Today’s consumers and businesses crave convenience and speed, particularly when it comes to payments. This, in conjunction with increasing digitization across diverse industries, is driving high adoption of embedded financial services.
In this article, we’ll look at what embedded payments are, where opportunities lie for them to grow, and how they can be integrated into your business.
What are embedded payments?
Embedded payments allow a customer to complete their transaction without leaving the company's website or mobile app, facilitating a fast, frictionless checkout experience. While embedded payment features can be built and maintained directly by the platform, they typically are obtained from third-party providers.
There are two main types of embedded payments. The first refers to those on ecommerce merchant websites, where customers select their preferred payment method and pay directly through an embedded link.
The second refers to embedded payments for platforms, where payments become an integrated part of the sub-merchant experience. A familiar example of this is Etsy, which offers small business users direct access to payment processing services rather than requiring them to build or outsource their own solutions.
What’s the difference between embedded payments and third-party payments?
Embedded payments, sometimes referred to as ‘in-app payments’, don’t require the customer to leave the app to complete a transaction. A user can choose to save their credit card information or bank account details for a fast checkout experience. For businesses that have repeat customers—such as coffee shops, gas stations, or grocery stores—storing payment details can lead to additional business, which is why many merchants offer loyalty programs for using their apps.
A third-party payment flow, on the other hand, handles the entire pre-payment experience within the app or website and then redirects the customer to an external payment processor. While this is how many ecommerce merchants operate, it can cause increased friction as it may not give the customer a chance to save their payment information or connect their bank account. It also typically takes longer than an embedded payment flow.
How do embedded payments for platforms work?
Embedded payments for platforms can either work natively, with the platform itself acting as a payment facilitator (payfac), or through a third-party provider.
Payfac model
In this model, payments are offered in-house by integrating a payment processor into the platform, making it—in essence—a payment facilitator. This historically more common method involves substantial startup and maintenance costs, not to mention significant considerations around security and compliance.
While the specifics of the integration can vary, the basic idea and overarching goal of streamlined payments remain the same:
To begin, a payment form will be integrated into the platform’s website or mobile app. This usually includes fields for the customer's credit or debit card details, along with any further information needed, like billing and shipping addresses.
Once this payment information has been entered, the platform will send the information to the payment processor, normally employing secure data transmission methods and encryption.
The payment processor will then validate and process the information, potentially checking for fraud and confirming the presence of sufficient funds. The results of the transaction will then be sent back to the platform, which updates and confirms the customer's order status.
For greater security, the platform may utilize tokenization. This replaces sensitive data with a unique token that can be used for future transactions and permits the platform to store payment details more securely.
Payfac as a service
In the third-party, or payfac-as-a-service, model of embedded payments, the platform works with a third-party provider who facilitates payment processing and other financial services without requiring the platform to build and maintain the infrastructure behind those services. This model has become increasingly sought-after, as it avoids the substantial costs and risks associated with becoming a payfac. This means it’s also faster to roll out.
Platforms looking to offer embedded payments can choose to either integrate an out-of-the-box solution or create a customized setup. Out-of-the-box is optimal for platforms looking to get up and running in as little time as possible, as they require minimal integration work and developer resources.
Tailored embedded payments, on the other hand, are ideal for platforms aiming to provide a fully customized payment experience. This solution ensures full control over the integration process and end result.
Examples of embedded payments
Embedded payments have been around since before the onset of fintech and ecommerce apps. For example, FasTrak has given California drivers the ability to instantly pay bridge and highway tolls, without needing to stop their vehicles, since 1993. This payment device is scanned from the road and can automatically debit a user’s bank account when funds are low—making it a pioneer in embedding a payment experience into a functional one.
Today, some embedded payments are ubiquitous: essentially digital wallets you can use anywhere. Others are for use with a single company, within their in-app experience, or provided by platforms to their sub-merchants for a streamlined end-customer experience.
Ubiquitous embedded payments
Ubiquitous embedded payments have become an integral part of many people’s daily lives. These include:
Apple Pay. One of the most well-known and widely accepted digital wallets, Apple Pay allows users to connect their debit or credit cards to their phone or Apple Watch, then tap to pay either online or at the point of purchase.
Google Pay (now part of Google Wallet). The Android phone equivalent of Apple Pay, Google Pay allows mobile users to save their credit or debit card information to their phones and tap to pay at a wide range of online and in-store merchants. It also enables users to store other passes and cards such as transit tickets, gift cards, and event tickets.
Samsung Pay. This embedded payment feature is part of Samsung Wallet, where users also can save their card details and pay at a wide range of online and in-store merchants. The wallet lets users store biometric data, cryptocurrencies, and even digital keys for homes and cars that can be used from a Samsung phone.
Merchant embedded payments
Most merchants that use embedded payments within their apps offer exclusive discounts and loyalty points. Doing so allows them to save money on payment processing when keeping payments in-house. It also helps create stronger brand loyalty and repeat business.
