Embedded Finance: A Beginner’s Guide To The Growing Intersection Of Tech And

The past several years have seen financial services embedded into a wide variety of software and applications peddled by non-bank providers. This trend is widely referred to as embedded finance and it is fast becoming one of the most disruptive trends in payments, banking and technology today. Embedded finance is reshaping the distribution model for financial services while creating a new role for technology companies in the financial lives of consumers and enterprises. 

It doesn’t take long to spot embedded finance in the wild. Financial services are becoming part of the stack for technology companies of all shapes and sizes, and the examples here are many:

• Point-of-sale, e-commerce and vertical software vendors – offering integrated payment processing and lending services to their sub-merchants (e.g., Lightspeed, Shopify, Toast, Mindbody).
• Ridesharing companies – offering various financial products (e.g., debit cards, instant payouts, digital wallets) to both customers and drivers (e.g., Uber
  UBER
  , Grab).
• Consumer-focused fintechs – expanding their functionality, for example through installment loans, debit cards and instant lending disbursement (e.g., Square
  SQ
  , Klarna, Revolut).
• Large consumer technology companies – offering digital wallets, P2P payment services, lending and credit and debit cards to their end users (e.g., Apple
  AAPL
  , Google
  GOOG
  , Facebook, Amazon
  AMZN
  ).
• Telcos – offering digital banking products, digital wallets and payment cards (e.g., Orange Money, T-Mobile MONEY).

The aim for these companies with financial services is to form a richer and stickier user value proposition . There’s also, of course, the revenue opportunity. Consider:

• Square converted the Cash App into a business that produced $325m in Q2 2020 gross profit (excluding Bitcoin) in roughly three years. This was largely accomplished by issuing debit cards linked to its Cash App P2P payment service, which it began offering to users in 2017 in partnership with Marqeta.
• Shopify processed $14bn gross payments volume through its Shopify Payments service in Q3 2020. This service is offered in partnership with Stripe. Shopify charges between 2.9% and 2.4%, plus $0.30, for each online transaction.
• Uber now handles more than 70% of driver payouts using Instant Pay. Uber leverages the debit rails of Visa
  V
  (Visa Direct) and Mastercard (Mastercard Send
  MA
  ) to enable the service, charging drivers a fee of $0.50 per payout. Instant Pay is free if the driver deposits funds to the Uber Visa Debit Card (issued by GoBank).

When it comes to execution, many tech companies have realized that their talents are best spent on their core business. They are instead outsourcing to third-party specialists to provide, as a service, the complex infrastructure needed to run financial services at scale. A crop of vendors has emerged to address this burgeoning opportunity, which…