Past performance is not necessarily a guarantee of future results, but it can serve as a guide for the future.
This is particularly evident in the payments and commerce sector, which has seen significant change in just the first half of this year due to advancements in technology and changing consumer expectations.
Against this backdrop, PYMNTS Brian ScottChief Growth Officer BelleraThe “What’s Next for Payments: July Interim Report” series explores the current state and future outlook for embedded finance and payments innovation.
Scott highlighted an interesting dichotomy in the market: the differences in strategies between small and large financial institutions. Financial institutions under $10 billion, often referred to as Durbin exempt, tend to focus on serving specific consumer demographics and communities. Smaller financial institutions use their scale to build deep, personalized relationships with their customers.
“We think there’s a lot of opportunity for Durbin exempt financial institutions to focus on a particular aspect of consumer need and meet it really well,” Scott said. “They’re rooted in the marketplace, in the community and in employer groups.”
In contrast, larger firms over $10 billion in size are focused on broader market growth and, as Scott noted, are more likely to pursue expansionary growth strategies due to the regulatory burden and caps on interchange fees.
He emphasized that embedded finance is becoming a key service for Durbin-exempt financial institutions to differentiate themselves and gain market share from larger competitors.
Improving user experience with embedded payments
One of the most notable trends shaping the future of payments and commerce is the rise of embedded finance. Embedded finance represents a giant leap forward in integrating financial services directly into non-financial platforms, improving user experiences and creating new revenue streams for businesses.
As Scott highlighted, some of the most obvious examples of how embedded payments have revolutionized how consumers interact with financial services are platforms like Uber and Starbucks, which have seamlessly integrated the payment process into their user experience.
“You don’t have to pull out a separate payment device, it’s already in the app, so it creates a great experience,” he said.
This seamless integration reduces transaction friction for both retail consumer and business-to-business (B2B) interactions.
From a financial institution’s perspective, the value of embedded payments lies in the concept of “stickiness” — that is, the fact that once a payment device, such as a credit card, is integrated into a user’s digital wallet, it tends to stay there.
“When a payment device is linked, it’s very valuable and sticky. Once you have it, it’s easy to maintain and hard to remove someone from it,” Scott said, adding that retention of embedded payment methods is 98 percent, barring a significant event like card reissue or fraud.
This high retention rate highlights the importance for financial institutions to secure top of wallet position and ensure their payment methods remain the preferred choice for consumers.
The role of advanced technologies in tomorrow’s embedded innovation
The future of embedded finance is closely linked to the integration of advanced technologies such as blockchain and artificial intelligence (AI).
Scott emphasized that these technologies will play an important role in addressing certain consumer needs that are currently unmet: For example, blockchain technology can facilitate cross-border fund transfers, particularly benefiting the unbanked.
Meanwhile, the potential for AI in compliance is huge. As financial institutions consolidate more financial-related entities, the regulatory environment becomes more complex. AI can streamline compliance processes, making it easier and faster to comply with evolving rules and regulations.
One of the less discussed yet extremely important aspects of embedded finance is fraud prevention. As integration of various financial services increases, so does the exposure of user data to fraud risks. Scott noted that managing data sharing is crucial in mitigating fraud. Analyzing multiple data points allows companies to better understand and verify a user’s identity, thus reducing fraudulent activity. This holistic approach to data management and fraud prevention is essential as the embedded finance ecosystem continues to grow.
A key strategy for financial institutions and businesses leveraging embedded finance is to focus on a niche market. Scott has noticed that financial institutions are increasingly targeting specific niche markets and integrating embedded finance solutions that cater to that specific segment. This approach often involves acquiring or partnering with companies that specialize in that niche service, thereby strengthening the overall value proposition to customers.
Bundling is another strategy that’s gaining traction, he added. Rather than charging consumers for each new service, companies are adopting subscription-based models in which bundled services are included in a fixed monthly fee. This approach not only simplifies billing for consumers, but also gives companies a steady revenue stream. By continually adding new services to the bundle, companies can increase customer retention and satisfaction.
As the landscape moves forward, continued innovation in embedded finance promises to unlock new opportunities and redefine how we interact with financial services. Whether it’s seamless payment experiences, targeted niche services, or deep technology integration, the future of finance will be embedded, integrated, and increasingly user-centric.
