Providing top customer experience has become non-negotiable for online business success, and embedded payments are playing a major role in setting the modern-day standard for what exactly is a great online buying experience.
When Super Office asked 1,920 business professionals what their priority was for the next five years, 45.9% said it is customer experience.
This is not surprising when research by PwC shows that 86% of customers are willing to pay more for a better customer experience or when Temkin Group found that SaaS companies with $1 billion annual revenue can double it in three years by focusing more on the customer.
Online payments is one of the areas where customers are continuously demanding better experiences.
For example, a survey by DECTA, a payment solution provider in the UK, found that 49% of respondents from both US and UK said they will abandon a purchase if their preferred payment method is unavailable. Reflecting on this data, DECTA concluded that “frictionless purchases can be extremely important for a positive customer experience.”
Enter embedded payments, a payment system aims to improve customer experiences by ensuring that consumers can complete purchases in-app or within a website without being redirected to an external page.
International Data Corporation now expects that by 2030, 74% of digital payments will be done via platforms that are not owned by financial institutions (that is, new and emerging embedded payments options).
But what exactly are embedded payments, how do they differ from integrated payments, and how do they benefit platforms, merchants, and users?
In this article, we will answer all these questions and more by focusing on 8 things you should know about embedded payments.
1. Embedded payments: A quick introduction
2. How do embedded payments work?
3. Embedded payments vs embedded banking
4. Embedded payments vs embedded finance
5. What is the difference between embedded payments and integrated payments?
6. What are the benefits of embedded payments for platforms?
7. What are the benefits of embedded payments for customers?
8. Getting started with embedded payments
[Do you want to improve your product's customer experience with an embedded payments system? Schedule a complimentary assessment with us to learn how Berkeley Payment can help.]
1. Embedded payments: A quick introduction
Do you remember the last time you bought something from Amazon?
You saw an item you liked and then clicked on the “Buy Now” button. Immediately, you saw that the transaction had been completed. After a few seconds or minutes, you received an email notification showing that the order had been truly completed. With just one click, you continue to complete your purchase on the website.
This is a classic example of an embedded payment solution, which was introduced by Amazon in 2000 (in a pioneering move) to replace the older shopping cart form. The company would go on to patent this one-click technology and later license it to other platforms and marketplaces.
Contrast this to the non-embedded form of payment that is still popular on many platforms. When you see an item you want to purchase, you click on a button that takes you to a different page where you input your debit or credit card details (or login to your account on a payment processor like Paypal), wait for an OTP (one-time password), input the OTP, and then complete the transaction.
Marketplaces such as Amazon, Etsy, and Ebay make it easier for them to embed payments since they exercise control over payment and delivery.
In addition, Shopify (an ecommerce platform) and Revel (a venue management software platform), among others, also offer embedded payments to their merchants. That is, merchants on these platforms can use the native payment processing system to make and receive payments without redirecting to any external payment gateway.
Ride-hailing platforms like Uber and Lyft have also joined the bandwagon. Users on these platforms now pay for their rides with just a click, without having to leave the app.
Subscription-based platforms like Netflix and Spotify also use embedded payments. Consumers do not need to do anything to renew their subscription. Their first payment is completed on the app (no redirection to a third-party platform) and all subsequent payments are automatically completed.
Pulling these examples together, we can define embedded payments as a system where payment is ingrained directly or built natively into a website or mobile app such that users do not need to be redirected to a third-party (external) payment gateway before they can complete purchases.
In essence, embedded payments is a critical response to the demand for improved user experience from consumers.
“User experience is becoming a bigger focus [in the business world]," said Simone Paul Tamussun, Vice President of Global Product Management and Development at MasterCard. In response to this, "payments should become as smooth and embedded as possible in the flow, no matter the channel the customer is using."
Today the expectation is that the industry will continue to expand. Bain and Co, a management consulting firm, now expects embedded consumer payments to be a $3.5 trillion industry by 2026, with embedded B2B payments set to be worth $2.6 trillion.
2. How do embedded payments work?
Simon-Kucher, a management consulting form, provides a perfect example of how embedded payments generally work.
As seen in the image below, with a non-embedded payment, customers have to make payments to three different payment processors: one for the platform itself, another for the restaurant, and another for the rider.
With embedded payments, UberEats, for example, now has a single payfac (payment facilitator) that processes transactions and remits money to the wallets of the three players involved.
Customers only need to make a single payment.
What’s more? By saving their payment information, they can complete subsequent orders with a single click.
In addition to deploying a single payment facilitator, embedded payments also allow marketplaces, platforms, and other businesses to “process transactions directly at the point of service – without being rerouted to another app or page,” as Electronic Payments International, a payment data and insights website, puts it.
