Embedded Finance: Step-By-Step Guide

Embedded finance is becoming increasingly important for the whole digital industry. Fintech elements can be found nowadays in nearly every application, from the gaming industry to e-learning. So, in this blog post, I will focus on the part of the process that interests every business owner: the implementation. 

Embedded finance, like any digital product or feature, is an investment. Still, it is an integral part of retail software or any product that involves funds transfer, such as buying items or paying for services.

Currently, the embedded finance market’s total value is estimated to be over $155 billion, but with a CAGR of 16.8%, it is expected to reach $251.5 billion by 2029.

I have compiled this article based on my and my colleagues’ hands-on experience. As this solution’s popularity is soaring, I believe it can bring incremental benefits in nearly any market segment.

What is Embedded Finance 

Embedded finance definition refers to fintech elements implemented into non-fintech solutions, allowing customers to embed financial services directly into their platforms. For example, a fintech element can be integrated into the platform via an API, which would allow users to pay the bill, buy a service, or perform any other activity associated with financial software. 

With such capabilities, embedded finance definition has certain advantages for businesses that decide to implement such features. For example: 

• streamlining financial processes, 
• ensuring enhanced customer experience, 
• reducing the need for intermediaries, which cuts business owners’ costs. 

The embedded finance revolution is a transformative shift in which financial services expand into non-financial sectors through strategic partnerships. Collaborating with embedded finance solutions providers allows companies to quickly and cost-effectively offer financial products. 

Insights into Embedded Finance Market

The embedded payments market is vast and innovative, but most importantly, it is still expanding. Financial transactions play a crucial role in determining the market size and potential for expansion over the coming years. 

Currently, in the US alone, the embedded finance segment generated over $20 billion in revenues, with over 50% of card spending happening online. With some of the top embedded fintech software providers having a CAGR of over 50%, the segment is enriched with modern startups and companies from all over the world. 

Among the fastest-growing companies working in the embedded finance fintech segment are the following: 

1. Bond, headquartered in San Francisco, has $45 million in revenue and a 50% CAGR as of 2023. This product is aimed at launching and scaling financial products.
2. Cross River, a New Jersey startup focused on payment processing, lending, and banking-as-a-service, reached $150 million in revenue and 35% annual growth.
3. Finix from San Francisco is an enabler for payment management, which allows its customers to implement and manage payment solutions independently. In 2023, they hit the 45% CAGR and reached $30 million in revenue. 

The industry shows positive dynamics for business development. The abovementioned startups can integrate with businesses from different markets, so let’s take a closer look at how embedded finance solutions can revolutionize other domains. 

Examples of Embedded Finance Solutions for Different Industries

While embedded finance fintech is essential for some, it’s more of a competitive leverage for others. Financial service providers play a crucial role in integrating financial products into non-financial environments.

Payments 

Among the most popular embedded finance fintech solutions, payments are likely to be the number one financial service integrated into various platforms. Over 62% of businesses process their transactions digitally, the B2B sector is projected to grow to $174.38 trillion by 2030, and the total transaction value of general digital payments is currently at $11.63 trillion. Financial institutions, including traditional banks, play a crucial role in this ecosystem by collaborating with fintech companies to enhance payment processing by integrating with embedded payments.

For businesses, an embedded payments solution would mean an opportunity to manage the payments made through their platform. It would enable the users to pay via the website or a mobile application just by entering their data or using alternative payment methods such as QR codes or biometric identification. This can be achieved with the connection to financial institutions.

Lending 

With lending-as-a-service becoming more popular, these APIs can be integrated into software solutions to enable users to get a credit extension or even enable a buy-now-pay-later feature. The workflow for this solution would greatly automate the traditional lending process, increase revenue generation, and accelerate time to market by quickly integrating with the existing solution. 

Generally, the integration would enable users to choose a credit option right from the checkout interface. The API could perform an automatic KYC and security verification, review the transaction history, evaluate risk limits, and offer a suitable loan option.

