Today’s consumers crave convenience and speed, particularly when it comes to payments. Just consider the difference when paying for a taxi or an Uber.
The former is full of friction: It involves reaching into one’s bag or pocket, taking out a means of payment, tapping a card or asking for change, considering how much to tip, and potentially even asking for a receipt. The latter, on the other hand, is seamless, requiring no effort or action thanks to the automatic payment set-up.
This friction-free Uber experience is a classic example of an embedded payment. Below, 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 are payment features integrated within an app or platform. Frictionless, fast, and easy, they make payments seamless and may even feel invisible to the customer. Think double-tapping the button on the side of your iPhone to pay with Apple Wallet or opening up the Starbucks app to make a mobile order and earn rewards points.
This improved experience offers an easier way to pay, which can increase payment conversion and brand loyalty, in turn.
What’s the difference between embedded payments and third-party payments?
The key difference between embedded payments and third-party payments is that embedded payments don’t require customers to leave the app. That’s why they’re sometimes referred to as ‘in-app payments’, as well.
A third-party payment flow, on the other hand, handles the entire pre-payment experience within the app or website, then redirects the customer to a third-party payment processor. While this is how most 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.
With embedded payments, payment card information can be saved or bank accounts can be connected, and the whole experience happens quickly and seamlessly. Moreover, the entire process is contained within the same app. For businesses that have repeat customers—such as coffee shops, gas stations, or grocery stores—this can yield greater rewards, which is why many merchants offer loyalty programs for using their apps.
What are some examples of embedded payments?
Embedded payments have been around since before the onset of fintech and e-commerce 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.
Examples of ubiquitous embedded payments 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. They recently announced Apple Savings, a high-yield savings account that provides additional benefits to Apple Card users. By creating a card and savings account within its own Apple ecosystem, Apple is making significant gains in the financial services realm and should be considered a challenger to banks.
Google Pay: 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 send peer-to-peer payments to other users with a Google Account.
Samsung Pay: This embedded payment feature is now 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 also lets users store biometric data, cryptocurrencies, and even digital keys for homes and cars that can be used from a Samsung phone.
While all of these wallets link with cards to enable payments, embedded payment features within a single company’s app are more likely to include bank payments as well. Most merchants that use embedded payments within their own 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 app 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 own 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 provides rewards to members within the Starbucks app, going so far as issuing double the points when members upload funds to their Starbucks accounts instead of paying with credit or cash at the point of sale. This incentivizes users to leave funds on their cards, which has created a source of interest-free capital for Starbucks, as it borrows from the $1B plus that users leave on their cards.
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What are the benefits of offering embedded payments?
Embedded payments are gaining popularity because of the unique benefits they provide. Among these are:
A better user experience: Just like paying for a taxi versus getting out of a ride-share, embedded payments are easier. The typical embedded payment is click to confirm, like Apple Pay’s side-button double-click or Amazon’s swipe-to-buy-now feature. These are a more convenient user experience that likely converts at a higher rate than manually typing in credit card numbers.
Financial rewards: Companies using embedded payments can steer customers towards lower-cost payment options (usually ACH) and then offer back a portion of the savings in the form of discounts or rewards. As in the example above, a gas station app might offer a discount per gallon and other food and beverage rewards when customers pay with their bank account in the app.
Stronger brand loyalty: Creating a better customer experience is likely to increase brand loyalty and keep customers paying within the app. A merchant who offers financial rewards as well (ideally by passing on a percentage of their own savings) can expect brand loyalty to skyrocket. Think of it as ‘gamifying’ the shopping experience to make it more fun for users, while also encouraging them to buy more. Starbucks has done this well, with nearly 29 million active rewards members—accounting for over half of the company’s sales.
Is there such a thing as B2B embedded payments?
Embedded payments are not only reserved for consumer-to-business (C2B) transactions but have business-to-business (B2B) applications as well. In fact, many see B2B payments as a significant opportunity for embedded payments.
There are numerous applications for B2B embedded payments. Two of these use cases include:
B2B marketplaces: Just like consumers, businesses need to make repeat purchases from the same merchants. Many companies, for example, have business memberships at Costco and Sam’s Club and use an app or website to make purchases. This represents an interesting opportunity for those companies to add embedded payment options to their app and offer exclusive discounts and rewards to users.
This could be the case for countless B2B marketplaces spanning hundreds of industries (restaurants, construction, automobiles, IT, etc.).
Expense management: Business credit card and expense management platforms like Brex, Divvy, and Ramp are leading the way in B2B embedded payments through their branded payment cards. Each of these companies offers a software platform for managing expenses, as well as a credit card that syncs with the platform—essentially embedding payments into the software itself. The integrated software platform can be used to track and approve card purchases, set purchase limits and restrictions, and more.
Because they do so well collecting interchange revenue from these types of card payments, many expense management companies offer their services for free. The more they can do to get users to keep paying with their cards, the more success they have.
How does Plaid help make embedded payments happen?
Plaid is behind the scenes of 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, having recently announced a full-stack payments solution. Called Transfer, it handles the entire money movement process beyond the account authentication step Plaid is most known for. 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. The latter 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. While cards will not be replaced entirely, embedded payment flows are likely to deliver more bank payment options, helping consumers get comfortable with the idea.
The launch of FedNow will also make bank payments more accessible. As the Federal Reserve’s first new payment rail in fifty years, it delivers instant bank payments in a similar fashion to RTP but should expand the access and availability of instant payments.
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.
→ Learn how you can leverage Plaid Transfer to create a seamless embedded payment experience within your company’s app.