Embedded finance: How CIOs must prepare

What embedded finance really means for the enterprise

Embedded finance is about much more than just payment checkout flows and processing -- it's a suite of financial services, including the following:

• Lending, such as buy now, pay later options.
• Banking services such as account creation or debit card issuance.
• Insurance, such as travel insurance on airfare sites.

Embedding finances creates a streamlined user experience that simplifies the financial process. Its uses span across industries -- including retail, healthcare, manufacturing and SaaS.

"Today's customers -- especially younger generations -- expect seamless, intuitive interactions. And they won't hesitate to leave if those expectations aren't met," said Phillip Goericke, CTO at NMI. "In fact, a recent NMI survey found that 64% of Gen Z and millennials would switch to a different business if in-app payments weren't available."

As embedded finance continues to grow in popularity, it transforms organizations into partial financial-service providers. However, this shift to financial services also comes with risks and obligations that organizations cannot ignore.

The CIO's new role: Ownership of fintech infrastructure

As organizations shift to this new model of financial services, CIOs and other executive leaders now play a key role in fintech operations, ushering in a new era of CIO strategy.

"CIOs now sit at the intersection of customer experience, business growth and compliance risk," said Joan McGowan, head of U.S. financial services consulting at SAS. "They must help design systems that are both frictionless and responsible."

Taking ownership of the organization's fintech integrations and infrastructure requires CIOs to lead in many areas they may not have previously, including the following:

• Platform selection.
• Security architecture.
• System integration.
• Data governance.
• Ongoing partner risk management.

Embedded finance has evolved into a core capability for enterprises.

"It's no longer a simple add-on," said Neal Riley, co-founder at Salable. "It's real-time, highly sensitive data flowing through systems that cannot be insecure. Customers expect stellar security as the default alongside the flexibility that embedded finance provides. And if CIOs don't control the foundation, they can't control the risk or the future direction."

Core technology capabilities CIOs need to build

To support embedded finance at scale, CIOs must establish the right foundational capabilities.

API-first architecture

APIs should be regarded as a core part of the architecture, instead of an afterthought. APIs are essential for connecting non-financial platforms with financial services.

An API-first approach to architecture should incorporate the following:

• High-volume API orchestration to handle payments, credit checks and wallet operations without disruption or failure.
• Low-latency, resilient integration with BaaS and fintech partners.
• Monitoring, throttling and observability.

Real-time data infrastructure

Financial events and processes need constant visibility through real-time updates and accurate reconciliation. Real-time data infrastructure helps keep financial processes moving and can quickly identify issues before they begin to affect customers or operations.

Event streaming, data queues and consistent data models ensure that all events are captured accurately and in order.

"CIOs can also get better data visibility, and that enables analytics, insights, and tailored financial services, which gives them more predictability and autonomy in how they evolve their product roadmap," Goericke said.

Modern identity and authentication

Security considerations must be top of mind for CIOs to keep embedded finance processes safe and secure. Comprehensive identity and authentication management is crucial to ensuring data remains secure.

Identification and authentication should be managed through technology, such as Know Your Customer (KYC) and Know Your Business verification, multi-factor authentication, and fraud-detection layers, as well as identity lifecycle management.

Reliability and uptime

Operations should have service level agreements (SLAs) that go beyond typical nonfinancial enterprise standards. Additionally, playbooks for redundancy, failover, disaster recovery and other incidents should be optimized to ensure services stay reliable.

Security requirements that shift to 'financial grade'

In addition to technology capabilities, organizations must consider additional financial-grade security requirements to avoid high-impact threats and risks.

"Embedded finance reaches true 'financial-grade' status only when the infrastructure meets rigorous security and compliance standards,"Goericke said.

Expanded attack surface

Embedded finance carries a higher risk of threats, including fraud, credential stuffing and synthetic identity attacks.

"With faster payments, the risk exposure is higher," said Saurabh Joshi, president of CSG Forte at CSG. "Money moves quickly, and if you don't act fast, you're dealing with more than just a bad transaction; you're dealing with a collections issue and potentially a liability issue."

Encryption standards and secure data handling

Keeping data safe and secure requires essential safeguards, such as end-to-end encryption for financial transactions and tokenization of payment data to prevent data breaches and fraud.

