Embedded finance is the integration of financial services””payments, lending, insurance, and banking””directly into non-financial platforms and applications. Instead of redirecting customers to a bank or separate financial institution, companies embed these capabilities into their own products, allowing users to access financial services without leaving the platform they’re already using. When you buy furniture on Wayfair and select “pay over 12 months” at checkout, or when an Uber driver receives instant earnings deposits through the app, you’re experiencing embedded finance in action. This approach represents a fundamental shift in how financial services reach consumers and businesses.
Rather than financial products existing as standalone destinations, they become invisible infrastructure woven into the software people already use daily. For startups and entrepreneurs, embedded finance creates opportunities both to enhance existing products with financial features and to build the underlying infrastructure that powers these integrations. This article examines how embedded finance actually works, the different categories of embedded financial services, the technology stack that makes it possible, and what founders should consider before adding financial features to their products. We’ll also cover the regulatory landscape, revenue models, and where this space is heading.
Table of Contents
- How Does Embedded Finance Actually Work Behind the Scenes?
- The Five Categories of Embedded Financial Services
- Why Non-Financial Companies Are Adding Financial Features
- Building Versus Buying: How Startups Should Approach Embedded Finance
- Regulatory Complexity and Compliance Requirements
- Unit Economics and Revenue Models in Embedded Finance
- Infrastructure Providers Powering the Ecosystem
- Where Embedded Finance Is Heading
- Conclusion
How Does Embedded Finance Actually Work Behind the Scenes?
Embedded finance relies on a layered infrastructure connecting licensed financial institutions with the software platforms that customers interact with. At the bottom sits a licensed bank or financial institution that holds the necessary regulatory approvals to offer banking services, issue credit, or underwrite insurance. In the middle, infrastructure providers and Banking-as-a-Service (BaaS) companies package these capabilities into APIs. At the top, non-financial companies integrate these APIs into their products. Consider how a SaaS company might offer business credit cards to its customers. The SaaS company doesn’t need a banking license.
Instead, it partners with a BaaS provider like Marqeta, Treasury Prime, or Unit, which in turn has relationships with sponsor banks like Celtic Bank or Cross River. The SaaS company handles the customer relationship and product experience while the sponsor bank handles regulatory compliance, capital requirements, and the actual movement of money. The BaaS provider translates between these two worlds through APIs. This structure creates clear divisions of responsibility but also introduces dependencies. If your BaaS provider loses its relationship with its sponsor bank””as happened when Synapse Financial collapsed in 2024, leaving thousands of end users temporarily unable to access funds””your embedded finance product faces serious operational risk. Due diligence on partners isn’t optional; it’s essential.
The Five Categories of Embedded Financial Services
Embedded finance breaks down into several distinct product categories, each with different technical requirements, regulatory considerations, and revenue potential. Embedded payments are the most mature category, encompassing everything from in-app checkout to stored payment credentials. Embedded lending includes point-of-sale financing (buy now, pay later), revenue-based financing for businesses, and lines of credit offered through software platforms. Embedded banking covers deposit accounts, debit cards, and money movement capabilities integrated into non-bank platforms. Shopify Balance, which gives merchants a business account and card directly within the Shopify dashboard, exemplifies this category.
Embedded insurance allows platforms to offer coverage at the point of sale””think shipping insurance at checkout or rental car coverage when booking travel. Embedded investing, the least mature category, includes features like automated savings, round-up investing, and stock trading within non-brokerage apps. However, not every category makes sense for every platform. Embedded insurance works well when there’s a clear, relevant risk at the point of transaction””protecting a purchase, covering a trip, insuring a rental. If your platform has no natural insurance moment, bolting on coverage feels forced and adoption suffers. The most successful embedded finance implementations match the financial service to an existing workflow rather than creating new ones.
Why Non-Financial Companies Are Adding Financial Features
The business case for embedded finance comes down to three factors: customer retention, new revenue streams, and data advantages. When users conduct financial activities within your platform, they become significantly stickier. A freelancer using your invoicing software who also receives payments and accesses working capital through your platform has much higher switching costs than someone who just uses you for invoices. Revenue diversification is equally compelling. Interchange fees on card transactions typically range from 1-3% of transaction value. Lending products generate interest income and origination fees.
Insurance carries commissions. For platforms with high transaction volumes or large customer bases, these revenue streams can become substantial. Toast, the restaurant technology company, now generates more revenue from its financial services than from its core software subscriptions. The data flywheel creates a third advantage. When you see a customer’s cash flow, payment patterns, and financial behavior, you can offer better-tailored products and make superior underwriting decisions. A platform that processes a business’s sales data can underwrite a loan faster and more accurately than a traditional bank working from tax returns and bank statements alone.
Building Versus Buying: How Startups Should Approach Embedded Finance
Startups pursuing embedded finance face a fundamental build-versus-buy decision at each layer of the stack. Building more in-house increases margins and control but requires significant investment in compliance infrastructure, engineering resources, and operational capabilities. Buying from established providers speeds time-to-market but compresses margins and creates vendor dependencies. Most startups should start with higher-level integrations””working with established BaaS providers rather than building direct bank relationships. Stripe Treasury, for example, lets platforms offer bank accounts and cards through a familiar API with relatively minimal compliance burden.
