Payment Flows and Treasury Management for Embedded Finance Platforms

The Complexity of Embedded Finance Money Flows

Embedded finance is the integration of financial services — payments, lending, insurance, banking — into non-financial products and experiences. The platform providing the non-financial product (a software company, a marketplace, a retailer) integrates financial capabilities via a Banking as a Service (BaaS) provider or directly via a payment institution licence. From the perspective of the end customer, the financial service appears native to the platform. From the perspective of the finance team, the underlying money flows are substantially more complex than they appear.

The treasury management challenges for embedded finance platforms are qualitatively different from those of a straightforward SaaS business. An embedded finance platform is handling money belonging to other people. It is subject to regulatory requirements about how that money must be held and protected. It must manage intraday liquidity positions — ensuring that enough cash is available to fund payouts before collections have settled. And it must maintain a reconciliation discipline that can distinguish, at any point in time, between funds belonging to the platform and funds belonging to customers.

Getting this wrong creates both regulatory risk and financial reporting risk. Regulatory risk: mishandling customer funds is a serious breach of the Payment Services Regulations and the FCA's safeguarding rules, with potential for enforcement action and reputational damage. Financial reporting risk: incorrectly including customer funds in the company's own balance sheet overstates cash, creates misleading accounts, and can lead to decisions — including hiring, investment, and fundraising — made on the basis of a falsely large cash balance.

The Typical Fund Flow Architecture

The money flow through a typical embedded finance platform follows a structured sequence. Understanding each step and the treasury implications at each stage is the starting point for sound financial management.

At each stage, the treasury implications are distinct. At the PSP/acquiring stage, the platform has a receivable — funds collected but not yet in the safeguarded pool. At the safeguarded pool stage, the funds are held on behalf of customers and are not the platform's own assets, though the float yield may accrue to the platform depending on the contractual arrangement. At settlement, the platform's fee is extracted and the residual is paid to the recipient.

Safeguarding: The Regulatory Requirement

Under the Payment Services Regulations 2017 (PSR 2017) and the Electronic Money Regulations 2011 (EMR 2011), regulated payment institutions and electronic money institutions must safeguard customer funds. The safeguarding requirement means that funds held on behalf of customers must be:

• Held in an account that is separate from the firm's own funds — a dedicated client funds account or safeguarding account — not commingled with operating cash.
• Held at a credit institution that has been specifically designated for safeguarding purposes, or covered by an insurance policy or equivalent guarantee.
• Recorded in the firm's books in a way that demonstrates the segregation and allows the amount owed to each customer to be identified at any time.
• Reconciled daily against the records of customer balances.

The FCA's Policy Statement PS21/19, published in July 2021, strengthened the safeguarding requirements for payment and e-money firms. The FCA has made clear that firms that combine safeguarded funds with own funds — even temporarily, and even if they intend to re-segregate — are in breach of the requirements. The FCA has taken enforcement action against firms that have failed to maintain adequate safeguarding, including firms that have used safeguarded funds to fund operating expenses during cash flow shortfalls.

Float Management: Yield on Safeguarded Funds

During the settlement window — the period between funds arriving in the safeguarded pool and being paid out to the recipient — the safeguarded balance earns interest. Who benefits from this yield depends on the contractual arrangements between the platform, the BaaS provider, and the customer.

In most embedded finance structures, the platform retains the float yield on safeguarded balances, subject to the regulatory requirement not to pass this benefit to customers (under certain regulatory frameworks) or to a contractual obligation to share it. The float yield is a meaningful revenue line for high-volume platforms: at an average float balance of £5m and a base rate of 4.75%, the annual float yield is approximately £237,500 before costs.

For accounting purposes, float yield earned on safeguarded balances is the platform's own revenue — it should be recognised in the profit and loss account as interest income. It is not a liability to customers and should not be deducted from the safeguarded balance. The safeguarded balance remains at the full customer funds amount; the yield is a separate P&L line.

