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.
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:
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).
Embedded finance can be a powerful way to offer financial products. Some embedded finance examples include:
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.
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™.
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).
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.
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).
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 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”).
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:
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:
Over the past five years, embedded finance has emerged as a powerful way to generate more revenue from existing users.
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:
“Unit has a complete feature set that allows us to do everything we want to do.” - Jeff Wells, Chief Supply Officer of Veryable
April 12, 2023
Frequently asked questions
When you work with a financial-service provider to build a financial product into your offering, that’s embedded finance. By contrast, “banking as a service” is a way to “power” embedded finance. Platforms use banking as a service as a way to offer, for example, branded payment cards.
Additionally, whereas “embedded finance” includes things like investments and insurance, “banking as a service” includes only those products traditionally offered by chartered banks: bank accounts, cards, payments, and lending.
Everyone’s situation is different, so there are no hard and fast rules here. However, one way to parse out whether embedded finance is a fit would be to ask yourself these questions:
If you answered yes to any of these questions, it might be worth investigating embedded finance. We'd love to help you think through it.
The resources you’ll need to invest to launch embedded financial products vary widely depending on your approach.
If you partner with a banking as a service platform, you can take your products live in about three months. If you choose to work directly with a bank, plan on spending 2 years and $2M. You’ll also need to hire a large, dedicated banking team.
Embedded finance implies working with a vendor or platform to launch a financial product as opposed to building it in-house.
For example, when Nike partners with Klarna to offer buy-now-pay-later at checkout, that’s embedded finance. On the other hand, when Ford built its own Weekly Purchase Plan, they became a financial-service provider.
Embedded banking is often used interchangeably with banking as a service.
It refers to the same process: when a technology company works with a chartered bank to offer financial products from within the company’s app or website, that’s known as embedded banking.
It’s not to be confused with embedded bank accounts (i.e., branded bank accounts).
Many leading platforms offer embedded finance. For example, Instacart offers the Instart MasterCard (a credit card), with rewards like cashback for shopping on Instacart.
At Unit, we’ve consulted with hundreds of tech companies. Based on our experience, these are some of the best use cases for embedded finance or banking.
Embedded financing is the process of providing your customers with access to funds inside your app or website, right at the moment they need it.
Common forms include cash advances, invoice factoring, credit and charge cards, term loans, and lines of credit.
Buy-now-pay-later (BNPL) is one of the most recognizable forms of embedded financing today. Platforms like Affirm and Klarna enable customers to spread a purchase across several monthly or biweekly payments, right at checkout.
Embedded financing is a type of financing. You provide your customers with access to funds, right when they need it. As an example, if you’re shopping for a car on Carvana, you can get pre-qualified for a loan on Carvana.
Embedded finance involves making financial products available inside your app or website. It’s an umbrella category that includes embedded financing. For example, the Uber Pro Card rewards drivers with cashback for refueling.
Embedded finance in the US is growing, and it's expected to double in size within the next three to five years, according to McKinsey.
Payments was among the first use cases; today, the top embedded finance companies range from financial infrastructure platforms to card issuers to embedded financing providers. Here are just a few examples:
Check out our guides page to learn more about embedded finance