In a recent survey of leaders in global finance, 72% said the majority of financial services will soon be consumed on non-financial platforms.
What does that mean, exactly? How are financial products making their way into apps like Uber and Shopify?
The answer is embedded banking. That’s when a tech company teams up with a financial institution to make banking products (e.g., high-yield accounts, credit cards) available inside their app or website.
One familiar example is Square Checking. Thanks to embedded banking, merchants who use Square’s point-of-sale (POS) solutions can also take advantage of Square bank accounts and debit cards. Among other advantages, this enables them to get paid within moments of completing a sale.
For Square, this has resulted in explosive revenue growth. In fact, in Q4 2022, Square’s gross profits from its merchant segment were up 22%, to $801M.
If you’re a leader at a tech company who’s curious about embedded banking, this guide is for you. In it, we’ll address questions like:
Embedded banking enables tech companies to make financial products (e.g., high-yield accounts, credit cards) available within their apps and websites.
Shopify Balance is a well-known example. Thanks to embedded banking, merchants who use Shopify to manage their ecommerce businesses can also take advantage of Shopify bank accounts and business loans. Among other advantages, this enables them to get paid within moments of completing a sale.
Embedded banking enables you to offer four kinds of financial products to your customers:
To show how embedded banking works, let’s use another real-world example: Lyft Direct.
In the Lyft app, drivers choose how they want to get paid. If they choose Lyft Direct, they can access their money within moments of completing a ride, right in their Lyft Direct bank account. They also receive a stylish debit card that earns cash back on things like gas and groceries.
Drivers love it not just because they can get paid right away, but also because they can manage their entire ride-share business (including accounting and taxes) from inside the Lyft app. For Lyft, the program is valuable because it generates several robust new revenue streams.
Behind the scenes, Lyft partners with Stride Bank to offer these financial products. Drivers interact with their bank accounts and debit cards via the Lyft app, and those requests are transmitted back and forth to Stride Bank, where the funds are held, via an application programming interface (API).
Many tech companies who offer embedded banking choose to do so with the help of a embedded finance platform. Such a partnership drastically reduces the required investment of time, money, and staffing. Working directly with a bank can take up to two years and $2 million, but a modern financial infrastructure platform can have you up and running in weeks.
A common question I hear from founders and product folks is “What kinds of companies are a good fit for embedded banking?”
There are two ways to answer this question. The first is, itself, a list of questions:
If you answered “yes” to any of the above, then you’re probably a good fit for embedded banking. There are also several use cases that work particularly well:
Gig workers expect to be paid right away. In many cases, they’re accepting work opportunities today so they can pay their bills tomorrow. Embedded banking is a powerful way to offer instant payouts that functions as a revenue generator rather than a cost center.
Marketplaces like Etsy and Shopify present a near-perfect use case for embedded banking. When they offer embedded banking, they provide their merchants with faster payouts and tailored financing options. They also keep more funds on their platform, boosting their bottom line.
Your customers don’t want to manage their business operations and their business finances separately. When you offer embedded banking, you become “mission control,” enabling your customers to manage all aspects of their company from within your platform.
Processing payroll? Many employees don’t have bank accounts, and many more would welcome the convenience of banking with their payroll provider (e.g., Gusto Wallet). The same principle applies to employee benefits like HSA and FSA accounts.
Do you help small businesses incorporate? Draft proposals, send invoices, manage their websites? If so, you’re a great fit for embedded banking. Small-business owners want help managing their finances, and you’re in a great position to offer it.
When it comes to financial products, Americans have a lot of options—so it’s natural to wonder why they would choose yours.
The short answer is that a majority of American small businesses are dissatisfied with the way they manage their money today—and they’re eager for an alternative. In fact, 84% of small businesses we surveyed said they would explore financial products from their business software tool, if they were offered.
For your customers, embedded banking products offer four distinct advantages.
Embedded banking products don’t just create value for your customers; they enable you to capture more value for your platform.
In other words, what will you need to invest in terms of time, money, and staffing? The answer varies widely depending on your approach.
For example, it’s possible to work directly with a bank, as many early banking apps did (e.g., Chime, Current). However, this approach can take 2 years and $2 million to launch, and it will require hiring a large, dedicated banking team.
On the other hand, you could partner with a modern financial infrastructure platform. The advantage of this approach is that you can usually go live in a matter of weeks. They can also provide:
Unit is a financial infrastructure platform that helps platforms like yours offer embedded banking and lending.
To date, nearly 200 leading tech companies have trusted us to help them build and scale their embedded banking and lending programs.
We’re also the only platform to offer White-Label Components—a suite of fully customizable building blocks—so you can easily build and control your frontend with minimal engineering resources. We help guide you on compliance requirements and bank relationship(s) so you can stay focused on scaling your business.
If you’re thinking about how embedded banking can add value to your platform, please reach out. We’d love to brainstorm with you.
November 9, 2023
Frequently asked questions
Embedded banking is safe when implemented with robust security measures, compliance with regulatory standards, and adherence to best practices.
When choosing an embedded-banking partner, tech companies should seek out reputable, trustworthy providers with a strong track record of compliance and security.
The two concepts are complementary; both represent the next stage in the evolution of financial services.
Open banking enables businesses and consumers to digitally connect their bank accounts (and other financial data) to third-party apps and services. For example, when you link your bank account to Venmo or Cash App, that’s open banking.
Embedded banking enables tech companies like Uber and Shopify to make banking services (e.g., bank accounts, credit cards) available inside their apps and websites.
The two terms are synonymous; both refer to the same thing.
When a tech company like Square offers banking products to its merchants inside the Square app, you can refer to it as either embedded banking or banking as a service.
Embedded banking is a subset of embedded finance.
Embedded banking refers to the integration of banking services, such as payments, lending, and account management, directly into non-financial platforms.
Embedded finance is a broader concept encompassing a wide range of services, including embedded insurance, investments, and financial planning.