Subscription management 

Monetization strategies are currently being discussed extensively among software developers, business owners, and investors. Among the most popular strategies is the subscription model, which, integrating with embedded finance, would provide considerable independence to the business that chose it.

For customers, it would be a pull payment that automatically withdraws funds from their accounts for the subscription, leaving them worry-free about overstepping the deadline. For businesses, this is a great way to automate the payments and nullify a large amount of hours spent on manual labor. Also, such an approach would generate data available for analysis, such as when customers cancel their subscriptions, which might help reduce customer churn and protect customer data.

How to Create an Embedded Finance Solution

I’ve built an understanding of embedded finance companies during my years in practice and even had a chance to work on our white label solution. Solutions that can integrate with different businesses are usually long-lasting and prove to be efficient due to multichannel financial support from users across markets and, in some cases, countries. 

The development of fintech and financial industries allows users to integrate financial tools with non-financial businesses. Working with such tools for many years helped me gain valuable insight into the industry, so I’m ready to share my experience with you.

What are the steps you need to take to create one? I’m describing them in this section. Let’s take a closer look.

Step 1: Identify the Target Audience for Embedded Finance 

If you already have a customer base, examine their demographics, behaviors, and pain points. If not, look at the competitors and your market. Figure out what differentiates your solution from others, what is its aim, and what problems it strives to solve. This can provide valuable insights into who might benefit most from your embedded finance offering. 

Evaluate your existing products, services, and expertise to determine which customer segments you can best serve. For instance, if your company specializes in lending, you might focus on businesses in need of working capital or small business loans.

Successful Example: Stripe

Some of the most successful embedded finance companies have already captured the audience’s attention. One such business is Stripe, a popular payment processing platform that offers invoicing, subscriptions, and other embedded finance solutions. Stripe enables businesses to easily integrate financial functionalities into their applications, making different businesses, from enterprises to SMEs, part of their target audience. 

You would benefit from narrowing your audience. Focus on a few specific niches or target only startups and SMEs. This approach can help you create new revenue streams by offering tailored financial services that meet the unique needs of these segments.

Step 2: Define the Work Scope and Business Capabilities 

Once you’ve identified your target audience, the next step is to clearly define the work scope and business capabilities of your embedded finance project. Embedding financial services into your existing business processes can create new revenue streams and enhance customer experiences. 

Make sure to pay close attention to: 

1. **Core functionalities: **These are the essential features and services of your embedded finance. Examples of core functionality include payments, lending, savings, and insurance products.
2. **Integration points: **Choose how your solution will integrate with your customers. It can be an API, a software development kit, or another option. 
3. **Security: **Following regulations is imperative for your solution to integrate with others, so make sure you know the location of your TA and what regulatory requirements are present in that region.

These are the elements of your work scope and would usually be discussed during the development. If you haven’t already figured out which platform you will use for your embedded finance software, you can also discuss this with your software partner. The options usually depend on whether you want to host your solution on physical servers or virtual cloud and if you want to have a full custom development or compile your solution from different vendors to create a unique white-label offer.

Step 3: Start Building Software Architecture

A well-structured software architecture is essential for the success of your embedded finance project, especially when integrating banking services. It provides a blueprint for development, ensuring scalability, security, and efficient integration with other systems. So, in this segment, I want to draw your attention to the mandatory architecture components. 

1. First are APIs, as they are crucial for enabling seamless communication between your embedded finance solution and other systems. These systems can include your clients’ platforms, payment gateways, and other integrations. 
2. The next important component is a robust data management infrastructure. It includes databases, data warehouses, and data analytics tools and is essential for storing, processing, and analyzing large volumes of financial data.
3. Given the sensitive nature of financial data, strong security measures are a must. Make sure you’re using either encryption, two-factor authentication, access control, or other security methods. 

Tips for Software Architecture 

Apart from these crucial components, consider also the possibility of scaling. To ensure that your architecture gives your business a plethora of opportunities to grow, you could turn to a** cloud-based solution**. It would allow you to scale both up and down as it is not a physical server and can be modified according to your needs. 

