While SaaS platforms and providers like Adyen present embedded finance as a “win-win” solution, the actual impact on small and medium businesses (SMBs) tells a different story.
Beneath the sleek surface lies a troubling reality: rising costs, reduced choice, and growing dependence on SaaS platforms.
Embedded payments may simplify processes, but they also entrench businesses in systems that prioritize platform profits over merchant interests.
This article explores how embedded payments, despite their convenience, impose restrictions that harm SMBs, limit transparency, and threaten fair market practices.
The Appeal of Embedded Payments
Embedded payments have grown in popularity as businesses strive to enhance operational efficiency and meet changing customer expectations.
These systems, where payment processing is seamlessly integrated into software platforms, are marketed as innovative solutions that benefit merchants, platforms, and customers alike.
On the surface, the appeal is undeniable: they promise convenience, improved cash flow management, and a streamlined experience for users.
However, to understand the broader implications of embedded payments, it is important to examine the factors driving their adoption and the perceived benefits they offer.
The Convenience Factor
One of the primary attractions of embedded payments is the elimination of friction in the payment process.
According to Adyen and Boston Consulting Group’s Embedded Finance Report, 80% of small and medium-sized businesses (SMBs) rely on Software-as-a-Service (SaaS) platforms to manage their operations.
Embedded payment solutions are touted as an essential feature within these platforms, providing businesses with tools to accept payments, reconcile accounts, and automate financial workflows — all within a single ecosystem.
These systems reduce the technical complexities associated with traditional payment gateways, enabling SMBs to focus on growth rather than operational logistics.
Enhanced Customer Experience
Embedded payments also improve the end-user experience by offering seamless checkout processes.
Research by Baymard Institute shows that 22% of customers abandon their online shopping carts due to long or complicated checkout procedures.
Platforms simplify transactions, reducing friction and increasing conversion rates by embedding payments directly into SaaS solutions.
These improvements are attributed to faster transactions, integrated loyalty programs, and reduced instances of payment errors — factors that enhance brand trust and customer retention.
Faster Access to Capital
Another selling point of embedded payment solutions is their ability to expedite cash flow management.
Traditional payment systems often delay fund transfers, with settlement periods ranging from 24 to 48 hours, according to Stripe.
Embedded payment providers, however, offer instant or near-instant payouts in many cases, helping businesses maintain liquidity.
For instance, platforms like Square and Stripe advertise same-day or next-day payouts as a core feature, a critical advantage for small businesses that may rely on these funds to manage daily operations.
Rising Adoption Across Industries
The rapid adoption of embedded payments spans various sectors, from retail to hospitality and beyond.
A report estimates that the embedded finance market will grow from $111.72 billion in 2024 to $1.43 trillion by 2033, representing an annual growth rate of over 32.81%.
This growth is driven by businesses seeking to enhance operational efficiencies while meeting consumer demand for integrated, frictionless experiences.
Notably, industries with complex billing cycles, such as healthcare and logistics, have seen a particularly sharp rise in adoption.
The Perception of Cost-Effectiveness
While the long-term implications of embedded payments remain contentious, their perceived cost-effectiveness is a significant driver of adoption.
Businesses initially benefit from reduced overhead costs associated with managing separate systems by consolidating multiple financial services into a single platform. Furthermore, integrated analytics and reporting tools allow SMBs to gain real-time insights into their financial performance, a feature valued by merchants.
The Hidden Costs and Risks
While embedded payments offer significant convenience, they come with hidden costs and risks that undermine the profitability and autonomy of small and medium-sized businesses (SMBs).
As platforms increasingly integrate payment systems into their software, the erosion of market choice, rising fees, and lack of transparency emerge as critical concerns.
These challenges reveal that the benefits of embedded payments are often overshadowed by long-term financial and operational constraints.
Rising Fees and Opaque Pricing
Embedded payment models often allow platforms to impose higher fees over time without providing merchants with clear pricing breakdowns.
Many platforms utilize tiered pricing models, which obscure the true cost of transactions.
For example, while a platform may advertise a low initial processing fee, additional surcharges for premium services, international payments, or chargeback handling are often buried in complex terms and conditions.
This lack of transparency makes it challenging for businesses to accurately calculate their payment processing expenses.
Dependency Risks and Revenue Impact
As platforms embed more financial services, businesses become increasingly dependent on their ecosystems, risking substantial revenue loss if fees rise or service quality declines.
This dependency gives platforms significant leverage to adjust pricing or terms without fear of losing merchants.
The implications are stark. With high dependency on embedded systems, SMBs sees a reduction in profit margins over five years due to rising costs and limited alternatives.
