An introduction to embedded finance

Grow your revenue with embedded finance

In 2022, the economic climate for tech companies began a decisive shift.

Before then, tech was booming, and venture capital flowed freely. Companies were incentivized and often rewarded for pursuing a strategy of “growth at any cost.”

By the end of the year, a looming economic downturn had made venture capital much harder to come by—and, as a result, more expensive. Tech companies were challenged to become profitable in a swift reorientation away from growth at any cost. As a result, many companies are seeking to acquire customers more efficiently and earn more revenue from existing users. 

Over the past five years, embedded finance has emerged as a powerful way to do both. One of the best paths to growth is to provide more value to existing customers and increase your revenue per user.
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As an example, more than 73% of Shopify’s revenue now comes from merchant services, the majority of which are embedded financial services.

If you’re a product leader or other decision maker in tech who’s thinking about how to make your product stickier and grow your revenue, this guide is for you. In it, we’ll take a look at real-world examples of embedded finance and big-picture questions like:

• What is embedded finance?
• How does it work?
• Who’s already doing it?
• What are the benefits?
• How do I get started?

What is embedded finance? 

When a company works with a financial-service provider to build financial products (e.g., bank accounts, cash advances) into their offering—that’s embedded finance. ‍

Affirm is a prime example. Launched in 2012, Affirm enables merchants to embed flexible payment plans in their checkout flows. To illustrate how it’s different from traditional financing options, let’s say you’re interested in buying a mattress from Eight Sleep, but you don’t want to use a credit card.

In the past, if you wanted to finance that purchase, you’d have to leave Eight Sleep’s website to visit online lenders like SoFi or Discover. After comparing terms, selecting a lender, and completing your application, you’d get a credit decision. Assuming you were approved, the funds would become available in your bank account within 2-5 days. At that point, you’d have to return to Eight Sleep’s website, re-add the items to your cart, and check out. 

With Affirm, the financing workflow is embedded into the checkout experience. You can finance your purchase in a matter of moments, without a hard credit check or a card to pay. 

For Eight Sleep, embedded finance (i.e., Affirm) is a revenue generator; it extends the purchasing power of their customers. It also helps them reach audiences who may not want to pay with cards.

Of course, Affirm is just one example of embedded finance. Others include embedded banking and debit cards (e.g., Uber Pro), embedded cash advances (e.g., DoorDash Capital), and embedded payments (e.g., PayPal at checkout). 

What are some examples of embedded finance?

Embedded finance can be a powerful way to offer financial products. Some embedded finance examples include: 

1. Embedded payments

‍15 years ago, online payments were almost unheard of. Today, the idea of enabling customers to make purchases on your website or mobile app is so commonplace that it's practically its own category. Common online payments providers include Checkout.com, Adyen, Finix, and Stripe.‍

2. Branded payment cards

‍American Airlines pioneered the branded payment card back in 1934. Since then, thousands of companies have recognized the value in providing branded cards (including virtual cards) to engaged customers and followed suit. Prominent examples include Disney, Costco, and the Target REDcard™.

3. Embedded lending and financing

‍Perhaps the most recognizable form of embedded lending and financing is buy-now-pay-later (BNPL). In addition to Affirm, checkout options like Klarna enable customers to spread a purchase across several monthly or biweekly payments. But there are many other flavors, including cash advances (DoorDash), invoice factoring (Outgo), credit and charge cards (Ramp), term loans (Toast), and revolving lines of credit (Amazon). ‍

4. Embedded bank accounts

‍In 2016, Uber partnered with GoBank to launch Uber-branded bank accounts for its drivers. Since then, dozens of leading tech companies have followed suit; Shopify, Lyft, AngelList, and Gusto are just a few examples. Typically, the goal is to pay customers faster, offer them better financing, and/or provide a single platform where they can manage their finances.‍‍

5. Embedded insurance

‍Have you ever been offered travel insurance when you’re buying a plane ticket? How about event insurance when you’re buying concert tickets? These are examples of embedded insurance, which has become increasingly common. Other categories include shipping (EasyShip), homeowners insurance (Baselane), and even car insurance (Tesla). ‍

6. Embedded investing

‍While embedded investing is not yet as well-developed as other categories on this list, it has shown early signs of promise. An example is when card rewards and/or spare change are used to invest in stocks (Acorns) or cryptocurrency (Venmo). In the future, you could be given the option to buy Starbucks stock when you’re checking out in the Starbucks app or invest in featured ETFs on CNBC.com.

How does embedded finance work?

How are financial products like bank accounts and loans made available within the apps and websites of platforms like Lyft and Shopify?

First, it's important to note that many financial products can only be offered by licensed financial institutions. As such, embedded finance typically requires that the non-financial-services company partner with a bank or other licensed financial institution. Many choose to do so with the help of a banking-as-a-service platform.

In 2021, embedded finance accounted for $2.6 trillion in total US transactions. By 2026, it’s expected to exceed $7 trillion.

Once you’ve established a partnership with a licensed financial institution, embedded financial products are generally managed via API. An API is a digital connection that enables communication between different websites and databases.

