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Banks beware, outsiders are cracking the code for finance

Embedded finance investments soar in 2021, data shows Buy now, pay later deals take center stage

LONDON, Sept. 17 (Reuters) – Anyone can be a banker these days, all you need is the right code.

Global brands from Mercedes and Amazon (AMZN.O) to IKEA and Walmart (WMT.N) are ditching the traditional financial middleman and plugging in software from tech startups to offer customers everything from banking and credit to insurance.

For established financial institutions, the warning signs are flashing.

So-called embedded finance — a fancy term for companies integrating software to provide financial services — means Amazon can let customers “buy now, pay later” when they check out and let Mercedes drivers pay for their cars for their fuel.

Sure, banks are still behind most transactions, but investors and analysts say the risk for traditional lenders is being pushed further off the front of the financial chain.

And that means they’ll be further away from the mounds of data that others list about their customers’ preferences and behavior — data that could be crucial to giving them an edge over financial services banks.

“Built-in financial services take the cross-sell concept to new heights. It is built on a deep, software-based, ongoing data relationship with the consumer and the business,” said Matt Harris, a partner at investor Bain Capital Ventures.

“That’s why this revolution is so important,” he said. “It means all the good risk goes to these embedded companies that know so much about their customers and what’s left goes to banks and insurance companies.”


At present, many areas of embedded finance are barely detracting from banks’ dominance and while some new entrants are licensed to provide regulated services such as lending, they lack the scale and deep funding pools of the largest banks.

But if financial tech companies, or fintechs, can match their success by grabbing some of banks’ digital payments — thereby raising their valuations — lenders may need to respond, analysts say.

Stripe, for example, the payment platform behind many customer sites, including Amazon and Alphabet’s (GOOGL.O) Google, was valued at $95 billion in March. read more

Accenture estimated in 2019 that new entrants to the payments market had amassed 8% of revenue globally — and that share has risen over the past year as the pandemic boosted digital payments and hit traditional payments, said Alan McIntyre, senior banking industry director at Accenture.

Now the focus is shifting to lending as well as complete turnkey digital lenders with a variety of products companies can pick and choose to embed into their processes.

“The vast majority of consumer-facing companies will be able to launch financial products that can significantly improve their customer experience,” said Luca Bocchio, partner at venture capital firm Accel.

“That’s why we feel excited about this space.”

So far this year, investors have invested $4.25 billion in embedded finance startups, nearly three times as much as in 2020, according to data provided by PitchBook to Reuters.

Leading the way is Swedish buy now pay later (BNPL) firm Klarna, which has raised $1.9 billion.

DriveWealth, which sells technology that allows companies to offer fractional share trading, raised $459 million, while investors put $229 million into Solarisbank, a licensed German digital bank that offers a range of software for banking services.

Shares in Affirm (AFRM.O) rose last month as it partnered with Amazon to offer BNPL products, while rival US fintech Square (SQ.N) said last month that it bought Australian BNPL firm Afterpay (APT.AX). bought for $29 billion.

Square is now worth $113 billion, more than Europe’s most valuable bank, HSBC (HSBA.L), at $105 billion.

“Large banks and insurers will suffer if they don’t act quickly and figure out where to play in this market,” said Simon Torrance, founder of Embedded Finance & Super App Strategies.

Reuters graphics


Several other retailers have announced plans this year to expand into financial services.

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 company Jfiti last month.

Car makers such as Volkswagen’s (VOWG_p.DE) Audi and Tatas (TAMO.NS) Jaguar Land Rover, alongside Daimler’s Mercedes (DAIGn.DE), have experimented with incorporating payment technology into their vehicles to take payment off your hands.

“Customers expect services, including financial services, to be integrated directly at the point of consumption, and to be easily, digitally and instantly accessible,” said Roland Folz, CEO of Solarisbank, which provides banking services to more than 50 companies, including Samsung. . .

It’s not just end users who are targeted by embedded finance startups. Companies themselves are being tapped as their digital data is hacked by fintechs like Canada’s Shopify (SHOP.TO).

It offers merchant software, and the Shopify Capital division also offers cash advances, based on an analysis of over 70 million data points on the platform.

“No merchant comes up to us and says, ‘I want a loan. We go to merchants and say, ‘We think it’s time for you to get financing,” said Kaz Nejatian, vice president, product, merchant services at Shopify.

“We don’t ask for business plans, we don’t ask for tax returns, we don’t ask for profit and loss statements, and we don’t ask for personal guarantees. Not because we’re benevolent, but because we think those are bad signals in the odds of success on the internet,” he said.

A Shopify spokesperson said the funding will range from $200 to $2 million. It has provided $2.3 billion in cumulative capital advances and is valued at $184 billion, well above the Royal Bank of Canada (RY.TO), the country’s largest traditional lender.


However, Shopify’s lending is still dwarfed by the big banks. JPMorgan Chase & Co (JPM.N), for example, had a $435 billion portfolio of consumer and community loans at the end of June.

Major advances in financing by companies from other sectors may also be limited by regulators.

Officials from the Bank for International Settlements, a consortium of central banks and financial regulators, last month warned watchdogs to get to grips with the growing influence of tech companies in the financial world. read more

Bain’s Harris said financial regulators took the approach that because they don’t know how to regulate tech companies, they insist that there’s a bank behind every transaction — but that didn’t mean banks would prevent fintechs from breaking in.

“They are right that the banks will always have a role to play, but it is not a very rewarding role and there is very little customer ownership involved,” he said.

Forrester analyst Jacob Morgan said banks had to decide where they wanted to be in the financial chain.

“Can they afford to fight for customer supremacy, or do they actually see a more profitable route to market to become the rails that other people ride on?” he said. “Some banks will choose to do both.”

And some are already fighting back.

Citigroup (CN) partners with Google on bank accounts, Goldman Sachs (GS.N) provides credit cards for Apple (AAPL.O) and JPMorgan buys 75% of Volkswagen’s payments business and plans to expand into other sectors. read more 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 David Clarke

Our Standards: The Thomson Reuters Trust Principles.

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