Are ‘embedded payments’ ready for their big payoff?
Embedded payments have caught on in a big way for some use cases. But are banks, consumers and businesses really ready to overhaul the way we pay?
This is an excerpt from AltFi Research's Embedded Finance: The New Frontier Of Lending report, which is available for free here.
Payments were the first aspect of finance to be embedded, as eCommerce rapidly moved away from lengthy checkout processes and towards One Click and Buy Now payment. Amazon and PayPal pioneered the field, and Apple and Google pushed it further into the mainstream when their wallet services were introduced in the earlier part of the last decade.
But where are embedded payments going next? Will typing in your card details soon seem like a thing of the past? Or could embedded payments adoption be bottlenecked, at least in the short term, by financial institutions or technical limitations? And with it being over five years since the PSD2 framework was first introduced, where does Open Banking fit into all this?
Most of the underlying technical infrastructure has already been built when it comes to making embedded payments work, according to Khalil Hefaf an investment manager at venture capital firm Target Global, a backer of Revolut and WeFox. He believes the question is really about how quickly customers are ready to undergo what he terms a “mindset shift”.
“People have historically been comfortable sharing their credit card details online,” Hefaf said. “But they haven't felt as comfortable giving access to a third-party app to make a payment on their behalf.”
Hefaf feels this is largely unreasonable and that, with modern infrastructure, embedded payments—at least in Europe—are just as safe “if not safer”, than traditional card payments, noting that “all providers need to be licensed”.
Areas For Future Growth
Embedded payments may soon be set to take off for payment use cases that work at a more leisurely pace, such as hairdressers or massage parlours, according to Seb Wallace, an investor at Triple Point Ventures.
These businesses have a “personal element” and deliver the service first. As a result, the exec feels they have more control over their customer and can nudge them into paying via whatever their preferred method is, including methods like QR codes.
“You're not going to go to a different hairdresser than your usual one [because of payment methods],” Wallace points out.
Wallace believes the sweet spot for embedded payments may be “middle ground” transactions of between £40 and £80—these are payments that are “not too big to want to make money on” and “not too small that they need to be super low friction and immediate”.
However, the exec echoed Hefaf’s concerns around consumer trust, noting, “If you’re spending a grand or two grand on a state-of-the-art TV, unless you're already familiar with embedded payments, you might be a little bit reticent to employ them”.
Potential Conflicts Of Interest
But it is not just consumer mindsets that could be holding back adoption—at least in the short term. Hefaf pointed to his surprise after finding out the APIs available from banks “aren’t nearly as stable or as robust as he expected”, even though in a post-PSD2 world, these types of open banking APIs are something banks have been obligated to make available for quite some time.
Though Hefaf does not feel that banks were “stonewalling” these types of transactions, he did highlight how incumbent banks “might not be putting too much of an effort to make these as efficient as they can be, because in a way that’s power leaving their purview”.
The VC pointed to neobanks as an example of how and why this could work: “A lot of their consumers are using neobanks as a tertiary or secondary account. So generally, there are limits in terms of how these banks can issue credit to these people, because they don't really have a full view of their financials.”
“But if consumers can link their primary bank accounts, then neobanks can get that view. Then they can start underwriting credit,” he added.
Hefaf dubs this potential conflict of interest as a “bit of a hurdle…”
Want to keep going? Read the full feature in AltFi Research's Embedded Finance: The New Frontier Of Lending report, out now!