Challenger banks in the hot seat; Inside Stripe’s push to diversify beyond payments; Neobanks across Europe fatten up as VCs demand profits;
In this edition:
1️⃣ Challenger banks in the hot seat
2️⃣ Neobanks across Europe fatten up as VCs demand profits
3️⃣ Non-financial offerings by banks
4️⃣ Fintech projected to become a $1.5 trillion industry by 2030
5️⃣ The road ahead for Asia’s digital banks
6️⃣ Overlap of digital wallet users
7️⃣ Inside Stripe’s push to diversify beyond payments
And many more….
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Challenger banks in the hot seat
What a wild couple of weeks for the banking sector.
First Republic failed and two prominent challenger banks saw valuation haircuts.
Challenger bank writedowns
Last week, Schroders wrote down its investment in Revolut in its annual reporting by 46%.
The week before, reports surfaced that Allianz X is looking to sell its stake in N26 at a 67% discount.
Those aren’t just simple valuation corrections — they’re full-blown resets.
Given the market cap compressions of public competitors Nubank and Wise, more valuation cuts are likely coming for other challenger bank unicorns.
What’s next for challenger banks?
3 key takeaways
1) Funding is drying up after years of mounting investment activity, as competition intensifies and more investors question challenger banks’ unique selling proposition.
2) Valuations will be corrected across other market leaders. Think Chime. The challenger was last valued at $25B during the fundy frenzy of 2021, which drove up fintech valuations across the board.
3) Profitable challenger banks will come into the spotlight. Nubank, Revolut, and Chime have already reached profitability, but the stakes are even higher now given the current state of public and private markets.
Meanwhile, leaders like Nubank and Revolut are focusing on building “super app” functionality to pad their margins even further.
Source CB Insights
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Neobanks across Europe fatten up as VCs demand profits
After years of sacrificing profitability at the altar of growth, neobanks are now focusing on profitability, amid restless VC demands for positive numbers.
In the UK, Starling, valued at more than £2.5bn, and Revolut, valued at £28bn, have made their first annual profits: Starling £32m in 2022 and Revolut £26m in 2021.
Monzo, valued at £3.8bn, which made a £119m loss in 2022, has said it’s “on track for profitability” by the end of the current financial year.
Though not exactly comparing apples with apples, it is worth pointing out that UK banking giant HSBC made a whopping profit of £14bn in 2022.
Across Europe, Amsterdam-based Bunq, valued at £1.6bn, reached quarterly profitability for the last quarter of 2022 and says it expects to continue to turn a profit throughout 2023.
Berlin-based N26, valued at £7.6bn, registered losses in 2021 of £153m while its smaller country rival Vivid Money is on track to be “operationally” profitable by the end of this year.
Meanwhile, Danish neobank Lunar, valued at over £1bn, made a £432,000 loss in 2021 but says profitability is firmly on its radar.
Customer number surging
While not taking a wreaking ball to incumbent banks, the disruptors have undoubtedly dented traditional banks’ customer numbers.
Leading the pack is Revolut which now has a humongous 27m customers (including 2m new customers in the last four months) across 36 markets.
Monzo has over 7m UK customers (including 200,000 potentially lucrative business customers) and is now ranked in the top ten biggest banks in the UK by customer numbers.
Starling has 3.5m customers (including 520,000 SME customers).
Bunq does not disclose customer numbers; Lunar has 630,000 customers and Vivid Money has around 500,000 customers.
Allied to customer numbers, another potential indicator of success could be app download figures.
According to figures from data firm Apptopia (which surveyed European monthly downloads across Revolut, Monzo, Starling, N26, Bunq, Monese), Revolut is in the lead with 64.74 per cent of downloads, ahead of second-placed Monzo (17.19 per cent).
Which strategy will win out?
Which neobank strategy- be it super-app, SMB-focus, or world domination- will prove the most successful will play out over time.
But it is noticeable that successful neobanks, unlike some of their fintech peers, have largely ridden out the economic downturn and not suffered the ignominy of downrounds and swathes of job cuts.
Experts agree we may see less neobanks in the future, but the successful ones will continue to flourish.
Source Tech EU
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Non-financial offerings by banks
Industry convergence is taking place in all sectors. For example, leading Middle East telco provider Etisalat has partnered with health and wellness platform Vitality Global to enter the consumer lifestyle sector. Launched in November 2022, the partnership increases customer engagement and expands the range of products offered, creating up-selling and cross-selling opportunities and new potential revenue streams.
Banking is no exception, and many banks already provide services that are completely unrelated to finance, such as housing, travel and e-commerce. Accenture’s analysis of the non-financial service initiatives of 36 banks globally shows that the focus differs across markets, depending on customer preferences. European banks focus more on mobility services such as facilitating highway payments or car sales and rentals, those in Asia Pacific and Latin America focus on providing e-commerce services, particularly for consumer goods, and banks in North America — the least active in this regard — provide mainly home buying referrals to partners such as real-estate agents.
