Barriers to embedded finance use and uptake by small businesses; Digital wallet payments use case maturity; Banking industry lacks AI maturity;

Sam Boboev
14 min readMar 22, 2023

In this edition:

1️⃣ Barriers to embedded finance use and uptake by small businesses

2️⃣ Key findings from our global banking review for 2022

3️⃣ Banking Industry Lacks AI Maturity

4️⃣ Did Silicon Valley Bank Start a Banking Crisis?

5️⃣ Can payments eat the world? Probably not!

6️⃣ Trends In The Embedded Finance

7️⃣ Digital wallet payments use case maturity

And many more….

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Barriers to embedded finance use and uptake by small businesses

On the demand side, the adoption of embedded finance by small businesses is likely to be dictated by their comfort level with digital solutions, product awareness, and trust in digital financial services, as well as other competing business priorities. When financial products and services are offered by non-financial institutions, many end users may not consider the source to be trustworthy enough.

On the supply side, barriers can be attributed to financial service providers and other embedded financial value chain players, such as technology providers and platforms.

Banks and other financial service providers may be unaware of the revenue potential that embedded finance represents. Many banks may be slow to upgrade their legacy technology systems, leading to different priorities around which segment to target first. Some banks with a strong retail history may opt for this approach.

- Financial service providers can also be slow to partner with platform providers; while partnerships stand to benefit all parties, financial service providers can be risk-averse in their collaborations — especially with non-financial organizations.

- Some embedded finance players may not target small businesses at all. This could be a strategic choice, for instance, to focus on retail customers. Digital providers and financial service providers may individually or collectively lack data-sharing frameworks and APIs that can support data sharing among parties.

- A lack of cost-effective electronic know-your-customer (KYC) solutions and processes that can be accessed and used by non-bank providers.

- There may not be suitable digital products available to or relevant to small business users.

- Non-financial service providers interested in lending off their own balance sheets may be deterred by the debt capital requirements.

Embedded finance requires an enabling regulatory environment and appropriate infrastructure to scale to the smallest and poorest businesses.

Digital and financial service providers will need to consider and address the demand side and supply side barriers to better encourage uptake of embedded financial services for small businesses.

Source Mastercard

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Key findings from our global banking review for 2022

Banks rebounded from the pandemic with strong revenue growth from higher margins and capital ratios. Bank profitability reached a 14-year high in 2022, with expected return on equity of between 11.5 percent and 12.5 percent. Revenue globally grew by $345 billion, propelled by a sharp increase in net margins, as interest rates rose after languishing for years on their cyclical floors. For now, banking globally is sitting comfortably on Tier 1 capital ratios of between 14 percent and 15 percent, and many segments of banking — including retail, wholesale, and wealth — have benefited.

Despite these short-term improvements, return on equity remains weak, far below where it was before the 2008 financial crisis. While half the world’s banks in 2022 continue to have a return on equity that is above the cost of equity, analysis suggests that the recent margin increases delivered returns above the cost of equity for just 35 percent of banks globally.

Strong regional variations in bank performance underlie this global picture. Banks in some countries, including many regional banks in the US, the largest banks in Canada, and banks in Indonesia, Mexico, and India, are experiencing rapid growth and rising profitability, while others, including in Europe and China are seeing marked downturns. One notable effect of this divergence is that the whole notion of “emerging markets” (in banking) is dead, because the group of countries to which this term refers is no longer monolithic: some of the best-performing and high-growth banks are to be found in Asia — as are some of the worst-performing and lowest-growth ones.

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Banking Industry Lacks AI Maturity

For financial institutions, the development and deployment of AI solutions is far less developed. According to Accenture, only 1% of financial institutions can be considered AI Achievers. More concerning is the reality that 75% of financial institutions are still in the early experimental stage of AI development. This is noteworthy, since Achievers, Builders and Innovators tend to devote more technology, time and talent to delivering on AI visions and to transform their organizations.

It may not be surprising that industries like technology are far ahead in their level AI maturity. What may be surprising is that financial services is at the bottom … by a relatively large margin. Even when estimates were made around the growth of AI maturity over the next few years, financial services remains at the bottom of industries evaluated.

