- Embedded payments offer a compelling strategy for driving business growth, generating revenue, staying competitive and enhancing the customer experience.
- The revenue generated from embedded payments can help improve a startup's financial performance, making it more attractive to investors.
- Most embedded payment companies have underlying partners. As regulatory pressures continue to ramp up on these BaaS (“Banking-as-a-Service”) companies, it’s essential to confirm they will remain compliant.
As a startup, you’ve put considerable thought into your core product or service offering. You’ve developed its place in the market, its unique value to your customers and why it will be a profitable investment to potential partners.
Of course, the innovation cycle never ends. You’re continually seeking ways to elevate your offering and stay ahead of the competition. That’s where embedded finance, particularly embedded payments, comes in to play.
For startups with payment flows or even peripheral payment needs, embedding payments into your customer experience offers a valuable solution. Working with a third-party to embed payments helps simplify the process, enabling you to focus on your core offering while at the same time unlocking new opportunities for growth.
With that, let’s dive into seven key benefits startups may enjoy by embedding payments:
1. Generate additional and diversified revenue.
By providing your customers with the option to make payments directly within your platform, you can further monetize your offering with an additional revenue stream. Embedded payments can allow you to charge transaction fees, offer paid features like faster payouts and enable new business models like ‘buy now, pay later’ (BNPL) options or subscription-based services. The incremental revenue from these transactions can add up over time. Embedded payments by consumers totaled $1.7T in 2021 and is projected to reach $3.5T by 20261. If you’re not capturing this additional revenue, others will.
2. Get insights into your customers, their purchase behaviors and their capital needs.
From a marketing perspective, there’s almost nothing more valuable than being able to monitor customer behavior ‘at the checkout’. When do they typically make a purchase? What offers are they responding to? Where are they making the purchase? Does offering a BNPL solution materially change cart sizes at checkout? Embedded finance solutions provide useful tools for harnessing data on customer trends and understanding what may be driving specific buying decisions. One example: Toast knows the seasonality of their restaurant customers and can surface lending offers based on this insight.
3. Opportunity to increase your valuation.
Embedded payments helps you realize improved economics, allowing you to recognize more of the payment fees as top-line revenue. This enhances both your revenue and your value. This increased revenue demonstrates stronger business potential to investors and can contribute to your ability to command a greater valuation.
Our data shows clear investor interest in the potential of payments and embedded finance. In 2023, payments remained the top-valued subsector in fintech for the third straight year. And amidst broader market uncertainty, fintech valuations still hold a premium compared to tech overall, with the median disclosed deal size for payments startups at $45M.1 Though the data is specific to fintech, it highlights the increasing value investors place on businesses that seamlessly integrate payments.
4. Enhance the customer experience.
With embedded payments, you make it easier for your customers to engage with you. Spend with you. And stick with you. Put simply, embedding payments makes your customers’ lives easier. It gives them the convenience of choosing how to fund their purchase. By enabling your customers to perform a transaction efficiently, without having to leave your platform, you make their experience more seamless, more welcoming and more satisfying.
The idea is to eliminate the need to redirect them to a third-party payment gateway, which in turn helps reduce cart abandonment rates. You’ve already captured the customer and have demonstrated your value prop. Now, you can take it a step further by simplifying customers’ payments and payouts.
Customers want choices and having multiple options such as credit cards, BNPL or digital wallets has become the norm. In fact, digital wallets are now the primary form of e-commerce payment – 49% of all payments according to FIS research.2
5. Increase customer lifetime value.
By prioritizing a positive customer experience, you naturally foster deeper customer loyalty. When customers enjoy their interactions with your brand, they're less likely to seek alternatives, which may lead to a sustained relationship and ultimately, increased customer lifetime value.
6. Open the door to offering additional financial services to your customers.
If you’re planning to embed financial services into your customer experience, starting with embedded payments is a logical place to start because it provides a solid foundation for facilitating financial transactions for your customers. This can take the form of offering embedded money movement with OBO (On Behalf Of) payment solutions, FBO (For Benefit Of) custodial accounts, partnering with an embedded payments company, or registering and operating your business as a payment facilitator.
Depending on the nature of your business, however, there are many other financial offerings you can embed and offer your customers, such as financing or insurance. These embedded finance capabilities can be expanded upon as you adjust your business model, expand your offerings or decide to take on more ownership and risk by building out the functionality in house.
7. Help mitigate risk.
In an uncertain climate, offering embedded payments does have the potential of adding a significant layer of regulatory risk and complexity. And it’s no secret that in recent years, the number of enforcement actions by banking regulators has grown exponentially for BaaS providers and fintech partner banks.
Partnering with a company like Silicon Valley Bank to facilitate payments in your platform can help you more effectively navigate the arduous process of complying with regulatory obligations. Not all third-party providers are created equal, so it’s wise to check that they have a solid compliance track record. A good rule of thumb is that the more extensive, detailed and rigorous – and maybe even burdensome! – the onboarding process is, the more likely your partner is following all the necessary regulations that govern the financial services industry and helping you prevent future roadblocks or problems. Compliance should be clear and efficient, but unlike payment methods, quick is not better in risk!
Whichever company you choose to provide embedded payments, it’s important to remember that your company will have a certain degree of liability. The level of liability you take on depends on the level of control you have over the payment processing and experience.
For these reasons, it’s not surprising that there’s a strong appetite for embedded financial services in today’s market. What does that mean for your startup? It’s a service very much worth considering – and one that your customers may already expect.
Our team at Silicon Valley Bank has deep experience in working with companies from seed to Series A and beyond to embed financial services. Contact us today to learn more about opportunities for your business and how we can partner with you to start realizing the benefits we outline in this article.
