Prepaid is not just a product anymore. Prepaid as a platform has cemented its way into conversations about the future of embedded finance — particularly as it relates to consumer and merchant payment choice, inclusion and digital payments innovation.
Prepaid has transformed from being a payment product to being a platform that has defined itself as being adaptable to consumer and business’ needs for providing a flexible, accessible and comfortable payment experience. With a high acceptance from merchants and its functionality on the existing payments rails, Prepaid has the payments, regulatory, operations and customer service expertise to enable embedded finance.
As payments leaders modernize their technology stack to offer faster, more seamless integrations between non-financial brands and the financial services needed to complement their customer experience, this has opened up discussion about the impact of embedded finance. At the CPPO Prepaid Symposium in June, payments leaders from Netspend, Mastercard, PayPal, Peoples Group and TreviPay gave their take on what’s driving this market and how embedded finance is shaping the future of money movement.
Embedded Finance and the Growth of Branded Ecosystems
Embedded finance is a fairly new term that has taken the payments ecosystem by storm as companies of all sizes work to find their role in the banking-as-a-service model (BaaS). The lines are blurring between what defines a financial services provider as non-financial companies are gaining greater capabilities to offer financial services.
“We believe embedded finance and the banking-as-a-service model is here to stay. We believe there will be about 7-8 branded ecosystems that a consumer will interact with to transact, engage, exchange information and collect rewards, etc.,” said Kelly Knutson, President of Netspend and Senior Executive Vice President, Global Payments. “Within those branded ecosystems, people will want to move money around. Money movement is a key ingredient. …Going forward, we are going to have to change our mindset from a product mentality into what role we play within that bigger, branded ecosystem.”
Whether it be moving financial products and services greater into retail distribution channels, or other environments that lend itself to embedded payment experiences — such as gaming — Knutson said it’s important companies align their offerings with consumer lifestyle decisions to enable payment choice. Doing so will also mean embracing partnerships across the ecosystem.
“People don’t necessarily look for a financial product. They look to satisfy a need. These other end-to-end lifestyle experiences are really driving that behavior. The payment decision is usually at the front end, or at the back end where you choose a mechanism that you, as a consumer, want to utilize to transact that transaction,” Knutson said. “We’ve started to look more broadly to where we fit into that financial experience. …The payments industry is not necessarily driving the formula, but we’re playing a role in a much bigger lifestyle of commerce decision.”
In order for embedded finance experiences to expand, he noted that the payments regulatory environment needs to catch up to consumer expectations. Knutson said that this topic must be viewed more progressively, as the “horse has bolted as consumer and technology expectations have run way ahead of the regulatory environment.”
The Evolution of the Prepaid Market: Advancing Embedded Finance Experiences
Prepaid is now being thought of as a platform, or mechanism to empower innovative digital payments experiences. Embedded finance has followed this same path as a mechanism for conducting a financial decision through a frictionless experience.
“Prepaid is the ultimate embedded finance,” said Howard Klein, president of Payments and Card Services for Peoples Group. “Prepaid of today is dramatically different than it was in the past….sometimes it looks indistinguishable from a bank account. Across the prepaid rails and the ecosystem that’s been built — a lot of innovative things can be built in the future on these through the cores, and not have to worry about the legacy infrastructure that the banks have to worry about.”
Consumers today expect simplicity in how they pay for things, but this payment experience doesn’t always translate in every payment environment, Klein said. Embedded finance solutions aim to solve this by enabling consumers to transact across more environments without having to switch between applications.
Peoples Group is focused on helping its clients enable financial experiences without having to get into the banking space and “worrying about all the regulations that go along with that,” Klein said. “Businesses just want to remove the friction for their customers and enable and empower them — without having to leave [the site or app] and get all the friction in the ecosystem,” he added.
Embedded finance isn’t just about consumers; it’s also about small businesses and providing merchants the same same-day payments experiences and instant gratification that exists on the consumer side, Klein added.
“It’s really important for us as a financial institution to make those API hooks so we can get the data from our partners and really enable them to empower consumers,” Klein said. “We need to reduce friction for partners, which we can do with more partners in the fintech ecosystem to embed services within the product offerings.”
