As part of our ongoing quest to demystify the hype and find the truth in payments, we take a look at the latest buzz-word, “embedded payments” and ask what it means and where it’s going.
In seeking to understand anything, first we must define our object. And with embedded payments, this is no simple task. For instance, some might claim (wrongly, in this writer’s view) that Buy-Now-Pay-Later (BNPL) schemes are a form of embedded payment if included on a credit card as an option, as they form part of a different payment flow.
For a simple definition of what embedded payments are, we could do worse than refer to Infinicept’s definition: “embedded payments include payment in a wider chain of customer interactions so that payment becomes a seamless part of wider customer experiences.”
“Embedded means … including payment in wider customer interactions to deliver a smoother experience.”
We can further enhance this definition with some concrete examples of embedded payments in action – think about your account being debited automatically when you step out of an Uber, for instance, or a transaction sent to your credit card automatically when you fill up and drive away from a BP gas station as a registered customer.
Barry O’Sullivan, Head of Payments Infrastructure at OpenPayd, defines embedded payments as “the combination of more than one function on a platform, such as account creation and payouts.
Embedded payments are gaining popularity in business-to-business environments, too – especially when it comes to the combination of logistics and invoicing.
In this case, a customer signs on delivery for a shipment and funds are automatically released as payment for the goods received – a digital version of the age old “cash on delivery” model.
Finally, embedded payments are said to form part of a wider movement towards embedded finance, in which customers access financial services through other (non-financial) products. Examples here include things like buying warranties at the same time as a product is purchased with a single click.
So embedded payments are real, with us and useful. But is the hype surrounding them in any way accurate? To answer that, let’s take a look at some of those pundit’s favourites – predictions…
An embedded future?
Getting the ball, or perhaps that should be log, rolling is a prediction from Wired magazine that embedded payments revenues will rise from $40 billion last year to $126 billion by 2026 – a more-than three-fold increase in five years.
Companies seem keen to get into embedded, too, as the graph below from Amaryllis/VoPay shows more than eight in ten firms looking to offer embedded in the next five years. That said, it’s worth noting that fewer than five percent currently do so.
“Despite big predictions, fewer than 5 percent of merchants offer embedded today.”
Along with our readers, we have been the victim of so many hype cycles in payments that some healthy scepticism may be appropriate here – especially since there is, or might be, a fly in the embedded ointment.
That fly can be found in the switch from physical transactions to the digital world and, more specifically, in the challenge of verifying digital identity in an online environment.
The implementations of embedded payments cited above all work on the basis of trusted buyer and trusted seller.
To take perhaps the best-known example of all, Starbucks has created a closed-loop card that combines loyalty with a payment wallet and online communications.
Customers load up their Starbucks card either from their bank account or payment card, and receive e-mail communications with special offers to spend their loyalty points on.
In other words, Starbucks know who their customers are, have multiple touchpoints and rich data about them, and can offer relatively low-value transactions with a single tap and instant settlement.
So far, so good – but what happens when the transaction values rise and – more importantly – embedded payments move out from under the snuggly quilt of trusted buyer and seller relationships?
Can embedded work when the payer isn’t subject to cast-iron KYC?
Recent huge rises in fraud attempts through the digital channel suggest transactions without any form of friction caused by authentication – which is, after all, a big part of the promise of embedded payments – could be a massively risky prospect.
Opening up embedded
“We’ll continue to see growth in embedded – but eID and eKYC need to improve for its full potential to be realized.”
Alex Reddish, Managing Director at Tribe Payments, is cautiously optimistic about the future of embedded.
“There’s no doubt we’ll continue to see growth in the embedded payments market given the capacity to improve the user experience. However, electronic identities linked to digital wallets, and eKYC more generally, need to improve if embedded is going to fulfil its potential in an increasingly digital economy.”
Open Banking offers potential solutions for KYC and authentication in embedded payments.
For instance, embedded providers could use Open Banking’s mandate for banks to share APIs to deliver bank-level authentication on transactions.
This technique has already been successfully adopted by Account-to-Account players such as Trustly and Zimpler to deliver the instant payments proving wildly popular with the 18-35 demographic and “gig” economy workers.
In the UK, if not as yet in continental Europe, there are signs that Open Banking is now going mainstream, so watch this space.
In the meantime, we can expect to see the further proliferation of “closed-loop” embedded payment schemes founded on the sound principle of known buyer and known seller.
Indeed, some banks and merchants are already setting up private networks of trusted parties to offer combinations of ordering and payment, delivery and payment, and other embedded payment options.
This trend towards multiple “closed loop” systems that fulfil much of the promise of payments futurologists is something we’re also seeing in buzz-areas such as the metaverse, blockchain and others.
However, it’s going to take some time before the consumer in the street really starts to notice the benefit.
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