Though all embedded payments involve the use of a single payfac, there are actually two models with which the embedded payments functionality can be deployed: Platform as payfac model and Payfac-as-a-service model.
Platform-as-payfac model
With this in-house approach, platforms (and marketplaces) build and manage the integrations needed to become a payment facilitator.
In the first instance, this involves platforms integrating a particular payment processor that will be responsible for handling all the transactions of users.
Once the integration has been done, payment forms on the websites associated with the platform (or the single website in the case of a marketplace) will collect and securely transfer payment information (debit and credit card details) to the payment processor. Some platforms also use tokenization – replacing sensitive payment information with token – so that payment information can be more securely transferred to the payment processor.
The payment processor receives the payment information, processes the payment, and sends back information on the status of the payment back to the platform (successful or unsuccessful).
Whether on platforms or marketplaces, all of these take just a few seconds and the user will never have to leave the website.
To improve user experience, platforms save all payment information so that subsequent transactions can be completed with just a click. Some platforms also offer extra features like multiple payment options and invoicing.
This model has some challenges though: expensive initial outlay, ongoing maintenance costs, security concerns (especially as payment information is transferred from websites to payment processors), among others.
Payfac-as-a-service model
An alternative is the Payfac-as-a-service model.
Here, platforms and marketplaces only need to integrate with third-party payment providers that will provide, handle, and manage the processes involved in operationalizing the embedded payments feature.
Through just one integration, marketplaces and platform users will be able to make and receive payments on their websites and/or apps.
This model has the advantage of allowing quick and cost-effective onboarding since platforms and marketplaces don’t need to build and maintain their own infrastructure. It also allows them streamline their payment process as multiple systems are incorporated into a solution from a single service provider.
3. Embedded payments vs embedded banking
Embedded payments, embedded banking, and embedded finance are three terms that often confuse people.
Are they synonyms? If they are different, how so? Can you have one without the other?
Let’s start with embedded payments and embedded banking.
While embedded payments allow users on a platform to make and receive payments on their websites or mobile apps, embedded banking allows them to access banking services like bank accounts (digital wallets) and customized debit cards.
Lyft is a popular example of the latter.
On the Lyft app, drivers have access to their own checking account and debit card. Once they complete a trip, the money goes to this checking account. And when they need to spend the money, they can do so with the related debit card (with cashbacks and rewards to boot).
There is even an optional savings account where they can save some of their earnings.
This solution is embedded because Lyft drivers don’t need an external bank account or even debit card to access their earnings on the app.
In essence, when Lyft allows users to pay for trips with just a click, that is an embedded payment. On the other hand, when it allows drivers to access a checking account, savings, account and customized debit card, that is embedded banking.
Shopify is another example.
By providing users with business accounts and debit cards, it allows them to separate their personal accounts from their business accounts. It also provides numerous rewards for those who make in-store and online purchases with the cards.
Future Market Insights valued the embedded banking industry at $14.5 billion in 2022 while they expect it to grow at 22.1% CAGR to become a $106.8 billion industry by 2032.
4. Embedded payments vs embedded finance
“Customers expect financial services to be directly integrated at the point of consumption, and to be convenient, digital, and immediately accessible,” said Roland Folz, chief executive of Solarisbank.
Embedded finance is the answer to that longing.
The term “embedded finance” is an umbrella term that covers embedded payments and embedded banking. The embedded finance ecosystem also includes other financial services such as embedded insurance, embedded investments, and embedded lending, amongst others.
(Below is an overview of the ecosystem provided by McKinsey and Co)
Some providers of embedded lending like AfterPay and Klarna allow consumers to make installmental payments for a wide variety of products.
Additionally, Acorns is an example of embedded investments.
Users of the app don’t need to transfer money to their account before they can start investing. Instead, the app rounds up their purchases and automatically invests the remainder ($100 is deducted for a $96 purchase with the remaining $4 invested).
Tesla is a good example of embedded insurance.
Users of Tesla cars can purchase an insurance policy from its website without the aid of any broker or insurance company. Boost and Matic are other examples.
The entire embedded finance market (excluding embedded payments) is predicted to be worth $138 billion by 2026, a 215% increase from its 2011 value ($43 billion), according to a forecast by Juniper Research.
5. What is the difference between embedded payments and integrated payments?
There is a final distinction that we must make to gain further clarity on what embedded payments are all about: embedded payments vs. integrated payments.
Integrated payments are a system that connects a payment processing solution to a software platform through the aid of an API. The software platform often contains important solutions like accounting, CRM, inventory management, and POS.
Many restaurants, retail stores, and ecommerce websites provide good use cases of integrated payments. Payments from customers are automatically fed into a software platform that includes an accounting solution (as revenue), inventory management system (to reduce the number of items left in store), and CRM system (to update the activity of the particular customer), among others.
