Banks beware, outsiders are cracking the code for finance
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[September 17, 2021] By
Anna Irrera and Iain Withers
LONDON (Reuters) - Anyone can be a banker
these days, you just need the right code.
Global brands from Mercedes and Amazon to IKEA and Walmart are cutting
out the traditional financial middleman and plugging in software from
tech startups to offer customers everything from banking and credit to
For established financial institutions, the warning signs are flashing.
So-called embedded finance - a fancy term for companies integrating
software to offer financial services - means Amazon can let customers
"buy now pay later" when they check out and Mercedes drivers can get
their cars to pay for their fuel.
To be sure, banks are still behind most of the transactions but
investors and analysts say the risk for traditional lenders is that they
will get pushed further away from the front end of the finance chain.
And that means they'll be further away from the mountains of data others
are hoovering up about the preferences and behaviours of their customers
- data that could be crucial in giving them an edge over banks in
"Embedded financial services takes the cross-sell concept to new
heights. It's predicated on a deep software-based ongoing data
relationship with the consumer and business," said Matt Harris, a
partner at investor Bain Capital Ventures.
"That is why this revolution is so important," he said. "It means that
all the good risk is going to go to these embedded companies that know
so much about their customers and what is left over will go to banks and
WHERE DO YOU WANT TO PLAY?
For now, many areas of embedded finance are barely denting the dominance
of banks and even though some upstarts have licences to offer regulated
services such as lending, they lack the scale and deep funding pools of
the biggest banks.
But if financial technology firms, or fintechs, can match their success
in grabbing a chunk of digital payments from banks - and boosting their
valuations in the process - lenders may have to respond, analysts say.
Stripe, for example, the payments platform behind many sites with
clients including Amazon and Alphabet's Google, was valued at $95
billion in March.
Accenture estimated in 2019 that new entrants to the payments market had
amassed 8% of revenues globally - and that share has risen over the past
year as the pandemic boosted digital payments and hit traditional
payments, Alan McIntyre, senior banking industry director at Accenture,
Now the focus is turning to lending, as well as complete off-the-shelf
digital lenders with a variety of products businesses can pick and
choose to embed in their processes.
"The vast majority of consumer centric companies will be able to launch
financial products that will allow them to significantly improve their
customer experience," said Luca Bocchio, partner at venture capital firm
"That is why we feel excited about this space."
So far this year, investors have poured $4.25 billion into embedded
finance startups, almost three times the amount in 2020, data provided
to Reuters by PitchBook shows.
Leading the way is Swedish buy now pay later (BNPL) firm Klarna which
raised $1.9 billion.
DriveWealth, which sells technology allowing companies to offer
fractional share trading, attracted $459 million while investors put
$229 million into Solarisbank, a licensed German digital bank which
offers an array of banking services software.
Shares in Affirm, meanwhile, surged last month when it teamed up with
Amazon to offer BNPL products while rival U.S. fintech Square said last
month it was buying Australian BNPL firm Afterpay for $29 billion.
Square is now worth $113 billion, more than Europe's most valuable bank,
HSBC, on $105 billion.
"Big banks and insurers will lose out if they don't act quickly and work
out where to play in this market," said Simon Torrance, founder of
Embedded Finance & Super App Strategies.
Venture capital investment in embedded finance leaps
[to top of second column]
An employee walks past a sign at Shopify's headquarters in Ottawa,
Ontario, Canada, October 22, 2018. REUTERS/Chris Wattie
YOU NEED A LOAN!
Several other retailers have announced plans this year to expand in financial
Walmart launched a fintech startup with investment firm Ribbit Capital in
January to develop financial products for its employees and customers while IKEA
took a minority stake in BNPL firm Jifiti last month.
Automakers such as Volkswagen's Audi and Tata's Jaguar Land Rover have
experimented with embedding payment technology in their vehicles to take the
hassle out of paying, besides Daimler's Mercedes.
"Customers expect services, including financial services, to be directly
integrated at the point of consumption, and to be convenient, digital, and
immediately accessible," said Roland Folz, chief executive of Solarisbank which
provides banking services to more than 50 companies including Samsung.
It's not just end consumers being targeted by embedded finance startups.
Businesses themselves are being tapped on the shoulder as their digital data is
crunched by fintechs such as Canada's Shopify.
It provides software for merchants and its Shopify Capital division also offers
cash advances, based on an analysis of more than 70 million data points across
"No merchant comes to us and says, I would like a loan. We go to merchants and
say, we think it's time for funding for you," said Kaz Nejatian, vice president,
product, merchant services at Shopify.
"We don't ask for business plans, we don't ask for tax statements, we don't ask
for income statements, and we don't ask for personal guarantees. Not because we
are benevolent but because we think those are bad signals into the odds of
success on the internet," he said.
A Shopify spokesperson said funding goes from $200 to $2 million. It has
provided $2.3 billion in cumulative capital advances and is valued at $184
billion, well above Royal Bank of Canada, the country's biggest traditional
Shopify's lending business is, however, still dwarfed by the big banks. JPMorgan
Chase & Co, for example, had a consumer and community loan book worth $435
billion at the end of June.
Major advances into finance by companies from other sectors could also be
limited by regulators.
Officials from the Bank for International Settlements, a consortium of central
banks and financial regulators, warned watchdogs last month to get to grips with
the growing influence of technology firms in finance.
Bain's Harris said financial regulators were taking the approach that because
they don't know how to regulate tech firms they are insisting there's a bank
behind every transaction - but that did not mean banks would prevent fintechs
"They are right that the banks will always have a role but it's not a very
remunerative role and it involves very little ownership of the customer," he
Forrester analyst Jacob Morgan said banks had to decide where they want to be in
the finance chain.
"Can they afford to fight for customer primacy, or do they actually see a more
profitable route to market to become the rails that other people run on top of?"
he said. "Some banks will choose to do both." And some are already fighting
Citigroup has teamed up with Google on bank accounts, Goldman Sachs is providing
credit cards for Apple and JPMorgan is buying 75% of Volkswagen's payments
business and plans to expand to other industries. 06:00:00 "Connectivity between
different systems is the future," said Shahrokh Moinian, head of wholesale
payments, EMEA, at JPMorgan. "We want to be the leader."
(Reporting by Anna Irrera and Iain Withers; Editing by Rachel Armstrong and
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