An interview series: All you need to know about embedded finance

Embedded finance isn’t just an industry buzzword: if you look around, you’ll see examples everywhere, and it’s trending upward. Think of the times your checkout was seamlessly embedded within an app like Uber or JustEat.

Of course, when you start crossing borders, everything becomes more complicated. Embedded finance providers face a unique roadblock: global financial regulations and their regional differences.

As embedded finance providers ourselves, we’re tackling that complexity head-on to enable businesses to stay on top of this trend. That’s why we’ve created a series of articles on all things embedded finance. To kick things off, we spoke with Currencycloud’s co-founder and Chief Evangelist, Richard Arundel, and Product Director Piers Marais, on why providers must take a proactive approach to regulations to successfully offer cross-border transactions.

A primer on embedded finance

Embedded finance enables any company that wants platform payments, lending capabilities or other specialized financial services to natively embed pre-built solutions from financial partners via an API integration.

The benefit? Financial services can be integrated into almost any industry, including a growing number of non-financial websites and apps that operate globally.

These solutions are both seamless for end users and alluring for companies that seek to own transactions within their platforms — which is why embedded finance is projected to reach nearly $230 billion in revenue in five years’ time.

Financial partners are a key player in this rise. They do the hard work to develop the technology and offer it via APIs; this enables their clients to quickly integrate these services into their tech stacks while focusing on serving customers and expanding into international markets.

That also means that providers need to do the legwork to tackle regulations and become fully compliant across regions. Navigating those complexities is a necessary hurdle to clear in order to create a global embedded finance solution that can process cross-border transactions.

Global embedded finance regulation at a glance

The rise of borderless eCommerce means businesses can serve users all over the world — in theory. Yet, regional regulations still have great influence over embedded finance, particularly how quickly new businesses can go to market and reach new audiences.

Regulatory compliance is one of the more difficult steps to offering embedded finance. Providers need to abide by different regulations depending on where companies’ end-users are.

For example, regions like the United States, European Union and the United Kingdom all have different regulations and provider structures. Businesses who serve the US market may find that the US has a more segmented approach than other regions; historically, a business would have to work with multiple entities like a series of sponsor banks. “This would affect your go-to-market time unless you pick the right provider that offers an-all-in one package for you” says Richard.

When it comes to the EU and UK, financial transactions are now classified as cross-border transactions that interact with separate regulations.  Companies with users in both regions might find themselves working with two separate embedded finance providers that serve the separate regions. This may lead to cost inefficiencies and delays in being able to go to market.

The same is true in other parts of the world — it’s easy to see how regulation complexity makes scaling and business processes hard to manage alone.

How providers approach regulations to better serve businesses

“When it comes down to it, regulation is probably the hardest thing to address,” says Richard. “2020 was a pivotal time in the emergence of embedded finance providers. In 2021 we will see more and more providers who are going to try and remove that pain for businesses.”

Given the complexity of regulations, businesses should look for trusted embedded finance partners who can address pain points in these key areas:

  1. Time and cost burden of regulation;
  2. A focus on internationally expanding businesses; and
  3. Assistance for emerging, unregulated software platforms.

1. Time & cost burden of regulation

Emerging businesses who want to offer embedded financial tech should look for providers who have already done the hard work on their behalf. Trusted partners will be fully regulated and compliant in each target region.

These partners enable direct customers to go to market more quickly by not having to invest time and money in compliance themselves.  “The entity needs to have usually some boots on the ground and pursue Electronic Money Institution (EMI) licensing in jurisdictions, which allows the provider to handle flows of funds” says Piers. EMI licensing enables a business to deal in digital currency or electronic money —  it’s just one level down from a banking license.

Pursuing regulation compliance for financial technology can be both expensive and time-consuming — two factors that are particularly problematic for growing businesses, whether they’re in funding rounds or launching in new markets.  “It’s not easy or cheap to go through those bureaucratic processes” shared Piers. Luckily, some financial technology providers can shoulder the burden and offer time and cost savings to businesses.

This saves businesses time and money by being able to go to market more quickly, save hard-earned capital, and manage profit margin as a result.

2. A focus on internationally expanding businesses

In order to better serve growing international business, some embedded finance technology providers take on the cost and burden of regulation in several regions at once. They achieve this by developing a network that delivers regulatory compliance in multiple territories, often via in-country banking networks or strategic Fintech partnerships.

The result? Digital-first businesses can serve more customers in more areas at a greater speed. Piers believes that in essence, “Clients can get their solution to  market as quickly and as cost effectively as possible, without having to worry about regulatory complexity.”

3. Assistance for emerging, unregulated software platforms

Some industry thought leaders like Angela Strange at Andreessen Horowitz believe that every company will be a Fintech company in the future. Whether or not this will come to pass remains to be seen — but “what we do know is that businesses like Uber will continue to want to add payments to platforms,” according to Richard.

Providers are focusing on a growing number of unregulated software platforms like tech firms, accounts receivable and marketplaces. By nature, these businesses serve global customers across regions, which can make compliance complicated.

It’s expected unregulated software platforms will continue to grow in 2021 and beyond. These new platforms won’t be tied to certain regions; they will demand embedded technology providers that work effortlessly across borders when adding payments to their system.

Learn more about embedded finance

Continue to explore Currencycloud’s series on the real-world possibilities of embedded finance — lookout for our second article in this series, an interview with HUBUC on why better business depended on upgrading from digital banking with an eye towards the embedded future.

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