Intraday Liquidity Management

The most practically demanding treasury management challenge for embedded finance platforms is intraday liquidity. In most payment flows, collections from customers take time to settle — card transactions may take T+1 to T+3 to arrive in the safeguarded pool, depending on the payment method and the acquiring arrangement. Payouts to recipients, however, may be expected immediately or within hours. This creates a structural funding gap that must be managed actively.

Consider a platform that processes £100,000 of inbound payments on a given day, with card collections settling T+2, and that is obligated to pay out £80,000 of settled transactions to merchants on the same day. Without a pre-funded float or an intraday liquidity facility, the platform cannot fund the payout until the card collections settle two days later.

The solutions to the intraday liquidity challenge are:

• Pre-funding: The platform maintains a standing balance in the safeguarded pool that exceeds the anticipated same-day payout obligations. This requires capital to be tied up as working capital in the safeguarded pool, but it eliminates the intraday funding risk entirely.
• Intraday credit facility: The BaaS provider or a bank provides an intraday credit facility that can be drawn to fund payouts before collections settle, and repaid when collections arrive. This is the preferred approach for high-volume platforms but requires a credit facility arrangement.
• Settlement netting: Where the same counterparties both pay in and receive out on the same day, netting the flows reduces the gross liquidity requirement. A marketplace with buyers and sellers who are both active daily can often net substantially.

FX Management for Cross-Border Embedded Payments

Embedded finance platforms processing cross-border payments — payments that involve a currency conversion between collection and payout — face FX risk at each point in the settlement cycle. A UK platform collecting GBP from a sender and paying EUR to a European merchant faces FX exposure from the moment the GBP is collected until the EUR payout is made. In a volatile FX environment, this exposure can erode margin materially.

The practical treasury management approach for embedded finance FX is similar to that for dedicated payments businesses: pre-fund in the destination currency where possible, use forward contracts to lock in rates for anticipated flows, and maintain daily FX position reporting to ensure that open exposures are within defined limits. For platforms where FX is a significant revenue component (the platform takes a spread on the FX conversion), the FX management framework must also ensure that the platform's committed exchange rates to customers are achievable in the market at the time of execution.

Reconciliation: The Operational Backbone

The reconciliation discipline for an embedded finance platform is more demanding than for a conventional business because there are multiple books that must agree with each other at every point in the settlement cycle. The key reconciliations that must be performed are:

1. Customer ledger to safeguarded account: The sum of all customer balances on the platform's own ledger must equal the balance of the safeguarded account at the custodian bank. This reconciliation must be performed daily and any discrepancies must be resolved within 24 hours. Persistent discrepancies indicate either a processing error or a safeguarding breach.
2. Acquiring account to platform records: Funds received from the acquiring bank or PSP must be reconciled to the corresponding customer transactions on the platform. Every credit in the acquiring account must match an identified customer payment.
3. Payout records to bank debits: Every payout initiated by the platform must be matched to a debit from the safeguarded account or the payout account. Unmatched payouts may indicate fraud or system errors.
4. Fee recognition to settlement records: The platform's fee revenue recognised in the P&L must be traced to specific settlement events. Fee income should not be recognised until the relevant payment has settled and the fee has been extracted from the safeguarded pool.

Key Takeaways

• Embedded finance platforms manage three distinct pools of money: the safeguarded customer funds pool, the acquiring/collection float, and the platform's own operating cash. Each must be accounted for separately.
• Under PSR 2017 and EMR 2011, customer funds must be held in a designated safeguarded account, separate from the firm's own funds, reconciled daily.
• The most common accounting error is including safeguarded customer funds in the firm's own cash balance. This is incorrect: customer funds are a liability, not an asset of the firm.
• Float yield on safeguarded balances is the platform's own revenue and should be recognised in the P&L as interest income, separate from the safeguarded balance.
• Intraday liquidity management requires either a pre-funded float, an intraday credit facility, or settlement netting to ensure payouts can be funded before collections settle.
• Four daily reconciliations are required: customer ledger to safeguarded account; acquiring account to platform records; payout records to bank debits; fee recognition to settlement records.
• A clean daily reconciliation between customer ledger and safeguarded account is a key signal of financial maturity for auditors and investors.