How does this differ from embedded payments?
Instead of integrating an external payment solution to a software platform, embedded payments add payment facilitation as one of the solutions in the software platform.
That is, we see “payments being directly embedded into software, enabling businesses to combine their payment and software mechanisms together in one package – or a ‘one-to-one’ approach,” according to Electronic Payments International.
If the embedded payments system is well set up, then it should naturally provide the benefit that an integrated payment does – a link with the accounting, CRM, inventory management, and POS solutions. However, that link is no longer external but native.
6. What are the benefits of embedded payments for platforms and users?
Now that we have clarified what embedded payments are all about, let’s consider some of the benefits they provide to platforms and users.
Better conversion
There is a strong link between user experience and conversions. Every $1 spent on user experience will yield a $100 return, according to Forrester, a market research company.
By making the checkout process seamless, merchants can reduce instances of abandoned carts and improve conversion rates since consumers bugged by the difficulty of paying will often abandon the order (either temporarily or permanently).
Higher customer retention
In addition to improving the conversion rate, better user experience also leads to higher brand loyalty and customer retention rates.
Research from PwC shows that 65% of shoppers find customer experience to be more influential than advertising in their purchase decisions, with 33% of them ready to leave a brand after a negative experience.
The more satisfied customers are with a merchant, the more they are likely to stay. According to Electronics Payment International, embedded payments can “reduce friction and boost customer loyalty.”
Similarly, by providing embedded payments, platforms become more valuable to their users (merchants). This perception of greater value will make it easier for them to stay.
Increased revenue
Merchants will increase revenue as cart abandonment reduces and more consumers complete their orders.
Platforms will also increase revenue as customer retention increases. In fact, whatever the business model, embedded payments can increase revenue by improving customer experience.
Growth in other revenue streams
Platforms that provide embedded payments will open new revenue streams for themselves. They can charge merchants a fixed fee per transaction processed or a subscription fee. They can even offer premium features like invoicing for an extra fee.
In fact, research done by Simon-Kucher shows that for some platforms, revenue from payments end up overshadowing revenue from general subscriptions.
Furthermore, Electronic Payments International believes that the exponential growth of companies like Shopify and Toast can be “attributed to the new revenue streams that have been unlocked by embedded payments.”
Greater access to data
With embedded payments, merchants and platforms can access a large volume of customer data from which they can generate business insights.
"Payment data analytics is an untapped source of truth," said Geoff Brown, Director of Global Data Strategy and Acceptance Analytics at MasterCard. "Leveraging data can allow companies to make informed decisions whilst increasing customer retention."
7. What are the benefits of embedded payments for customers?
Ease of making payments
Embedded payments help customers make payments for goods and services in the most convenient way possible.
Improved experience and satisfaction
Since payment is an important part of the user experience, easier payment means better experiences.
Better offers
“End customers also benefit from an enhanced interaction, purchasing experience, and financial inclusion, as well as more competitive offers,” said Simon Kucher.
“Equally, because companies can negotiate better pricing due to scale, customers get lower prices than they would if they interacted with each party separately.”
8. Getting started with embedded payments
If customer experience is as important as business professionals say it is, then embedded payments are no longer a luxury for platforms, marketplaces, and other businesses.
At Berkeley Payment, we help financial and non-financial organizations, platforms, and marketplaces integrate embedded payments and embedded banking into their websites and apps.
Our solutions allow users to collect and receive real-time payments (embedded payments), as well as create different types of branded debit cards (embedded banking).
We provide a payfac-as-a-service model which saves users from initial upfront costs, maintenance costs, and the often arduous task of maintaining a secure and compliant payment system.
By handling top security measures (including KYC and AML, fraud detection and prevention) needed for the operation of the embedded payments and banking systems, we help users save time and money.
The personalisation, flexibility, and scalability we provide is one of the main reasons why top organizations like Google, Coca-Cola, Hyundai, Nestle, and Volkswagen, among others, trust us.
Our aim is to extend the same core competencies to as many organizations as possible so they can also enjoy the immense benefits of frictionless payments and native access to banking services.
[Is your organization interested in deploying embedded payments and banking in the most cost and time efficient way possible? Schedule a complimentary assessment with us so you can learn more about how Berkley Payments can help transform your organization’s payment system.]
Takeaways
- Improving customer experience is the best way for businesses to increase customer retention and conversion.
- In the modern world, embedded payments, by making payment as frictionless as possible, is crucial to improving customer experience.
- Businesses today are going beyond embedding payments as banking (embedded banking) and other finance solutions (embedded finance) have been added to the fray.
- Incorporating embedded payments either through a platform as payfac model or a payfac-as-a-service model will help companies increase revenue and enhance customer satisfaction.
