Embedded payments continue to make their mark as one of the most exciting and fastest developing areas on the Fintech map. As such, it comes as no surprise that the landscape is evolving very rapidly, with no end of exciting innovations being announced on what seems like a daily basis.
Yusuf Ozdalga is a London based Partner at QED Investors with a focus on European financial technology and consumer finance companies. QED is the premier VC in the fintech space. Ozdalga joined QED in 2017, and his career has spanned roles as an operator, advisor, entrepreneur and investor. His current portfolio of investments include Wagestream, Zopa, and GAIN Credit.
He started his professional investing career in 2006 as a Director of Principal Finance at Lehman Brothers, funding speciality finance and consumer credit companies in Europe, including early fintech plays such as some of the first online loan originators in Sweden. Prior to joining QED, Ozdalga was an Investment Director with the growth private equity fund Eastgate Capital, helping emerging companies and entrepreneurs build lasting consumer franchises by leveraging the power of data analytics.
Here Ozdalga gives his views on how embedded payments are the way forward and how smaller companies are going to be able to implement them:
To summarise, the term embedded payments refers to the payment component of a transaction being so smooth and seamless that it is almost invisible to the customer. The classic example is the experience of using Uber: As you leave the car, closing (never slamming) the door, the payment happens automatically, in the background, without the customer having to do anything. Comparing this experience with that of a smaller, less sophisticated online merchant, where one has to enter the sixteen digits, address, CVC code, and hope the browser does not crash, it becomes clear how transformative embedded payments can be, both for the customer and for the the driver, who is paid just as seamlessly through the Uber platform.
Uber, however, is a tech giant worth billions of dollars, and clearly smaller or less digitally native merchants do not have the developer resources with which to build such seamless payments processes.
This is exactly where today’s Banking-As-A-Service (BaaS) or embedded payment providers are coming into play. They create the developer-friendly tools that enable other businesses to embed payments as well as banking processes to their services, with a minimum of Fintech specific developer resources. As this particular industry is evolving very rapidly, a few very interesting trends have emerged recently.
Firstly, thanks to more and more BaaS providers, we are seeing a true democratisation in the progress of embedded payments. Thanks to Stripe, Shopify, and the latest tech providers such as Weavr, companies can now easily implement complex payment logic and banking processes into their products and services. This trend is also enabled by accumulated tech expertise that has built up over the years in the industry. For example, Weavr has created its own payment coding language with small modules that other developers can use to embed modular solutions.
As a consequence, we can predict that embedded payments will become increasingly ubiquitous for consumers and that an increased level of standardisation for developers will emerge in the form of more constant APIs and programming languages that makes it easier and cheaper to implement these solutions.
Another key trend is the rapid proliferation of payment rails in the industry. This is driven by country-specific payment alternatives such as Alipay or WeChat Pay from China gaining more traction, while the EU recently announced its intention to build a payment rail system that rivals Visa and MasterCard.
With this sort of proliferation, the role played by BaaS providers will become ever more important. We can therefore expect more complex networks of interlocked payments rails in the future, with embedded payments players helping to curate and orchestrate innovation, while increased competition between payment rails leads to the cost of payments becoming ever cheaper.
And when it comes to cheaper payment rails, the biggest and most transformative development is probably the global emergence of open banking payments rail. While the UK sits very much at the cutting edge of these developments, it is clear that other countries will follow at their own respective paces. The ability to send money directly from my account to a merchant’s account with the push of a button or the scan of my face on my phone will clearly create a serious alternative to today’s payments rails, and the fact that we can do so at a fraction of today’s costs is clearly something that incumbents are busy internalising as we speak. We can expect these big payments networks to have to take positions on how they will deal with open banking payments, and while lots of consolidations and acquisitions will emerge, we can also expect to see continued downward pressure on payments costs from both consumers and merchants.
Another important trend is the rise of embedded payments in cross border payments. Remitly and Flywire have been setting the pace here, as Google served notice on the big banks with its decision to partner with Wise and Western Union and enable Google users to transfer money internationally in a much more seamless manner. Clearly, embedded payments are spreading their wings and in the future, they may become so invisible that we simply stop thinking about them at all; just another voice command to our AI assistant, like setting the timer for boiling eggs.
Embedded finance is becoming more and more ubiquitous each day, with a simple facial scan or fingerprint being the way in which many payments are completed, or some payments becoming virtually invisible to the end user. With investments such as Braintree (which was sold to PayPal) and more recently weavr.io in London, and Treasury Prime in the US, I continue to witness at first hand not such the applications of such fast, friction free promise, but the importance of parallel integrated thinking by the VCs who enable them; shaping a business model from its inception, acting as co-founders with specialised sector insights, suggesting established partner companies with which to collaborate, when and why to merge or acquire on the pathway to an exit, and on what terms.
How VCs help founders to nurture the fledgling business and not just the technology of the product, will boost their chances, increase their valuations and ultimately change the face of embedded finance.