Winning Top Of Wallet: How Financial Institutions Compete in the Embedded Finance Era

Past performance doesn’t always guarantee future results, but it can inform them.

That’s particularly evident when it comes to the payments and commerce landscape, which has witnessed a sea of change in just the first half of the year, driven by technological advancements and evolving consumer expectations.

Against that backdrop, PYMNTS sat down with Brian Scott, chief growth officer at Velera, to unpack the current state and future prospects of embedded finance and payments innovation for the series “What’s Next In Payments: July Halftime Report.”

Scott highlighted an interesting dichotomy in the market: the difference in strategies between small and large financial institutions. Those below the $10 billion threshold, often referred to as Durbin-exempt, tend to focus intensely on serving specific consumer segments or communities. They leverage their smaller scale to create deep, personalized relationships with their customers.

“We see a lot of opportunities for Durbin-exempt financial institutions to focus on certain aspects of a consumer need and focus on serving that really well,” Scott said. “They are entrenching into a marketplace, into a community, into an employer group.”

In contrast, larger institutions above the $10 billion mark are more focused on broader market growth. These institutions, as Scott noted, face higher regulatory burdens and have their interchange fees capped, which drives them to pursue expansive growth strategies.

He emphasized that embedded finance is shaping up to be a key offering for Durbin-exempt institutions to differentiate themselves and capture market share from larger competitors.

Enhancing User Experience With Embedded Payments

Among the most notable trends in shaping the future of payments and commerce is the rise of embedded finance. Embedded finance represents a significant leap forward in integrating financial services directly into non-financial platforms, enhancing user experiences and creating new revenue streams for businesses.

As Scott highlighted, the most obvious examples of how embedded payments have revolutionized the way consumers interact with financial services include platforms like Uber and Starbucks, where the payment process is seamlessly integrated into the user experience.

“There’s no need to pull out a different payment device. You’re already in the app, and it creates a great experience,” he said.

This seamless integration reduces friction in transactions, both for retail consumers and business-to-business (B2B) interactions.

From the perspective of financial institutions, the value of embedded payments lies in the concept of “stickiness” — once a payment device, such as a credit card, is integrated into a user’s digital wallet, it tends to remain there.

“If your payment device is the one that is linked in, it is incredibly valuable and sticky as well … once you have it, it is easy to maintain and hard to get someone out of that position,” Scott said, adding that, unless there’s a significant event like card re-issuance or compromise, there’s a 98% retention rate for the embedded payment method.

This high retention rate underscores the importance for financial institutions to secure top-of-wallet status, ensuring their payment method remains the preferred choice for consumers.

The Role of Advanced Technologies in Tomorrow’s Embedded Innovations

The future of embedded finance is closely linked with the integration of advanced technologies such as blockchain and artificial intelligence (AI).

Scott emphasized that these technologies play a crucial role in addressing specific consumer needs that are not currently being met. For instance, blockchain technology can facilitate money movement across borders, particularly benefiting underbanked populations.

Meanwhile, AI’s potential in compliance is significant. As financial institutions integrate more embedded finance players, the regulatory landscape becomes more complex. AI can help streamline compliance processes, making it easier and faster to adhere to evolving rules and regulations.

And one of the less discussed but highly significant aspects of embedded finance is fraud prevention. As the integration of various financial services increases, so does the exposure of user data to potential fraud risks. Scott pointed out that managing data sharing and is crucial in mitigating fraud. By analyzing multiple data points, businesses can better understand and verify user identities, thereby reducing fraud incidents. This holistic approach to data management and fraud prevention is essential as the ecosystem of embedded finance continues to grow.

A key strategy for financial institutions and businesses leveraging embedded finance is focusing on niche markets. Scott observed that institutions are increasingly targeting specific niches, integrating embedded finance solutions that cater to those particular segments. This approach often involves acquiring or partnering with companies specializing in niche services, thereby enhancing the overall value proposition for their customers.

Bundling is another strategy gaining traction, he added. Instead of charging consumers for every new service, businesses are adopting a subscription-based model, where a fixed monthly fee includes a bundle of services. This approach not only simplifies billing for consumers, but also provides businesses with a steady revenue stream. By continually adding new services to the bundle, businesses can enhance customer retention and satisfaction.

As the landscape moves forward, the continuous innovation in embedded finance promises to unlock new opportunities and redefine the way we interact with financial services. Whether it’s through seamless payment experiences, targeted niche services or advanced technological integrations, the future of finance is embedded, integrated and increasingly user-centric.