How Your Company Can Solve Payment Friction with Embedded Finance

Picture this: A person hires a plumber through a platform that connects consumers with contractors. Everything has gone smoothly so far, but now it comes time to pay. 

If the platform has an embedded payments feature, the person hiring the plumber is in luck: Just pay on the app directly. 

But what if the platform doesn’t have a payment feature? In that case, the consumer and plumber have to take the extra step of agreeing to a method of payment. That could mean going to a third-party platform or something even more manual, like writing a check. 

This situation is called payment friction, which refers to challenges that get in the way of customers making payments for a product.

If you’re a company that serves small businesses and vendors, you can help them overcome payment friction with embedded finance products that will make your product more valuable to them and bring in new revenue.   

What is payment friction? 

Any time a business or consumer cannot acquire the goods or services needed promptly because they cannot easily access or utilize embedded payment options on the same platform, that causes payment friction.

To read our ultimate guide to embedded finance products for B2B SaaS companies, download it here.

Examples of payment friction include:

• Going off platform: If someone has to use an outside platform or tools to pay for services they acquire through your platform, that’s a burden. 
• Writing a check: Checks take time to receive and clear and could get lost in the email. Paper checks are going extinct, according to Business Insider, with the number being written dropping by almost 2 billion per year.
• Onerous manual input: Having to type out bank account and routing numbers into a platform requires extra steps from consumers. Sharing this sensitive information can also make consumers uncomfortable. 
• Slow-moving payments: A payment option exists in-platform but transactions take a long time to go through. 
• Cash-flow problems: Payments get stalled or canceled due to insufficient funds in an account, even if the account owner in question has resources elsewhere to fund the transaction. 

Here’s what your company needs to know about payment friction, and how to leverage banking as a service (BaaS) to build your own payment ecosystem to help you or your clients overcome it. 

Challenges of payment friction + solutions

• Businesses that experience payment friction can lose customers and face greater risks.
• Companies can solve payment friction by building their own payment features.
• A fleshed-out payment ecosystem creates additional benefits like customer loyalty, faster transactions, and a foundation for additional useful tools.
• Banking as a service (BaaS) provider Treasury Prime is an expert at building payment ecosystems. 

The costs of payment friction

Payment friction can cost your business customers. If a competitor provides the same offerings as your company but makes it easier for customers to pay for those products or services, that competitor will have an advantage. They may even be able to charge customers higher rates in exchange for that convenience. 

At the same time, if you only offer off-platform or legacy payment options to customers, you could be inviting greater risk into transactions. What if someone forges a check? What if a business that uses your platform only charges customers after a service, and a customer skips out on payment? Even if it’s not your fault or your liability, your users could still blame you. 

Solutions to payment friction

The COVID-19 pandemic accelerated the shift from brick-and-mortar to e-commerce, making online payments table stakes for businesses. As a result, companies like Stripe and Shopify, which help businesses digitize payments, saw incredible gains. Shopify nearly tripled its revenue since the start of the pandemic. 

This tells us two things: Businesses view easy payments as a competitive edge, and value B2B services that include payment tools. 

If you’re looking to overcome payment friction, you can take two different routes.

• Add individual payment options: You can contract individual payment providers to help you enable specific forms of payment in your app or on your website. 
• Build a payment ecosystem: You can work with a BaaS provider such as Treasury Prime to build your own payment ecosystem, where you integrate with a bank to offer payments and additional services directly. 

The payment ecosystem route provides significantly more product possibilities, greater insight into customer behavior, introduces new sources of revenue for your business, and allows you to offer additional features. 

Examples of payment ecosystem solutions

• Buildertrend provides construction management software to builders, remodelers, and other contractors. Users can open white-labeled bank accounts through Buildertrend, allowing them to accept payments from customers, remit payments to contractors, and manage overall cash flow. The platform supports payment rails including cards, ACH, and wire transfers. 
• Azibo is a comprehensive financial platform for landlords. Landlords can use Azibo to open business banking accounts, screen tenants, collect rent, purchase property insurance, access competitive business loans, and track business spending such as payments for property maintenance. 
• DoorDash The company’s recent DoorDash Capital initiative gives eligible restaurants and food businesses a cash advance to cover needed expenses in exchange for a small fee and interest-free payback in the form of a percentage of food sales. 
  

Benefits of building your own payment ecosystem

The easiest way to build your own payment ecosystem is to partner with a bank through a BaaS provider. This enables you to open FDIC-insured accounts for your end users, issue cards, process ACH and wire transfers, and more. When you establish a payment ecosystem you can:

• Earn revenue from interchange fees on card transactions.
• Make your app stickier for users by encouraging them to store money in your white-labeled bank accounts.
• Help you and your clients get paid faster and more securely.
• Provide your end-users with greater and more centralized information about their transactions.
• Automatically generate tax documentation for revenue your end-users earn on your platform. 
• Gather more data on how your end-users use your tools and platform.
• Funnel money between users faster using account-to-account transfers. 

When you build a payment ecosystem, you’re able to go further than solving basic payment friction. Not only do you keep transactions on your platform and save users from having to resort to onerous payment options such as mailing checks, but you can offer additional customized products that make transactions smoother, and help your customers conduct business more efficiently. 

To discuss how we can help your fintech or embedded finance company scale, contact us here. Want to learn more about our process? View our API reference or play around with our Developer Sandbox.‍