It is an undeniable trend that an increasing number of businesses are embedding financial services into their products. Those that have embarked on this journey often experience multiple benefits if the new services solve an existing problem for their customer base, but it requires taking a thoughtful and informed approach to avoid negative downstream complications.
First, let’s define what “Embedded Financial Services” means for the purpose of this exploration. Embedded financial services offer a convenient way for customers to access financial services within the context of a non-financial service or product.
Common Examples of Embedded Financial Services
|Integrated payment processing in business management software||Providing deposit accounts to business and consumer customers.||Issuing virtual and physical debit card products tied to a stored funds account|
|Integrated money movement for AP/AR solutions||Earned wage access and payroll advances||Loans and working capital solutions for businesses|
|Consumer lending at the point of sale (e.g. Buy Now, Pay Later)||Offering insurance during the checkout process||Instant payments using Push to Card and Real Time Payments|
Benefits are Realized by the Customer and the Business
By using financial services that are integrated into the core product, the customer can reduce the number of vendor relationships it has to maintain and often benefits from a more streamlined product experience, which makes managing their business easier. Overall costs can be reduced if newly generated revenue leads to lower costs for other products.
The business benefits from developing a more sticky relationship as their customer now relies on them for more business critical services and they often recognize additional revenue per user and diversified revenue streams as a result of adding new value.
This combination of factors can provide a significant competitive advantage that can improve the odds of new business and reduce voluntary churn. Given these potential benefits, it is no surprise that many businesses are evaluating whether they should embed financial services.
Customer Need’s Should Dictate Which Services are Offered
Before offering embedded financial services, each organization needs to understand the demand their customers might have for them. Developing a streamlined, integrated customer experience with these services is no small undertaking, and ensuring that the products will fit the needs of its customers is paramount. Businesses should hold discovery calls with customers in each segment where these services have potential relevance, and design the product experience with their needs in mind.
- Payment Processing: Do customers have a need to accept payments for their business?
- Deposit Accounts: Would customers benefit from storing funds in an account linked to the product?
- Debit Card Issuance: Do customers need a payment instrument to access funds held with the business?
- Loans and Working Capital: Do customers need more access to credit, or faster access to expected funds? Do they experience challenges due to working capital needs?
- Consumer Lending: Do buyers need access to increased purchasing power for this particular purchase?
- Insurance: Rather than finding it elsewhere, would a customer making this purchase benefit from including insurance during the checkout process?
Key Considerations for Offering Embedded Services
If offering financial services makes sense for the business and its customers, there are several important considerations to keep in mind.
Ability to Migrate Customers
A common problem that businesses encounter when developing a strategy for embedded financial services is the limited ability to migrate customers to their integrated solution. This is most often the case in payment processing, as the customers might have existing payment processing agreements with exclusivity, minimum volumes, or lengthy terms that prohibit them from using another payment provider. There are solutions to this issue depending on how you design your model. A migration analysis should be performed to understand how constraints related to existing agreements might affect your revenue forecast.
Key Questions: What percentage of my customers will be able to use these services, and how does this answer affect my product development strategy and timeline?
Involvement in the Flow of Funds
As money moves from one party to another, businesses will have to determine whether their products require them to be directly in the flow of funds. If you are in the flow of funds, this means that funds in transit make a stop at a bank account owned by the business prior to arriving at their final destination. It is important to obtain legal counsel that can help interpret money transmitter laws and regulations when evaluating participation in the funds flow. The process to obtain a money transmitter license is expensive and time consuming, and may affect speed to market.
Key Questions: Does my business need to be in the flow of funds, and if not, how can I avoid the need to become licensed?
Speed to Market
Many of these considerations contribute directly to how quickly you are able to launch and scale your product. As mentioned above, money transmission licenses, if required, can slow down a launch significantly, and can be avoided in many cases by relying on third parties to manage the funds movement. Integration timelines may differ if connecting directly to providers such as banks, but can be reduced by using third parties with bank API connections.
Key Question: What are the critical factors in my product development strategy that will have the most significant effect on my ability to launch this product?
A critical component to product strategy and development will be deciding which provider(s) will enable financial services on your behalf. Each service will have multiple potential providers to evaluate, with varying ability to serve your unique requirements. It is often necessary and recommended to perform a comprehensive Request for Proposal process to ensure the differences across providers are well understood.
The geographic reach of the provider used may be important as international growth is considered. The international ambitions of the business for these services will affect what providers to use, as well as the infrastructure requirements.
