The Complete Embedded Finance Primer: Strategies, Examples, and Revenue Models

When I introduce myself as an Embedded Finance advisor, I always make the same joke: I only work on Embedded Finance projects. Luckily, everything is Embedded Finance, so I don’t have to decline any projects 🙂

Indeed, the term Embedded Finance is often misused or misunderstood. However, it is not always easy to determine whether a certain product is embedded in finance, and even solutions that are not directly Embedded Finance can still be relevant to the ecosystem. That being said, I believe it’s important to understand the foundation and players in the space. Thus, I wrote this Embedded Finance primer document to explain the industry and answer the most crucial questions about Embedded Finance I encounter daily.

Table of Contents

• How do you define Embedded Finance?

• Which financial products can be embedded?

• Has Embedded Finance reached a tipping point?

• What makes an Embedded Finance product great?

• Which companies are building Embedded Finance products?

• How can you make money with Embedded Finance?

• How can you build an Embedded Finance product?

How do you define Embedded Finance?

At its core, Embedded Finance combines the financial and non-financial worlds. Every financial activity (e.g., a card transaction, applying for a loan, or signing up for insurance) is directly connected with a non-financial one (buying a coffee, a house, or a car). 

Without Embedded Finance, we typically start with a step in the non-financial world; then, we have to switch to the financial world before continuing our journey on the non-financial side. This switch could be walking to a bank branch, calling the bank, or opening the banking app on your phone. These are all steps where you leave the non-financial brand to interact with the financial world.

With Embedded Finance, this switch is no longer necessary. You can perform financial and non-financial activities directly within the same service. Promoting and using financial services at the point of need reduces context switching for the user, making their search and selection process more efficient. As a result, they are likely to receive a better-fitting product.  

While this may sound straightforward, reality can be more complicated. I use the following requirements as a guiding hand whenever I am uncertain whether a product is Embedded Finance. An Embedded Finance product needs to

• be offered by a brand,

• be seamlessly integrated into the customer journey

• create new financial products

These characteristics are essential for distinguishing Embedded Finance products from three adjacent areas: vertical Fintech, co-branded cards, and open finance.

Embedded Finance vs Vertical Fintech

To qualify as an Embedded Finance product, a non-financial brand must offer it. Simply put, Starbucks or DHL can offer an Embedded Finance product, not HSBC (bank) or Revolut (Fintech). However, it is easy with brand names like these; it gets more complicated when we enter specific niche industries.

For example, AtoB offers a product specifically targeted at the logistics industry. Some might argue that this is an Embedded Finance offering due to the industry focus and offering of non-financial features. However, looking closely, you will see that AtoB is a vertical Fintech company. These companies focus on specific verticals and may offer some small non-financial features, but their core products and messaging are all about Fintech products. My rule is that when a company uses its financial products (e.g., cards, accounts, etc.) in its core product messaging, it is Fintech, not an Embedded Finance product.

Technically, banks could also offer an Embedded Finance product while embedding non-financial features into their product offerings. While this is theoretically possible, we see very few banks doing it. This is because most banks have a very diverse customer base, and potential non-financial features (e.g., industry niche ERP tools) are only suitable for a small sub-segment of their overall customer base that does not justify the technical efforts to build it.

Embedded Finance vs. Co-branded Cards

Partnerships between companies from the financial and non-financial worlds are common. However, only those products that are seamlessly embedded into the customer journey create the Embedded Finance magic.

Let’s take co-branded credit cards, for example, from Amazon or your favourite airline. I don’t consider them Embedded Finance products because the connection between financial and non-financial offerings is weak. While you can collect points and rewards with the card and redeem them while using the main product, the connection remains poor. Two applications, usually with two separate accounts and login credentials, require dual monitoring to perform various tasks. Co-branded credit cards tend to be the child of two very different parents, a non-financial brand and a financial institution, and this is very obvious to the user. Don’t misunderstand me; some co-branded cards are extremely popular and profitable. That being said, I would assume that with rising competition for proper Embedded Finance products and Fintech products with similar cashback features, co-branded products will face more challenges in the coming years (especially new ones).   

