Retail Brands as Banks: How Embedded Finance Generates Loyalty and Revenue

Retail companies are increasingly dipping their toes into banking and finance. With branded credit cards and payment features, they’re creating stronger bonds with customers — and new revenue streams.

For many large brands with technological capability, embedded finance products like these add significant value to the customer experience. To understand how, let’s dig into what embedded finance is and how it works.

Embedded Finance Closes the Gap Between Brands and Banking

In a nutshell, embedded finance is when nonfinancial companies like retailers offer financial products. This includes lending, integrated payments, debit and credit cards, digital wallets, insurance, and more.

Embedded finance isn’t new. Costco and Walmart, for example, have long provided closed-loop credit cards that act just like any bank-issued card. With today’s technology, there’s now potential for even more companies to create new revenue streams and engage customers with embedded finance. Companies like Marqueta provide payment platforms that power companies from DoorDash to Affirm, while platforms like Unit offer a scalable banking API for products like accounts, loans and payments.

There are many motivations for retail companies to offer financial services. For customers, such services drastically reduce friction during crucial moments in their journey, from payment and financing to obtaining insurance. Embedded financial services can prevent customers from having to navigate away from a shopping experience to complete a transaction or from having to pull out a wallet or purse to check out.

Embedded finance also keeps customer funds and debts with the company instead of in their bank or on a separate credit card. This creates more financial leverage for the retailer, generates revenue from lending, insurance or payment fees, and provides a broader range of customer data.

With more data and a tighter financial relationships with customers, retailers can use embedded finance for acquisition, retention and increasing customer lifetime value, all while generating new revenue.

7 Ways Retailers Can Offer Financial Services

A number of retailers are already launching major embedded finance projects, such as:

• Branded fintechs: Walmart recently announced plans to launch its own fintech, paving the way for it to offer financial services like bill pay, money orders, check cashing, and pre-paid cards.
• Embedded payments: Originator of 1-Click Ordering, Amazon.com now has physical checkout-free stores and payment products, including payment installation, a secured credit card, co-branded payment cards, and a merchant network through Amazon Pay.
• Digital wallets: Walmart and Amazon both offer their customers “closed” digital wallets, with credits that can be added or deducted only through the issuing merchant. Other retailers partner with PayPal, Apple Pay, Google Pay, Mastercard, and/or Visa to accept digital wallet payments.
• BNPL: Various retailers are teaming up with Klarna and Afterpay to offer buy now, pay later (BNPL) options that reduce purchase friction for high-priced items.
• Financing: Shopify offers its sellers business loans without credit checks by using information about the seller’s revenue. Repayments can even be scheduled as a percentage of monthly sales.
• Insurance: Retailers of cars and other large assets now offer their own insurance, such as Tesla does with Tesla Insurance. Instead of shopping around for insurance from separate providers, buyers can opt to purchase insurance through the seller at the point of purchase.
• Tech partnerships: Delivery services like DoorDash and Instacart make it easy for retailers of all kinds, not just grocers, to connect with customers shopping from home or on mobile.

Most of these projects are made possible with the help of open APIs that allow various systems to communicate data across operations. As more retailers build out from this technology, embedded finance will only become more accessible and common.

All of these approaches to embedded finance digitize retailers’ offerings in a way that provides more customer data and incentivizes customers to bank with their favorite brands, deepening the customer relationship.

Are Customers Ready to Bank With Retail Companies?

If you’re wondering whether consumers are willing to trust nonfinancial companies with their money, look no further than a recent Solarisbank survey. More than one in four respondents would use a checking account offered by Amazon.

As consumers grow accustomed to sharing personal data with the companies they do business with, there appears to be an expansion of trust that reaches into financial transactions. This is compounded by a well-documented modern desire for convenience.

Customers aren’t especially interested in banking; they’re interested in the goods and services their money can buy. When trusted companies provide quality goods as well as easy-to-use financial products, the convenience is hard to turn down. Retail companies can add value and convenience for customers while generating new revenue with embedded finance.

Tarun Bhasin is the CEO of Kunai, a digital agency designing and building the next generation of fintechs.