How businesses are using embedded finance to stay one step ahead

At Airwallex we firmly believe that embedded finance is a key component to any successful business in the modern world. With over 1,200 people working across 19 international offices, Airwallex provides full stack account management, cards, multi-currency wallet and payouts solutions to empower businesses to operate without borders.

In this article, we’ll highlight how embedded finance can help businesses identify new revenue streams, reach new customers and stay one step ahead of the competition.

What is embedded finance?

The concept of embedded finance as such is not particularly new. We can define embedded finance as integrating (i.e., embedding) a financial product or service into the overall product or service offering of a business. Think bespoke credit cards or insurance products offered by supermarkets, or loans that you can take out at the counter of a department store to purchase a new washing machine.

The crash of 2007-08 paved the way for the emergence of the fintech revolution, which has elevated embedded finance to a whole new level. As more businesses focus on a smooth user experience to seamlessly complete all financial transactions inside their apps, more and more people have become active users of embedded finance. From purchasing an item on Amazon to taking an Uber ride, most of us actively interact with embedded finance almost on a daily basis.

A recent study reported that embedded finance will reach a USD7 trillion value globally over the course of the next 10 years. But why is embedded finance so important and how does it work from the technical point of view? Let’s have a look.

Types of fintechs

The fintech world is quite diverse. In essence, any business that uses technology to facilitate financial services can be called a fintech. In a recent study, Deloitte defined that the fintech landscape in the UK is made up of 23 different specialisms, which span across eight broad domains: payments, banking, lending, RegTech, InsurTech, WealthTech, quote aggregation and accounting, auditing and cashflow management.

As a provider of Banking as a Service (BaaS) and payment solutions, Airwallex can be confidently placed into the payments domain, which represents one of the main fintech industries. PwC predict that up to 28% of banking and payment services are at risk of disruption by fintech in the next few years, which is exactly what we aim to achieve.

Although not all fintechs are directly involved in payment processing and banking, there is one thing that unites most of these diverse businesses – the application of embedded finance in their product and service offerings. McKinsey sums up embedded finance products into four categories: deposits, payments, issuing and lending. By partnering up with a fintech that offers solutions in any of these categories, a business can exponentially increase its ability to scale by expanding their product portfolio and providing a seamless user experience for its customers. In essence, by leveraging the benefits of embedded finance, any business can become a fintech. 

Open banking and PSD2

To understand the technical and legal infrastructure that enables embedded finance and allows it to thrive, let’s take a brief look at the concept of Open Banking.

The European Parliament introduced the Second Payment Services Directive (PSD2) in 2015 – the year when the UK hit the tipping point of having more electronic payments than cash. PSD2 essentially mandated that banks make consumer data available to any third party if the customer requests it. This mandate propelled the concept of Open Banking, where any company can use technology to build applications, products and services around the data traditionally held only by financial institutions, such as banks, building societies or insurance companies.

The technological enabler of Open Banking is the use of application programming interfaces (APIs). An API is effectively an extra layer of software that allows an application to exchange data and communicate with other applications. We can describe an API as a contract, which defines that if a third-party application sends a request in a particular structure, our application will respond to that request with a particular set of data. PSD2 required traditional banks to develop APIs that would allow third parties to access customer data and make these APIs available free of charge.

Since we are talking about sensitive information, the third parties must become what is called a Payment Service Provider (PSP) by going through an authorisation process by a regulatory body in their jurisdiction, such as the Financial Conduct Authority (FCA) in the UK. Depending on the nature and scope of their services, such a third party can become an Account Information Service Provider (AISP) or Payment Initiation Service Provider (PISP). While AISPs are only allowed to get access to financial data, PISPs can also initiate payment processes if the user authorises and requests them.

As a financial service provider, Airwallex allows AISPs and PISPs to interact with our customers through the Airwallex Open Banking Service that is centred around our APIs, which in turn are the key for us to interact with our customers’ applications and products to implement embedded finance solutions for them. 

Business scalability and competition

The current global economic situation is characterised by a slowdown in economic activity, high inflation and overall uncertainty. At first sight, these may not be the best conditions for a business to thrive. However, these are exactly the times when resilience and scalability will ultimately decide a business's success.

