Episode Details

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 s