Embedded finance 2.0: beyond lending into cross-border payments?

New solutions for old problems.

Embedded finance continues the journey that fintech started. Fintech brought banks and technology companies together to create new products for the digital-centric customer. Embedded finance gives customers access to their money instantly, transparently and when they need it.

Examples of embedded finance include buy now, pay later (BNPL) instalment options at checkout, app-based payment and loyalty wallets, and small business software that combines invoicing, payment processing and payroll services.

It’s a $185 billion opportunity. That’s the total addressable market for just four embedded finance products: payments, capital solutions, accounts and card issuing, according to Boston Consulting Group.

We examine how embedded finance changed lending and consider the implications for cross-border payments.

What’s the problem with lending?

Borrowing money used to be paper-based and slow. Repayments were fixed and due on a set day each month until paid back. Lenders had to take borrowers on trust. And had no visibility of how loans were spent.

Embedded finance helped improve lending for everyone. Borrowers now have more personalized, intuitive access to credit at the point of need. Meanwhile, lenders love the higher approval rates, lower defaults and distribution costs.

Examples of embedded finance for lending

A great example of embedded finance is the ‘Just Add Fuel’ package available to Peugeot customers in the UK. This financing plan consolidates the cost of a new car with essential motoring costs into a single monthly payment over three years. It includes insurance, road tax, servicing, roadside assistance and warranty for a new car.

This fuss-free bundling of financial and non-financial services with purchase creates new revenue streams, strengthens customer loyalty and differentiates Peugeot. At the same time, customers save time, money and hassle sourcing the individual components. They need just add fuel.

A B2B embedded finance example is Shopify Capital, which pre-qualifies businesses for loans based on sales data. Businesses can seize more opportunities with improved cash flow. For example, invest in inventory, marketing, operations or payroll – whatever keeps their business moving forward. Whereas Shopify boosts engagement and revenue, while preventing customer business failure and reducing churn.

Digitalizing various stages in the borrower journey and embedding lending has helped solve real problems for both borrowers and lenders. But could a similar approach work for cross-border payments?

What’s the problem with cross-border payments?

There’s no doubt that cross-border payment can be painful. It’s often complex, time-consuming, manual and expensive. There’s also a general lack of transparency around pricing, timing and tracking.

However, the root cause of the problem is at an infrastructure level, rather than at an application level. It’s with the back-end correspondent banking system, responsible for international money movement. When the problem is different, so is the solution.

What is correspondent banking?

Correspondent banking is when one bank provides services to another bank, usually around cross-border transactions.

Imagine a business in the United Arab Emirates and a supplier in the UK. Both bank locally and want to send payments to one another. But because their respective banks don’t use the same domestic payment network, they can’t pay each other directly.

Instead, they rely on a network of international correspondent banks to move money behind the scenes.

Why is correspondent banking broken?

With the equivalent of world GDP moved across SWIFT international correspondent banking rails every three days, things may not always go smoothly. Cross-border payments get delayed or blocked, often without warning or explanation. Businesses can’t easily track payments or predict fees. They don’t know how long they’ll take. Or necessarily how much will arrive on the receiving account.

It’s possible to send an e-mail from the US to Australia almost instantly. But sending funds the same distance still takes days, so much so it’s probably quicker to get on a plane and hand deliver the funds.

This is principally due to three overlapping reasons: legacy technology, legacy attitudes and interoperability.

1. Legacy technology – since the 1970s, banks have linked their different domestic systems together via SWIFT to achieve global coverage, which comes with technical limitations.

2. Legacy attitudes – prioritizing short-term targets and the fear of disrupting existing revenues may make banks too invested in the status quo.

3. Interoperability – individual banks cannot necessarily act alone and maintain interoperability.

What are the alternatives?

When the problem is at a back-end infrastructure level, you need new rails, not merely new apps. Newer payment providers, like Inpay, have effectively built an on-us bank network, where payments take place between participant members. Inpay controls the routing of individual payments, which has two main advantages.

Firstly, we can pick the optimal route and pre-empt problems, resulting in industry-leading transaction success rates. Secondly, we can ensure that there aren’t unknown FX factors, or surprise intermediary bank fees, resulting in cost savings for our customers.

This makes cross-border payments as simple as domestic bank transfers in more than 100 countries. And drives maximum visibility, transaction success and payouts without deductions.

Alternative rails + expertise

Almost every system is more complex than it looks. That’s certainly true of payments. Each country has its own banking and clearing infrastructure. What businesses really need is expertise in handling complex cross-border payments. Yet local banks aren’t necessarily specialists in international transfers.

By contrast, Inpay was set up to connect businesses and communities globally to the opportunities that help them thrive. We do that by getting money to the right places. And solving complex payment challenges together.

We know the quickest way to route payments to pre-empt problems. We know what documentation is required and the questions likely to be asked. That’s how we’ve achieved industry-leading 99% transaction success rates. This is a different approach and skill set to a bank, who wouldn’t necessarily support and guide customers to that extent.