Examples of merchant-embedded payments include:
Target RedCard: Considered a leader in the embedded payments space, Target RedCard offers three payment options: Credit, Debit, and Reloadable. The credit option is Target’s own branded credit card, the debit option links to a customer's existing bank account, and the RedCard Reloadable is a full-on depository account that can receive paycheck direct deposits and be used anywhere Visa is accepted. All options offer 5% savings on any Target purchase, either in-store or online, and each has its unique benefits. A prime example of a major retailer using embedded payments to create brand loyalty, Target RedCard shows that retailers can also be fintechs.
SmartPay Rewards: While many gas station apps offer exclusive discounts and rewards, SmartPay Rewards was one of the first to emerge. Rather than use card payments, it encourages customers to link their bank accounts and pay via the app at the pump. In exchange for doing so, users save $0.10 on every gallon and earn fuel rewards that can be redeemed at connected convenience stores.
Starbucks Card: Another famous example of embedded payments, the Starbucks Card issues double the points when members upload funds to their Starbucks accounts instead of paying with credit or cash at the point of sale. This money users end up leaving on their cards has created $1B in interest-free capital that Starbucks borrows from.
Platform embedded payments
Finally, many platforms and marketplaces also provide embedded payment solutions to the sub-merchants who use them, streamlining the experience for both the sub-merchant and the end customer.
Some examples of platform embedded payments include:
Etsy: Etsy removed the limitations on the payment types and currencies accepted by the platform’s sub-merchants, helping drive their growth as well as that of the platform. Etsy generates revenue primarily from its transaction fees, charging 6.5% in payment processing and 2.5% in currency conversion.
Shopify: Similarly, Shopify’s total revenue is in large part made up of its Merchant Solutions revenue, which is underpinned by payment transaction fees. In 2023, Merchant Solutions revenue grew to $5.2 billion, or 73% of total revenue.
Amazon: Amazon’s third-party seller services cover things like payment processing and customer service support. These services accounted for nearly 25% of the company’s total revenue.
Ways to monetize embedded payments
While every business is different with its own set of specificities, embedded payments can help drive revenue in several ways. Platforms, in particular, have several options when it comes to monetizing embedded payments. These include:
Transaction fees: For platforms, a common way to monetize embedded payments is to charge a small fee for every transaction made through the system. This can take the form of either a percentage of the transaction total or a flat fee. Either way, it requires no upfront costs for sub-merchants and their end customers.
Subscription fees: Platforms can choose to charge monthly or annual subscription fees for access to their embedded payment system. In exchange, they may offer additional features like analytics, fraud detection, and customer support. This approach is often applied to businesses in need of a more robust payment system.
Premium offering: For an additional fee, platforms can provide more advanced functionalities like recurring payments, invoicing, and multiple payment options.
Plaid's 2023 Fintech Effect Survey
Navigate the latest consumer trends, create lifetime customers, and grow your business
How does Plaid help make embedded payments happen?
Plaid powers embedded payments for both bank and card payments. Many companies use Plaid as the infrastructure to seamlessly connect bank accounts to their embedded payments platform.
For companies like Divvy that offer a branded payment card, Plaid is involved in the account funding step. Users connect their existing accounts via Plaid to fund their embedded payment card account or make balance payments for a credit card.
Plaid is also heavily involved in many pay-by-bank options, with Transfer, its full-stack payments solution. Transfer handles the entire money movement process beyond the account authentication step. Companies looking to create an embedded bank payment system within their app can integrate Plaid Transfer and have everything they need (authentication + payment processing) to offer in-app payments via ACH and Real-Time Payments (RTP).
Where is the biggest opportunity in the embedded payments space?
One of the biggest opportunities in embedded payments lies in embedded pay-by-bank options for ecommerce and everyday spending categories like gas, groceries, and pharmaceuticals.
Brick-and-mortar merchants could seize this opportunity by offering embedded bank payments as part of their app. Linked barcodes could be scanned when a customer walks in and then automatically charged when the customer walks out—much like Amazon Go stores but on a wider scale. For small businesses, this type of payment could benefit them greatly by reducing their payment processing fees and giving their customers a friction-free experience.
Ecommerce apps also offer a huge opportunity for saving money and building brand loyalty through embedded payments. Target, for example, offers the same 5% discount to app users that it offers to in-store shoppers who use its embedded payment feature, the Target RedCard. This approach could be replicated as embedded payments become easier to build.
What does the future hold for embedded payments?
At Plaid, we believe in a bank-linked future, which includes bank payments on a larger scale. Bank payments use lower-cost rails such as ACH, whose speed is increasing with recent innovations like Same Day ACH and the Real-Time Payments (RTP) network.
This vision goes hand in hand with the growth of embedded payments, which continue to deliver more bank payment options and, in turn, increase customers’ comfort with the concept. As the adoption of embedded payments grows, so too will faster, easier, and cheaper bank payments—until the lower costs and convenience they provide become the norm.
The launch of FedNow in 2023 served as an additional step in this direction. As the Federal Reserve’s first new payment rail in 50 years, it delivers instant bank payments similar to RTP and is set to expand the access and availability of instant payments over time.
→ Learn how you can leverage Plaid Transfer to create a seamless embedded payment experience within your company’s app.