Embedded APIs: From Startups to Starbucks - The Future of Integration

Stripe’s recent launch of Stripe Treasury has drawn significant attention, marking its entry into the banking sector. This development mirrors similar moves by Google in banking and payments, and is echoed in filings by companies preparing for IPOs, such as Airbnb, DoorDash, and Affirm, all of which highlight “financial services” – a strong indication of continued growth within this industry.

A common thread unites these diverse companies: the seamless integration of financial services into their existing offerings. A growing number of fintech companies are making financial services more accessible across various areas, including investment, insurance, lending, and banking. Despite being relatively new to the market, these companies are achieving substantial valuations. What is driving this trend?

Today’s consumers desire more personalized experiences and reduced complexity, while businesses seek to enhance monetization without disruption. The value of providing support to both consumers and merchants at the precise moment, in the preferred manner, and at the desired time, is considerable.

Embedded finance fundamentally allows any brand or merchant to quickly and affordably incorporate innovative financial services into their products and customer interactions. Rather than developing these features internally, companies are turning to readily available “building blocks” – or APIs – to capitalize on the opportunity to extend customer relationships and cater to a broader range of needs in a single location.

This applies to startups, digitally focused brands, and established businesses, both online and offline. For new fintech companies or brands aiming to offer financial services, utilizing APIs is often the most practical solution, given the expenses associated with building integrations independently.

Consider, for example, a global airline avoiding the need to establish a team dedicated to know-your-customer compliance or fraud detection. Or lenders who can reduce risk and accelerate processes by eliminating the need for pay stubs or personal information verification?

The ultimate objective is to foster customer loyalty and generate additional revenue. Traditionally, established brands have relied on banks for co-branded programs and partnerships. However, this “offline” approach is typically white-labeled and requires significant manual intervention, with limited flexibility. APIs offer a transformative alternative, as demonstrated by the success of Starbucks Rewards, a prime example of leveraging data, rewards, and loyalty programs. Businesses are no longer simply selling leads; they can now directly participate in product development and distribution to improve profitability.

Currently, embedded finance is being implemented in various ways: directly within a product (such as Tesla’s insurance offering), through distribution channels (like a startup offering insurance during a car purchase), and at the technology level (using building blocks to enhance overall functionality, such as a lender using a data API for instant underwriting).

We generally categorize these building blocks into two groups: providers, which offer “plug and play” applications, and enablers, which facilitate the delivery of financial services.

The market is seeing a surge of new players, and there isn’t a single solution for everyone. Some companies possess data advantages, others have strong distribution networks, and still others create new opportunities through enhanced customer experiences. While these “digital wrappers” around financial services infrastructure appear effective, the question of which companies will emerge as market leaders remains. Will enablers ultimately evolve into providers?

Key factors for successful embedding

The potential benefits are apparent, but the market is still developing, with numerous fragmented solutions when a consolidated approach is needed to achieve scale and identify long-term leaders. Furthermore, traditional banks are unlikely to accept a role as simple intermediaries for financial transactions, so continued innovation from existing players should be anticipated. For example, Chase, Citi, and American Express are all introducing new installment lending options.

We consulted with a variety of partners within our network – including operators from Fortune 500 companies and prominent financial institutions, as well as innovators in emerging markets – to understand how both startups and established companies should approach embedding. Here’s a summary of our findings:

Best practices for startups and digital-first companies

Utilize data to maximize effectiveness – by integrating company and transaction data, you can generate revenue while enhancing user experiences, offering cross-selling opportunities, and developing risk models that boost customer retention and loyalty. However, ensure you have the necessary expertise in-house or dedicated resources to support these new offerings.

Best practices for established companies

Focus on embedding, rather than reselling, as context is paramount. Those who succeed will be those that deliver services directly within the relevant context, addressing a need in real-time, instead of offering standardized, pre-packaged solutions. Embedding allows brands to introduce their own financial services tailored to specific customer segments and generate new revenue streams (such as capturing interchange fees, interest income, or revenue sharing from insurance/warranty premiums). Established brands already possess strong distribution networks; now is the time to leverage them.

Incumbents versus new market entrants

Select a solution that aligns with your specific requirements – there is no universally ideal answer. Prioritizing configuration flexibility over speed is crucial, and always consider the scale of your operations as well as any geographical limitations. Both new and established brands should avoid relying solely on a single partner, as the stability of newer companies can be uncertain.

Enablers or providers can expedite time to market, but over-reliance on a single platform can create significant vulnerabilities. Major companies like Shopify and Square have expanded beyond partnerships and developed their own internal capabilities. While new entrants may fulfill core functions, switching providers can be extremely costly, and there is currently no clear leader in the market. For established brands, it may be prudent to observe which companies can consolidate, scale, and ultimately emerge as dominant players.

The future is embedded, but winners are yet to be determined

As global investors, we have observed the power of embedding in various markets worldwide. Consider the substantial success of superapps like Grab in Singapore and WeChat in China, which have driven increased usage and adoption through integrated payments, banking, wealth management, and insurance services.

Superapps have enhanced their value by streamlining diverse customer journeys – but this is only possible when information is centralized, programmable, and readily accessible. While the U.S. currently lacks a comparable superapp, and embedded finance has faced some setbacks, such as the retreat of Uber Money, we anticipate a continued shift towards business models that incorporate financial services. It’s important to remember that numerous paths to success exist, with a wide range of providers and enablers to choose from.

While current financial technology has served its purpose, there is an opportunity to enhance the functionality and interoperability of core services. Convenience has been a primary benefit thus far, but the future will emphasize consistent user experiences and brand integration so seamless that customers will not be able to distinguish it from the core product.

Although it is premature to identify definitive winners, we expect to see the emergence of major category leaders in the coming years – serving both enterprise and small-to-medium-sized businesses – along with innovative use cases that are currently unforeseen. Ultimately, the most successful fintech companies will be those that provide the tools to cultivate tomorrow’s most valuable customers.

Cathay Innovation has a financial interest in FinAccel, Fundbox, Kueski, Igloo and Quantifind.