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Three Ways Financial Institutions are Capitalizing on Embedded Payments


Software-led payments are driving rapid changes to financial institutions’ payment services strategies.

Software companies (sometimes known as independent software vendors or ISVs) are becoming the predominant distribution platform for payment services. This means that ISVs are adopting business models where they look, feel, and act like a merchant services provider.

This shift in the market is a sobering one for FIs. If they do not somehow participate in the transition to software-led payments, they risk losing a source of stable, low-cost deposits and non-interest revenue market share, and – ultimately – being completely disintermediated.

The good news is that FIs have a massive opportunity to address this shift, provided they update their go-to-market models – and their tech stacks. Today, forward-leaning FIs are making investments in:

  • Tech-forward sponsorship programs for payment facilitators (Payfacs).
  • Software partner channels, overtaking or replacing ISOs as the go-forward sales partners for their payments programs.
  • Direct sales, leveraging embedded payments to deliver a better customer experience and generate more value for their merchant customers.

The merchant services market evolution

Financial institutions have historically played multiple important roles in merchant services / payment processing. Typically, they have followed one of two paths. They might have offered their own merchant services programs, often relying on incumbent providers such as First Data. Or they might have established a channel distribution network through agents and independent sales organizations (ISOs), where customer acquisition, customer servicing and lifecycle management have all been managed by the ISOs.

Today, however, these two paths are rapidly becoming outdated. Digital-first companies have begun leading the market and changing how payments are delivered, often by becoming Payfacs or using other models to achieve similar goals.

Large tech companies like Square, Stripe and Shopify have used these new models and taken advantage of technology advances to streamline and simplify the payments acceptance process. Smaller, more vertically targeted ISVs have followed suit with their own payments offerings embedded into their platforms, making accepting payments simple and straightforward for merchants.

This software-led approach signifies profound change for the industry. It has established an expectation of capabilities such as automated underwriting, instant onboarding, and sophisticated integrative functionality. Software-led financial service models mean that new principles apply to payments acceptance, no matter who is dealing directly with the merchant. Disjointed and clunky customer experiences are no longer defensible.

Merchants have options, and their number one focus is a streamlined experience for their customers. Today’s payments enablers must have a tech-forward approach to the market. The old merchant services models simply can’t compete with the features that are now available from modern, tech-forward delivery platforms.

This tech-enabled approach has also expanded beyond payments as large tech companies have begun offering other banking and financial services. Stripe provides integrated financial services through its Stripe Treasury, Issuing and Capital offerings. Shopify granted small business customers more than $400 million in merchant cash advances and loans through Shopify Capital during the second quarter of 2022. Square Loans has facilitated more than $11 billion in loans since its inception. Payments provider Adyen launched two new embedded financial products, Capital and Accounts, for the U.S. and Europe in October 2022.

The traditional ways of managing payments and financial services are undergoing transformation and banks that cling to them do so at their peril; the result is that they will continue to lose customers and share of wallet to a new generation of payment / fintech providers.

What should financial institutions do now?

It is true that banks that don’t find their path in this new landscape are likely to lose customers. But all is far from lost. First, it’s important to note that the landscape itself is enormous – and expanding.

The merchant services market, the segment of companies that enable payments acceptance, continues to grow, largely driven by small businesses. Digital commerce volume is expected to grow 22% per year between 2019 and 2023, according to McKinsey & Co. 76% of the revenue growth within merchant services is coming from small to medium enterprises.

A recent report from Bain Capital said that the embedded finance revenue opportunity for software providers and the infrastructure that enables them is expected to more than double from $21 billion in 2021 to $51 billion in 2026. The firm expects embedded finance-driven business lending to grow five-fold to $1.3 billion by 2026.

Second, the trend toward the tech-forward integration of the payments value chain does not mean that traditional FIs have no role to play in this exploding market.

On the contrary, the shift to software-led payments opens significant, game-changing opportunities for FIs as well. Given current expectations, FIs can – and must – build new go-to-market programs around software-led payment models.

By doing so, FIs can not only retain more of their own customers, they can also grow non-interest income and obtain stable, low-cost deposits through their payments-related activities.

There are three primary ways we are observing FIs capitalizing on software-led payments: enabling merchant services through downstream channels by sponsoring Payfacs; evolving from ISO-dominant channel programs to those led by software companies; and leveraging the tools and infrastructure of embedded payments themselves to sell directly to merchants, delivering a better customer experience and generating more value as full Payfacs.


Any nonbank payments provider working directly with merchants, such as an ISO or now a Payfac, must be sponsored into the card networks (Visa, Mastercard) by a bank. As the entities that own the relationships with the card brands, sponsors allow these new tech-forward players to have access to the payments processing ecosystem.

Sponsors provide oversight, set risk and compliance thresholds, and communicate guidance directly to their Payfacs. As financial institutions, they are likely to have deep expertise in regulatory compliance, government relations and legal issues related to the payments industry – all of which other payments providers rely on.

Sponsors have responsibility for protecting the payments system from bad actors, and they are financially responsible for the activities of the Payfacs in their portfolio. Each sponsor has its own set of Payfac requirements regarding underwriting, risk monitoring, funds settlement, and other policies and procedures.

While banks that sponsor Payfacs might also sponsor ISOs, those ISOs that have built embedded software capabilities are adopting the Payfac model. The same principles of risk management apply to both providers, but there are nuances, with oversight and risk management required to be more scalable and efficient.

Software provider (ISV) partner channels

While more and more software providers are becoming Payfacs, software providers that are not big enough or well-resourced enough to do so themselves can partner with Payfacs to harness some of the benefits they provide.

This model is known by several names: Payfac lite, Payfac-as-a-service (PFaaS) or managed Payfac. Companies that operate as Payfac lite providers extend their merchant onboarding, underwriting, or integration processes to software providers for use with their own clients. This means that even the smallest platform catering to the smallest business can offer some of the benefits that Payfacs offer, such as custom branding and streamlined onboarding, without becoming a Payfac.

Banks that enable Payfac lite providers set up a payments business entity and work with software partners to go to market.

Payfac lite-enabling banks offer their Payfac customers the ability to manage a payments program – to manage risk, perform settlement and fund the submerchant – through their platform. They also offer a merchant application with sophisticated underwriting capabilities and streamlined onboarding.

Direct sales

Finally, some banks are choosing to set up Payfac operations to sell payment services directly to merchants.

There are several benefits to operating a Payfac as the platform for merchant sales. Banks now have significantly more ownership of the value chain, allowing them to set product/feature priority and be more responsive to their customers’ needs. With a Payfac model under their management, they have complete visibility – critical not only for risk management and compliance, but also for offering more tailored products from the banks themselves. Ultimately, the “Payfac within a bank” approach gives the bank a maximum “flex posture” to address the changing dynamics of its customers.



The introduction of technology-first solutions into payments and financial services has indelibly changed the landscape. The legacy approaches of merchant services may be holding steady in various segments, but the narrative is clear: software-led payments is the new world – and it’s eating the old.

But the opportunity provided by this market shift is enormous, and traditional providers do not have to be left out of it.

By adopting a go-to-market strategy that meets the moment – embracing software-led payments with a digital-first mindset – FIs can grow their non-interest income and fend off the competition that is increasingly coming from outside the traditional players, enabling their businesses to continue to thrive.​



To speak with a payments expert or to learn about how Infinicept can help you evaluate your software-led payments options, contact us.

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