Embedded Finance and Payments - An update - Thanks to simon-kucher

 In very simple terms, embedded finance is when a non-financial business provides financial service to its customers by integrating financial services into its non-financial products or services.

• Vertical consolidation in the industry as a result of regulatory developments and the rise of e-commerce has increased competition. 
• Customers are now able to purchase goods and services both more easily and from a larger number of providers

Therefore, in an effort to attract and retain individual and business customers, companies are increasingly focusing on the experience of their customers in order to develop a seamless customer journey while providing high levels of service. 

Producers are innovating their customer journeys and value propositions, leading them to realize that payments play a pivotal role in these contexts.

 Leading entrepreneurs have therefore begun to embed payments into their offering – hence the term “embedded payments.” This has also expanded to include a broader set of financial services – “embedded finance.”  

With UberEats, the payment process covers delivery personnel and restaurants. The result is you don’t even have to think about making a payment – all are made directly by Uber to the respective parties. And complexity of more parties in the payments, is getting removed.

Benefits:

1. Higher conversion – Especially in retail and direct-to-consumer industries where competition is intense 

2. Increase in customer satisfaction –Smooth and low-friction purchases keep customers happy, making them willing to pay more for the goods/services 

3. More Repeat Business - Faster transactions make customers more likely to come back

4. Lower churn - Critical with high customer acquisition costs and/or competition

5. More Data -  Insights that can be used to provide more relevant offers and services to the customer, further enhancing the above advantages

6. Additional Revenue Streams - Revenue from these embedded finance solutions products can even surpass the revenues from non-payment finance products (payment revenues contribute as much as 75 percent of total revenues and 55 percent of operating profits) 

Even businesses that haven’t embedded all payments have seen improvements from partial embedding. Those that have deployed solutions such as PayPal Express, Apple Pay, or Amazon Pay have seen a 15-percent improvement in conversion because the payment and shipping information is already available, making checking out smoother and faster.  

What’s more, the benefits aren’t limited to companies and producers. End customers also benefit from an enhanced interaction, purchasing experience, and financial inclusion, as well as more competitive offers. Equally, because companies can negotiate better pricing due to scale, customers get lower prices than they would if they interacted with each party separately. For example, an owner-operated cab might pay a markup of around one percent to its payment processor while Uber pays its processor less than 0.05 percent. 

A compelling example of customers benefiting from embedded payments is turnover-based financing for merchants. With a clearer overview of the merchant’s daily turnover, a payment processor can make better-informed decisions on lending and recover funds more easily by retaining a share of the processed funds. This is a blessing for small merchants that may not have access to working capital from formal lending institutions and/or must pay much higher interest rates. 

B2B: Why the Pain? - Thanks to Glenbrook

 B2B payments keep commerce moving, but B2B transactions can be incredibly painful for both senders and receivers.

• What makes B2B transactions so difficult, even as digitization transforms other business processes and areas of the payments world? 
• And What technologies are helping finance teams improve their B2B payments experiences?

 The payment piece of B2B payments is relatively simple; the hard part is data.

Understanding the B2B Context

Commercial activity requires businesses to pay each other on an ongoing basis. Businesses are constantly sending and receiving payments from their customers and suppliers (generically, their counterparties). Some of these transactions are straightforward and akin to C2B transactions: think of your team buying whiteboard markers on a company card, for example. But about half of B2B transactions are invoiced transactions made on credit. This is a unique, distinctly not consumer-like transaction type rife with data challenges, colored by tension between Accounts Payable (AP) and Accounts Receivable (AR) departments… and ripe for improvement.

We think of invoiced B2B transactions in terms of what we call the “financial supply chain.”* This is the end-to-end view of a B2B transaction, from purchase order to invoice, payment, and reconciliation.

The underlying reason for this is that information related to the transaction is exchanged between counterparties leading up to and alongside the transaction, and this information might change between stages of the financial supply chain… or be disputed by the other party. This exchange of data is generally manual and can lock up liquidity as it drags on.

From PO to Invoice…

This data exchange begins with the purchase order, or PO. When a buyer makes a purchase, they send a PO to the supplier explaining what they would like to buy and detailing the credit terms of the transaction. Think of this as the first data element that is passed between the buyer and supplier. Suppliers ingest the PO and fulfill the order. In the back office, order fulfillment is translated into the creation of an invoice describing the order that will be provided to the buyer. 

This is the first opportunity for the data challenge to manifest. The invoice might not represent the same products and services as what the buyer ordered. The supplier’s warehouse may have run out of the buyer’s preferred material, or the purchase may have been negotiated by both parties after PO receipt. Then, the order is fulfilled and invoiced. 

…to Payment and Reconciliation

The next step in the financial supply chain is payment. As we mentioned earlier, payment is generally simple. But the payment must be accompanied by information describing what the payment is for. This is referred to as the remittance detail. Confusion alert: you may hear the term “remittance” used elsewhere in the payments community to describe international P2P payments, such as those made by a worker in the US to their family at home in another country..

This is the next step where a “data mystery” may emerge. The remittance information may not match the information included in the invoice, which may not match the PO. 

So what can organizations do?

The first step is digitization. A startling one in three B2B payments are still made using paper checks in the US and Canada, according to AFP. Even when businesses transact using electronic payment instruments, data might travel via paper or PDF. Getting that information into a machine readable format as early in the transaction lifecycle as possible allows businesses to more effectively manage their payments experience. Digitization opens the door to automation: with AP and AR software can use data elements in the PO, invoice, or payment itself to make business decisions.