The US National Bureau of Economic Research highlighted in their recent study the importance of deploying technology at scale in times of a financial crisis. Embedded finance powered by Open Banking APIs fits into this definition. As a matter of fact, the accelerated digitalisation of many traditional businesses, such as high street retail stores, during the recent pandemic created a large market for embedded finance. Pressured by a sudden and rapid change in market conditions, these businesses realised that regardless of the nature of their operation, integrating at least some financial service into their new online business model had to become an integral part of their ecosystem.

These businesses are now facing a whole new cohort of competitors, called the Digital Native Brands (DBNs), whose entire business model is designed around technology. Embedded finance is by default one of the main pillars of their business strategy.

Another important factor in the current market is the emergence of a whole new category of consumers with different demands for service quality. As digital natives are becoming a rapidly growing group of consumers, customer expectations of seamless user experience become more of a dealbreaker than a nice-to-have. These customers expect an application to perform a financial transaction with just a few taps on the screen. The race to attract these customers eventually defines which businesses will rise above the competitors.

 The good news is that enabling this experience does not require a total redesign of the ways a business works or the products it offers. Business scalability and product enhancement can be achieved by partnering up with fintechs that focus on embedded finance solutions and adding these solutions to the ecosystem of your business. This is not limited to the use case of a retail business looking to outsource their payment handling flow to a third party. It can also be an existing financial service provider that needs just one extra feature to boost their existing service offering, such as optimising their FX solution or being able to add multi-currency accounts to the range of their financial products. 

Accelerating business scalability with embedded finance

Now that we’ve defined embedded finance and the technology behind it, let’s have a look at some practical use cases.

Earlier this year, Airwallex partnered up with leading investing app, Plum, to enhance their payment ecosystem. This integration allowed Plum to launch a new stock investing feature, where having the optimal FX rate can make a dramatic change for customers trading on international markets or making cross-border payments. Instead of investing millions of pounds into developing their own payment platform, Plum leveraged the benefits of embedding Airwallex into their ecosystem whilst concentrating their development efforts on their core business – the investment platform. Not only did this integration save Plum a lot of money on development, but it also enabled them to expand their portfolio offering with new features, which ultimately helped them attract more customers and extend their market share. All of this was made possible by connecting Plum to Airwallex’s APIs, such as the Transactional FX API. With little development effort on Plum’s side, the readily available Airwallex APIs started working towards Plum’s customer success.

To make the most out of the API functionality whilst optimising the development and integration costs, we bundle our APIs into a dedicated product offering aimed at meeting specific customer needs. In this way, it is not necessary for the business to pay for data that they don’t need and to spend the development resources on integrating with an API that does not add any value to the business.

We have organised the APIs into a number of categories, which are based on our experience in meeting the needs of a variety of businesses. If an eCommerce company only needs to accept multi-currency payments online, our Online Payments product can do just that. To streamline the flow of funds globally, our Treasury product would be a better fit. In a use case similar to Plum, we would use the Transactional FX product that is funnelled through our Transactional FX API.

Business with needs in issuing and managing multi-currency cards at scale would benefit from using the Issuing product. A business that employs people around the world could optimise their global payments with our Payouts product. Alternatively, if a business needs to build their own financial ecosystem, we can use the Scale product to create a robust network of connected accounts. We can also work with the business on a bespoke basis to make sure that our APIs deliver exactly what the business needs.

The practical side of integrating embedded finance into any application is relatively simple to describe. Thanks to Open Banking, all financial institutions expose APIs to trusted third parties, such as Airwallex. These third parties, in turn, develop their own APIs to connect to the APIs of the financial institutions, and make their own APIs available to the customer applications. A customer then integrates their application with the relevant third-party’s API and leverages the benefits of the third-party’s product offering. The last step is creating a smooth UX flow to ensure customers can use the product easily.

Although the current state of embedded finance is centred around banking and digital platforms for startups and SMEs, the technology, market conditions and customer needs are constantly evolving. All this will lead to the emergence of even more accessible financial services and help create an even better user experience. 

Build, upgrade and scale with Airwallex

Airwallex’s purpose in this is to empower businesses to grow without borders by embracing the opportunities of the future.

Our powerful APIs allow businesses to embed best-in-class financial solutions into their products, improving customer experience, global reach and profitability.

If you’re interested in scaling your business with embedded finance, Airwallex may have the exact product to take you one step ahead of your competitors.