Embedded Finance: Banks’ New Growth Channel
In the past, a community bank in Connecticut could attract customers through physical branches and marketing efforts, but expanding beyond its geographic footprint was cumbersome.
Today, that same bank can partner with a single independent software vendor (ISV) and unlock a channel to thousands of customers across the U.S. who were previously unreachable.
In a recent PaymentsJournal podcast, George Malesky, Director of Partnership Development at Qualpay, and Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, discussed how ISVs’ growing role in embedded finance is creating a new distribution strategy for financial institutions.
The evolution of this model has also fundamentally shifted the role of banks. Rather than simply offering accounts and payment rails, more institutions are becoming embedded finance enablers—a strategy that can position community and regional banks as integral financial services providers.
The Four-Legged Table
Consumers may not ask for embedded finance by name, but they expect to pay within the apps and websites they already use—not through a separate banking portal. That expectation has carried into the business environment, where merchants across industries want payment capabilities built directly into the software they use to run their businesses.
Embedded finance has emerged to meet this demand, and its success depends on four interconnected participants: sponsor banks, Banking-as-a-Service (BaaS) providers, ISVs, and end customers.
At the foundation is the sponsor bank, which provides regulated financial services such as holding deposits, issuing accounts, and facilitating access to payment networks. The sponsor bank is responsible for regulatory compliance, anti-money laundering (AML) and Know Your Customer (KYC) oversight, and financial risk management.
BaaS firms provide the technology and operational infrastructure that makes embedded finance possible. They build the APIs that support functions such as digital onboarding, payment orchestration, underwriting automation, compliance workflows, settlement and reconciliation, and white-label capabilities.
ISVa bring those capabilities directly to the businesses that need them. They are responsible for customer support and product adoption, both of which are critical to the success of an embedded finance offering. In the process, they maintain one of the model’s most valuable assets: the customer relationship.
That relationship gives ISVs access to vast amounts of data about business behavior and industry-specific pain points—insight that can inform both the products they offer and the financial services layered into them.
“Banks don’t naturally have these workflows,” Malesky said. “An accounting software knows exactly when a business sends invoices; a healthcare platform knows when patients are going to make payments; a property management platform knows when rent’s going to be collected. They have a more intimate knowledge, and that context allows financial services to appear exactly when and where they are needed.”
The final participant in the end customer, who validates and powers the entire system. Each party plays a distinct role, and the model depends on their ability to work together. Remove one piece, and the broader embedded finance ecosystem quickly begins to break down.
“Without the bank, you’d have no regulatory banking products,” Malesky said. “Without the platform, no scalable APIs or automation. Without the ISVs, there would be no customer distribution, and without the customer, there’s no adoption of revenue.”
“You can think of it as a four-legged table. Take out one leg and make it wobbly,” he said. “There’s no independence here, each one of those legs makes it all come together and makes it work.”
A Workflow, Not a Destination
While all four participants are essential, ISVs occupy a particularly important position because they sit closest to the end customer. That position has created meaningful financial, strategic, and competitive advantages for software providers.
The most obvious is a new source of revenue. Instead of relying solely on subscription fees, ISVs can participate in payment processing revenue and generate additional income from banking and financial services. These opportunities can include treasury services, lending, referrals, and deposit programs.
The value extends beyond revenue. Embedded finance can bolster customer retention by bringing payments, banking, invoicing, reconciliation, and financing together within a single platform. For merchants, the convenience of managing these functions in one place can make a software platform much harder to replace.
“Once that software is wrapped into the business, it’s very hard for a business owner to change software platforms,” Apgar said. “They basically have to start over, not just with their menu if they’re a restaurant, but with all of their suppliers, recipes and inventory levels. Unless the software is flat-out not working, there’s very little incentive. There’s a high barrier to change on the business owner’s part.”
“When you’re a bank providing embedded finance and going along for the ride, you’ve acquired not just a customer, but a very sticky and stable customer,” he said.