Automation in turn opens the door to machine learning. As you continuously ingest data and make decisions using digital information (rather than your own AP/AR acumen or intuition), you can inform machine learning models that begin to predict common issues and corresponding solutions. Think of this as the computer learning from the exception queue.

For example, one supplier might always send you an invoice with an unusual date format. After seeing your AP clerk manually adjust this, your AP software tool can learn to make this change on your team’s behalf.

On the AR side, machine learning can also help predict which customers are more or less likely to pay on time, helping your treasury team better predict cash flow. 

New standards and systems

But despite all these positive possibilities, it might strike you that automation and machine learning are band aid solutions that do not address the root causes of B2B pain. We view automation and machine learning as exciting innovations that meaningfully reduce the pain of B2B transactions, but we are also interested in the opportunity presented by emerging standards, namely ISO 20022. Put simply, ISO 20022 is a format for financial messages that aims to make such messages machine readable. In the ideal world, messages created by one software system can be read by another software system on the opposite side of the transaction and will include all necessary information to tie payments to invoices, even where there are differences between the two. ISO 20022, is employed by many fast payment systems; as fast payments mature in the U.S., we look forward to seeing the impact of ISO 20022 on B2B transactions. We’ll explore what we think this impact will look like in our next B2B Payments Views post.

Aim for incremental improvements

In the meantime, B2B payments will move incrementally towards better outcomes for buyers and suppliers as they continue to adopt software solutions that improve their process efficiency. The B2B space is huge, complex, and slow-moving; we do not expect a single provider or network to solve the problems of the entire ecosystem anytime soon. But between new technology and new standards for future technology, we are hopeful that finance teams will feel less pain from B2B transactions.

*Not to be confused with supply chain finance, or reverse factoring

How does Mastercard 𝐌𝐞𝐫𝐜𝐡𝐚𝐧𝐭 𝐐𝐑 𝐜𝐨𝐝𝐞 replace PoS (Point of Sale)?

 The diagram below shows how Mastercard MPQR (Merchant Presented QR) works. There is 𝐧𝐨 𝐏𝐨𝐒 𝐭𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐨𝐫 𝐩𝐡𝐲𝐬𝐢𝐜𝐚𝐥 𝐜𝐚𝐫𝐝 involved.

Step 1️⃣: The merchant presents its QR code at checkout. 
There are 𝐭𝐰𝐨 𝐭𝐲𝐩𝐞𝐬 of QR codes:

- 𝐃𝐲𝐧𝐚𝐦𝐢𝐜: the code is generated for each transaction and includes the payment amount

- 𝐒𝐭𝐚𝐭𝐢𝐜: the code is used for all transactions

Step 2️⃣: The customer scans the QR code using a mobile app and confirms the payment.

Step 3️⃣: The payment app sends transaction data to the transaction originator to initiate MPQR payment.

Step 4️⃣: The transaction originator debits the customer’s account in the customer’s bank.

Steps 5️⃣ and 6️⃣: The transaction originator sends a payment request to the Mastercard network. Mastercard routes the payment request to the merchant’s bank.

Steps 7️⃣ and 8️⃣: The merchant’s bank approves or declines the request. If it is approved, the merchant’s bank credits the merchant’s account.

🔹 Steps 9️⃣ - 1️⃣1️⃣: The payment response is sent back all the way to the mobile app.

How to Evaluate CORE Banking Platforms?

 

Payment Facilitation Eco System

 

Merchants register with a payment facilitator and give basic company data, like their legal name, tax identification number, and banking information. The payment facilitator conducts a risk assessment on merchants.

Merchants will be accepting payments using the payment facilitator after they have been approved. Payment facilitator gathers transactions from several merchants and deposits them into a single account.

After deducting fees and other costs, the payment facilitator settles the funds into the merchant's bank account, usually on a daily or weekly basis.

Embedded Finance in Payments - Thanks to Whitesight

Over the past years Payments have been disrupted and transformed like NO other business in financial services. Embedded Finance is now triggering a new metamorphosis, changing the name of the game across the entire value chain.

As traditional payments have been ceding market share to online and software-led channels, players like Stripe, Block (ex Square), Adyen or PayPal have taken a dominant position.

Dominant players are pursuing a multi-level strategy

1) They drive their ecosystem play 

2) They strengthen profitability (increase net take rate and alternative monetization) though payments is NOT a profitable business in EU (not like US :) )

3) They diversify their revenue model 

4) They lock-in businesses not on price but on value-added. 

This is one of the many ways in which embedded finance is completely transforming business and financial services as we know them.

 It is not just about processing (or acquiring) anymore, but about end-to-end merchant propositions that extend to all kinds of merchant needs.

In this direction, players (like adyen, paypal, stripe), provide now an additional connecting layer between the payments’ infrastructure and their merchants, acting as an indispensable partner that embeds additional offerings (Lending, issuing, payroll, treasury, tax and Insurance are value-added services (VAS)) into an ECOSYSTEM, that drive differentiation and retention.

Adyen & Stripe for Platforms offers the main functionalities that a platform might need

- Onboarding, payment processing, payouts, 

- Packaged into a customizable, 

- Out-of-the-box solution together with issuing, capital and account embedded finance capabilities

Platforms and marketplaces are clearly the business model to dominate business and finance, now and in the future. 

If Banks, FIs can offer their market participants not only payments but also onboarding, payouts, cards, accounts, fraud management, lending – based on their transactions that process – and a dozen of other services that not only make customers life easier but also help Banks, FIs to generate more business.

Largest US Banks

 

Cards Issuers in EU Countries

 

US cards and payments market size is valued at $9.6 trillion in 2022