From Embedded Finance to Embedded Everything

Embedded finance has become so seamless that for both consumers and businesses today, it’s easily seen as a standard function that has always been around.

It’s because of its ease of use that cross-border business has become more common - or arguably essential in today’s competitive markets - and that international transactions are no longer a barrier to business growth for the SME.

But we are only at the start of the embedded finance journey.

Today, we see embedded finance in everything from Amazon, Shopify and Uber; the design was created so the user never needs to leave the ‘store’ to fulfil their transaction - making for a much more enjoyable experience. We’ve seen this rise through the popularity of digital wallets like Apple Pay and Samsung Pay, and more prominently now, lending with fintech companies such as Klarna and Afterpay who are driving the Buy Now, Pay Later (BNPL) model.

However it’s thanks to open banking technology and the various supporting regulations like PSD2 that embedded finance is where it is. This, and the increased availability of APIs by financial service providers who are regulated by default. Their regulated status alongside secure APIs means that non-finance companies can connect to their network and that suddenly, the world has things like embedded payments available in many interactions.

Just the beginning 

Juniper Research’s recent study found that by 2026, the embedded finance market will jump by an astonishing 215% to exceed $138 billion. In addition, Lightyear Capital predicted the industry to grow to $7 trillion in 10 years. So, where is this growth coming from?

The Juniper Research whitepaper recognised five key areas: embedded payments, embedded banking, embedding investments, embedded insurance and embedded lending, and unsurprisingly, predicted the latter to make up 50% of this mighty growth.

Embedded insurance has started to take off, albeit with a few more challenges and technical complications versus embedded payments, as we see options for risk protection from anything like flights, mobile phones to concert tickets. In the wake - or rather not quite the wake yet - of the Covid-19 pandemic, this has proven more important and popular for business resilience and consumer confidence.

Likewise, embedded investment is growing. As the world becomes increasingly tech-savvy and tech-inclined, trading capabilities are now coming from within messaging platforms, payment providers (PayPal), retail channels, employee portals and even from Amazon Alexa devices.

It’s clear that what is being proved is the popularity, capability and necessity for greater investment and opportunities within the embedded finance industry, whatever form that takes. 

But, what else?

The intersection and overlap of finance and technology has entirely changed the cross-border landscape and so to me, the next logical step for the industry is embedded currency management; an unbundling of FX and cross-border payments, if you will.

Friction in FX cost still lies within currency risk; i.e. “how much will it be in my local currency, once the payment is made?” For businesses who trade significant amounts overseas and often, the FX loss is often eye wateringly high.

However, if invoices for products or services are offered with currency risk protection embedded within them, payment providers, with their extensive FX product suite, can add more value to both the buyer and seller.

Let’s look at it another way: what would it actually do?

It would solve payment friction

Embedding currency purchase-to-payment options within an existing workflow allows for automation, with the additional comfort blanket of knowing what you’re getting.

It’s digitally native to the customer environment

At its core, it follows the same life cycle of embedded payments which are set within the digital environment of the customer. It would be seamless because the technology is already there, and in keeping with what’s expected.

It would build huge pools of valuable data 

Embedded currency and cross-border payment options allow both customer and payment providers to build and use larger data pools. Alongside artificial intelligence, customers and providers would be better equipped to assess unoptimised purchases and correct these with timely and efficient offers. 

It would reduce FX loss and costs

If deployed correctly, it will help SMEs to make better currency decisions that are sustainable and aligned to their own business needs - reducing unnecessary FX losses and ultimately improving profit margins. 

What would embedded currency management look like?

For businesses selling

Exporters could optimise their pricing with an automated foreign currency management plan. This would be embedded within the invoice process and allow the possibility for invoice discounting and early receipt.  

For businesses buying

Let’s use Alibaba as an example and for context. As one of the biggest B2B marketplaces, orders here are large and take longer to fulfil in comparison to others. Alongside this challenge is the fact that most products and services listed are in USD, despite the majority of users having different local currencies. The opportunity here then is for businesses to better manage the cost of their USD purchases right then and there before they leave the platform, with an embedded currency management solution.

For cloud accounting software

Through secure APIs, existing invoice data would be pulled to show a business’ payment behaviour that can then be used to make smarter, real-life data-led currency decisions and payment plans. This means the FX risk is managed within the customer’s cloud accounting software, where it makes sense to be, and that they instantly have full transparency at the point of purchase or invoice approval. 

It’s then not hard to see the appeal for payment providers to be connected to this - flipping the traditional model of managing FX providers on its head and instead enabling SMEs to make faster, frictionless and better purchasing decisions with a greater confidence in the numbers to expect on their bottom line. 

Final word

While all this is the next logical step in the area of cross-border digital sophistication, understandably it is still a huge step change for both the SME and the payment providers within the existing business model. But that doesn’t mean it won’t happen. The most progressive SMEs will get it and the most digitally aggressive payment providers will offer it, making sense for their own share of wallet and to remain competitive.  

Watch this space keenly, I say.