But these non-traditional products are rarely marketed and sold through banks’ core platforms. Just 32% of the non-financial products and services offered by these 36 banks are integrated into their primary mobile app, while 8% are available through a dedicated app and 60% through other channels such as the website of a third party that is not integrated with the mobile app.
For example, the Belgian bank and insurer KBC offers mobility services, food delivery and event tickets through its main banking app. Meanwhile, Singaporean bank DBS offers a variety of nonbanking solutions such as car purchases and sales, real estate, travel and hotel bookings through a dedicated website, DBS Marketplace.
Survey data indicates that there is consumer appetite for non-financial products: around one-third would purchase big-ticket non-financial products from or through a bank, such as properties (36%), cars (32%) and travel (20%), without necessarily including the associated finance.
Source Accenture
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Fintech projected to become a $1.5 trillion industry by 2030
Fintech revenues are projected to grow six fold from $245 billion to $1.5 trillion by 2030, according to a new report released by Boston Consulting Group (BCG) and QED Investors.
The fintech sector, which currently holds a 2% share of the $12.5 trillion in global financial services revenue, is estimated to grow up to 7%, of which banking fintechs are expected to constitute almost 25% of all banking valuations worldwide by 2030.
B2B2X and B2b will lead the next era of growth
The first part of the fintech journey was led by payments, accounting for roughly 25% of cumulative equity funding ($120 billion) since 2000.
And according to the report, the sector will grow fivefold to $520 billion, driven by cross-border payments, “payment-plus” models (bill pay and payment apps offering adjacent services such as wallet services), and the proliferation of use cases driven by real-time payments.
While payments led the last era, B2B2X and B2b (serving small businesses) will lead the next.
B2B2X is made up of B2B2C (enabling other players to better serve consumers), B2B2B (enabling other players to better serve businesses), and financial infrastructure players.
The B2B2X market is expected to grow at a 25% CAGR to reach $440 billion in annual revenues by 2030, supported by growth in embedded finance and financial infrastructure; while the B2b fintech market is expected to grow at a 32% CAGR to reach $285 billion in annual revenue by providing solutions to credit-starved and poorly served small businesses.
Spread businesses in the developed world will face challenges
Spread businesses in developed markets (which include banks and neobanks, lending platforms, mortgage lenders, and credit unions) will face challenges scaling up profitably and will need to start lending on their own balance sheet while accessing lower-cost funds, one method of which is by acquiring a banking license.
One significant challenge is incumbent banks are investing heavily in technology to improve their customer experience and value chains, making it difficult for neobanks to differentiate themselves.
With roughly 2.8 billion underbanked (50% of which reside in emerging economies) and an additional 1.5 billion unbanked (75% of which reside in emerging economies) adults in the world, neobanks will play a key role in expanding financial access.
Source BCG
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The road ahead for Asia’s digital banks
5 key themes
Theme 1: Evolution of financial services, from products like payments to lending With a bleak global economic outlook and liquidity drying out, profitability has shifted to be front and center of mind for Asian digital bank CEOs. While reaching the underbanked or unbanked is a key driver to gain traction within the market, lending has proved to be the secret sauce towards a winning and profitable strategy for digital banks.
Theme 2: Driving financial services evolution via innovative technology architecture Innovation is key for bringing value in terms of products and services to digital bank customers. Hence, the foundational architecture of a digital bank needs to be modular to allow rapid testing and launching of new products, and secure exchange of data with ecosystem players. Achieving this successfully would enable digital banks to reap various benefits.
Theme 3: Role of open and trusted data to drive financial services evolution
Open and trusted data, such as a national identity database, enables digital banks to reap the benefits of an open ecosystem to effectively serve their underbanked and unbanked target customers. The pros range from simplifying banking processes such as onboarding, and reducing risk by utilising a unified identity database to prevent fraudsters from using fake identities, to reducing service costs by leveraging trusted sources instead of having to undergo hefty compliance processes.
Theme 4: Attracting, training, and retaining talent
Attracting talent is one of the most pertinent challenges that Asian digital bank CEOs need to solve. With talent being a key driver of success, Asian digital banks must develop the right talent value proposition to attract and retain the best talents. The participants concurred that several key areas they wish to focus on are building and maintaining the right work culture, developing a core employer proposition that is compelling to the target talent pool with flexibility based on the employees’ preferences, and utilising greater performance-based incentives to attract and motivate the right talent.
Theme 5: Policy expectations from regulators
Regulators have taken a positive step forward with the issuing of digital banking licenses. However, further evolving regulations would enable countries to embrace even more benefits from digital banks and improve the banking industry as a whole. While regulation changes could be introduced in various shapes and forms, a conducive regulatory environment for digital banks would include supporting efficiency to lower unit economics by embracing sandboxes to drive innovation, and enabling better collaboration and infrastructure within a country and across the region, thereby facilitating a level playing field with incumbent banks.
