Embedded payments present banks with both opportunities and threats

If you want to see the future of commercial banking, it’s already here, in the form of software-embedded payments. For commercial banks the opportunities to unlock new revenue growth are unparalleled. But for banks that aren’t prepared, embedded payments could prove an existential threat.

Dimitri Dadiomov, CEO and co-founder, Modern Treasury

Over the last 10 years, companies like Stripe and Adyen have built massive card processing businesses by providing the software tools that Internet-first, e-commerce companies needed and banks lacked. As a result, banks have lost significant direct payment volumes and customer relationships to these emergent players.

Unless banks embrace the opportunity that embedded payments represent, the same phenomenon could unfold with bank payments. Customers and payment volumes will move away from banks because of a lack of software tools.

This trend is already playing out in the marketplace. Some companies, recognizing the importance of software to payments — and vice versa — are buying up relevant players. Payments software provider Global Payments, for one, has embarked on a massive software acquisition spree. It bought several companies across the property management, healthcare, education, and hospitality industries, among others, including Zego, Active Network, AdvancedMD, Touchnet, Heartland and SICOM.

Similarly, to bolster its support for embedded payments, Fiserv, a payment and fintech provider, bought CardConnect and BluePay, which is now Clover.

So, what’s next?

As software pushes deeper into broader sectors of the economy, including insurance, real estate, education, logistics, lending, healthcare and financial services, embedded payments will increasingly impact constituent elements of the banking ecosystem.

Here’s a look at what to expect:

Banks. Anticipating growing demand from the marketplace, a variety of new payments-focused platforms have emerged with a goal of complementing banks’ existing products and helping them thrive in a software-defined future. Because most banks still deliver a discrete payment experience, companies with complex fund flows must either build complicated software infrastructure to support their software payments or outsource to a non-bank provider that has built this software infrastructure for them. As such, banks are increasingly partnering with fintechs to enable their customers to get payment operations up and running more easily and quickly.

Credit cards. Credit cards won’t go away, but they’ll no longer be the only game in town. As software-integrated payments take hold in industries such as real estate, insurance and others, bank payment rails, such as ACH, wire transfers and real-time payments, will be used as an alternative to credit cards, especially for larger transactions — real estate as one example — where credit card fees make their use unlikely.

Financial Services. Software has already become the front door into customers’ financial lives — the “new bank branch.” Financial activities that once took place in person, such as getting a loan, making a payment or opening a credit card account, are now all happening through software. COVID-19 has only accelerated this trend.

Customers. The same trade-off is playing out for companies who move money. Because the payments industry, as McKinsey notes, “now encompasses the end-to-end money movement process, including the services and platforms enabling this commerce journey,” customers either have to spend the time to build their own complex software infrastructure or partner with fintechs that have already done so.

More change ahead

Maybe none of this should be a surprise. Software has moved en masse into practically every industry, just as tech entrepreneur and investor Marc Andreessen wrote in his famous 2011 Wall Street Journal essay, “Why Software is Eating the World.”

Andreessen argued that we were at a turning point in software innovation. Internet adoption had achieved critical mass and digital infrastructure, such as software programming tools, and internet service providers, had reached a level of maturity to foster widespread innovation. He was proved right.

History shows us one of the most powerful determinants of success is the ability to adapt — not just to threats but also to opportunities. Embedded payments present both to commercial banking. Right now, many of the smartest, most adaptable commercial banks are well on their way to making sure embedded payments land firmly in the opportunities column.

Dimitri Dadiomov is CEO and co-founder of Modern Treasury. 

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