What Does Embedded Finance Mean for Merchants?
“Embedded Finance” has received an increasing amount of attention in recent months as a new and growing aspect of the payments and fintech industries. It has direct consequences and potential uses for merchant businesses, as well. As with many ostensibly new trends, it largely involves using new technological methods to more efficiently integrate longstanding payment and finance tools and strategies.
What Is Embedded Finance?
Forbes provides a useful definition of embedded finance as tools and systems that: “embed finance and banking programs into non-financial products and services.” Often these embedded services are provided by fintech or payments providers but merchants can offer some embedded finance services as well.
The forms of embedded finance that merchants can provide to consumers include:
- Buy Now, Pay Later (BNPL) loans in which a purchase is broken into installments with the merchant essentially financing the rest of the purchase and recouping the rest through the installment payments
- Point-of-service lending in which merchants provide financing options similar to BNPL but for larger purchases
- Integrated warranty and insurance plans in which the merchant finances and fulfills the plan
- Closed loop store payment cards that function like traditional payment cards but only at the merchant’s own stores and without the involvement of card networks
- Loyalty programs in which a merchant keeps track of loyalty points for repeated purchases and finances either internal or external rewards
Warranties and merchant financing options are not new but embedded financing takes advantage of technological advancements to more easily allow merchants to offer these services to consumers.
Can Embedded Finance Result In Chargebacks?
Because embedded finance involves working without traditional financial institutions such as banks and card networks in order to provide financial services, there is no risk of embedded finance chargebacks for merchants. Indeed, this is one of the key benefits of embedded finance for merchants. While it is not without its risks (some of which are enumerated below), offering embedded finance options will not lead directly to chargebacks.
Embedded financing offers plenty of benefits for merchants. These may include attracting new customers who can’t or don’t want to use traditional finance options, lowering costs to consumers by eliminating banks and their fees, and building closer relationships between merchant and consumer through initiatives like loyalty programs.
But there are potential downsides for merchants to consider, as well. As with any technological change, there are upfront implementation and ongoing operational costs for merchants that choose to offer some sort of embedded financing. Merchants must weigh those costs against any potential new revenue that embedded finance options may attract. Additionally, merchants need to consider the risks inherent in expanding beyond their usual area of expertise. By engaging in financial operations, merchants are taking on the role of a financial institution without the experience, understanding of risks, and financial and reputational heft of a financial institution. There are consultants and embedded finance providers that can help manage these risks and challenges but that would add to the aforementioned operational costs.
Ultimately, embedded finance will be a valuable option for some merchants and more trouble than it is worth for others. Any merchant considering offering embedded finance options would need to weigh the costs and benefits to their business specifically before making a decision.