Embedded Finance vs. Open Finance

When non-financial brands integrate financial features, they can create new financial products for their customers (=Embedded Finance) or connect them to existing financial accounts (=open finance). While there are some similarities between the two concepts, there are also many differences. Open finance is excellent for some use cases, but most of the benefits of Embedded Finance cannot be achieved with open finance. Many banks do not have excellent APIs, which results in a negative user experience. Additionally, you can only retrieve some data and access some functionality via open finance. This is much less than what you can offer your users when you have created a new financial product for your customer in the first place.

Which financial products can be embedded?

Finance is an umbrella term that aggregates various types of financial services. Therefore, Embedded Finance refers to any financial product in a non-financial customer journey. While there are many flavours in between, I would argue that precisely five financial products can be embedded: payment, banking, lending, investment, and insurance.

Before discussing them in detail, I want to emphasise that the proper wording is essential. When using the term Embedded Finance, you refer to all five products. This makes sense when we discuss Embedded Finance at a high level, as I do in this blog post. However, I would always advise being specific. So, when you, for example, discuss a banking product being embedded, use the term embedded banking rather than Embedded Finance.

Payments

Defining embedded payments is the hardest of the five financial products. Every business must accept money, so this cannot be the criteria. Therefore, I define a payment as ‘embedded’ when the non-financial brand generates additional revenue by accepting it. A typical example of revenue-generating payment products is platforms that handle payment flows for their customers and partners. These platforms typically enable their business customers to accept payment from their customers.

Examples:

• Shopify: Shopify provides e-commerce companies a tech solution to launch and scale their businesses quickly. With Shopify Pay, merchants can easily accept payments, and Shopify earns with every transaction. 

• Toast: Toast provides payment products for restaurant businesses. Its core products are devices for restaurant staff to take orders and perform other restaurant-relevant activities. With integrated payment capabilities, the server does not need another device and can take payments from guests directly. 

• Mews: Mews offers a SaaS product for the hospitality industry. Its payment product allows hotels to accept online or offline payments from customers.

• GoDaddy: The domain registrar GoDaddy supports its customers with features to launch and grow their business. This includes payment acceptance, especially in the offline world.

Banking

Embedded Banking describes use cases where a banking account or card is embedded into a non-financial experience. The most straightforward examples are non-financial brands that offer a full-fledged banking product to their users. This could be a bookkeeping tool or a vertical SaaS. However, an Embedded Banking product can consist of only a card or an account. The card can be a prepaid, debit, or credit card, virtual or physical.

Examples:

• Lexware: Lexware is a German bookkeeping and invoicing provider that launched a full-fledged banking product, including accounts and cards. 

• Agicap: This French SaaS company offers financial planning and forecasting services and has launched a full-fledged banking product. 

• Ben: Employee benefits providers enable employers to transfer limited tax-free benefits to their employees monthly. Different methods exist, but a common approach is using a card product that employees can use for relevant transactions.

Lending

When a consumer or business can obtain financing products from a non-financial brand, we consider this embedded lending. Technically, any lending product can be embedded, meaning many different shapes and forms of embedded lending exist. The most common ones are working capital financing for SMEs and BNPL.

Examples:

• Restaurant platforms: Companies like Wolt or JustEats connect customers with local restaurants for food delivery and offer lending products to restaurant owners.

• E-commerce platforms: Companies like Shopify, Amazon or Ikas offer lending products to merchants. 

Investment

Embedded investment tends to be the least developed financial product in the embedded world. This is likely because investment products are so strongly connected to financial services that many prefer to deal with them at a financial service provider (offline and online) rather than with a non-financial brand. That being said, we are also seeing the first changes here, and there are some areas where even non-financial brands can succeed.

Examples:

• Energy provider: A German energy company offers an embedded investment product in addition to the standard energy subscription. This allows the consumer to use the funds if an additional payment is necessary at the end of the cycle (See our podcast with Evergreen).

