It's now easier than ever to start with Embedded Finance. But it's more difficult than ever to succeed with it.
During our virtual Embedded Finance Review event on August 29th, we discussed the five biggest mistakes when building Embedded Finance products. We were joined by guest speaker Christian von Hammel-Bonten, who shared personal experiences and insights. Additionally, many participants contributed their own perspectives to the discussion. Christian and I decided to put the insights and discussion into writing.
Embedded finance is a secret weapon for many companies. It's not uncommon to see 2-5x increases in revenue, retention, and other metrics once the company successfully embeds financial products.
Many companies assume that integrating financial services is a straightforward technical exercise: simply a few API calls and some front-end work. In reality, the technical integration is just the beginning. Success requires strategic thinking across business model, compliance, user experience, and operations.
If you're considering integrating payments, banking, lending, investment or insurance services into your product, you're in good company. But you're also entering a path many others have failed on.
This post outlines the five biggest mistakes companies make with embedded finance. And to be clear, the mistakes themselves are the primary insights of this post. But instead, we provide practical examples of each mistake and our personal suggestions for avoiding them.
Don’t forget your core business
Embedded finance could become one of, or even your main, revenue drivers. This will present a significant strategic challenge. Ensure your management team fully understands the strategic implications without diverting from the core business, products, and services. Why? Your customers don't buy financial services from you, but your core products and services. The financial services features are "only" embedded. If you don't continue to compete successfully in your core areas, you will lose both revenue streams.
Embedded finance is a catalyst, but it only works with a proper business foundation. As Toast CEO Aman Narang said, "Customers come to us for the tech, but we monetise them through financial services." They wouldn't come and be monetised if the core product sucked.
You face two risks here. First, internal competition on capacity, budget, focus, and management attention between your core product and the embedded finance service. While the Embedded Finance offering needs proper resources, neglecting your core business can be an extremely costly mistake. Second, if you don't embed it well, you create silos in your solutions. Therefore, you will not be able to leverage your core product and, in effect, you will have to start your go-to-market efforts from scratch, like a standalone Fintech startup.
And be realistic: you don't want to make a strategic change and become a bank, do you? Stay true to yourself. Don't forget why your customers came to you and that Embedded Finance is only an add-on to what they actually value.
Don't just start
Financial services are complex, and integrating them into your products and services adds more complexity. We see three areas where other companies have made bigger mistakes:
Don't believe you can build everything in-house
Embedded finance is not SaaS. Although we may all have a basic understanding of financial services, as users of them, critical topics are often hidden in the details, especially in regulations and laws. KYC, AML, PSD2, PCI, and many other regulations, also harmonised across the EU, are applied differently by legislators and/or local regulators in each country and may result in the situation where "you can't build and deliver what you planned."
Even Apple realised this when implementing BNPL for Apple Pay. They started in-house and then switched to Affirm. N26 has also faced various regulatory challenges across different European markets.
Don't select partners before you know what you want
First think, then act. One example we discussed at the virtual event was an e-commerce group that selected its payment service provider before finalising its strategy. When they switched e-commerce platforms, the preferred provider was unable to deliver the required level of integration. The consequence? They had to choose a second partner while still paying minimums to the first one.
Price is not the only crucial data point
Price is the easiest to determine and compare, and thus often becomes THE decision factor. However, if you don't know what you're asking for, you won't understand offers. We discussed the definition of a transaction during the virtual event. We highlighted that payment service providers like Stripe, Adyen, or Mollie sometimes have a different understanding of "what a payment transaction is" and consequently how it is charged. A supplier may look more expensive than the others at first glance, but when you design your processes and calculate your business case, you may realise the opposite. Consider the price, calculate your costs, but more importantly, assess the value the supplier brings first.
Our advice: Set the vision, define the strategy, then determine requirements. Start with the user, create personas, and understand their journey. Engage with industry experts who understand the market. We are not fans of over-engineering, but 50% clarity is insufficient for effective decision-making; 80% is.
Don’t forget to involve all stakeholders
Get management buy-in first. You need more than just a "yes, go ahead" or project approval. Embedded Finance is not just another project. It can fundamentally change your business and revenue streams. Shopify generates more than 70% of its revenue from financial services. Management must understand the strategic implications of this decision.
One of our clients started an issuing project. Clearly, management decided it, but never understood what it meant. They were thinking of building it up as another profit centre, but never understood the implications: required resources, budget, and ongoing operational requirements.
Embedded finance touches all departments. Let's take integrating a lending provider as an example: IT must technically integrate it into the purchase process, legal must handle the Terms and Conditions, marketing should communicate the new option, customer service will handle questions, accounting must charge for it, and operational reporting must be adapted. Plus financial services are heavily regulated. All departments are to be involved from the outset. As a product manager, you learn that if you don't manage the end-to-end product lifecycle, your product's success will suffer. Involve stakeholders as early as possible and guide them through the project from ideation to delivery. It's better to be early than too late.
Don’t underestimate the complexity
Embedded finance technology and services have advanced massively in recent years. Integrating financial services has become easier, but this shouldn't mean you should underestimate their complexity. What we have learned is that technical integration doesn't define complexity, but the regulatory and legal framework does.
You deal with money. Your partner might know a lot, but you could still be the first one in this specific setup, creating new requirements. We discussed numerous examples in the KYC (Know Your Customer) space during the virtual event, where an infrastructure provider assured a new German customer that they would not have to complete KYC. Eventually, the German regulator Bafin disagreed. Another public example in this area is N26, which, when it expanded to England, discovered it couldn’t conduct KYC checks the same way UK neobanks do. They had to comply with German regulations.
So you do your homework. Don't completely trust your partners and suppliers. Your partner may have expertise, but every setup is different. Verify your setup with legal advice upfront to ensure compliance with relevant regulations. Understand what you build and build up your business case accordingly.
So don't treat embedded finance as a pure technical project. Involving your legal team from the beginning is essential.
Don’t lose focus
Even if opportunities in embedded finance are manifold, resist the temptation to chase them all at once. The biggest trap is adding more features when your initial product isn't working well. This feature creep (feature fucking) is not a solution to any problem.
Deliver, measure, expand. Focus on your core value first. Get the integration right. Ensure your first service works flawlessly before proceeding to the next one. For example, start with payments. Does it work well? Only then consider adding banking services. In this example, we have seen companies add banking, believing it would boost adoption of the payment product.
When your embedded finance product struggles, adding more features feels like progress, but often makes things worse. Instead, fix what you have first. Perfect one service, measure its success, then expand to the next.
The opportunities in embedded finance are exciting, but success comes from mastering one thing at a time, not from building everything at once.
Conclusion
These mistakes aren't just theory; they're based on (our) real experiences. If you're navigating embedded finance challenges and want to discuss your specific situation, feel free to reach out.
You can also join our virtual or in-person events where we dive deeper into these topics with industry experts, or listen to our podcast for the latest insights. The key is learning from others who've walked this path before you.