That said, it is expected that the overall gap will narrow for financial services by 2024 despite some significant headwinds, such as legal and regulatory challenges, inadequate AI infrastructure, and a shortage of AI-trained workers. But, improvements must come quickly, since the machine learning models from Accenture show that the the most advanced ‘AI Achievers’ will more than double from the current 12% to 27% by 2024.

Why AI Maturity Matters

Creating AI use cases in finance must become a priority to drive competitive positioning and to prepare for a digital banking future. Research has found that investing in AI deployment not only can improve efficiencies, but can reduce the negative effects of economic pressures in the short term.

Accenture found that nearly 75% of companies have integrated AI into their business strategies and reworked their cloud plans to achieve AI success. For financial services, however, many of these initiatives are still in the formative stages. However, across all industries, nearly a third (30%) of AI pilot initiatives are improving back-office processes, accelerating R&D timelines for new products, and enhancing customer experiences.

“Of the most mature AI organizations, 42% said that the return on their AI initiatives exceeded their expectations, while only 1% said the return didn’t meet expectations,” according to Accenture. In addition, “the share of companies’ revenue that is ‘AI-influenced’ more than doubled between 2018 and 2021 and is expected to roughly triple between 2018 and 2024.”

Source The Financial Brand

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Did Silicon Valley Bank Start a Banking Crisis?

Silicon Valley Bank is no more. The question now, though, is whether the collapse of this tech-friendly regional bank is the start of something more serious — or just what happens when higher interest rates give companies less room for error.

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Bitcoin hits nine-month high as traders shift away from banks

Bitcoin hit its highest level in nine months on Friday as crypto traders shifted funds away from banks and warmed to rapidly shifting interest rate expectations.

The dollar-denominated price of the original and biggest crypto coin has surged more than 30 per cent this week to more than $27,000, its highest point since the onset of the crisis of confidence that engulfed the market last summer. The second-largest token, ether, has risen a fifth in the same period.

Buyers have emerged after a week of acute turbulence for the world’s banking industry on both sides of the Atlantic as investors fret over the valuations of smaller banks’ bond portfolios and business models.

The US government and large banks stepped in to steady the system while the Swiss central bank provided a $54bn emergency backstop for lender Credit Suisse.

The uncertainty has prompted speculation that the Federal Reserve and European Central Bank will pause their plans to raise interest rates aggressively to curb lingering inflation.

For the past 18 months the price of bitcoin, once touted as a hedge against inflation, has often been correlated with traditional stock indices such as the S&P 500 and the Nasdaq Composite, and sensitive to traders’ expectations on interest rates.

Traders point out that when investors have fears over crypto prices, they move funds into bank deposits and stablecoins. When there are concerns over banks, they rapidly move to purchasing tokens.

The market recovery has also been bolstered after reassurances from US authorities that deposits at the failed Silicon Valley Bank would be protected.

Circle, operator of the crypto market’s second largest stablecoin USDC, admitted it had $3.3bn trapped at SVB, triggering a temporary decline in the value of the stablecoin to 88 cents.

Stablecoins act as a conduit between crypto and sovereign money and are supposed to maintain their value one-for-one against the dollar at all times.

Despite a short-term recovery for digital assets, turbulence in the banking sector casts doubt over the crypto industry’s long-term footprint in the US.

Together with Silvergate and Signature, SVB was one of a tripartite of crypto-friendly banks that met their demise in recent days. Their failures have sparked fears among industry supporters that the US is de-banking the crypto industry.

Republican congressman Tom Emmer on Wednesday wrote a letter to the Federal Deposit Insurance Corporation, arguing that the regulator was purposely seeking to limit the banking industry’s exposure to crypto markets.

Source Financial Times

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Can payments eat the world? Probably not!

These falling valuations look more and more like the “new normal” for five major reasons: the normalisation of ecommerce and small-to-medium enterprise spending, fierce competition, mixed network effects, labour-intensive investments and IT technical debt.

Let’s start with the normalisation of ecommerce and SME spending. The former turbocharged growth for players like Stripe, Adyen, PayPal and Checkout.com, which make virtually all their revenues from this area.