• HR or payroll provider: These companies can offer their employees a new savings or investment product, often for retirement purposes (e.g., payroll provider Gusto with its retirement planning products).

Insurance

Insurance products differ from the other financial products we see in Embedded Finance. The most significant adoption of embedded insurance is within e-commerce and travel portals, which offer protection for goods or persons when paying for the main product. Embedded insurance differs from other embedded products because the companies embedding it vary greatly. You don’t often see a provider offering embedded insurance or another Embedded Finance product.

Examples:

• Rental platforms: Companies like Home2Go that allow property owners to put their homes onto a rental platform have integrated an insurance product to protect the homeowner.

• Pet insurance: Pet retailer Fressnapf offers pet insurance in its stores to pet owners. The policy covers the pet's life cycle, not just food and toy-related purchases.

Why do I limit the financial products that can be embedded to five? Firstly, the five financial products above are very broad. When somebody argues that we need a new crypto, DeFi, and/or stablecoin category, these can be added to the existing categories as they are just vehicles. For example, a stablecoin used for FX belongs to payments, Bitcoin for investments belongs to investments, etc. Secondly, some people want to add other products that are not financial, such as accounting and taxes. These products can be embedded and create magic similar to Embedded Finance. However, as they are not standard financial products, I would take them as separate embedded products, not Embedded Finance.

Has Embedded Finance reached a tipping point?

The Embedded Finance industry has grown rapidly over the past few years. While Embedded Finance has been around for decades (remember the loan at the car dealerships is also Embedded Finance), only around 2019/2020 have we seen substantial growth in the industry. I would say there are a few reasons why Embedded Finance is happening now and not 10 years ago:

1. Fintech adoption: This article makes strong points about the difference between Embedded Finance and Fintech. However, the rise of Embedded Finance is built on previous Fintech movements. With the rise of Fintech, consumers have started using new brands for their financial service activities, which has resulted in a shift in consumer mindset: You don’t need a traditional bank to perform banking activities. Various Fintech-friendly initiatives, regulations, and developments strongly supported the Fintech wave, benefiting Embedded Finance.

2. New infrastructure provider: Banking-as-a-service and other infrastructure providers existed before Embedded Finance emerged. However, these providers also learned that serving Fintech companies alone is insufficient. The usual saying is that a neobank that uses a banking-as-a-service provider either goes bankrupt or gets its own licence. However, even big non-financial brands often try to avoid regulation and partner with a regulated infrastructure provider. When the market realised this, the infrastructure provider shifted heavily and catered towards non-financial brands.

3. Digital platforms and vertical SaaS: Many companies can embed financial services, but digital platforms and vertical SaaS companies are much more likely to succeed. Their rise in the past few years was necessary for more substantial Embedded Finance adoption.

4. Success stories: The prominent role models in the Embedded Finance ecosystem started well before 2019/2020, but their success stories emerged around that time. The industry needed these role models to inspire the next generation.

5. COVID-19: This was not necessary for Embedded Finance to grow; nevertheless, many non-financial brands heavily accelerated their financial product offering during the pandemic, as traditional banks could not adopt that quickly (e.g., unable to visit a bank branch). 

What makes an Embedded Finance product great?

I talk a lot about success stories in Embedded Finance. But make no mistake—many companies fail at it. I have been covering them in my weekly newsletter, most recently Metro FS from Germany and Bukalapak from Indonesia. You will not be surprised to learn that there is no blueprint for succeeding in Embedded Finance. It requires much hard work and investment—time and money. That being said, there is something that every non-financial brand should aspire to when building an Embedded Finance product.

Create magical customer value

The best Embedded Finance products are not financial and non-financial products offered next to each other but ‘one’ product. The equation in the image below explains this. When a non-financial brand embeds a financial product (customer value of 1) into a non-financial product (customer value of 1), the combined customer value of the two products (3) should be greater than the sum of its parts.

This may sound philosophical, but let's be clear: If a non-financial brand develops an outstanding financial product but does not integrate it well into its core product, it competes with banks and Fintech companies equally. However, the non-financial brand should offer a product that is not comparable to an existing offering from the financial service industry. Ultimately, choosing the non-financial brand's financial product should be a “no-brainer” for many of the core product's users. 

