The Embedded Finance Field Guide for Emerging Enterprises

The growth of embedded finance is undeniable. Apple Pay alone is estimated to have over 500 million users. The point-of-sale finance market (which includes BNPL and point-of-sale credit) is set to exceed $760 billion in eCommerce transaction value by 2025. As many as 14.2 million Americans with a checking account now consider a digital bank to be their primary bank – a 67 percent jump from January 2020.

It’s now more possible than ever for emerging enterprises and mid-sized businesses to launch their own embedded finance solutions. To do that, though, you have to have a firm grasp on how the various concepts in the world of embedded finance relate so you can confidently choose the best partner for your needs.

To help, we’ve created this field guide to embedded finance concepts.

Key Concepts in Embedded Finance

Like any space with major growth opportunities, embedded finance has led to new terminology. It’s also spawned some pure buzzwords that don’t communicate much meaning. Below are the legitimate terms and concepts – ones you should have a firm grasp on as you undertake your embedded finance journey.

Digital Banking

Digital banking refers to the conducting of all banking activity digitally, divorced from any physical space. Larger banks may insist that their apps are part of digital banking, but true digital banking is completely virtual.

The difference isn’t just semantic. In addition to having expensive physical branches to maintain, legacy banks are built on legacy tech (think: IBM mainframes), which means the process of making changes is slow and costly.

Digital banks are built on modern technology. They can move faster and operate more efficiently. And they’re growing so fast in part because they’re reallocating the money they’re saving on branches and dated IT to customer acquisition efforts, like branding and lead gen.

Examples: Chime, SoFi, MoneyLion

Digital Lending

Digital lending is akin to digital banking: users conduct every step of the borrowing process digitally.

As with digital banking, digital lenders have lower operating costs than their legacy counterparts, operate on more modern technology, aggressively invest in customer acquisition, and generate a wealth of digital information on their customers.

Examples: Better.com, LoanDepot, Upstart

Open Banking

Open banking is a practice that enables third parties to aggregate transaction and account data from a bank, unifying all that data into one secure location through the use of APIs. Open banking has two common use cases:

Personal finance management: Apps like Personal Capital and Prism pull data from multiple statements sources via APIs and deliver a holistic view of a user’s finances.
Underwriting that uses alternative data: APIs pull data from multiple sources and use proprietary algorithms to evaluate creditworthiness as defined by something other than a FICO score.

The implications are huge, and platforms like Plaid, which put open banking data to use, are gaining traction and value.

By aggregating the ever-increasing consumer financial data available (thanks in part to digital banking and digital lending), Plaid and others make it possible to get a more comprehensive picture of potential borrowers – even those without much traditional credit history.

Embedded Finance

Embedded finance refers to the integration of financial services into a non-financial platform, and is an umbrella term that encompasses card issuance, open banking, digital lending, digital banking, and more.

One example of embedded finance is Buy Now Pay Later (BNPL). Platforms like Affirm, Afterpay offer a seamless experience to finance or break-up the payment of an online purchase into four payments. All of the experience from applying for BNPL to getting approved happens within the checkout experience without the shopper having to leave the retailer’s website.

Embedded finance centralizes financial processes so companies can perform services ranging from integrating payments on their website to issuing their own cards. These functions create a more seamless customer experience and enable companies to build customer relationships and turn payments into a revenue driver – and they’re made possible in part because of all the other changes happening in the space.

Banking as a Service

“Banking as a service” (BaaS) is essentially a collection of disparate banking modules stacked together with an API layer. In other words, it’s nothing net-new; it’s just a repackaging of what’s out there. But ideally in a digitally-native, SaaS offering.

Choose an Embedded Finance Partner that Offers Guidance and Support

There’s never been a better time to launch an embedded finance product. As you consider your options, we recommend partnering with a provider you can trust to guide you throughout your journey. At Highnote, we’ll deliver not only best-in-breed technology and relationships but also ongoing support as you iterate your solution to meet your customers’ needs.