For cash-strapped small businesses, these profit losses can threaten long-term viability.
Lack of Transparency
Embedded payments often operate within closed systems, providing limited visibility into transaction data and associated fees.
This opacity prevents businesses from identifying inefficiencies or negotiating fairer terms.
For instance, many embedded systems bundle services such as payment processing, reporting, and analytics, making it nearly impossible for businesses to determine the true cost of each service.
As a result, merchants may unknowingly pay for features they neither use nor need.
The “Walled Garden” Effect of Embedded Finance
Embedded payment systems create a “walled garden” effect, confining small and medium-sized businesses (SMBs) within a single platform’s ecosystem.
While convenient initially, this dynamic restricts flexibility, increases switching costs, and undermines competitive leverage, leaving merchants with fewer options to control their payment processing strategies.
High Switching Costs
Once businesses adopt embedded payment systems, the barriers to switching providers can be substantial.
These costs often result in significant downtime, with businesses experiencing disruptions lasting from two to six weeks during the transition.
For many SMBs operating on tight margins, these barriers are simply too high, leaving them locked into systems that may no longer meet their needs.
The cumulative effect of these switching costs creates an ecosystem of dependency, where platforms retain control while businesses lose flexibility.
This dynamic not only limits a merchant’s ability to seek better terms but also increases their vulnerability to rising fees and unfavorable service changes over time.
Loss of Competitive Leverage
Embedded systems make it difficult for businesses to compare providers or negotiate fees.
This heavy dependency limits merchants’ ability to leverage competitive pricing or alternative services.
As a result, payment providers have substantial freedom to increase fees with little resistance.
The lack of competitive leverage also allows providers to impose restrictive terms, such as long-term contracts and bundled services, further reducing SMBs’ negotiating power.
These practices contribute to a growing gap between platform profitability and merchant sustainability, leaving businesses with limited options to control costs or switch to more transparent providers.
Data Lock-In and Vendor Dependency
Embedded platforms often control key transaction and customer data, making it challenging for businesses to switch without losing critical insights.
Such limitations force businesses to weigh the cost of data migration against the potential benefits of switching providers, often resulting in a decision to remain locked into the platform.
This dependency gives providers significant leverage, allowing them to prioritize their interests over merchants’ needs.
The Effective Alternative Approach for SMBs
It’s easy to gravitate toward what seems popular or widely adopted, assuming it’s the best choice. But for SMBs, these decisions often lead to more harm than good—creating inefficiencies, hidden costs, and limited flexibility.
The key question is: does it truly meet your business’s unique needs?
Verifee offers a fundamentally different approach to payment processing, prioritizing transparency, choice, and merchant empowerment.
Unlike embedded payment systems that lock businesses into restrictive ecosystems, Verifee provides flexible, open solutions designed to adapt to each business’s unique needs.
This model ensures that merchants retain control over their operations without being burdened by hidden fees or opaque pricing structures.
At the heart of Verifee’s approach is a commitment to transparency. Merchants have complete visibility into their payment processing costs, with detailed breakdowns that eliminate confusion.
This clarity allows businesses to make informed decisions, optimize their financial strategies, and identify areas where they can save.
By avoiding bundled services and unnecessary add-ons, Verifee ensures that businesses only pay for what they truly need, helping them protect their profit margins.
Another key differentiator is Verifee’s emphasis on choice.
Unlike closed-loop systems, our platform is compatible with a wide range of third-party providers, giving merchants the freedom to compare and select the best options for their specific requirements.
This open approach fosters competition, driving better pricing and service quality across the market.
Verifee also recognizes the importance of flexibility in today’s dynamic business environment.
Its solutions are designed to integrate seamlessly with existing systems, ensuring minimal disruption during onboarding or transitions.
This adaptability is particularly valuable for businesses seeking to scale, diversify their offerings, or explore new markets.
Ultimately, Verifee’s alternative approach champions merchant autonomy.
By putting an end to the walled garden model and promoting transparency and choice, Verifee empowers businesses to thrive in a competitive landscape without sacrificing control or profitability.
Conclusion
Embedded payment systems create significant challenges for small and medium-sized businesses (SMBs), from restricted market choice and high switching costs to hidden fees and limited transparency.
These systems lock merchants into rigid ecosystems that prioritize platform profits over business growth, leaving SMBs with little control over their payment processing strategies.
Verifee is the perfect alternative for businesses seeking to break free from these constraints. Partner with us to experience a payment solution designed with your success in mind — flexible, transparent, and built to meet your unique needs.