Therefore, the non-financial brand still needs to build a great financial product, but it also needs to invest as much time and effort as possible in the intersection of the two products. This depends on the core product, the customer's pain points, and current workflows.

Don’t embed it because you can

Many of the non-financial brands that fail with Embedded Finance products have not been able to achieve this magical customer value. In some cases, the companies did not even aspire to do so. I know of a few examples: the brands build the Embedded Finance product because “they can”. Other non-financial brands believe their reputation and customer loyalty are so strong that customers will run to them once they offer financial services. However, in many cases, customers can choose from a wide range of financial service providers, and the brand itself is not the driving factor. What matters are great products. Thus, companies that succeed with Embedded Finance start with the customer and their problems, and they don’t build Embedded Finance products because they can.

Which companies are building Embedded Finance products?

My weekly newsletter covers many non-financial brands building and launching financial products, from consumer-focused offline retailers to B2B software providers. Because each company and its customer pain points differ, there is no hard rule about which company should launch an Embedded Finance product and which should not.

That being said, I have noticed that some companies have it easier to launch such products. A company that fulfils all of these requirements is typically ideally positioned.

• B2B solution → Both B2C and B2B companies can launch Embedded Finance products. However, B2B companies often have it a bit easier. First, it is much easier to create ‘magical value’ for businesses as they already use various other software where finances play one role. Second, building a positive business case in B2B is easier, as businesses are more willing to pay for services because of higher financial kickbacks (see “How to make money with Embedded Finance” below).

• Core product touches finance → An invoicing tool is likely better able to convince users to open a bank account with them than a CRM tool. In other words, creating magical customer value is easier if finance already plays a role in your current offering.

• Data-rich offering → When a non-financial brand wants to offer a lending product, selecting the right borrowers is key. If the non-financial brand (in cooperation with other partners) uses the same data as any bank, it will have difficulty building a better product than banks (banks are good at underwriting). However, if the lending offering from a non-financial brand can leverage unique data from its core product (e.g., customer feedback for the business that is applying for the loan), then this will help them to differentiate.

• Sticky product → When a product is ‘sticky’, the user returns to it regularly. Financial activity has a stickiness (e.g., checking account balance regularly) and is efficient for the user if these two happen in the same tool.

Since these four points are not rigid requirements, it’s probably better to say that any company that fulfils them should consider launching a financial product. However, that does not mean that a company that does not fulfil all of these requirements should not launch a financial product.

How can you make money with Embedded Finance?

An Embedded Finance product succeeds when the user and the non-financial brand gain something. No company embeds financial services for its own sake but for a reason. I would argue that any of these reasons ultimately means higher revenue and profit for the company. But if we want to split them into one stage before, I would separate them into:

• Attract new customers → Combining non-financial and financial offerings attracts new customers who previously did not use the non-financial offering alone.

• Reduce churn → The magical value and stickiness of financial products (e.g., changing your bank account is hard) can help non-financial brands reduce the number of users who leave the product for a competitor.

• Increase revenue per existing customer → The two points above positively affect the number of customers. In this case, the number of customers stays the same, but the revenue per customer increases. I would argue this is the most crucial point for non-financial brands, so let’s look at this closely.

Direct charging

Let’s start with the most obvious: A company can charge an additional fee for using its product whenever it launches a new one. This could be a monthly fee for a bank account. It is not more complicated than that.

However, it should be pointed out that charging for financial services is not always easy. Many customers expect no or very low fees, and a new product with a higher cost than existing products might have difficulty gaining traction. Secondly, there are significant distinctions between various financial products. Therefore, some non-financial brands charge for their financial products, but it’s rarely the biggest revenue channel.

