Consider the fact that not all that long ago, navigation was not part of the car; it was something you had to bring into the car, with a GPS system. Now? It’s embedded. Cameras? Embedded into smartphones.
To get there, he said, Western banks — which have been built up around the core activities of deposits and lending — might take a cue from financial services elsewhere in the world, as open banking takes root in Europe and super apps emerge in Asia.
To get there means embracing a mindset shift. As he put it, “Banks here have not looked at payments as a profit center, and they did not care about cash flows.”
But now, in the age of the pandemic, financial institutions (FIs) are taking a hard look at what money really means: It’s about cash in and cash out, for consumers and commercial enterprises alike.
Embedded finance, he said, is a natural step in the evolution of banking because it centers on the most important relationships people have with their money: where it sits, and where that money needs to go. It can be defined as the integration of a financial solution into a business’s infrastructure.
In terms of mechanics, embedded finance/banking is intended to streamline access to lending, insurance or payment processing without redirecting the customer to a third-party.
The technological process of getting that done is complex, but it is getting easier as real-time payment schemes get up and running around the globe and new rails are being constructed to move that money. FinTechs and neobanks are constantly working on improving interfaces, and by extension, the user experience.
The improvements are widespread.
“The back end used to be clunky,” he said, “but the back end is catching up with the front end.”
Aided by machine learning and artificial intelligence (AI), the front and back ends are intertwined enough so that a wealth of payments functions can be embedded into all manner of apps and use cases. The positive impact of these improvements can be felt by the fact that revenues at forward-thinking enterprises can increase by several multiples.
That’s a marked improvement for the early embedded finance entrants, McCarthy said, which relied on interchange revenues from FIs that, unregulated, sat above the “Durbin cap” on those fees.
The past is a bit of prologue here, he said, reflecting on his time working with Stripe as Visa’s EVP of innovation and strategic partnerships. Stripe has, over time, morphed beyond its genesis as an acquirer-processor into a full-blown ecosystem with, for example, treasury management solutions on offer. By anticipating and serving corporate cash flow needs, McCarthy said, Stripe and others like it have managed to become disruptive forces in finance.
“The good experiences that are sticky are the ones that exist where consumers want to be,” he said, where buy now, pay later (BNPL) might be combined with debit, and all of it can be combined with financial management software. In the end, a continuum of interactions can be monetized.
McCarthy said that private equity and public markets have indeed noted the shift — and are favoring firms that offer monetizing experiences, rather than just gathering eyeballs. The big banks have a leg up here, because they have scale and are now improving their user experience. One way they can see a strong top-line surge is through bill presentment and payment, a key point of friction for consumers.
The Big Tech giants — Google and Facebook among them — are still trying to solve payments with varying degrees of success, said McCarthy. Social media may indeed be a conduit for embedded payments, but as of right now there is a lot of room for improvement.
Online checkout also is ready for some tweaking, tied as it is to the point of sale. The PayPal interface has not changed significantly in a few decades. Apple Pay, in contrast, has moved the needle a bit by moving the buy button outside of checkouts and has created a user experience that has been beneficial to merchants.
As time winds on, we’ll see continual refinements in moving transactions into the background. Amazon, to its credit, has introduced the ability to pay with palm prints, and QR codes are gaining some adherents in the push to displace the card swipe (which, let’s face it, is still pretty simple).
Consumers will flock to the easiest ways to pay, mused McCarthy, and simplicity has usually been a hallmark and plays to the strength of the card companies. The card networks are well-suited to innovation because they can set standards and are ubiquitous.
He added that ease of use and simplicity in the consumer realm will also wind up changing B2B payments, which need a tech-driven refresh away from paper-based invoices, plastic cards out in the field and manual processes. Automation creates better workflows, and embedded payments can change the game for supplier/buyer relationships, especially among smaller firms.
The Holy Grail will be the way consumers and businesses feel about the payment, McCarthy said.
“Shopify has got an experience. Stripe and Apple have experiences,” he said, and the card giants’ SRC initiative will help embed finance in all manner of payments. Voice and face-based biometrics represent nascent ways to change payments.
But it will take time, as all developments do.
As McCarthy told Webster, no matter the use case, above all: “Embedded finance should be easy.”