Last summer, I wrote
about “How Fintech Is Eating The World”, projecting that various non-financial
companies would leverage their platforms to offer financial products, many
existing products would embed a financial product as a feature, and that these
shifts might even create new industries.
One year later, it is
worth looking back and seeing how these trends have played out.
The risk of platforms
distributing fintech products
One of the largest
challenges to digital fintech adoption (and frankly any business) is customer
acquisition: how to find and scale a customer base affordably. So it is no
surprise that the organizations with large pre-existing customer bases are in
pole position to make big splashes. This year, Apple announced to much fanfare
its Apple Credit Card.
Social networks have an
incredible edge to leverage: they have a built-in customer base. In China, platforms
like WeChat have also become dominant payment ecosystems to the envy of many
players in the West. In 2019, Facebook launched Calibra to build a digital
wallet on top of a global cryptocurrency effort. Bytedance (the owners of
TikTok) recently purchased a digital banking license in Singapore to expand
into financial services. In emerging markets, these partnerships are with
ecosystem players. Jio, an Indian telecom, which serves the underbanked
received an investment from Facebook. In Indonesia, Facebook alongside Paypal invested
in Go-Jek, the ride-sharing player and increasingly super-app.
Ecommerce players have
expanded their offerings as well. Amazon partnered with Goldman Sachs to offer
small business credit lines up to $1 million to its merchants (complementing
some of the work it has been doing in its ecosystem for years). Shopify similarly
rolled out loans to its customer base, starting with $200 just to start the
business. Since April 2016, Shopify Credit has loaned over $750 million in
capital. These loans are becoming features of selling on these respective platforms,
and create a virtuous cycle for both merchants and the platform. When SMBs have
access to more capital they can expand their business through investments in
greater inventory or productive capacity. This leads to greater volume on the
platform. And because the platform controls the revenue stream, and has unique
insights into the business model, they are uniquely positioned to assess and mitigate
the risk. Because small businesses and consumers are so challenging to acquire
at scale, these platforms have a unique moat, and it is more challenging for
others to comparatively break-in.
The enabling
infrastructure continues to get built out
One of the largest
challenges to offering financial products for non-financial firms is the
regulatory and compliance needs that are completely different to most
companies’ core business.
Today, a partner bank
ecosystem, which started as a cottage industry has expanded and makes it easier
for anyone to provide financial services. Over two decades, between 2002 and
2020, the number of formal US partner banks has expanded from 4 to over 30
today. These fintech bank enablers operate at higher profitability and returns
levels than their more consumer focused brethren. These facilitate everything
from deposits, credit, card issuance, investments, and even insurance and
crypto.
A range of other
infrastructure is getting built out too, including recent fundraises for
enablers in KYC (e.g. Alloy), payments facilitation (e.g. Finix), brokerage
(e.g. Drivewealth), insurance (e.g. Boost) and a range of banking-as-a-service
platforms. Galileo the payments software provider, which interconnects banks to
credit card processors was purchased by SoFi for $1.2 billion.
Enabling infrastructure
is also making it easier to launch fintech startups internationally. Of course,
certain markets like the US are large enough to support and reward specialized
local players. In many other markets, startups operate in smaller markets and
need to be born global or at least born regional. Companies like Rapyd,
Flutterwave and NovaPayments make it easier to do this across borders.
Yet this will take time
These shifts will not
take place overnight.
For many, it is an
expensive investment that won’t provide immediate dividends. For instance, Uber
announced it would “deprioritize” investments into financial services related
projects, including its digital wallet.
The regulatory
ecosystem will also need to be managed, and this will take time. Whatsapp,
which recently launched payments in Brazil, after beta-tested it in India for a
year, was just shut down by the Brazilian Central Bank for anti-competitive
reasons.
And of course there is
the story of Wirecard – one of the original fintech enablers – which provides
payments infrastructure and support for a range of ecommerce providers and
others, and last. Last year, it received a $1 billion investment from Softbank,
but it has now become insolvent.
However, long-term, the
trend remains clear
There is certainly a
lot of uncertainty at this moment. However As Satya Nadella, the CEO of
Microsoft recently proclaimed: “We saw two years of digital transformation in
two months”. The same is certainly true in the fintech space.
I expect next year to
see a continued acceleration of this trend of fintech globalization, and will
update you all again this time in 2021.
Click
here for the original article.