There is an experience advantage, too. Embedded finance allows business owners to access financial services through the same intuitive, consumer-grade digital experiences they have come to expect elsewhere. For merchants accustomed to navigating fragmented and complex financial workflows, that can represent a shift.
“If you think about a restaurant owner, at 2:30 or 3:00 in the afternoon between shifts in the past, they might say, ‘I have to go out now and run to the bank,’” Malesky said. “Instead, they should be thinking about ‘I need to pay my suppliers’ and then taking 20 to 30 steps into the back office.”
“Banking simply happens in the background of everything else they do, that’s where embedded financial services create additional value,” he said. “The software becomes a more complete and holistic operating system for the business, and it’s a workflow instead of a destination.”
Becoming an Embedded Finance Enabler
Taken together, these benefits have pushed ISVs to the forefront of embedded finance, and that shift is changing what banks need to provide.
Historically, many banks viewed their role as complete once they facilitated services such as opening deposit accounts, processing ACH transfers, issuing cards, or conducting wire transfers.
But as these individual services have become more commoditized, the opportunity for banks has moved upstream. Rather than providing financial products, institutions can provide the infrastructure that allows those products to become part of a broader software experience.
“Think of it as an acquirer-in-a-box, giving an ISV, PayFac, or fintech everything they need to launch financial services quickly, without building that additional infrastructure themselves,” Malesky said. “The platforms typically include API-first architecture, modern APIs that allow the ISVs to integrate banking directly into their software without expensive custom development and additional work. They want it to function just like any other cloud service.”
That means delivering digital onboarding experiences through which customers can open accounts, complete KYB and KYC requirements, apply for merchant services accounts, receive underwriting decisions, and begin processing payments.
Compliance is another critical piece of the equation. Banks need to provide the oversight and controls required to support embedded financial services while giving ISV partners the infrastructure to manage those obligations effectively.
“I always talk about compliance being the heaviest lift because anyone outside the industry—especially ISVs—when you come into payments and banking, you don’t quite realize everything that’s involved,” Malesky said. “That includes AML, OFAC, KYB, transaction monitoring, risk scoring, and the list goes on and on. It is an expansive requirement, for good reason, that outside of banks becomes a difficult and expensive challenge.”
The customer experience matters just as much. Embedded finance platforms should offer white-label capabilities so financial services can appear seamlessly within an ISV’s platform and carry its branding. Customers should not feel as though they are being redirected to a third-party or an external website.
Banks can extend this value further through merchant portfolio management. Rather than limiting reporting and risk monitoring tools to their own internal teams, they can give ISV partners visibility into merchant performance, portfolio health, and risk.
The commercial model matters as well. Establishing clear revenue-sharing arrangements gives banks and ISVs a share incentive to grow the relationship and deepen the financial services offered through the platform.
Finally, banks should establish mechanisms to capture and use the data generated through these partnerships. One of the most powerful advantages of embedded finance is the visibility it provides into business transactions and cash flow.
That information can help banks underwrite more accurately, offer appropriate working capital, reduce credit risk, and ultimately improve customer outcomes.
Shifting the Distribution Strategy
All of these capabilities point to a shift in how banks can approach distribution.
The institutions that provide embedded finance infrastructure are positioning themselves for a financial services landscape that won’t be defined by the largest branch network or the broadest product catalog. Instead, it will be shaped by institutions that can deliver banking services wherever businesses choose to work.
For community and regional banks, that shift may seem daunting. But they don’t need to build an entire embedded finance ecosystem from scratch. Solutions like those offered by Qualpay can provide modern embedded finance APIs and onboarding workflows that connect financial institutions to ISVs—and, through those partnerships, to the broader digital economy.
“They have to find the right partners and then enable their software companies to become banking distribution partners,” Malesky said. “With the right platform, banks can onboard partners in weeks instead of years, and automate all the things that we process to make the experience so seamless for their customers.”
“Then, the technology becomes a multiplier. Embedded finance-era technology isn’t just an enabler of growth, it is the distribution strategy,” he said.