Embedded Finance and the Rise of E-Commerce
Advancing embedded payments experiences is being propelled by the sheer volume of transactions being conducted online. Ellie Zolghadr, director Product Development at Mastercard, said that in 2020, there was an additional $900 billion globally spent online. Embedded finance is a component of ensuring these online commerce experiences are frictionless for all consumers and businesses.
“We go where the customers go. We are working to provide the technology, infrastructure and programs to make payments from one side as invisible and frictionless, but at the same time safe and secure for customers. We are trying to take notes from what has been working in the physical space and putting a lot of focus on digital,” she said.
As the pandemic rapidly changes consumer behavior and expectations, this has created a fundamental shift in how they transact with businesses. The gap that exists, she said, is with some small businesses that were not able to keep pace with the sudden shift. Bridging this gap is one challenge the entire payments industry must address — which opens up more conversations about opportunities for embedded finance solutions.
“How [consumers] do business has not changed. The consumer behavior and expectations have changed. How they get their funds and access their funds has changed. …We need to ensure it doesn’t go back to what it used to be.” Zolghadr said. “Having access to funds fundamentally makes a shift into how small businesses manage their finances. It’s shifting the ecosystem into the consumer ecosystem for the better. …The consumer demand and need and pace of innovation is pushing this.”
Addressing the Entire Customer Journey: Enabling Frictionless Transactions
Brandon Spear, CEO of TreviPay, said the pandemic has exposed gaps in the B2B payments ecosystem. Embedded finance, he said, is a space “that’s here and now,” and is relevant to how they view B2B payment interactions.
“We lean into the way that selling organizations can get paid and how they are dealing with manning working capital,” Spear said. “The customer journey is often critical into how they execute this. In B2B there is often more friction into the customer journey than there should be. The last 15 months has really exposed the manual efforts that need to be re-prioritized. There’s been a really interesting uptick for small businesses.”
For example, small businesses have been “desperately trying to insert themselves into the credit cycles,” Spear said. But there is still friction and disconnect across the entire payments experience that doesn’t enable businesses to navigate the payments ecosystem as seamlessly as consumers have access can. Addressing this friction across the entire B2B payments journey is one that will be relevant as the conversations about embedded finance continue.
Much of the discussions around embedded finance have brought to light how financial products are defined. Increasingly, apps are not the destination, but rather the tool to enable a financial transaction. This is at the heart of what embedded finance solutions are looking enable across more consumer and business payment experiences.
“When you think about embedded finance and the shift to digital in the past 12+ months, it’s really about how consumers now consider the app the product. Whatever the platform they’re using, they consider that to be the product,” said Michael Suppa, PayPal’s Head of Payments, Canada. “They are looking for simple, holistic and embedded solutions. They want to get what they want fast, seamlessly, safely and securely. PayPal is not a destination app. We are a transaction app. People come to our app to transact through other experiences.”
Consumer expectations, he noted, has pushed the payments ecosystem forward toward getting embedded payment services in more apps to enable more seamless transactions. As new digital payment services evolve, prepaid continues to play a role in this embedded ecosystem. This is particularly relevant as financial modules get linked through plug-and-play experiences for embedded finance needs, Suppa said.
“Consumers are looking to have things in context — when they are doing a particular activity, they want to be offered embedded finance options in context of that activity. I think that’s where the industry is moving — offering those contextual embedded finance offerings,” he added. “Prepaid is really well positioned to get one of those models with easy to implement APIs. There’s an ability to become embedded with the developer committee and let them know they can easily connect and offer finance services to their customers in context of the user experience.”
Video: Erasing the Lines — Embedded Finance
Jennifer Tramontana—Executive Director, CPPO
- Kelly Knutson – President, Netspend and Senior Executive Vice President, Global Payments
- Ellie Zolghadr – Director Product Development, Mastercard
- Michael Suppa – Head of Payments, Canada, Paypal
- Howard Klein – President of Payments and Card Services, Peoples Group
- Brandon Spear – CEO, TreviPay