The embedded payments industry strives to simplify payment acceptance. Each provider and business are in a race to offer the best payments experience for customers.
And as with any race, securing the lead often means staying just one step ahead of the competition.
Steve Jobs once said:
It takes a lot of hard work to make something simple, to truly understand the underlying challenges and come up with elegant solutions.
Let's take a closer look at what embedded payment services are, how they work, and why they matter.
What are embedded payments?
‘Embedded payments’ refers to integrations of payment processing technology with third-party applications or platforms.
They enable cardholders to make electronic transactions seamlessly both online and offline without exiting payment interfaces, applications, or websites. This streamlines payment processes and enhances user experience.
They are especially prevalent in industries like retail (including eCommerce), the gig economy, travel, and hospitality, but their popularity is growing across all sectors.
Examples of embedded payments
Amazon, the world's largest eCommerce company, took embedded payments one step further in 2018 by opening its first Amazon Go store (there are now approximately 43). These cashierless stores rely on sophisticated sensors and cameras to detect purchases.
Ridesharing and food delivery apps like Uber, Lyft, DoorDash, and Grubhub centrally integrate embedded payments into their business models. This business model is based on making an already fast service even faster than its traditional competitors.
Streaming services such as Netflix and Spotify utilise embedded payments to streamline the payment process for both users and service providers. Users provide their payment information once, and subsequent subscription fees are deducted from bank accounts automatically.
Online games often integrate embedded payment options for in-game purchases, virtual items, upgrades, and more. These integrated payments can make it easy for gamers to improve their gaming experience without leaving the game.
Travel booking services, like Expedia and Booking.com, embed payments to facilitate booking flights, hotels, car rentals, and other travel-related services without users having to visit separate payment sites.
The broader embedded finance services ecosystem
Embedded payments belong to a broader suite of embedded finance services. These include - but aren't limited to - the following:
- Embedded finance: Loans or credit offered at checkout or within eCommerce platforms. For example, buy now pay later (BNPL) financing offered at point of sale (POS) in retail stores or on eCommerce websites.
- Embedded insurance: Relevant insurance coverage offered with purchases made on non-insurance platforms. For example, travel insurance offered when buying plane tickets.
- Embedded banking: Bank account functionality, such as balance checks and fund transfers, is integrated seamlessly into non-financial platforms.
- Embedded savings: Users can automatically round up payments and send part of them directly to savings accounts.
- Embedded lending: Loan options are integrated into everyday transactions, allowing users to access credit or financing effortlessly as they go about their regular spending.
Why embedded payments matter
Embedded payments are primarily important to businesses because they can significantly improve the chances of customers making purchases.
Customers that become frustrated or confused at checkout are less likely to convert. The average cart abandonment rate varies in different countries and industries. However, it often hovers around 70% in Europe and North America.
Payments are a vital component of the overall customer checkout experience. This an area even the largest eCommerce sites struggle with.
A study by the Baymard Institute found that checkout UX performance for the top 71 top-grossing US and European eCommerce sites was as follows:
- 0 are 'perfect'
- 6 are 'good'
- 23 are 'decent'
- 36 are 'mediocre'
- 8 are 'poor'
Embedded payment solutions are multifaceted
Embedding payment acceptance significantly contributes to checkout UX. However, how well payments have been embedded and how relevant the additional features they include matters a lot, too.
For example, reducing the number of steps customers take, enabling multiple currencies, displaying all transaction fees, all matter. And they all important in different ways to different businesses.
How do embedded payments work?
There are several steps which contribute towards successful and seamless embedded payments.
1. Integration of payment API
Your businesses’ payment service provider (PSP) or payment gateway software provider will usually embed - i.e., integrate - your payments.
Firstly, they will obtain the necessary API credentials to integrate their payment API into your applications. They will also integrate it with your internal tech stack.
Subsequently, your customers should be able to initiate payments seamlessly within your digital wallets and platforms. And you should be able to easily access and view data and analytics this generates.
2. Storing payment information
Once integration is complete, your customers can begin to make payments.
Now, the embedded payment system collects and securely stores the payment information and other details of each new customer. This means that future payments can be processed even faster and more seamlessly.
Tokenization
Embedded payments often use tokenization to securely store payment information.