But the strength of the US economy and of SMEs post Covid has also underpinned other payments firms whether it is Square or the three legacy merchant acquirers. All US payment processors are dependent on SMEs for the majority of their revenues given the higher fees they can charge in this segment. Now spending at (and by) SMEs looks like it could slow, as US consumers have largely run down their pandemic-era savings.

Secondly, competition is fierce and likely to get even tougher. Stripe and Adyen have taken market share from legacy players given their strength in ecommerce as well as superior functionality. For instance, for smaller ecommerce vendors, the likes of Stripe were early in offering white labelling. But the weakest and second largest of these legacy players, Worldpay, will probably make big efforts to catch up after it demerges from FIS. It could also actively pursue more deals. First Data has also found success under Fiserv ownership, with its Square-like Clover product and its Carat operating system.

Traditionally, banks have looked at their merchant-acquiring businesses as non-core, which has led to many of the roll-up opportunities in the industry. But they have refocused on building more platform revenues, and with armies of technologists running around, they are likely to be more formidable players going forward. The leader of this pack is JPMorgan, and Jamie Dimon has been vocal on the need for aggressive investments. Chase is by far the leading bank-owned merchant acquirer in the US, and is winning market share fast.

The size of the bureaucracy and lack of automation in legacy banking and payments technology is illustrated well by FIS’s group headcount of 69,000 at the end of 2022. This comes to a revenue per head of a mere $210,000. Fiserv’s is about twice that amount. So while headcount growth at newer players like Stripe have attracted significant attention, they aren’t dissimilar to legacy providers. Adyen is of course highly profitable. And taking Stripe’s rumoured net revenue of $2.8bn and its current headcount of 7,000 gives a revenue per head of $400,000, which suggests its biggest issues are compensation levels and other costs. The problem is that firms that dominate industries, like Visa and Mastercard, typically have revenue per head of around $1mn.

Source Financial Times

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Trends In The Embedded Finance

At the moment, there are several significant trends for BaaS and embedded banking that are critically important for banks to track to keep up.

All In One

Human attention is the critical currency of the 21st century. Much of this attention is channeled through a smartphone that has hundreds of mobile apps installed, including social media. Because it is tough to keep in mind the laws and structure of each service, people naturally gravitate towards ecosystems of different, equally organized products that third-party partner companies can provide.

Natural Demand

FinTech organizations have created a robust global demand for payment services that consumers expect from extensive technology and other non-banking companies. According to a study by Solarisbank, 61% of respondents are willing to use financial services provided by brands they trust. Moreover, such companies cannot cope with this request on their own due to complex regulatory restrictions and the lack of the necessary expertise. BaaS presented as a boxed solution ideally addresses this market demand.

Open API

Currently, the Open API reflects two trends. First, this is the transition to the Web 3.0 paradigm, within which each person owns all their data and can quickly revoke access to them from third parties. Secondly, central banks have a regulation that introduces directives like PSD2 to stimulate the development of quality services and competition.

At the same time, PSD2 quite clearly divides market participants into account operators and financial service providers. Having lost the exclusive right to be the sole service provider for its client base, the bank can sell payment expertise and infrastructure to those who will try to take advantage of technological and market changes.

Source Geniusee

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Digital wallet payments use case maturity

Big tech wallets focus on enabling frictionless payments via phone HW/SW and by embedding their payment platforms into in-app commerce (i.e., content, app, or virtual goods). Google struggled for years to achieve success with a digital wallet beyond the Play store (in-app) payments foundation, but now seems to have better traction on the back of robust contactless acceptance and deeper Google Pay e-payment penetration. As we discuss in a separate article (Apple Fintech Ecosystem), we estimate that Apple controlled c. $800 billion of spend in 2022, most of which came from Apple Pay. We view Apple Pay as a major success across POS and digital commerce, though other of Apple’s fintech products are less successful to date, or just now coming to market. Meta Pay (formerly Facebook Pay) primarily supports payments on Meta’s own social platforms.

Mobile apps powered by A2A (account-to-account) are growing rapidly in many European markets as well as India and Brazil. In both India and Brazil, usage of apps powered by A2A payment rails exploded in the last three years, driven by a push for financial inclusion, and inexpensive payments for merchants. India’s UPI network processed $1.5 trillion of volume in 2022 (c. 35–40% attributable to C2B commerce). These wallets are generally bundled into broader banking apps.