Embedded financial products are typically offered under the brand name of the non-financial company rather than the financial-services provider. For example, although the Lyft Direct debit card is issued by Stride Bank, Strides’ branding does not appear prominently on the card. This arrangement is also known as “white label” (or, in the world of cards, as a “co-branded card”).

The value of embedded finance for your business

We’re still in the early days of embedded finance; its growth is predicted to accelerate dramatically over the next few years.

To cite just one statistic, embedded finance accounted for $2.6 trillion (nearly 5%) of US financial transactions in 2021. By 2026, that number is expected to exceed $7 trillion.

More than 73% of Shopify’s revenue now comes from merchant solutions, the majority of which are embedded financial services.

One reason that embedded finance is growing so quickly is that it delivers meaningful value for companies like yours. This includes:

• New revenue streams. Embedded finance helps you deliver more value to existing customers and generate new revenue. For example, Veryable increased revenue by 3x after they launched embedded finance. Learn more in our revenue guide, or plug a few numbers into our revenue calculator. 

• Lower customer acquisition costs. When you solve more of your customers’ problems, you set yourself apart from competitors while offering a more compelling value proposition. For example, after Baselane launched embedded finance, they saw their customer acquisition cost decrease by 50%.

• Customer loyalty and satisfaction. Embedded financial products create powerful reasons for customers to return to and engage with your product. Why? Because financial products are quintessentially “sticky.” As an example, Roofstock found that customers who bank with them are retained 3.5x more than those who don't.

Customer demand for embedded finance

Embedded finance is relatively new, so it’s natural to wonder why your customers would want it. 

In fact, as companies like Lyft, Affirm, and Shopify have shown, demand for embedded finance is robust. The reason is that American small businesses and consumers aren’t getting their needs met by traditional financial institutions.

“With embedded finance, our platform functions as mission control for our customers. Without it, we’re just another software tool in a big, messy stack.” – Sumukh Sridhara, Head of Product of AngelList

In a study we recently published with The Harris Poll, we learned that American small-business owners are fed up with the way they’re handling their finances today. It takes them too long to get paid (63%); they can’t get the financing they need (70%); and they’re using 4-5 different software tools to manage their money (45%).

Through embedded finance, you can help your customers solve these problems, offering them:

• Improved access and convenience. By making financial products available within the platforms that customers already use, tech companies can reach audiences that banks have had trouble connecting with.

• Better cash flow. Small businesses are struggling to manage cash flow. 63% of small- and medium-size businesses say it takes too long for funds to become available in their bank accounts. With embedded finance, platforms can send funds to their customers within moments or even on-demand.

• Better financing options. In our study, 62% of small-business owners said that, as a result of the current economic environment, they need additional financing to support their businesses. Tech companies—who better understand their customers’ business models and what they can afford to repay—have the opportunity to provide more tailored financing with better terms versus a bank.

Over the past five years, embedded finance has emerged as a powerful way to generate more revenue from existing users.

• Consolidated financial management. In the same study, 45% of small-business owners said they’d be willing to try a new provider if they could manage their finances from a single platform. When you offer embedded financial products, your product becomes essential; your company is no longer just another vendor in the tech stack.

• Tailored rewards. You understand your customers better than the bank. You know what they value, what their pain points are, and how they measure success. As a result, you can craft a targeted rewards program that is truly meaningful to them.

Unit’s approach to embedded finance

Unit is an embedded banking and lending that helps tech companies make bank accounts, debit and charge cards, payments, and lending available to their customers. 

To date, nearly 200 leading brands have trusted us to help them launch and scale their embedded banking and lending products. Customers who partner with us can experience faster and more predictable go-live dates, stickier products that get better engagement, and robust revenue streams.

We believe that our customers are best served by offering the following:

1. Fully-featured technology. Unit is a complete embedded finance platform. That means we provide all the features your customers expect so that you can build the modern banking and lending experiences that your customers will adopt and love. 

2. Built from scratch. We build our own infrastructure rather than relying on legacy technology from other providers whenever possible. As a result, we can offer more flexible terms and conditions, enhanced product velocity, and a seamless user experience.

“Unit has a complete feature set that allows us to do everything we want to do.” - Jeff Wells, Chief Supply Officer of Veryable

3. Streamlined compliance. We work closely with banks and key technology partners to streamline compliance for our customers. Consolidating compliance helps you stay focused on building your business while knowing you and your customers are protected.

4. Multiple bank partners. Working with multiple bank partners is the best way to help companies go to market quickly, access a complete set of high-quality financial products, avoid latency issues, and grow. Learn why.

5. Premium service and support. For your financial products to succeed, you need more than technology: you need a dedicated partner at every step. We provide premium onboarding, one-on-one support, and expert advice to help you launch and scale effectively. 

6. Simplicity. In the past, launching financial products was difficult—but we believe it should be simple. That’s why Unit is a true plug-and-play platform; it’s our business to abstract away complexities and keep things simple for our customers.

If you’re interested in learning more about embedded finance and how it can help you increase revenue, contact us to book a demo—or just start building in our sandbox.