, while others have decided that this is not a priority for their merchant customers right now.
“Software as a service providers have also entered the market, embedding a variety of lending and finance options into their business management platforms. The good news is that merchants have a lot of different options for financing, so they don’t need to rely on payment processors to access embedded finance solutions.”
How should payment processors respond?
Finally, Scott Frisby, head of strategy Europe at payment solution provider Elavon, explains how payment processors should approach the situation and how best to adapt: “Firstly, it’s important for them to stick to what they know best. Looking at where their customers are, and how they can improve their experience while driving their own revenue.
“For payment providers, this could mean selling software upfront with embedded payments to merchants alongside other embedded finance products such as loans, VAT services, and currency services. All of this means PSPs are more deeply involved in the consumer-facing angle than ever before, from shopping apps and integrating loyalty, to cross-sales enhancements and click & collect.
“As with offering any financial products, ensuring compliance with regulation can be a challenge as embedded finance develops. From the consumer side, there’s an element of trust, giving consumers confidence to use embedded products and services. Educating consumers also plays a big part in this.
“There’s an eternal challenge to offer more and more functionality to consumers in e-commerce while at the same time making the final ‘pay page’ at checkout simpler, cleaner, and less cluttered. The way to do this is to constantly test checkout page design effectiveness and to use emerging dynamic tools. For example, payment providers are using AI to only display payment methods or buy buttons that the consumer has used before.
“Another example would be to offer instalment functionality only for items that meet a certain value threshold or are timed to coincide with holiday shopping. Algorithms can be used to ensure insurance for travel is promoted only after a prior insurance policy has expired, as opposed to today where it is automatically cross-sold on every purchase.”
