The Embedded Finance Revolution: Transforming Software Platforms and Marketplaces

Embedded finance is poised to reshape the landscape of software platforms and marketplaces, promising a host of opportunities and innovations. However, despite its immense potential, several hurdles need to be cleared for widespread adoption within the Software-as-a-Service (SaaS) industry.

Luke Latham, General Manager of Australia and New Zealand at Airwallex, and Tom Randklev, Global Head of Product at CellPoint Digital, shared valuable insights with PYMNTS about what businesses should comprehend regarding embedded finance solutions and why they are essential for merchants seeking success in financial services innovation.

Small- to medium-sized businesses (SMBs) often grapple with numerous challenges when it comes to managing and adopting financial services. These challenges range from handling payments and disbursements to dealing with the complexities of multiple payout methods and currencies, along with a lack of automation. Latham emphasized that software platforms and marketplaces, due to their close relationships with customers, are ideally positioned to seamlessly integrate financial services and products into their user experience.

Latham noted, «If you think about an eCommerce marketplace interested in providing credit or loans to their customers, they already have visibility of all the payment flows, which is essential to embedding a robust risk management framework to make that product viable and which positions them to play a leading role in the next phase of the evolution of embedded finance.»

Embedded finance isn’t just about one-click payments; it’s about ensuring security, compliance, and navigating the intricate regulatory landscape. A strong foundation is critical for the success of embedded finance initiatives.

One of the reasons embedded finance is so appealing is that it intersects with the increasing digitization of daily life and aligns with users’ behavioral expectations. Latham pointed out, «Any financial product or service that has traditionally involved a departure from the user experience, or an additional set of activities, is there for the taking.»

Randklev added, «The end user believes [payments are] an expected part of their user experience, and that is the mindset that platforms are needing to respond to.»

However, businesses considering embedded finance must make a crucial decision: whether to buy, build, or partner. Both Latham and Randklev advocate for a strategic approach, highlighting the complexities and costs involved in building financial services in-house and underscoring the importance of finding a reliable partner with expertise in compliance, governance, and financial services nuances.

Latham emphasized that when choosing a FinTech partner, platforms should consider product offerings, geographic coverage, and revenue models. He cautioned against merely trying to catch up without aligning embedded finance with their core competencies and defining key performance indicators (KPIs) and success metrics.

The consensus is that partnering often represents the most efficient and cost-effective approach to entering the embedded finance space when compared to buying or building. Randklev added, «To the extent that [partnering on embedded finance] becomes infinitely successful, then businesses have the ability to build themselves out of that partnership.»

Looking ahead, by prioritizing compliance, forging strategic partnerships, and embracing future trends, software platforms and marketplaces can unlock the full potential of embedded finance, delivering users a seamless and enriched financial experience. Randklev expressed excitement about the possibilities of generative AI in the embedded finance space, while Latham anticipates the integration of advanced AI and data analytics to offer personalized financial products and services tailored to specific industries.

Latham and Randklev foresee continued global expansion of embedded finance, with platforms leveraging these services to reach a broader audience while catering to industry-specific needs.