This article was originally published in Business Age on 6th July 2022
Plug and Play (PnP) Finance is a new term, but it has been a long time in the making. It has its roots in the world of embedded finance, which refers to financial products becoming so ingrained in our everyday applications and experiences that they become virtually invisible.
However, there are important differences between embedded finance and PnP Finance.
Firstly, embedded finance is a result and can be achieved in a number of different ways. Some of those ways can be quite hard and costly to implement. For example, a marketplace may be able to facilitate payments on its platform, which are then embedded, but the marketplace in question may have to deal with a lot of thorny issues around customer onboarding, KYC, payment flows, settlements, etc. This requires a lot of work for the marketplace, both in terms of developing software, as well as dealing with the implementation and management of regulated products.
Conversely, Plug and Play Finance refers to the means by which one achieves that same embedded result. And in the case of PnP Finance, the solution is already modularized and implementing it takes weeks, not months. So one way of thinking about plug and play finance is that it is a subset of embedded finance, but a particular subset that is much more easy for businesses to use and integrate.
PnP solutions are easier to implement because they contain all the elements needed to on-board customers, provision financial instruments, and conduct financial activity without innovators (the businesses using PnP solutions, such as the marketplace in the above example) having to get into the details themselves.
Specifically, onboarding is easier because the plug and play finance provider takes on the risks and responsibilities associated with onboarding customers such as KYC and other AML requirements. This in turn is possible because the PnP provider tokenizes sensitive customer data, and the innovator hence never has to handle this data in its raw form, which saves them the burden of being subject to more regulation.
Similarly, the provisioning of financial instruments such as cards, accounts, insurance policies etc. is all done by the PnP provider, and the innovator using the plug and play services does not need to get into the details of doing any of that. On the other hand, a customer that wants to simply embed a financial service may have to get into a lot of nitty gritty detail around the specifics of each product. PnP Finance means that the business just gets ready to consume modules where all key decisions and parameters have already been taken care of.
A good example of such a plug and play finance solution in the market today is Stripe Connect, Bolt, or Weavr where the innovator is taking the financial solution as is. Big tech is also moving into this space one giant step at a time. For example, Apple, who had entered the payments space with Apple Pay has now taken one step further by announcing it will let its users in the United States benefit from a buy now pay later service to split their purchases into instalments.
So what of the future? What will come next?
The next step in this evolution will be the emergence of PnP platform providers. Most PnP solution providers today only offer one solution. For example, Klarna delivers one solution around Buy Now Pay Later (BNPL) that can be integrated into an online checkout experience, Stripe Connect delivers a PnP solution for marketplace payments, etc. PnP Finance platform providers will enable the creation of multiple PnP solutions in one place from one vendor.
Another likely outcome in the not-too-distant future is that financial institutions will realise that providing an embedded finance solution such as Banking-As-A-Service (BaaS) is difficult because it requires a very high level of supervision of the innovator and their end customers. They may then start migrating to a more PnP approach, where parameters and use cases are pre-determined, any sensitive data is tokenized and hence not accessible to the innovator.
Finally, Because PnP Finance is easier to implement, it will become a driving force for more and more products and services having financial modules ingrained inside them.
While these new developments clearly come with significant customer and societal benefits by making commerce even more friction free and ubiquitous, there are nonetheless significant risks and warnings to which one needs to pay careful attention.
Warning one is that we are at an inflection point today, and the rules we set in place will reverberate well into the future, magnifying in significance and scale over time. Regulatory bodies such as the FCA cannot ignore the implications of these developments and need to think carefully about how concepts like customer outcomes, affordability, and competition translate into this new world. For example, is Apple offering BNPL good or bad for competition? How much bargaining power will merchants have? How does one define regulatory jurisdictions? The key here is to find the right balance of letting the market develop while intervening in the key areas.
Warning two is to do your homework carefully when using a plug and play finance service provider. If you are a business owner or manager looking to reap the benefits of plug and play finance, be mindful that all is not always as advertised. Do your diligence carefully before choosing your PnP provider. Reach out to those who know the space well to ask their views on which providers to use. Hold your service provider accountable. Many companies have a nasty habit of over-promising and under-delivering.
Warning three, and perhaps the most important one, is to not get left behind. Innovators that successfully embrace the full potential of PnP Finance will be able to offer embedded finance solutions faster, with better user experiences, and by taking on less regulatory risk. It stands to reason to think that these businesses will leapfrog those that are slower or do not offer embedded finance solutions in the first place.
Whether it be making payments or providing any other financial service, we need to keep up with the latest developments as business owners, managers, regulators, or law makers. The world is moving forward at ever increasing speed, and the future of finance belongs to those that adapt the fastest.