Are Starbucks and Uber 'embedded payment' systems ruining your finances?

You tap your smartphone a couple of times, jump out of your Uber, and run into Starbucks to pick up your order.

Then you realize you have nothing in the house for dinner tonight. No problem. Another couple of taps and you’ve got DoorDash coming later with some takeout.

At no point did you need to dig out a credit card and enter your number and pin or stand in line to pay at a cash register.

All the payments were handled through complicated computer systems sitting invisibly behind the user-friendly smartphone apps of Uber, Starbucks, and DoorDash.

They, along with Amazon, Shopify, Lyft, and Apple, are among the pioneers of this technology, called “embedded finance,” but there are now thousands of other companies adopting it.

These systems seamlessly connect bank accounts, credit cards, payment management hubs, and retail outlets like Uber and Amazon. They’re invisible to the user, but involve complex technologies.

Sounds great—only not everyone’s a fan. Security issues, overwhelming complexity, high instances of fraud, and other problems are embedded in these systems too. And these problems are proving difficult to solve.

Consumers get convenience, companies get massive amounts of money

Bain & Co., a private equity firm, crunched the numbers a year ago and found that embedded finance accounted for $2.6 trillion, or nearly 5%, of total U.S. financial transactions in 2021.

The firm thinks that number will exceed $7 trillion, or more than 10% of total U.S. transactions, by 2026. The high transaction volume adds a lot to company revenues—which is why Starbucks, Uber, and all the rest love embedded finance.

Investment fund Lightyear Capital—which partners with the two powerful firms—recently estimated that it will generate $230 billion in added company revenue by 2025, up from $22.5 billion in 2020.

A second option that has been introduced is “buy now pay later” (BNPL) loans. Players in this space include Klarna, Affirm, and Acorn.

These short-term, no-interest installment loans boost revenues for companies like Amazon, Best Buy, Shopify, and others. Grand View Research forecasts that total global BNPL transactions will reach $20.4 billion by 2028, from $6.1 billion last year.

The flies embedded in the ointment

With all the attention focused on embedded finance, it is amazing that so many of its problems remain unsolved. Back in 2014, Starbucks got in big trouble for not protecting its users’ banking details. Because of this, many users claimed to be victims of fraud.

Fast forward to today, and bank-owned payments system Zelle is being reprimanded before Congress for—you guessed it—not protecting its users’ banking details.

Javelin Research says that 18 million Americans were victims of embedded finance payment systems fraud in 2020.

Fraud is clearly the most immediate problem. But there are others.

A growing concern caused by the growth of embedded finance technologies, and the responses by banks that see it as a serious competitive threat, is that the whole field is getting too complicated. Individuals just wanted things to be simpler.

Banks are entering alliances with financial technology companies. Approximately 65% of banks have partnered with a fintech company in the past three years, according to PYMNTS. Yes, even banks with their own systems, like Chase.

This growth of payment options is burdening consumers with single-company apps, other wallets and payment systems, and their traditional bank accounts.

Most of these are free, so they’re not a financial drain, but each one is a potential target for hackers—and when they hack into one, they often hack into them all.

Keeping track of all the apps and payment systems is crucial because users must catch mistakes and outright fraud and report it if they hope to be compensated for their losses.

Practice careful convenience

One best practice experts suggest is simply to limit the number of embedded finance apps to those you use the most.

A librarian who is a coffee nut might find Starbucks a necessary app, but probably doesn’t need the Home Depot app if she only goes there four times a year for new light bulbs.

Also, it helps to pick a payment method for each store—individual app, wallet, payment system, whatever—and stick to it. Having multiple systems pay out to the same company is a recipe for confusion.

While the technology might be rapidly advancing, the same tried-and-true financial advice stands firm: Be organized and keep good records to keep your financial life in order.