Kickbacks

Instead of charging directly for a financial product, non-financial brands can generate revenue from kickbacks. There are different examples, but interchange revenue from a card product stands out. If a non-financial brand offers a card to its users, it can make money from every transaction. If a person buys a coffee from a local café, the café will pay a certain percentage of the transaction as a fee to its payment provider. This fee is split among different providers. A portion of this fee, Interchange, is a kickback for the bank issuing the card. The interchange encourages banks to offer cards to their customers. The interchange always goes to the regulated institution that issued the card. That said, most non-financial brands have negotiated an interchange split between themselves and the regulated card issuer.

It depends on the exact product, market, and regulation whether interchange or other kickbacks can be a relevant revenue source (e.g., the interchange for consumer cards in the EU is capped). 

Data insights

The first two revenue opportunities were rather obvious. Let’s go deeper and discuss how data insights can increase revenue for non-financial brands. A company launching its first financial product can gain additional valuable user insights. But how can we leverage this to boost revenue? For example, a retailer offering their own card product to its customers can gain detailed insights into where and how much their customers spend at their stores versus competitors. These insights can be of very high value, as the retailer can adjust promotion, pricing, and loyalty products accordingly. If the card-using customer base is a good representation of the overall customer base, the positive impact can be significant - but it might be hard to measure.

Increase in the usage of the core product

If you analyse the most successful Embedded Finance companies, you will realise they all achieved significant growth in their core product. The most obvious example is when marketplaces and digital platforms launch lending products. Yes, these companies will charge directly for a loan, but the most significant impact is elsewhere.

If you research why Shopify launched the Shopify Capital product, you will realise that Shopify didn’t want to offer lending products. However, almost every merchant using Shopify cited cash flow constraints as one of their biggest growth challenges. A company like Shopify can grow in two ways: onboard new customers or help existing customers grow. While launching Shopify Capital, many merchants could buy and sell more inventory. These additional sales on Shopify will lead to more revenue for Shopify (e.g., their payment product). Many non-financial brands offering lending products have created a flywheel, which puts the company on another level.

For some companies, revenue from financial services might not be relevant today. But make no mistake: Some companies profit from financial services, even though you did not know they offer financial products.

How can you build an Embedded Finance product?

Building a great Embedded Finance product is extremely difficult. On the one hand, a non-financial brand must create magical customer value and make money (at least in the long term). On the other hand, resources are limited, and the capabilities of relevant providers will impact the product offering.

The initial Embedded Finance product from a non-financial brand will never be perfect, but it needs to be good enough to get the company to the next stage. So, non-financial brands need to have a plan, not just for what the perfect product looks like but also for how it can grow from MVP to the next iteration without losing internal leadership support.

The graphic above shows a typical journey of a non-financial brand while building its first financial product. All these steps are crucial and can be further analysed, but I would like to focus on the provider selection process.

In most cases, a non-financial brand can opt for an easy, medium or hard approach. Each approach has its pros and cons. My general advice is that the hard and, in some cases, even the medium approach, should only be considered if there is a high confidence that the product and setup will work. Most companies, especially those with limited experience in financial services, should opt for the “easy” approach. This means working with one provider that covers (almost) all necessary requirements, for example, a banking-as-a-service provider, if the non-financial brand wants to launch a banking product. Remember, there are still significant differences between providers from the same category (easy, medium and hard).

I am managing a list of European infrastructure providers that I use for my consulting activities. At this point, I don’t want to publicly share it, but feel free to reach out if you are interested. Looking at my newsletter coverage, the following names are some of the key players in Europe (in alphabetical order):

Payment → Adyen, Mollie, Stripe

Banking → Enfuce, Marqeta, Modulr, Solaris, Swan, Thredd, Weavr

Lending → Banxware, Liberis, Silvr, Youlend

Insurance → Cover Genius, Embea, Hepster

Investment → Lemon Markets, Seccl, Upvest, Wealthkernel

Conclusion

Embedded Finance is a jungle, and new people joining the industry often have difficulty understanding the full details. This post probably did not answer every question, but I hope it gave you a good introduction and insights.

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PS: The graphics in this article are from my 29 slides Embedded Finance Intro Deck. As a free subscriber, you can download and re-use these graphics any way you like.