Key Questions: Who are the potential candidates for enabling these services, how are they different, and who can meet my requirements the best? What countries should I launch first, and what providers will support my international expansion plans?
The business will need to consider the technical infrastructure required to support the financial services it wants to provide. There may be multiple options for how to approach this. For example, if the business is offering deposit accounts from one or more banks, and there is a need to move money between these accounts and other bank accounts, and a need to track the amount of funds in each account, it may be necessary to use a ledger, as well as a provider that can connect to the bank partners in use. The business should consider their own engineering resources and capabilities to determine whether infrastructure can be built or bought, and the level of effort required to maintain this infrastructure.
Key Questions: What technical infrastructure is required to enable these services, and should the business build/buy/partner to achieve the optimal solution?
The options a business has for pricing new financial services is multiple and varied, and oftentimes requires a holistic analysis of core product pricing. Businesses offering business management software to customers might lower the cost of the software, knowing that the new payments processing revenue will contribute significantly to overall revenue growth. Debit card issuance is often free, as the business will generate revenue from the interchange fees generated by use of the card. Deposit accounts are likely free or low cost in order to drive attach rate, or simply to enable the services on the platform. Loans and working capital services are highly dependent on macroeconomic conditions, but also need to consider the risk profile of the customers.
Key Questions: What are the objectives of the business as it pertains to pricing (e.g. incent usage, maximize revenue, improve customer satisfaction)
Organizational Roles and Structure
By offering these new services, which are often very different from the core products and services offered by the business, there will be new roles to hire for. The section below outlines new responsibilities that will arise when offering financial services provide some insight into what new roles might be necessary to support them. As new teams are built, an evaluation of the optimal organizational structure is required to ensure success of the new strategy.
Key Questions: What new roles will need to be hired or trained, and what is the optimal organizational structure to support the new strategy?
Embedding Financial Services Means New Responsibilities
When money is involved, risk is involved. It is absolutely imperative that a risk controls strategy is developed prior to the launch of any new financial service. This will involve evaluating the customer experience end to end, with a comprehensive view of the payments environment, to implement risk management processes and controls, as well as monitoring and managing these risks on an ongoing basis.
If the organization is now responsible for offering financial services, there will be several responsibilities managed by a Payments Operations team or individual. This may include managing relationships with the third-party providers (e.g. acquirers, banks, infrastructure providers, card issuer program managers, risk management providers, etc.). This team is also often responsible for escalated customer support issues that require communication with the providers to resolve, or require access to tools and information that only the Payment Operations team has access to. This team will interface across the organization with teams responsible for compliance, risk, legal, product, customer support, and more.
Offering financial services to customers means that your business is now subject to various regulations, such as anti-money laundering (AML) and know your customer/business (KYC/KYB regulations) It is critical to remain compliant with these regulations, and will often require that new processes and controls are implemented to meet these requirements. It is also important to perform diligence on the third-party providers to ensure they are following the relevant laws and regulations applicable to them. This has become a particularly sensitive topic as of late.
With payment processing, depending on the business model used, there may be a need to manage the merchant or sub-merchant underwriting process. This is necessary to be compliant with federal laws and regulations, as well as for the rules passed through to the business from their payment provider. For businesses offering loans and working capital services, underwriting will be required to understand the risk profile of the customer. For deposit accounts, banks will have stringent onboarding requirements that will have to be incorporated into the customer workflow.
The business may now be collecting and storing new data and information that were not obtained and stored prior to offering financial services. This sensitive data may include personal identification information (PII), financial information such as bank account and card numbers, payment history, employment and income information, and others that may depend on the particular industry vertical and the financial services offered. The business is now responsible for ensuring strong data security measures to protect this information, or to rely on third-parties that can manage this information on your behalf.
Once financial services have been embedded in your product, your customer will view your business as the provider of these services, even if a third party is responsible for enabling the underlying service. Agreements with your underlying providers should contemplate how to resolve common and escalated issues that arise when using the new service. Many businesses want to provide front-line support with their customers in order to ensure a maximum level of satisfaction with the outcome of any issue.
Conclusion: Take a methodical and informed approach to embedding financial services to maximize revenue, customer satisfaction, and operational success
Embedding financial services can contribute significant benefits to a business and its customers, but it is important to be aware of the implications to operations and risk and legal exposure. Once you understand the needs of your customers, develop a comprehensive product development strategy that evaluates the changes your business will need to make to support these new services effectively. If you need support during this process, Glenbrook is here to help you navigate this complex opportunity.