Secure key management practices are essential, including strict access control, auditing logs and lifecycle management.

Fraud prevention and risk scoring

Staying risk-aware through methods such as transaction monitoring, anomaly detection and behavioral analytics can ensure that issues are detected and addressed as quickly as possible to prevent fraud and other risks.

Compliance obligations CIOs cannot ignore

Embedded finance services have strict financial compliance obligations that CIOs must be familiar with to ensure their operations remain legally compliant.

"The moment money and sensitive data start moving through your systems, you take on the same risks and responsibilities as a bank, even if you're not one," Riley said. "The problem is that a lot of smaller embedded finance players don't realize this until they're already in deep."

Embedded finance triggers regulatory responsibilities

Embedded finance -- even when it's a nonfinancial enterprise -- may still have regulatory responsibilities to follow.

"When you embed finance, you are effectively touching the regulated banking system, which means obligations like AML and CFT monitoring, data protection, and consumer-duty requirements sit inside your codebase and operating model," said Ariel Lemelson, CISO of dLocal.

Key frameworks and rules

CIOs should keep in mind the necessary compliance frameworks, including the following:

• KYC and anti-money laundering for identity verification and anti-fraud checks.
• Payment card industry data security standard to safely store digital payment data.
• Consumer protection laws, such as the Truth in Lending Act.
• State-by-state financial regulations.
• Oversight and guidance from the Consumer Financial Protection Bureau.

Auditability and traceability

Logging standards for embedded financial services must go far beyond traditional IT standards for operations. Any financial function requires an audit trail for every transaction to ensure accountability, transparency and regulatory compliance.

Choosing and managing BaaS, payment and fintech partners

Partnering with the right partners is crucial to ensuring embedded services are reliable and effective.

"The CIO role is becoming far more partnership and collaboration-driven," Riley said. "They now need to orchestrate across complex ecosystems -- working closely with fintechs, e-commerce platforms, and other banks and regulators."

Vendor evaluation criteria

Predefining evaluation criteria to assess vendors based on financial needs and security requirements is critical to ensuring that chosen partners align with organizational needs and priorities.

CIOs should evaluate vendors based on factors including the following:

• Licensing and regulatory coverage.
• API documentation quality.
• Data residency controls.
• Fraud prevention and dispute processes.
• Roadmap stability.

SLAs that matter for financial operations

Understanding vendors' SLAs can help determine how they may handle expected service volume and how potential disruptions may be handled.

CIOs should consider uptime guarantees, incident response times, chargeback processes, and API rate limits and surge capacity.

Third-party risk and dependency exposure

CIOs must also consider the risks of fintech instability or regulatory shutdowns, as well as how vendors handle offboarding and exit strategies. These risks should be consistently monitored, rather than relying solely on one-time vendor monitoring.

Integration challenges with legacy systems

Embedded finance should be able to seamlessly integrate with legacy systems and existing architecture.

CIOs must consider that many software and systems -- including legacy ERP, billing, CRM and ecommerce systems -- may lack API support.

"CIOs need cloud-native, microservices-based architecture that can quickly integrate with partners and reduce their dependence on the legacy core," McGowan said. "CIOs [also] need staged modernization plans that use integration layers to reduce risk and accelerate delivery. Governance and compliance teams must be embedded in that modernization roadmap to ensure stability as the stack evolves."

Future trends CIOs should monitor

CIOs must prepare for the future of embedded finance as well as the present8.

"We're moving quickly into an era where payment systems not only automate themselves but also think for themselves," Goericke said. "The next generation of payments infrastructure will adjust dynamically; it will be evaluating risk, optimizing authorization and tailoring the experience based on a customer's real-time context."

The embedded finance space should be regularly monitored to stay ahead of emerging trends, including the following:

• Real-time payments and FedNow adoption.
• Open banking API mandates.
• AI-driven credit and fraud models.
• Expansion of embedded insurance and lending.
• Rising scrutiny of banking-as-a-service providers.
• Regulatory tightening after recent BaaS-related enforcement actions.

Alison Roller is a freelance writer with experience in tech, HR and marketing.