Hi, I’m Brent Farley, the managing member of Farley Law. We do work for banks and financial institutions, especially in developing new products and services. Today I want to talk to you about Embedded Payment Advances.
According to Forbes, the embedded payments industry is growing at a rapid pace, with revenues expected to grow from $43 billion in 2021 to $138 billion in 2026.1 This emerging industry offers you, as a financial institution, a lucrative way to profit from this phenomenon by offering your clients additional services and convenience. We’re talking about Embedded Payment Advances. This allows your clients to gain access to advanced funds where the payment is secure and the timing of the payment is known – all for a small fee.
Embedded Payment Advances is an up-and-coming area. The reason we’re suggesting that you look closer at this industry is because we’re finding that it’s becoming a stable area. You can draw this conclusion from the fact that it’s drawing regulatory attention and rulemaking. Yes, we can safely say that embedded payment advances are here to stay.
Embedded Payment Advances is based on a concept that’s been around for a while. Let’s take a look at where it came from, what it is today and where it’s going. If you look back ten or fifteen years to tax refunds in the United States, individuals would fill out their tax return and turn it in to the IRS, after which, a lot of people will get money back on their tax return, particularly with the earned income credits. They would fill out their tax return and would receive a known amount of money back. They know it’s coming because the federal government is paying for it. The question was asked, “What can we do to make this process more convenient for people while earning a little extra for ourselves?” Tax preparers realized that they could advance those funds and charge their clients a convenience fee for it. This has been around for a while now. It’s been lucrative on the advance side as well as helpful on the receiving side. It’s a relatively certain way of making some money because you can control the refund, as well as the flow of the refund. You understand the timing. You understand the amount that’s coming back.
Now take a step forward. We have some new entities who have taken a step into the payroll space, where when an employee has earned a wage and they haven’t been paid it yet, these companies are stepping in and giving early access to those wages. You might see it as payroll advance, but a lot of these companies are taking the position that these are earned funds and that they’re just giving access to the funds early. Because a payroll advance company can come in and make that payment electronically, companies don’t have to make daily payments, and employees have earlier access to their wages. The fee may be paid by the actual employee, or sometimes the fee may be paid by the employer, or even someone else – such as a third-party arrangement. These payroll advances have been so successful that we’ve now seen regulators on the East Coast stepping in and starting to regulate the activity so that’s not abused.
What is the next step? We don’t think that payroll advances are the only place where advances might take a foothold. There’s a broader scope that can be applied here. Take a further look into the economy, maybe into the gig space, or into e-commerce. Look to influencers and to people who earn money in different ways. It’s coming, and there’s an opportunity to take advantage of it. Anywhere where there’s a delay in payment from the time that a service fee or payroll is earned and the time it is paid, there’s an opportunity to step in and make this sort of advance. Also, the fee doesn’t necessarily need to be high.
In conclusion, we believe that there are more places to step in and offer these types of services and conveniences than is currently being utilized. Anywhere you find a payment that is fairly secure, where the timing of payment is known, and where the funds are earned, there is an opportunity to be looked at.
1Jamison, Andrew. “The Future Of Embedded Payments: What The Consumer-Centric Approach Means For Banks And Businesses.” Forbes.com, 27 April 2022.
Brent Farley is the managing member of Farley Law, PLLC
Farley Law, PLLC helps business owners identify business and legal strategies they can use to protect business and personal assets, increase and keep more income, and increase peace of mind regarding the way their business operates. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.