Zilvinas Bareisis: At Celent, we define Embedded Finance as the discovery and acquisition of tailored financial services products at the point of need within the digital experience curated by a non-bank third party.
The industry dialogue around Embedded Finance and digital payments is sometimes hampered by the lack of consistent terminology. For example, we continue to hear statements like ‘wallets are overtaking cards’ and ‘paying for an Uber ride is an example of Embedded Finance’. The extent to which these statements are true depends on one’s perspective. The key is to focus on strategic goals, solving customer problems, and delivering superior payment experiences.
Digital wallets make payments easier, but not all easy payments experiences are provided by wallets. Also, many digital wallets today act as a ‘front end’ to a card transaction. Therefore, it is critical when analysing payments statistics to remember and differentiate between the payment experience layer and the underlying rails, or between ‘payment preferences’ and the actual ‘payment instrument’. So, as an example, while my preference at the merchant site might be to pay with a digital wallet, such as PayPal, I also have to decide which payment instrument ultimately to use once I’m logged into the wallet. From an acceptance point of view, this is clearly a wallet transaction. But from the issuing point of view, it’s a card transaction (unless I decided to pay with my stored balance or alternative rails, such as a bank account).
What about other good payment experiences? If I decide to pay by card online, my browser can prefill all the details; all I need to enter manually is my security code (CVV). Is my browser acting as a digital wallet? We would argue ‘no’, but it’s certainly a positive experience for the customer.
Uber offers perhaps the ultimate example of a great payment experience – you get in and out of the car and the amount is charged to your card. We keep hearing people referring to this as ‘Embedded Finance’, but how is this different from a card stored on the Netflix app for subscriptions or with Amazon for one-click purchases? Yes, it’s a positive experience and makes payments ‘invisible’ – and we’ve even been calling it ‘embedded payments’ – but it is just a card-on-file payment and doesn’t meet our definition of Embedded Finance.
At Celent, we define Embedded Finance as the discovery and acquisition of tailored financial services products at the point of need within the digital experience curated by a non-bank third party. For us, the ‘discovery and acquisition’ part is critical; simply embedding an existing payment instrument into the customer journey to facilitate a better payment experience is not enough. This is why we argue that a customer paying for a ride with a card stored on the Uber app is not Embedded Finance; however, Uber issuing debit cards for its drivers to give them faster access to earnings is. Similarly, a customer adding their bank-issued card to Apple Pay and using it to pay for goods and services is not Embedded Finance, but Apple offering customers Apple Card in partnership with Goldman Sachs is. (see Figure 1)
Figure 1: Digital Wallets/ Card-on-File/ Embedded Payments vs Embedded Finance
Source: Celent
We appreciate that this is an issuing bank-centric view. Enabling business partners to issue cards is an incremental opportunity for banks, potentially requiring new investment, but processing a card-on-file transaction is not. On the other hand, for payments companies like Stripe and Adyen or FIS and Fiserv, enabling clients to offer Uber-like payment experiences is a huge opportunity. Of course, it’s also an opportunity for (mostly) large banks still offering merchant services, like JP Morgan, Citi, or NatWest.
Incidentally, and to confuse matters even more, Uber calls the section of its app that allows customers to manage their payment instruments a ‘wallet’. Indeed, it can store multiple cards, which the customer can select to pay for rides, including a prepaid account, Uber Cash. But that doesn’t make the Uber app a digital wallet – the customer can only use those stored cards to pay within the Uber ecosystem, such as the main Uber and Uber Eats apps, not anywhere else.
This brings us to an important requirement for mobile and digital wallets: they need to have a merchant acceptance network. This also implies that they need to have an acceptance mark/pay button that a customer can recognise and choose to pay with. That is why the likes of Apple Pay and PayPal are recognised digital wallets, but Uber and Netflix are not. Instead, they are apps (or platforms) with payments integrated deeply into their customer experiences. The same is true for Tesco ClubCard Pay+ or the Starbucks app – these merchant apps make it easy and rewarding for customers to pay in their stores, but they lack the external acceptance network needed to be called a digital wallet.
It does matter… to an extent. A commonly agreed framework to track industry statistics would be very helpful when building business cases for new initiatives. Being able to speak the same language within the industry is important. And yet, it’s likely that the language around payments will only continue to get more fragmented, as the idea of a wallet gets stretched in multiple directions, from crypto to identity wallets and the internet of things.
We advise our bank and payment provider clients not to get distracted by the terminology; one man’s ‘Embedded Finance’ is another woman’s ‘card-on-file’. Instead, focus on customer pain points and think creatively about how you can solve them, potentially through partnerships. Ultimately, designing and delivering amazing payment experiences is far more important than what we call them.
This article was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2023, which is the latest comprehensive market overview and analysis focusing on the key products and players within the Embedded Finance and BaaS ecosystem.
Zil leads Celent’s Retail Banking and Payments practice. His research focuses on the impact of technology-driven change in banking, with an emphasis on consumer payments, digital identity, and the open financial services ecosystem. Zil has 25 years of advisory experience working with executives at banks and their technology partners.
For almost 25 years, Celent has helped senior executives make confident decisions around technology strategies. We offer objective advice, backed by our analyst expertise, proprietary research, a large database of solutions, and award-winning global best practice use cases. We are part of the Oliver Wyman Group, a wholly-owned operating unit of Marsh McLennan.
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