What is embedded banking
Embedded banking is the practice of integrating banking services like accounts, payments, and lending into non-financial products or platforms. For example, an e-commerce website offering digital wallets or buy-now-pay-later options at checkout are embedded banking.
The embedded banking market is expected to generate $110 billion revenues by 2032 up $13 billion today. Those numbers suggest that embedded banking is something customers couldn’t do before just like for example AI.
That is not true though. In this article I will show embedded banking always was big and the predicted growth is just a change in the way the service is delivered. That matters because it means banks and technology providers should focus not on delivering a new customer service but on making it easier for platforms to deliver an already existing service.
Lending
Let’s start with the most iconic of embedded banking services : buy-now-pay-later (BNPL).
This is definitely not a new service. Shopkeepers have allowed their customers to keep tabs and pay later for millennia and businesses have offered 30 of 60 day payment terms for centuries. Business customers have trillions of dollars of debt outstanding to their suppliers today.
What is new about BNPL is that this debt can now be moved to the balance sheet of a financial service provider like Klarna rather than the supplier’s own balance sheet. What is also new is that someone like Klarna is better at assessing credit risk than the supplier which means credit can be extended at lower risk to more customers. Because providing credit encourages sales, more credit means more sales.
Payments
There are two types of embedded payments: taking payments and making payments.
Taking payments has always been embedded. Every non-bank accepts payments. For taking payments, ‘embedded payments’ is therefore a tautology: non-embedded payments don’t exist.
Making payments is different. Not many non-banks make payments on behalf of their customers. One type of business that has done this are marketplaces who often pay marketplace sellers on behalf of marketplace buyers.
What is new in embedded banking is that marketplaces can now create separate bank accounts for each of their marketplace buyers instead of receiving all money in their own account and paying out from there. This means marketplaces no longer have to be the buyer of record which makes it possible for anyone to become a marketplace. For example, accounting and ERP software providers can now become marketplaces and pay all of their customers’ suppliers.
Disbursements
Disbursements are a special type of payment where there isn’t a simultaneous exchange of goods or services in exchange for a payment but a one-way transfer of money only. Examples of disbursements are government benefits, charities disbursing money to beneficiaries and insurers paying claims. Salary payments and corporate expenses have many characteristics of disbursements as well.
Just like taking payments, disbursements have always been embedded. Non-embedded disbursements don’t exist.
What is new in embedded banking is that non-banks can now disburse money by issuing cards or electronic wallets to their beneficiaries. This has a few benefits: it means the disbursement can be instant, it means the beneficiary doesn’t need to have a bank account making it more suitable for unbanked or poorly banked beneficiaries and it means the disburser continues to have visibility and control over how the money is spent.
Conclusions
Embedded banking has always existed. Today’s technology just allows non-banks to deliver embedded banking in a more efficient way which in turn makes embedded banking possible in more situations.
The main job of banks and technology providers is therefore not to chase end customer demand but to make it easier for platforms to offer embedded banking.
Yordex makes it easy for any business to embedd banking. To find out more, please contact us.
