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A COMPLETE GUIDE TO EMBEDDED BANKING

Embedded banking enables tech companies to make a range of banking services
available to their customers. Explore how it can add value to your platform.

Last updated:

July 24, 2024

8 mins

Kieran Pasco

Head of Platform




THE RISE OF EMBEDDED BANKING

In a recent survey of leaders in global finance, 72% said the majority of
financial services will soon be consumed on non-financial platforms.

What does that mean, exactly? How are financial products making their way into
apps like Uber and Shopify?

The answer is embedded banking. That’s when a tech company teams up with a
financial institution to make banking products (e.g., high-yield accounts,
credit cards) available inside their app or website.


Square Checking delights merchants while generating robust new revenue streams
for Square.

One familiar example is Square Checking. Thanks to embedded banking, merchants
who use Square’s point-of-sale (POS) solutions can also take advantage of Square
bank accounts and debit cards. Among other advantages, this enables them to get
paid within moments of completing a sale.

For Square, this has resulted in explosive revenue growth. In fact, in Q4 2022,
Square’s gross profits from its merchant segment were up 22%, to $801M.

If you’re a leader at a tech company who’s curious about embedded banking, this
guide is for you. In it, we’ll address questions like:

 * How does embedded banking work?
 * How does it generate revenue?
 * What kinds of companies are a good fit?
 * Why would my customers want it?
 * What does it take to launch?




WHAT IS EMBEDDED BANKING?

Embedded banking enables tech companies to make financial products (e.g.,
high-yield accounts, credit cards) available within their apps and websites. 

Shopify Balance is a well-known example. Thanks to embedded banking, merchants
who use Shopify to manage their ecommerce businesses can also take advantage of
Shopify bank accounts and business loans. Among other advantages, this enables
them to get paid within moments of completing a sale.

Embedded banking enables you to offer four kinds of financial products to your
customers:

 1. Bank accounts. Embedded bank accounts work just like other bank accounts.
    Some can even generate interest for your customers.

 2. Debit, credit, and charge cards. Branded payment cards are a convenient way
    for your customers to spend money from their bank accounts (debit cards)
    and/or access needed funds (credit or charge cards). They can be created
    virtually or physically printed.

 3. Payments. Your customers want to move money: to do things like pay their
    rent, send remittances, and make peer-to-peer transfers. With embedded
    payment methods like ACH, wires, book transfers, and checks, you enable them
    to do so.

 4. ‍Lending and financing. Embedded lending and financing involve giving your
    customers access to needed funds. Common forms include credit cards, charge
    cards, term loans, invoice factoring, and cash advances.


HOW EMBEDDED BANKING WORKS 

To show how embedded banking works, let’s use another real-world example: Lyft
Direct.

In the Lyft app, drivers choose how they want to get paid. If they choose Lyft
Direct, they can access their money within moments of completing a ride, right
in their Lyft Direct bank account. They also receive a stylish debit card that
earns cash back on things like gas and groceries.

Drivers love it not just because they can get paid right away, but also because
they can manage their entire ride-share business (including accounting and
taxes) from inside the Lyft app. For Lyft, the program is valuable because it
generates several robust new revenue streams.

Behind the scenes, Lyft partners with Stride Bank to offer these financial
products. Drivers interact with their bank accounts and debit cards via the Lyft
app, and those requests are transmitted back and forth to Stride Bank, where the
funds are held, via an application programming interface (API).

Many tech companies who offer embedded banking choose to do so with the help of
an embedded finance platform. Such a partnership drastically reduces the
required investment of time, money, and staffing. Working without a platform can
take up to two years and $2 million, but a modern financial infrastructure
platform can have you up and running in weeks. 


When drivers choose Lyft Direct, then get paid within moments of completing a
ride.


COMMON USE CASES FOR EMBEDDED BANKING

A common question I hear from founders and product folks is “What kinds of
companies are a good fit for embedded banking?”

There are two ways to answer this question. The first is, itself, a list of
questions:

 1. Does your platform have a large transaction volume? (e.g., Shopify)
 2. Do your customers have unique financial needs? (e.g., Baselane)
 3. Do you have a strong brand and a devoted customer base? (e.g., Square)
 4. Do you want to pay your customers faster? (e.g., Veryable)
 5. Are your customers underserved financially? (e.g., Lyft)
 6. Do your customers need access to capital? (e.g., Nav)

If you answered “yes” to any of the above, then you’re probably a good fit for
embedded banking. There are also several use cases that work particularly well:




1. GIG-ECONOMY PLATFORMS

Gig workers expect to be paid right away. In many cases, they’re accepting work
opportunities today so they can pay their bills tomorrow. Embedded banking is a
powerful way to offer instant payouts that functions as a revenue generator
rather than a cost center.


2. E-COMMERCE MARKETPLACES

Marketplaces like Etsy and Shopify present a near-perfect use case for embedded
banking. When they offer embedded banking, they provide their merchants with
faster payouts and tailored financing options. They also keep more funds on
their platform, boosting their bottom line.


