This article is written by Kyriba
Embedded finance is the practice of integrating financial services within non-financial platforms and services with the objective of delivering the financial service at the “point of need.” In the not-so-distant past, accessing financial services such as payments, lending, and investments required either a visit to the bank or a redirection to a financial services provider’s portal or call center. Software platforms, software enablers, and banks are driving digital transformation, seamlessly integrating financial services, or ’embedding’ them, into non-financial services contexts. This revolutionizes how financial services are delivered and consumed. Payments are the most prominent of all embedded financial use cases for customers.
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The Rise of Embedded Finance in B2B Context
Embedded finance and, by extension, embedded payments are commonly talked about in the context of consumers. However, they are increasingly gaining prominence within the B2B context. According to 2021 estimates from Bain, B2B payment volumes amount to $27.5 trillion, with Accounts Payable and Accounts Receivable representing 90% of the value. This volume is expected to reach $33.3 trillion by 2026. Embedded payments account for a low single-digit share of B2B payment volumes. B2B embedded payments are expected to quadruple from $0.7 trillion (2.5% share) in 2021 to $2.6 trillion in volume (7.8% share) in 2026. ACH accounts for the majority of embedded payment volumes, with a small fraction coming from cards. This transition is becoming increasingly possible with the rise of open banking and APIs that enable the seamless embedding of financial services in business systems and processes.
Before APIs, embedding financial services directly within existing business processes was complex. For instance, embedding payments from one bank into a business’s ERP could take anywhere from 6–8 months or longer. This long time-to-market was a result of many complexities (e.g., multiple ERPs, customizations, need for specialized resources or lack thereof). The onboarding time and investment required to embed financial services often outweighed the benefits. This was even more complicated for mid-market and enterprise businesses with multi-bank relationships.
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The Role of Software Enablers in Enabling Embedded Experiences
The rise of software enablers utilizing the Software-as-a-Service (SaaS) model has been critical to delivering embedded experiences. These embedded finance solutions began by enabling payments and other financial services into business processes using host-to-host connections, diminishing the role of traditional bank portals. To enable truly embedded experiences, APIs are increasingly becoming available from banks and software enablers.
Banks in the US and other geographies have made significant investments in APIs. In Europe, regulations such as PSD2 have aided this transition, while in the US, it has been market-driven. Banks’ motivations include reducing complexity, improving agility, enabling partners, ensuring regulatory compliance, and driving innovation. Over 75% of these APIs are for internal use, with the remainder intended for distribution purposes via partners or developers. Partners act as enablers, saving corporations time and effort in dealing with disparate API integrations across banks. Corporations empower themselves to automate downstream treasury or other non-treasury business processes. This is in alignment with the organization’s operational goals by seamlessly accessing multiple bank APIs via partners.
Banks’ Investments in APIs
Consider a scenario where a treasurer and a Treasury payment analyst discuss an urgent payment to a counterparty. They use their organization’s internal messaging platform (e.g., Microsoft Teams). Traditionally, this would require the analyst to access another system. For example, a bank portal or TMS would initiate, approve, and release the payment. The power of open APIs enables such requests to originate. And be approved, and released within the context of the messaging system. Providing real-time visibility into the account’s beginning and ending balance. There is no reason to switch contexts. Treasury professionals can securely execute the entire process within the context of the messages exchanged. This example captures the essence of embedded finance as payments. Financial services deliver efficiently and seamlessly at the point of need, i.e., through a conversation over a corporate messaging platform.
APIs can also act as catalysts for upstream or downstream process / system modernization. For instance, an existing system (e.g., a web portal) may be supporting a slow FTP-based legacy process. You can modernize managing intercompany loans without needing to rip and replace the entire system. With APIs, the same system can process real-time requests for intercompany loans. And stay in sync with the treasury management system.
Embedded Finance to Embedded Treasury
The rise of embedded finance and the adoption of APIs have transformed how financial services are delivered and consumed. Businesses can now seamlessly integrate financial services into their existing systems and processes. With the help of software enablers and banks. This improves efficiency and reduces complexity. Those that embrace this trend are likely to enjoy a significant advantage in the years to come. Corporates should consider adding APIs to their transformation strategy and should proactively speak with their bank / provider. In order to explore the possibilities.
