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Accounting for Embedded Finance: Making Sense of Banking-as-a-Service for Small Businesses
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Maintain accurate and organized financial records for easy reporting
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Introduction: Why Embedded Finance Is the Next Frontier for Small Business
Small businesses today are no longer just selling products or services—they’re becoming financial ecosystems.
Whether you're an e-commerce brand offering payment plans or a SaaS platform integrating customer wallets, embedded finance has made its way into everyday operations. It boosts revenue opportunities and customer convenience, but it also introduces a new layer of financial and regulatory complexity.
In this guide, we’ll unpack what embedded finance means, why it complicates accounting, and how to handle it with confidence.
What Is Embedded Finance?
Embedded finance is the integration of financial services directly into non-financial platforms. It eliminates the need for third-party apps or redirections, making transactions seamless for customers.
Common Embedded Finance Features:
- In-app payments (e.g., Apple Pay, Stripe Connect)
- Buy Now, Pay Later (BNPL) (e.g., Klarna, Afterpay)
- Digital wallets or stored value accounts
- Integrated loans or micro-insurance offerings
Real-World Examples:
- A delivery platform that provides drivers with on-demand insurance
- A fitness app that offers membership credits via digital wallets
- A SaaS platform integrating Stripe Treasury for user payouts and account funding
Why Embedded Finance Complicates Accounting
These innovations increase customer retention and revenue—but also create non-traditional financial flows. That means:
- Funds might sit in custodial or wallet accounts before reaching your primary ledger.
- Settlements may be delayed or batched, complicating revenue timing.
- You must track fees, float balances, and partner payments.
- Regulatory compliance is now part of your operational scope, especially in fintech-adjacent verticals.
Key Accounting Areas to Watch
1. Revenue Recognition
Embedded finance affects when and how revenue should be recognized:
- Instant payments vs. settled payments: Revenue might not hit your books immediately.
- For BNPL transactions, determine if you recognize the full sale amount upfront or over time.
- Ensure your accounting method (cash vs. accrual) aligns with platform-specific settlement behavior.
2. Third-Party Financial Service Fees
Fees from services like Stripe, PayPal, Unit, or Plaid should be:
- Categorized correctly (e.g., processing vs. platform fees)
- Broken down by service to understand real cost per transaction
- Reviewed regularly, especially as pricing models change
3. Wallet and Custodial Fund Tracking
If your platform holds funds on behalf of customers:
- Treat those as liabilities, not income
- Separate wallet balances from operating cash
- Maintain ledger entries for each wallet or float account to ensure audit readiness
4. Tax Implications
- Understand whether financial services trigger VAT, GST, or sales tax obligations.
- Cross-border wallet use may invoke multi-jurisdictional tax rules and reporting requirements.
- Stay compliant with KYC/AML regulations if acting as a quasi-financial intermediary.
Best Practices for Managing Embedded Finance in Your Books
✅ Use fintech-friendly accounting software
Choose tools that integrate with services like Stripe Treasury, Plaid, Payoneer, or Wise to ensure automated and accurate reconciliation.
✅ Create dedicated ledger accounts
Separate:
- Product/service revenue
- Transaction fees
- Custodial wallet balances
- Embedded finance income (e.g., interest earned on wallet floats)
✅ Partner with fintech-savvy accountants
A generalist CPA may not know how to treat wallet funds, settlement lags, or BNPL contracts. Partner with a team (like Go Peak Accounting) that understands embedded finance at a technical level.
✅ Regularly reconcile settlement reports
Use monthly or weekly reconciliation reports from your embedded finance providers to validate:
- Payout schedules
- Wallet balances
- Deferred revenue status
✅ Stay current on fintech regulations
Depending on your setup, you may need to register as a money transmitter or partner with a licensed financial intermediary. Don't ignore your legal obligations.
Final Thoughts: Turning Embedded Finance into a Strategic Advantage
Embedded finance isn't just a trend—it’s a shift in how businesses deliver value. By offering frictionless payments, financing, and wallet features, small businesses can unlock deeper loyalty and more predictable cash flow.
But this evolution comes with accounting responsibility.
Businesses that fail to manage embedded finance correctly risk compliance issues, misstated revenue, and poor cash flow visibility. Those that get it right, however, are building the next generation of smart, customer-centric companies.
📌 Takeaway
Embedded finance is transforming small business operations. With the right accounting practices, you can manage this complexity, remain compliant, and unlock new sources of value.
Need help navigating embedded finance in your books?
The fintech accounting experts at Go Peak Accounting are here to guide you.