3. VERTICAL SAAS PLATFORMS

Your customers don’t want to manage their business operations and their business
finances separately. When you offer embedded banking, you become “mission
control,” enabling your customers to manage all aspects of their company from
within your platform.


4. PAYROLL AND EMPLOYEE BENEFITS PROVIDERS

Processing payroll? Many employees don’t have bank accounts, and many more would
welcome the convenience of banking with their payroll provider (e.g., Gusto
Wallet). The same principle applies to employee benefits like HSA and FSA
accounts.


5. BUSINESS FORMATION AND MANAGEMENT

Do you help small businesses incorporate? Draft proposals, send invoices, manage
their websites? If so, you’re a great fit for embedded banking. Small-business
owners want help managing their finances, and you’re in a great position to
offer it.




WHY CUSTOMERS CHOOSE EMBEDDED BANKING PRODUCTS

When it comes to financial products, Americans have a lot of options—so it’s
natural to wonder why they would choose yours.

The short answer is that a majority of American small businesses are
dissatisfied with the way they manage their money today—and they’re eager for an
alternative. In fact, 84% of small businesses we surveyed said they would
explore financial products from their business software tool, if they were
offered.

For your customers, embedded banking products offer four distinct advantages.

 1. Faster access to funds. Embedded banking helps you pay your customers
    faster—even on demand. It’s a way of offering instant payouts that generates
    revenue rather than costing you money.

 2. Better financing options. 62% of businesses we surveyed said they can’t get
    the lending and financing they need. Fortunately, you’re in a great position
    to help. You understand your customers’ business models and their cash flow;
    you know what they need and how much they can afford to repay.

 3. More tailored terms. Traditional financial institutions weren’t built to
    serve the needs of small businesses—and they haven’t kept up with the times.
    When you offer embedded banking, you can provide more tailored terms: fewer
    fees, better interest rates, and targeted rewards for the things your
    customers care about.

 4. A one-stop shop. According to Baselane founder Mathias Korder, “Banking is
    the source of truth for any small business.” Adding banking to your product
    transforms you into a one-stop shop: a single software tool that your
    customers can use to manage every aspect of their companies.




HOW EMBEDDED BANKING BENEFITS TECH COMPANIES

Embedded banking products don’t just create value for your customers; they
enable you to capture more value for your platform.

 * Product differentiation. With embedded banking, you offer a more complete
   product and a better user experience. As a result, you stand out from
   competitors. For example, Roofstock has seen a 4x higher customer lifetime
   value when customers use Stessa Cash Management accounts.

 * Acquisition. A differentiated product makes it easier to acquire
   customers—and correspondingly lowers your acquisition costs. For example,
   after they launched embedded banking, Baselane saw their customer acquisition
   cost decrease by 50%.

 * Engagement. When you make banking services available, your customers engage
   more with your platform—for things like payments, accounting, and financial
   insights. For example, customers who use Nav’s embedded bank accounts are
   2.5x more likely than non-banking customers to pay for additional Nav
   products (e.g., apply for a loan, purchase a detailed credit report).

 * Retention. Banking is famously sticky. For example, Roofstock found that
   customers who use their Stessa Cash Management accounts are retained at a
   rate 3.5x higher.

 * Satisfaction. A more complete product leads to greater satisfaction. For
   example, customers who use Nav’s embedded bank accounts have an NPS of 79,
   35% higher than non-banking customers.

 * Revenue. Ultimately, the items in this list lead to increased revenue
   generation. In fact, embedded banking has the potential to generate five
   distinct revenue streams, and can lead to 2-5x increase in revenue per user.
   To get a detailed estimate of what you could be earning, check out our
   revenue calculator.




WHAT DOES IT TAKE TO LAUNCH EMBEDDED BANKING?

In other words, what will you need to invest in terms of time, money, and
staffing? The answer varies widely depending on your approach.

For example, it’s possible to do without an embedded finance platform, as many
early banking apps did (e.g., Chime, Current). However, this approach can take 2
years and $2 million to launch, and it will require hiring a large, dedicated
banking team.

On the other hand, you could partner with a bank using a modern financial
infrastructure platform. The advantage of this approach is that you can usually
go live in a matter of weeks. They’ll typically support things like:

 * Direct bank relationship. There are more than 4000 banks in the United
   States, but only a few dozen have demonstrated the ability to effectively
   partner with tech companies to offer embedded banking. A good financial
   infrastructure platform will help you identify a bank partner that
   specializes in your target audience and use case.

 * Technology. Embedded banking requires dedicated software to perform tasks
   like ledgering, payments, and reconciliation. It’s complex, and the stakes
   couldn’t be higher. Choose a partner with a proven track record of success
   who can provide all the necessary banking technology.

 * Compliance. Banking is subject to dozens of compliance and regulatory
   requirements—most of which will be unfamiliar to non-experts. Your
   embedded-banking provider should have a team of experienced compliance
   professionals to help guide you.

 * Underwriting. Underwriting means figuring out whom to lend to, how much, and
   on what terms. It’s hard to get right, and mistakes can be costly.
   Fortunately, a financial infrastructure platform can facilitate underwriting
   and make the process simple.