The tradeoff is that Stripe takes a cut and controls the customer experience parameters. As volume grows, bringing more of the stack in-house can make sense, but premature optimization here burns capital and delays launch. The exceptions are startups building embedded finance as their core product rather than a feature. If you’re creating a vertical BaaS platform for a specific industry or building infrastructure that other companies will use, you’ll need deeper banking relationships and likely your own compliance team from earlier in your journey. These are fundamentally different businesses than adding payment acceptance to an existing software product.
Regulatory Complexity and Compliance Requirements
Embedded finance doesn’t eliminate regulatory requirements; it redistributes them across multiple parties. The sponsor bank maintains primary regulatory responsibility, but platforms that market financial products face their own compliance obligations around advertising, fair lending, privacy, and consumer protection. The lines of responsibility aren’t always clear, and regulators have increasingly scrutinized these arrangements. State-level licensing adds another layer of complexity. Money transmission, lending, and insurance each carry their own licensing requirements that vary by state.
While BaaS providers often handle federal regulatory relationships, platforms may still need state licenses depending on how products are structured and marketed. A lending product offered in all 50 states might require coordination with multiple state regulators, each with different examination schedules, reporting requirements, and fee structures. The warning here is direct: regulatory risk in embedded finance is real and asymmetric. A compliance failure can result in enforcement actions, fines, and forced product shutdowns””outcomes that can threaten a startup’s existence. Before launching any embedded finance product, get explicit clarity from your legal counsel and BaaS partners about who owns which compliance obligations and what happens if something goes wrong.
Unit Economics and Revenue Models in Embedded Finance
Revenue in embedded finance typically flows from transaction fees, interchange, interest margins, and premium sharing. Interchange revenue from card transactions usually splits between the platform, the BaaS provider, and the sponsor bank, with platforms typically receiving 50-80% depending on volume and negotiating power. On a 2% interchange rate, that might translate to 1-1.6% of transaction volume reaching the platform. Lending economics work differently. Platforms either earn origination fees (typically 1-5% of loan value), ongoing servicing fees, or a share of interest income.
Some arrangements involve the platform taking a portion of credit risk, which increases potential returns but introduces balance sheet complexity. Buy now, pay later products that don’t charge interest to consumers rely on merchant fees, typically 3-6% of transaction value. The comparison worth noting: interchange revenue is lower margin but highly predictable and scales directly with transaction volume. Lending revenue offers higher margins but carries credit risk and requires more sophisticated operations. Insurance commissions fall somewhere in between. Most successful embedded finance strategies combine multiple product types, using payments as the entry point and expanding into higher-margin products once customer relationships are established.
Infrastructure Providers Powering the Ecosystem
The embedded finance infrastructure market has matured significantly, giving startups multiple provider options at each layer. For embedded banking and cards, providers like Unit, Treasury Prime, Bond, and Solid offer APIs that connect to sponsor banks. Stripe Treasury provides similar capabilities with the advantage of integration into Stripe’s broader payment infrastructure. Marqeta focuses specifically on card issuing with deep customization capabilities. For embedded lending, companies like Lendflow, Canopy, and Pier offer loan origination and servicing infrastructure.
In embedded insurance, providers like Boost, Cover Genius, and Sure enable platforms to offer coverage without becoming licensed insurers themselves. Each provider has different strengths””some optimize for speed to market, others for customization, and others for specific verticals or geographies. Shopify’s approach illustrates one integration path. Rather than building financial infrastructure from scratch, Shopify partners with Stripe for payments, works with multiple lending partners for Shopify Capital, and launched Shopify Balance through a bank partnership. This multi-vendor approach lets Shopify optimize each product category while maintaining strategic control over the customer experience.
Where Embedded Finance Is Heading
Several trends will shape embedded finance over the next several years. Regulatory clarity will increase””the OCC, FDIC, and state regulators are actively developing frameworks specifically addressing bank-fintech partnerships, which should reduce uncertainty but may also increase compliance requirements. Consolidation among BaaS providers seems likely as the market matures and sponsor banks become more selective about partners following several high-profile failures. Vertical-specific solutions will proliferate. Rather than general-purpose embedded finance infrastructure, expect more platforms tailored to specific industries””healthcare, construction, logistics””where domain expertise enables better products and underwriting.
AI-powered underwriting will become standard, enabling faster decisions and more personalized financial products based on platform-specific data. For founders, the strategic question isn’t whether embedded finance is relevant””it almost certainly is for any platform with commercial activity. The question is timing and sequencing. Adding financial features too early distracts from core product-market fit. Adding them too late means missing retention and revenue opportunities while competitors integrate. The right moment is typically when you have strong customer relationships and sufficient transaction volume to make the unit economics work.
Conclusion
Embedded finance transforms financial services from standalone destinations into invisible features integrated throughout the software platforms people already use. For startups and entrepreneurs, this creates opportunities to deepen customer relationships, unlock new revenue streams, and build differentiated products that competitors can’t easily replicate. The infrastructure to enable these integrations has matured significantly, making embedded finance accessible to companies that couldn’t have considered it even five years ago.
The path forward requires careful partner selection, clear understanding of regulatory responsibilities, and realistic assessment of unit economics at your current scale. Start with the financial services that most naturally fit your existing customer workflows, build relationships with proven infrastructure providers, and expand deliberately as you develop the operational capabilities to support more complex products. Embedded finance isn’t a feature to bolt on””it’s a strategic capability that, done well, can transform your business model.