At its core, embedded finance combines two worlds: financial services and digital. Having long been kept apart, their integration opens up vast opportunities for innovation that bring major practical advantages.

Embedded finance allows business models and their related consumer experiences to operate more effectively, for example, by making working capital more efficient or making payments easier.

Embedded finance promises value for customers, embedders, financial institutions, and the larger addressable market.

Let me break it down a little:

Customers

There is huge value for SMEs when they can get better access to finance thanks to the rich data already available on the systems they already use, such as accounting packages or e-commerce platforms. The same opportunity exists for underserved consumers: combining applications that deal with a broader aspect of their lives (such as their mobile phone contract) with new financial services makes these consumers economically viable to serve with more than just basic financial services.

Embedders (those who embed finance into software or platforms)

Innovators who embed financial services into their products benefit in three main ways. Firstly, they have the opportunity to monetise financial transactions that now take place on their platform. Secondly, by enriching their product with new supercharged features, they attract new customers and engage them more deeply. Thirdly, the result is greater retention and value over the customer’s lifetime.

Financial institutions

Embedded finance providers act as a force multiplier for the distribution and consumption of financial services offered by banks. If embedded finance providers enable more businesses, for example, to put more debit cards in people’s hands, the bank that provides the underlying instruments also stands to gain.

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The market potential is large and expanding. Bain & Company expect the US market for platforms and enablers to more than double to US$51 billion by 2026 (in total revenue across payments, lending, banking, and cards from 2021). The transaction value of embedded finance also will surge from US$2.6 trillion to US$7 trillion across the same time scale.

Next, let’s assess where we are now.

Current embedded finance climate

Until recently, state of the art for building Embedded Finance solutions was to use APIs (programming interfaces) provided by banks for, say, creating accounts or issuing cards – this approach is called Banking-as-a-Service (BaaS).

For most innovators, however, BaaS is a heavy lift: implementation times are long, and it requires a hefty investment.

It’s only going to get more complex as regulators increasingly scrutinise the BaaS model. Suddenly it seems that regulators are indeed taking a look.

Concerns were raised by the UK regulator, the Financial Conduct Authority (FCA), to EML Payments, in November 2022 – resulting in EML Payments temporarily ceasing to onboard new customers.

The Office of the Comptroller of the Currency (OCC) in the US recently hinted more regulation is forthcoming to the BaaS space there too. The public filing of an agreement between the OCC and Blue Ridge Bank highlights a firm example of regulators taking action on BaaS models by a specific bank.

While not great news for Blue Ridge, it provides an example map for other fintech and banks in the market and how they can keep on the right side of regulation. Thus, improving and adding additional protection for the end user.

This is why a radically new approach is needed

What if embedding financial services was no more complex for innovators than integrating third-party software? And what if banks had a bulletproof answer to their regulators’ concerns with BaaS.

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To achieve this, at Weavr we are pioneering a different approach to BaaS, which we call ‘plug and play’ because all the technical, regulatory and operational complexity related to the embedded financial services are included ‘in the box’ with the innovator only having to take on peripheral responsibilities. As importantly, all the responsibilities that the bank needs to be taking are also ‘in the box’.

Unpacking what’s in the box

All the facilities, responsibilities and processes that the bank would typically cater for when delivering its own financial products are provided for in a configurable way. This includes:

Customer on-boarding: customer ID verification, screening and risk assessment
Financial data security tools for innovators to operate within data security standards such as PCI-DSS
Components to support the regulatory requirements for strong customer authentication, for instance, through biometrics
Logging of customer acceptance of terms and fees, as well as of any material customer financial activity
Connection to transactional systems and financial systems of record (e.g. ledgers)
Orchestration across multiple financial institutions, financial tech vendors and service providers

Few, if any, innovators that want to take advantage of embedded finance have the appetite to grapple with the above responsibilities. Still, absolving innovators from most of these burdens has to be accompanied by sufficient freedom for creativity and creating seamless customer experiences.

At the same time, the bank (and perhaps more importantly, the regulator) is assured that these sensitive matters are being done to its standards and not outsourced to the innovator who typically neither wants nor can effectively take them on.

Five key principles that plug-and-play finance solutions should adhere

In summary, if we had to propose a ‘manifesto’ for plug-and-play finance, it would include these principles:

Software-only responsibility: Plug-and-play finance solutions should, wherever possible, be no more onerous to implement and run than any other software package.
Abstraction from financial protocols: Plug-and-pllay finance solutions should abstract away details of specific technical protocols associated with (often legacy) financial technology and expose functionality in high-level intentional terms (what, rather than how), such as onboarding a customer, issuing a card, enabling a transfer of funds, while aggregating and encapsulating the many fine-grained sequences of steps, interactions and exchanges of data to achieve them.
Contextual adaptation: functionality and processes offered by Plug-and-play finance solutions – whether related to risk management, compliance oversight, end-customer charges, approval workflows, etc. – should not be one-size-fits-all. They should be adaptable to the deployment context.
Maximum allowed access to financial data and controls: Plug-and-play finance solutions should provide maximum visibility over financial data and maximum control over financial actions as allowed for by (a) data security, end-customer privacy and financial regulation, (b) by the ability for the end-customer to effectively delegate and withdraw access, and (c) the risk of inadvertent or malicious action by the innovator or third-parties to the detriment of the end-customer.
Minimum constraints over non-financial data and controls: Plug-and-play finance solutions should leave it open as far as possible for the innovator to design any aspect of the solution that doesn’t compromise the integrity of the financial solution or bring the innovator into the scope of financial regulation.

The plug-and-play approach changes everything, unleashing the power of embedded finance across a multitude of industries.

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