Digital payment solutions are changing the retail industry at a rapid rate. Consumers’ growing desire for fast, convenient transactions means retailers can no longer solely rely on traditional payment methods—even when it comes to in-store purchases and transactions.
FIS Global predicts that cash transactions will account for less than 13% of payments worldwide over the next few years. With mobile wallets, virtual cards, and buy now, pay later (BNPL) models becoming more commonplace, retailers have the opportunity to attract tech-savvy customers and strengthen their brand reputation in today’s digital era.
This article will unpack the role of one often overlooked but extremely valuable aspect of digital payments: embedded finance. How can forward-thinking retailers implement the technology into their business model? Let’s find out.
The Value of Embedded Finance
For brands with their own software applications through which customers access products or services, embedded finance is an excellent way to simplify the buying process. By integrating financial services provided by banks, fintechs, or other regulated entities into the retailer’s platform, companies enable customers to make payments without exiting the application.
In the pursuit of more personalized and relevant customer interactions, embedded finance has become ubiquitous in widely-used mobile applications worldwide. It’s become a strong expectation that e-commerce platforms have their own built-in payment gateway.
Think Uber, Airbnb, and Amazon. These globally-renowned companies have revolutionized the modern customer experience, thanks, in part, to the convenience of one-click online checkouts.
While the market is starting to mature, this innovative approach to digital commerce should not be overlooked. This is particularly true for retailers with niche services and offerings, as an integrated payment capability within their application will significantly drive up customer satisfaction, engagement, and loyalty.
Technology Behind Embedded Finance
Application Programming Interfaces (APIs) are a necessary component to connect a payment processing system with an e-commerce platform. They provide the technical infrastructure upon which embedded finance systems are based. In addition, APIs enable secure and seamless data sharing, which is critical for user privacy and regulatory compliance.
Once API integration is completed, seamless data connections between financial institutions, fintechs, and the retail business are enabled. Now, the customer can find what they are looking for, place an order for it, and make the payment in a few swift steps.
Embedded finance takes many forms, but to start off, let’s unpack the most widely-used applications of this technology. Namely, digital wallets, buy now, pay later, and embedded insurance.
Digital Wallets
Using Near-Field Communication (NFC) technology, digital wallets allow consumers to pay with their credit or debit card details stored on their mobile phones. This eliminates the need for individuals to carry their physical bank cards or cash with them, and transactions are completed by holding the opened wallet application near the retailer’s point-of-sale device.
There are three types of digital wallets:
- Pass-through digital wallets
Examples of pass-through digital wallets include Apple Pay and Google Pay. These are simply applications that store the consumer’s bank account information and serve as an intermediary mechanism to facilitate payments, and are not involved in moving money at all.
This type of digital payment acts as a substitute for a physical card—with one difference. The pass-through wallet creates a unique token for each transaction so that the user’s real card details are never shared.
- Stored value digital wallets
With most stored-value digital wallets, the user needs to load funds onto their profile before using it. But in some cases, the necessary amount of money is loaded automatically when a payment is made. The most popular example of a stored-value digital wallet is PayPal.
- Closed digital wallets
OlaMoney and Amazon Pay are the most popular examples of closed digital wallets. These platforms can only be used with the issuing retailer, and any details like spending limits are controlled by the merchant.
Buy Now, Pay Later
With credit cards and layaway programs slowly losing their luster for newer generations of consumers, the buy now, pay later (BNPL) model has taken the e-commerce landscape by storm.
The increasingly popular method of payment allows customers to make a purchase from a retailer, but instead of paying the full price upfront, the customer can spread the payment over several installments—usually with no interest.
For retailers, this provides a way to increase sales because customers who might not have been able to afford a product otherwise can now purchase it and spread the costs over a period of time. However, the retailer will pay a percentage of the transaction fee to the BNPL service provider.
Top BNPL providers currently include Klarna, Splitit, and PayPal Pay in 4.
Embedded Insurance
Embedded insurance is a type of technology that allows insurance products to be integrated into other services or products, such as e-commerce platforms, car rentals, or travel bookings, among others. It is a way for retailers to offer insurance services to their customers seamlessly without requiring them to go looking for separate coverage.
Of course, this option applies to companies with offerings that are more valuable than clothes, or food and beverages.
According to Instech, the embedded insurance market is expected to grow 6x larger by 2023—and while the model has already caught on in the airline sector, its popularity is rising across a range of industries.
Conclusion
As we look to the future, the retailers that embrace embedded finance are poised to redefine industry norms and emerge as leaders in their respective corners of the retail industry. By adopting this innovative model, businesses can propel themselves toward enhanced customer engagement, loyalty, and sustainable growth.
