Embedded finance and APIs: a new financial frontier

How financial APIs enable every company to be a financial company—and the massive opportunity they create

February 01, 2022

Tom Sullivan Pic
Tom Sullivan

Tom is a writer at Plaid. He's passionate about the freedom that the union between financial services and technology can create.

Embedded financial solutions change when, where, and how people interact with financial services—and create substantial opportunities for both financial and non-financial companies. 88% percent of companies that implement embedded finance report increased engagement, and 85% say that it helps them acquire new customers.

In this article, we’ll explore the relationship between embedded finance and the financial APIs that power them.

What is embedded finance?

Embedded finance refers to financial services offered seamlessly in consumers’ everyday experiences through non-financial products and services. For example, an insurance or payment plan offered by Home Depot with the purchase of a new lawnmower is a financial product ‘embedded’ in a non-financial shopping experience.

Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or something else. 

According to Ben White, Policy R&D at Plaid, “One of the key elements that define embedded finance is that it’s a financial service offered outside of the traditional ‘going to the bank’ context. Embedded finance brings financial services to the exact moment it's needed, instead of being an entirely separate part of a consumers’ life.” 

Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items. Now embedded finance is taking hold online, as e-commerce retailers are offering banking services directly on their websites without redirecting customers to a bank. This phenomenon is enabled by ‘banking-as-a-service’ companies like Unit and Synapse, that use API integrations to embed financial services into the user experience of non-financial companies. 

Embedded finance use has picked up in recent years, and is expected to exponentially rise. It’s estimated that embedded financial services will produce $230B in revenues in 2025—a 10-fold increase over the $22.5B in revenues in 2020. 

By opening up new markets and improving customer experiences, embedded finance presents a significant opportunity to both financial service providers and non-financial companies. 

Embedded finance and financial APIs

Financial APIs (application program interfaces) are a key element of embedded finance. They enable the data connections between financial institution accounts, fintech companies, and non-financial companies that make embedded finance possible. 

Before financial APIs, non-financial companies, like e-commerce retailers, needed to invest a large amount of time and resources to offer financial services—including forging partnerships with financial institutions. A prime example of ‘pre-digital’ embedded finance is the airline credit card offer given at the end of a flight. 

But the ability of software programs to interact via APIs has reduced the barriers to embedded finance. Smaller companies, such as e-commerce merchants, can easily integrate with embedded finance providers to start offering products like point-of-sale loans or insurance. 

Essentially, any company can offer financial services via financial API integrations. Their customers can expect faster, more convenient, and more flexible shopping and financial experiences.

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Embedded finance use cases

Three of the most common use cases for embedded finance include:

Embedded lending

Before embedded finance, a consumer needing to borrow money for a large purchase either had to use their credit card or take out a traditional loan from a financial institution—both of which carry high-interest rates. Financial APIs and embedded finance have changed that by enabling companies to offer more favorable loan options at the point of sale. 

“Buy now, pay later” may be one of the most visible and common forms of embedded finance seen by online shoppers. It appears during the online checkout process, at the moment consumers are contemplating their available funds. These offerings typically provide monthly or weekly payment installments over a predetermined period with no interest. Popular companies offering buy now, pay later solutions include Klarna, Affirm, and Afterpay

Embedded insurance 

Embedded insurance at the in-store checkout has been around for some time, but financial API technology facilitates its spread to digital marketplaces and additional products. Embedded insurance is useful because it’s offered when and where people need it, with no need for a separate engagement with an insurance company or agent—and sometimes with multiple competitive options. 

Companies have various ways to embed insurance into a digital checkout flow, most via partnerships with fintech companies. These fintech companies build insurance options into the checkout flow, enabling consumers to choose insurance as an ‘add-on’ to their purchase.

There are three common types of embedded insurance:

  • Singular policy: Companies (for example Boost and Bsurance) underwrite the insurance policies themselves and then integrate them into purchase flows via APIs. 

  • Multiple policies: An ‘agency’ approach where companies integrate multiple insurance options into the checkout flow via APIs. Examples include Matic and Branch

  • Extended warranties: Companies like Clyde and Extend offer extended warranties in ecommerce checkout flows, typically under a single policy option.

Embedded payments

Taking out a credit card and entering its number is a friction point that can cause consumers to abandon a purchase should their card not be handy. Embedded payments make this process much easier, as no physical card is required. 

Embedded payments are a way of connecting and saving a payment method for later use at the click of a button. The Starbucks app, for example, saves credit or debit card information for 1-click payments while customers earn points for using the app. 

Embedded payments go beyond credit cards. By using APIs to connect financial accounts to mobile apps for ACH payments, embedded payments give consumers the option to pay directly from their bank accounts while saving merchants on fees. 

SmartPay Rewards, a mobile app for gas stations and convenience stores, offers customers discounts and rewards in exchange for using its embedded bank account payments tool. Using ACH for payments saves the merchants on fees, because ACH fees are usually less than credit cards. Discounts and rewards increase brand loyalty and keep customers coming back.

Embedded Finance: Financial services whenever and wherever customers need them

The benefits and opportunities of embedded finance

Embedded finance is a huge opportunity not just for fintech companies and businesses, but also for consumers. It gives consumers options to increase convenience and savings, like zero-interest point-of-sale loans, or rewards for using a brand’s e-commerce app. 

Data shows that consumers are willing to adopt embedded financial services if it benefits them to do so. In fact, 46% of millennials say they would be interested in opening a checking account with Amazon, and more than 30% would be willing to do the same with companies like Starbucks, Uber, Facebook, or Google. 

Convenience is one of the main reasons consumers are willing to adopt embedded finance. Shopify Pay, which allows users to save their payment information for later use, is a prime example. By making the checkout process four times faster, Shopify Pay increases checkout-to-order rates 1.7 times—showing that added convenience plays a significant role in preventing consumers from abandoning their cart. 

Fintechs that offer embedded finance products are also gaining significant ground. Embedded finance fintech startups (like those mentioned previously) are seeing huge gains in venture capital investment rounds as the market grows. As of September 2021, venture capital investments in embedded finance were nearly triple those of all of 2020.

In a market expected to grow 10 times in value from 2020-2025, numerous players are looking to capitalize on the opportunity. Timing, execution, and market understanding will determine who gains the most, as businesses, fintechs, and financial institutions will surely compete to take advantage of this growing opportunity.

The future of embedded finance

According to Plaid and Accenture’s research report, there are four central ways that embedded finance could alter the way both financial and non-financial companies conduct business.

1. Rearranged relationships between financial providers and consumers. With more companies acting as financial companies, financial providers will need to become more accustomed to sharing customers with non-financial companies for services only they used to provide. 

2. New revenue streams. By embedding financial services into established buying journeys, many new revenue streams have already been established. Additional revenue streams are likely to continue popping up as companies find new and creative ways to add value through embedded finance. 

3. New types of competition. As embedded financial services become widespread—and more non-financial companies start wading into these new waters—financial services companies will need to rethink business models as they compete for new frontiers. 

4. A new era of partnerships. Financial providers and brands will forge lasting (and highly beneficial) partnerships. These partnerships will provide the experience and skillsets that brands need to offer embedded finance without hiring whole teams of financial experts and software developers. 

The opportunity for financial services to expand into previously non-financial areas is unprecedented—and still in the very early stages. This financial transformation will continue to gain strength across nearly every sector as more companies adopt embedded finance and as consumers become more comfortable with these services. For companies wishing to join the embedded finance revolution, the time to start building is now.

Ben White, who leads research and development on Plaid’s policy team, contributed to this article. He is passionate about the potential of fintech to lead to a more inclusive financial system.

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