Lets talk the future of embedded payments

Fans of embedded payments say they’re the future: financial services working in the background, or “embedded” in other commercial functions.

For some time, developments in technology have been making payments of all kinds easier, faster and cheaper – if not always safer.

Industry visionaries imagine a future in which everything from banking to mortgages and insurance become embedded – thence the name – in other activities such as web browsing or product selection.

Seen as the first step towards a fully “embedded finance” future, are embedded payments really happening, or is this just open banking under another name?

From hype to happening 

Cornerstone Advisers estimate that embedded payments are currently used for around $16 billion of transactions worldwide.

That includes things like Uber, where payment is deducted from a user’s account on completion of a ride, and Apple Pay, Google Pay or Amazon one-click.

By the strictest definition, those last examples aren’t really “embedded payments”, since they involve a click for payment and some form of user engagement via biometric authentication.

However you define them, Cornerstone Advisers say embedded payments are about to explode, with transaction values growing almost ten-fold in the next three years to hit $140 billion.

According to Olivier Ottavi, Payments Expert at PA Consulting, that’s down to huge growth potential in the B2B sector: “payment processing is being integrated into accounting software to simplify bill payments.

Open Banking democratised access to payment rails through standardised APIs. A partnership between Crezco, a UK fintech, and Xero, the software company, exemplifies this trend.”

Away from back-end processes, logistics is another huge opportunity for embedded payments.

Here, confirmation of delivery also serves as approval to pay – a digital version of the old “cash on delivery” arrangement that can be combined with e-receipts and e-invoicing for a smoother, faster and cheaper process.

Falling out of bed? 

So far, this sounds like a no-brainer for payers and payees – if not, necessarily, for intermediaries and banks.

After all, as digital wallets proliferate, we’re likely to see far more peer-to-peer transactions, wallets with greater power – think credit lines, insurance and more via wallet – all of which could erode the number and value of transactions run through banks and networks such as Visa and Mastercard.

In this context, it’s clear that some actors may be less incentivised than others to see embedded payments become a success.

Johannes Kolbeinsson, CEO of Paystrax, says that in any case there’s still work to be done to smooth out the “tedious” process of flipping between platforms and services in Open Banking, a process which can still involve numerous stages of re-authentication.

Kolbeinsson’s comment in fact throws up one of the banana skins for embedded payments – authentication.

Rob Straathof, CEO of Liberis, a platform that provides small businesses with loans and working capital, agrees that Know-Your-Customer (KYC) and authentication processes are going to come into focus, especially as new payment methods that make embedded payments easier gain ground.

“KYC and authentication have to be top-notch”, says Straathof. “At present, many forms of payment are not really instant and as we get to new forms such as variable subscriptions and recurring payments, authentication is only going to become more important.”

Regulators waking up 

Despite the importance of strong authentication to success, as yet regulators do not appear to fully appreciate the risks involved with instant payments that happen without direct intervention from the consumer.

In the event that fraudsters were to successfully take over a consumer’s account set up for embedded, the losses could be significant.

To some extent, the UK’s Confirmation of Payee (CoP) regulations, introduced in 2019, reduce the risk of consumers paying to unrecognised entities or criminal mule accounts, while the EU’s PSD3 promises to strengthen existing authentication requirements into the instant payment space.

That said, a 30% rise in the level of fraud associated with authorised push payments (APPs) during the pandemic for things like meal deliveries shows that there’s more work to be done.

PA Consulting’s Olivier Ottavi comments: “Impending regulations, set to take effect next year, will primarily impact Payment Service Providers (PSPs) and shift liability away from consumers towards banks for transactions where the customer is a victim of fraud.”

“An upcoming liability shift could see banks liable for millions of pounds of losses.”

Ottavi notes that this liability shift could see banks liable for millions of pounds of losses, and that banks could become more cautious about implementing embedded payments as a result – or reintroduce some of the dreaded friction embedded payments were designed to reduce.

Of course, there are other ways around this, such as the use of rich transaction data to identify high-risk transactions, or combining transaction data with automatic device confirmation to cut fraud risk.

Banks are also introducing Transaction Risk Indicators, similar to those used for online card payments in EMV 3D Secure, for Open Banking payments.

Bedding-in the consumer 

One final hurdle for embedded payments is consumer comfort and familiarity.

Just as research from Visa claimed that two-thirds of Americans prefer using cards because they understand them, so consumers may be slow to warm to the idea of picking a dish for delivery online, then having their bank account debited with no further action on their part.

As the innovation cycles in payments grow shorter, and consumers are confronted with a plethora of new payment methods, it may be time to catch our breath – on the retail side, at least.

In B2B payments, the advantages of combining delivery and payment or automating accounts receivable (AR) with embedded payments are obvious, and look far more likely to book stratospheric growth in the near term given the lower number of actors involved in the process, and the relative ease of confirming a company’s identity during a transaction.


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