Vertically specialized wallets are intriguingly diverse, driven by niche value propositions across many use cases and sectors of spend. Gambling is a vertical that adopted digital wallets early in its evolution towards digital commerce. These wallets offer payments for online gaming and betting, in-casino deposits and withdrawals (some), and can support loyalty and offers from operators. Employee benefits are another interesting use case where apps act as wallets for various prepaid use cases such as lunch vouchers, gym memberships, or public transport. Open-loop mobility apps often emerge from public transport, tolling, or parking, expanding into adjacent use cases.

Vertical use case enablement is also a key value proposition for many merchant wallets, which are generally proprietary/closed-loop. Uber and similar apps enable a variety of mobility use cases such as ride sharing and food delivery (these merchant platforms often evolve into open-loop wallets such as GrabPay). Leading hotel merchant apps can support booking, but also check-in, room access, and room service. Wallets are also quite useful within café/restaurant to order @ table or to order to skip the queue. Auto wallets (i.e., smart cars) and fueling apps are still emerging, but will enable fueling/recharging and purchase of goods or service along a journey. For each of these apps, payment functionality, generally via a vaulted card, are mission critical to powering frictionless use cases. Loyalty benefits are also often a value-add to merchant digital wallets.

Source Flagship Advisory Partners

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F-Prime Fintech Index Overview

After hitting a peak of $1.3T in late 2021, the F-Prime Fintech Index declined to $397B by December 31st, 2022.

While the public market correction has been broad, tech and fintech stocks have seen the largest declines — the Fintech Index was down 72% in 2022.

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Here Are Key Takeaways From UBS’s Historic Credit Suisse Deal

The Terms

Credit Suisse shareholders will get UBS stock in a deal that values the bank at 3 billion francs. The firm was valued at about 7.4 billion francs at Friday’s close, around 20 billion a year ago, and more than 100 billion at its 2007 peak.

The use of public funds mean that about 16 billion francs of additional Tier 1 notes be written off to zero. That means bondholders — typically seen as more senior in a bank collapse than shareholders — lost more.

Credit Suisse’s statement said the deal is expected to close by the end of the year and UBS Chairman Colm Kelleher said there were no options for UBS to back out. Switzerland’s government used an emergency ordinance to avoid the need for a shareholder approval.

Kelleher and UBS Chief Executive Officer Ralph Hamers will retain their roles in the combined entity. A representative for FINMA, the Swiss regulator, said at a Sunday press conference announcing the deal that Credit Suisse’s management will stay in place until the deal closes. Then, their future becomes a decision for UBS.

Business Future

Kelleher was also clear that UBS is excited about Credit Suisse’s wealth management business and Swiss business; not so much about its investment bank.

A UBS press release emphasized that the combined firm will have $5 trillion of client assets. And Kelleher said the firm was determined to keep Credit Suisse’s profitable Swiss unit, despite concerns about concentration in the domestic market from this deal.

But the investment bank will be shrinking, likely ending the dreams of a CS First Boston spinoff.

Job Cuts

Kelleher said it’s too soon to know a job-cut number, but UBS gave indications it will be significant. The firm said it plans to cut the combined company’s annual cost base by more than $8 billion by 2027. That’s almost half of Credit Suisse’s expenses last year.

Government Support

Both banks have unrestricted access to the Swiss National Bank’s liquidity facilities. And the Swiss government promised to swallow as much as 9 billion francs “arising from certain assets that UBS takes over as part of the transaction, should any future losses exceed a certain threshold.”

The government’s loss-guarantee was necessary because there was little time to do due diligence and Credit Suisse has hard-to-value assets on its books that UBS plans to wind down, Kelleher said. If that results in losses, UBS would assume the first 5 billion francs and the federal government the next 9 billion francs. Any further hits would have to be shouldered by UBS.

Source Bloomberg News

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Sam Boboev

I am a fintech enthusiast and product leader passionate about crafting simple solutions for complex problems. Subscribe https://www.fintechwrapup.com/