It is a process of replacing payment data (for example, credit card numbers) with unique tokens. Meanwhile, the real payment information is then stored in a centralized token vault until transactions are completed.
3. Payment processing and authorization
The standard payment processing system takes place once transaction information has been passed on via an embedded payment method.
In short, payment requests are securely sent to the payment gateway, which facilitates communication between payment networks (e.g., Visa, Mastercard), issuers, and merchant banks to authorize the transaction.
4. Transaction status confirmation
An update on a transaction status should come via the point where an embedded payment was made.
What are the benefits of embedded payments?
1. Increased conversion rates
Simplified payment processes can lead to higher conversion rates and customers coming back for more. This is because they reduce the chances your customers will become frustrated or disinterested with making purchases.
This is particularly important for online payment services, where abandoning baskets and finding alternative providers is easier and quicker than it is in store.
2. Unified user experience
A unified user experience is a customer experience that is the same, or very similar, across different sales channels. Embedding payments contribute to achieving it.
This can cover several areas. For example, inventory and pricing being the same on all channels. And brand design and marketing strategy being consistent.
Having a unified user experience helps in two main ways. Firstly, it gives customers consistent user experiences. This increases user satisfaction and familiarity and reduces frustration.
Secondly, it means improvements you make to customer experience don't have to be iterated across multiple channels. For example, pricing or inventory changes should automatically appear across all channels.
3. High level of security
Like other financial institutions, embedded payments providers need to comply with industry standards on transaction security and sensitive data management. They also do not want their customers or reputation suffering the negative effects of data breaches, fraud, etc.
So, many embedded payment solutions incorporate and maintain robust security measures that protect sensitive financial information and reduce the risk of fraud.
4. Compliance and regulations
Integrated payment solutions can help businesses stay compliant with various financial regulations and industry standards. This reduces legal and operational risks.
5. Increased customer loyalty
A smooth payment experience can encourage repeat business, which in turn can lead to better brand loyalty. It can also indirectly create or reinforce the notion that your business or brand is technologically advanced and forward-thinking.
6. Data insights
Embedded payment systems can collect valuable data about user behaviour and transactions. This enables your businesses to gain deeper insights and make more informed data-driven decisions around personalizing user experiences, inventory management, optimizing pricing strategy, etc.
7. Cross-selling and upselling
Businesses can use embedded payments to cross-sell or upsell related products or services during the checkout process.
Your other relevant products and financial services, can be presented to be added to basket with just a few clicks. And embedded finance offerings - which can further increase average order volume (AOV) - can also be made available.
New revenue streams
In some cases, embedded payments enable you to provide in app purchases from a third-party provider. For example, you might integrate embedded insurance offerings with your payments. This in turn can earn your business a commission.
8. Global reach
Many embedded payment solutions support multiple currencies and payment methods. This allows your businesses to expand its global reach.
What are the disadvantages of embedded payments?
1. Cost
While embedded payments can sometimes reduce transaction fees, there are costs associated with integration, maintenance, and ongoing support.
2. Complex integrations
Integrating payment systems within an application can be complex and time-consuming. It requires expertise and resources that many businesses don't have internally.
3. Security risks
If not implemented and maintained properly, embedded payment systems can pose security risks. Payment services providers will often be liable for the risks involved. However, this does not make your business immune from reputational damage.
Choosing an embedded payments provider
Finding the right third party embedded payments provider for your business is important.
First, identify a competent and experienced provider with expertise relevant to your industry and business. It helps to read customer reviews from a range of sources and have direct discussions with potential providers and - if possible - other customers.
The value-added services providers bring matter. They could advise you on payment methods in your industry, for example.
Conclusion
Embedded payments are integrations of payment processing technology with third-party platforms. They are designed to improve the overall user experience, reduce friction in the payment process, and increase customer satisfaction.
They are integrated directly into online and offline points of sale (POS). They utilize security measures, such as encryption and tokenization, to safeguard user data and payment transactions.
The benefits of embedded payments include increased conversion rates, a unified user experience, strong security, and insightful data collection.
Beyond payments, the broader ecosystem of embedded financial solutions encompasses services like embedded finance, insurance, banking, and savings. Choosing the right provider for any of these services requires considering competence, industry expertise, and the value-added services they offer.
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