Embedded Finance to Embedded Treasury: Are Corporates Ready for the Transition?
Embedded finance is the practice of integrating financial services within non-financial platforms and services with the objective of delivering the financial service at the “point of need”. In the not-so-distant past, accessing financial services such as payments, lending, and investments required either a visit to the bank or a redirection to a financial services provider’s portal or call center. With digital transformation driven by software platforms, software enablers, and banks, financial services can now be seamlessly integrated, or ‘embedded’, into non-financial services contexts. This is revolutionizing the way financial services are delivered and consumed. Payments is the most prominent of all embedded financial use cases for customers.
While embedded finance and by extension embedded payments are more commonly talked about in the context of consumers, it is increasingly gaining prominence within the B2B context. According to 2021 estimates from Bain, B2B payment volumes amount to $27.5 trillion, with Accounts Payable and Accounts Receivable representing 90% of the value. This volume is expected to reach $33.3 trillion by 2026. Embedded payments accounts for a low single-digit share of B2B payment volumes. B2B embedded payments are expected to quadruple from $0.7 trillion (2.5% share) in 2021 to $2.6 trillion in volume (7.8% share) in 2026. ACH accounts for the majority of embedded payment volumes, with a small fraction coming from cards. This transition is becoming increasingly possible with the rise of open banking and APIs that enable the seamless embedding of financial services in business systems and processes.
Before APIs, embedding financial services directly within existing business processes was complex. For instance, embedding payments from one bank into a business’s ERP could take anywhere from 6-8 months or longer. This long time-to-market was a result of many complexities (e.g., multiple ERPs, customizations, need for specialized resources or lack thereof). The onboarding time and investment required to embed financial services often outweighed the benefits. This was even more complicated for mid-market and enterprise businesses with multi-bank relationships.
The rise of software enablers utilizing the Software-as-a-Service (SaaS) model has been critical to delivering embedded experiences. These embedded finance solutions began by enabling payments and other financial services into business processes using host-to-host connections, diminishing the role of traditional bank portals. To enable truly embedded experiences, APIs are increasingly becoming available from banks and software enablers.
Banks in the US and other geographies have made significant investments in APIs. In Europe, regulations such as PSD2 have aided this transition, while in the US, it has been market-driven. Banks’ motivations include reducing complexity, improving agility, enabling partners, ensuring regulatory compliance, and driving innovation. Over 75% of these APIs are for internal use, with the remainder intended for distribution purposes via partners or developers. Partners act as enablers saving corporations the time and effort in dealing with disparate API implementation across banks. With seamless access to multiple bank APIs via partners, corporates are empowered to automate downstream treasury or other non-treasury business processes in alignment with the organization’s operational goals.
Consider a scenario where a treasurer and a treasury payment analyst discuss an urgent payment to a counterparty using their organization’s internal messaging platform (e.g., Microsoft Teams). Traditionally, this would require the analyst to access another system (i.e., bank portal or TMS) to initiate, approve, and release the payment. The power of open APIs now enables such requests to originate, be approved, and released within the context of the messaging system, providing real-time visibility into the account’s beginning and ending balance. There is no reason to switch context as the whole process can be executed securely within the context of the messages being exchanged by treasury professionals. This example captures the essence of embedded finance as payments, a financial service, is delivered efficiently and seamlessly at the point of need i.e., conversation over a corporate messaging platform.
APIs can also act as a catalyst for upstream or downstream process / system modernization. For instance, an existing system (e.g., a web portal) that may be supporting a slow FTP based legacy process for managing intercompany loans can be modernized without having to rip and replace the entire system. With APIs, the same system can process real-time requests for intercompany loans and stay in sync with the treasury management system.
Embedded Finance to Embedded Treasury
The rise of embedded finance and the adoption of APIs are transforming the way financial services are delivered and consumed. With the help of software enablers and banks, businesses can now seamlessly integrate financial services into their existing systems and processes, improving efficiency and reducing complexity. Those that embrace this trend are likely to enjoy a significant advantage in the years to come. Corporates should consider adding APIs to their transformation strategy and should proactively speak with their bank / provider to explore the possibilities.
If you are passionate about the future of embedded financial services, and are attending the upcoming NACHA April event “Smarter, Faster Payments 2023” in Las Vegas, I will be joining a panel discussion on the topic of “Maximizing Embedded Payment Experiences Through Integrated Partnerships”. Join me there and let’s connect!