You could also consider using a microservices architecture. This type of architecture consists of different independent services that can scale independently, which would be extremely beneficial for this business. You would be able to monitor which services are more popular among your customers and be flexible according to demand.

Step 4: Implement Security Mechanisms

I’ve briefly mentioned security before, but now let’s take a closer look at what can be done to ensure that your embedded finance software is adhering to the necessary standards. 

1. Employment of **strong encryption algorithms **to protect sensitive data.
2. Implementation of the access control that would enable authorized users to access critical systems, and block others from imperative data. 
3. Conduction of regular security audits to ensure that the software does not have data breaches, vulnerabilities, or other risks associated with data leaking. 
4. Development of an incident response plan that would dictate a prompt reaction in case of data breach or malfunction, and help minimize inflicted damage, if any.
5. Compliance with regulatory requirements for your geographic location and business segment. 
6. Evaluation of the systems you are integrated with to perform third-party risk management and ensure that you and your partners, including traditional banks if you partnered with them, are on the same page regarding security.

Step 5: Test The Developed Solution

As you’re closing in on your launch, make sure that your embedded financing software has been thoroughly tested at every stage of the development process. This will help you ensure the solution’s proper workflow and cut costs on future maintenance, re-dos, and hotfixes. 

I recommend performing functional testing to ensure that the solution’s performance does not differ from the expected under any circumstances, performance testing to deliver upon the set customer expectations, and security testing to ensure the paramount safety of your clients. 

Step 6: Launch The Embedded Finance Software

When launching, make sure that you have a launch plan that includes marketing strategies and communications to promote your product. This is essential in a highly competitive industry such as finance. You also should create an onboarding plan to help your customers easily understand and navigate through the embedded financing software. 

But one of the most important steps at this stage is to set realistic goals and reachable key performance indicators. To see if your product is really making its way up to the top of the market, set a certain period of time for analysis and one or several of the following indicators: 

Customer acquisition

Calculate the number of acquitted customers and see the rate with which your business progresses. To do this, you could use a simple formula: Cost of Sales + Cost of Marketing ÷ the Number of New Customers.

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Customer satisfaction

Pay close attention to customer feedback and your software’s rating on various platforms. To calculate it correctly, divide the number of totally satisfied and very satisfied customers by the total number of responses.

Transaction volume

Calculate the amount of total transaction volume for six to twelve months and divide it by the number of months under analysis to see if the software is as popular as you hoped.

Revenue generated

As simple as it gets,** just monitor your business profits. **

Key Embedded Finance Development Considerations

It’s important to remember that when launching embedded financing software, you’re creating a B2B solution that would be used by other business owners. So, you should consider the specifics of your target market. See them as partners or investors rather than just customers; this will help you better understand your audience and stay on the same page with them. 

If you’re providing solutions for a few selected niches, make sure you know the security requirements and have proven experience working with the domains in the past. It will help you assure your clients that working with you will be beneficial.

Do not forget about testing, as your software will be performing for different clients and will need a very sturdy architecture. All the technical specifications you can potentially leave to a good development team or agency. DashDevs has worked with projects like these, and I have personally been involved in many of them in my career, so I can confidently say that this is one of the cornerstones of success. It’s important to free up your hands for strategizing, analyzing, and promoting while keeping your hand on the pulse of development and having a good partner to back you up.

Conclusion

Overall, embedded finance can be a very beneficial investment if you’re looking for a way to scale in the B2B market. It would enable you to generate higher profits by allowing your customers to automate, enhance the customer experience of their clientele, and upscale revenue streams.

You will become a partner to your clients, but you also need to find a good and reliable technical partner. I have worked with DashDevs for years, and they have guided their clients through over 500 developed projects, including our exclusive white label. We have always treated customers as partners. Together, we created solutions that brought prosperity to both sides, leading our customers to over 2x revenue growth.

If you’re interested in partnering with us – let’s book a call!