 * Capital. Lending to your customers requires operational capital—the funds
   you’ll advance, which will later be repaid. Many tech companies prefer not to
   leverage funds from their balance sheet for this purpose. For this reason,
   several financial infrastructure platforms also provide access to the capital
   needed to fund lending programs.


HOW UNIT CAN HELP

Unit is a financial infrastructure platform that helps platforms like yours
offer embedded banking and lending.

To date, nearly 200 leading tech companies have trusted us to help them build
and scale their embedded banking and lending programs.

We’re also the only platform to offer White-Label Components—a suite of fully
customizable building blocks—so you can easily build and control your frontend
with minimal engineering resources. We help guide you on compliance requirements
and bank relationship(s) so you can stay focused on scaling your business.

If you’re thinking about how embedded banking can add value to your platform,
please reach out. We’d love to brainstorm with you. 



Originally published:

November 9, 2023

IN THIS GUIDE


The rise of embedded banking
What is embedded banking?
How embedded banking works 
Common use cases for embedded banking
Why customers choose embedded banking products
How embedded banking benefits tech companies
What does it take to launch embedded banking?
How Unit can help


Frequently asked questions


IS WHITE LABEL BANKING SAFE?



White label banking is generally safe and secure, thanks to the stringent
regulatory requirements that apply to financial institutions and the robust
security measures they employ. 

The safety of white label banking services is underpinned by several key
factors:

 * Regulatory compliance. White label banking services are offered through
   established financial institutions that are required to comply with all
   relevant regulations.

 * Data encryption. Data transferred between the user, the platform, and the
   banking partner is encrypted to prevent unauthorized access.

 * Fraud detection. Advanced fraud detection systems are employed to monitor
   transactions and identify suspicious activity.

 * Privacy policies. Rigorous privacy policies ensure that customer data is
   protected and used in compliance with data protection laws.

 * Insurance. Funds held in white label banking accounts are often insured by
   the government. In the United States, for instance, FDIC insurance covers up
   to $250,000 per depositor.


WHAT IS A NEOBANK?



A neobank is a company that offers online banking services without physical
retail locations (“bank branches”) that a customer can visit.

A few neobanks (e.g., Varo, SoFi) hold bank charters, but most do not. The rest
offer banking services via white label banking (e.g., Mercury, BlueVine).

Many neobanks focus on improving the user experience. They offer features such
as real-time notifications, instant payments, budgeting tools, savings goals,
and easy-to-use interfaces.


HOW DOES EMBEDDED BANKING RELATE TO THE CONCEPT OF OPEN BANKING?



The two concepts are complementary; both represent the next stage in the
evolution of financial services.

Open banking enables businesses and consumers to digitally connect their bank
accounts (and other financial data) to third-party apps and services. For
example, when you link your bank account to Venmo or Cash App, that’s open
banking.

Embedded banking enables tech companies like Uber and Shopify to make banking
services (e.g., bank accounts, credit cards) available inside their apps and
websites.


WHAT IS THE DIFFERENCE BETWEEN EMBEDDED BANKING AND BANKING AS A SERVICE?



The two terms are synonymous; both refer to the same thing.

When a tech company like Square offers banking products to its merchants inside
the Square app, you can refer to it as either embedded banking or banking as a
service.


WHAT IS THE DIFFERENCE BETWEEN EMBEDDED BANKING AND EMBEDDED FINANCE?



Embedded banking is a subset of embedded finance. 

Embedded banking refers to the integration of banking services, such as
payments, lending, and account management, directly into non-financial
platforms. 

Embedded finance is a broader concept encompassing a wide range of services,
including embedded insurance, investments, and financial planning.


WHAT IS THE DIFFERENCE BETWEEN DIGITAL WALLETS AND WHITE LABEL BANKING?



Digital wallets are apps that store payment information, enabling users to make
electronic transactions. 

They can hold credit/debit card details, bank account information, and digital
currencies. Well-known examples include Apple Wallet and Google Wallet. 

White label bank accounts are typically comprehensive bank accounts, with
features like check deposits, wire transfers, and access to other financial
products. They are offered by a regulated financial institution and sold under
the logo of another company. For example, Shopify Balance and Uber Pro Card
include white label bank accounts. 

White label bank accounts come with several advantages over digital wallets.
These accounts typically offer a broader range of services and are often
eligible for FDIC pass-through insurance coverage. Unlike most digital wallets,
they can potentially earn interest for the account holder.


WHAT’S THE DIFFERENCE BETWEEN WHITE LABEL BANKING AND PRIVATE LABEL BANKING?



White label banking and private label banking are two terms that refer to
different types of partnerships between banks and non-bank entities.

 * In a white label banking arrangement, a non-bank entity offers banking
   products or services to its customers under its own brand name. Still, the
   products or services are actually provided by a licensed bank behind the
   scenes.

 * In a private label banking arrangement, a licensed bank offers banking
   products or services to a specific group of customers under a different brand
   name than its own. The bank may partner with a non-bank entity that has
   access to the target customer group, such as a retailer or an airline.




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