Guest Post from Joel Barenco, software engineer at Cledara.
As a software engineer at Cledara, I have the chance to work closely with banking products such as accounts and debit/credit cards. Some recent projects included the change of card issuer processor and the improvement of our internal processing of card transactions. It is a truly exciting area to work on and I’m glad I can see the inner workings of such a huge industry (card payments represented $9.5trn in the U.S. in 2022). It however took me some time before fully understanding the vocabulary and the different concepts in that space. I thought I’d share a quick introduction for whomever might be interested in the topic.
What is FinTech?
To properly explain embedded finance, it is worth stepping back to understand what FinTech is. At its core, FinTech is the combination of financial services and technology. If you ask people which companies are in that space, you will probably hear trending companies such as Revolut, Paypal, or even Binance for crypto. But actually, FinTech has been around much, much longer. In fact a couple of centuries ago Western Union introduced its money transfer service in 1871. From those early beginnings, there’s been indeed a long lasting history of financial technologies with the likes of payroll processor ADP (1950s) or bank technology provider Fiserv (1980s) that became the first processor of Visa and MasterCard bank-issued credit cards.
Fintech service offerings have been evolving through time in parallel with the underlying sectors it serves and the available technology. Main areas of innovations have included credit cards, ATM machines, stock trading, online banking, and more recently crypto.
BaaS - Banking-as-a-Service
Fast forward to today and we are witnessing innovations in the field of core banking thanks to the rise of cloud-native technologies, open banking and the democratisation of Application Programming Interface (API). FinTechs now access bank systems directly via API’s and can build new offerings on top of the banks’ regulated infrastructure. Banking-as-a-Service (BaaS) is a new layer in the banking value chain offering the aggregation of regulated core financial products from banks to distributors. Historically, banks would own the whole value chain by providing the technical elements and the distribution (branches). Now for example, customers of Cash App (by Square) are given a customised debit card to use at for in-store purchases and/or withdraw money from ATMs through Marqeta and their bank partner, Sutton Bank. This new layer of innovation allows for modern user experiences and consumer-first services that help accelerate the adoption of banking services and integrate these services in the everyday lives of consumers and businesses.
The Rise of Embedded Finance
With embedded finance, non-financial companies can leverage BaaS to integrate their financial products within their ecosystem and provide new features to their end customers. Uber integrated payments into its app so that riders can leave without doing anything at the end of a ride, while some e-commerce now proposes Buy Now Pay Later (BNPL) type of payment options (i.e. pay in installments) in partnership with specialised FinTech providers. Beyond payments, Amazon now offers purchase insurance when buying certain items, like computers; Shopify expanded its services on the financial side with products like Shopify Capital (loans) and Shopify Balance (accounts). Increasingly we see financial services integrated seamlessly into the flow of commerce - and I believe we are just getting started.
How Cledara Leverages Embedded Finance
At Cledara, we help businesses simplify the way they discover, buy, manage and cancel software. One way we do this is by integrating financial products (i.e. virtual debit and credit cards) inside of our application in order to provide control over SaaS subscriptions spend. We do this by generating dedicated payment cards for each SaaS application created by the user. For each card, our customers decide who gets access to it, and can easily close it if needed which in turn effectively cancels the underlying subscription. So in the process of helping customers manage and control their software subscriptions, we have embedded a financial instrument directly into our product experience to facilitate the underlying process for the customer - the complexities of which are abstracted away in the background.
Embedded finance becomes really interesting when you continue to build on top of those core financial services to create new features that better serve (constantly evolving) customer needs. In the previous case, we further the control aspect with features such as approvals flows and budgeting, to allow customers to set spend limits per card to avoid overspending.
We are just getting started. It’s important to remember that we are still at the beginning of this new wave of innovation in FinTech. More building blocks of finance will be made available “as a service” across many customer use cases. At Cledara, with our vision to create an ecosystem for software buyers and sellers to interact effectively, we are lucky to be at the forefront of this trend and see many opportunities to improve our product. We’d love to hear from you - Follow us on our socials or our newsletter to stay tuned to our latest news!