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Overlap of digital wallet users
While having only one physical wallet may make sense for most adults, this isn’t the case for digital wallets — at least not yet. MCBI data shows that users of one digital wallet are very likely to use others as well. For example, a staggering 88% of Apple Pay users say they also use PayPal. The latter’s dominance is especially visible in this respect. Nearly every user of any competitor digital wallet also uses PayPal, but the overlap doesn’t stop there: 65% of Google Pay users also use Cash App, and over half of Cash App users also use Venmo.
This use of multiple digital wallet providers may suggest there are gaps a new competitor could fill, but that’s actually not the case. Consumers across the board say they are highly satisfied with their digital wallet providers, even though they use multiple. For example, 82% of Venmo users have a favorable view of the app, despite the fact that 65% of them also report using Cash App. It seems consumers are content managing their money with various digital wallets and don’t expect one digital wallet to serve all their needs.
The high satisfaction but high disloyalty is due to two factors: First, these providers have gone to great lengths to make it easy to sign up for their wallets, and second, not every merchant or retailer accepts every wallet, making it necessary for consumers to have several wallets to meet their payment needs.
While this is great news for banks in the sense that customers don’t seem to have a limit to the number of digital wallets they’ll sign up for, it doesn’t guarantee they’ll actually use a new wallet with any frequency.
Source Morning Consult
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Acquiring business models across merchant segments
There is a constant expansion of non-card players which are going beyond addressing use cases and segments previously underserved by the traditional payments industry or targeting cost reduction opportunities. Competitive dynamics and their speed vary significantly between developed and emerging economies, but in general terms, large incumbent acquirers in developed markets have historically focused on large merchants, leaving unmet demand in small and micro-merchant spaces. In developing economies, this situation is even more prevalent due to the large under-served merchant segment in which closed-loop wallets, mobile money, and emerging payments have been operating.
The implication is that rivalry in the industry is characterized by lateral competitive pressures based on the ability to unbundle and reconfigure transaction processing services; additionally, there is an upwards expansion of players addressing the needs of non-customers from a traditional acquiring perspective — they have developed an effective blueocean strategy and are currently are moving upstream. This applies to telecom providers and closed-loop super-apps expanding into banking and acquiring in developing economies as well as to Block, previously Square, establishing its base with micro-merchants and then expanding to larger merchant segments in developed economies.
Source Arkwright
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Key decisions for embedded-finance market entrants
Choose where to compete. For most banks with proprietary distribution, embedded finance represents a significant cannibalization risk. However, banks with limited footprints or localized relationships, such as community banks and regional banks, may see it as an attractive way to expand their revenue base. Some may be comfortable with growing deposits and earning revenues relatively passively, at least early on, but many will look for opportunities to differentiate themselves and boost revenues through more advanced products and support. At the moment, payments-focused technology providers are leading the charge on embedded finance, using their money movement capabilities to attract distributors and then expanding into products that have been the strongholds of banks, such as lending.
Build and enable a modern developer experience. Many banks and legacy financial services infrastructure firms are not yet equipped to externalize their processes and workflows to allow distributors to seamlessly integrate embedded-finance products into their journeys or distribution platforms. Distributors wanting to scale up quickly will need to build a modern developer experience, including the necessary technology to enable it. To do this, they should provide third-party developers with self-service access and well-documented APIs.
Adapt to B2B2C and B2B2B sales motions. Although some financial institutions operate with channel partners, many are accustomed to serving end customers directly. Those using direct channels will need to build a new set of capabilities to support distributors in selling embedded-finance products to their consumer or business customers.
Develop support and risk services. Retailers, manufacturers, telecoms, and other distributors of embedded finance may not have the capabilities to build, sell, and service financial products in a risk-controlled, regulatory-compliant, effective manner, nor will they have the time or appetite to build such capabilities. They will look to balance sheet and technology providers for advice on how best to deploy embedded finance and orchestrate the expertise and tools needed to deliver it in a compliant way. As well as providing advice, the balance sheet and technology providers will need to build a risk management framework that gives them confidence that the distributors they work with are acting within their risk appetite and in a compliant manner.
Source McKinsey & Company
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Inside Stripe’s push to diversify beyond payments
Facing more competitive pressure and a hit to its valuation, Stripe has made several moves in recent months to become a more valuable partner for small businesses.
Stripe in late April launched a revenue and finance automation suite, bringing together a number of products that handle recurring revenue, accounting, analytics and money management. Stripe has added individual products, including a tax application programming interface, which manages sales taxes for transactions on and off Stripe; it also updated its billing and revenue reporting tools to streamline processing.
The series of rollouts aims to keep the company fresh as small businesses become a larger target for payments companies, card networks and banks — and as the valuations of Stripe and many other fintechs have eroded in recent months.
“The job of finance at a company isn’t constrained to the collection of money — it’s about helping construct the business,” said Vivek Sharma, business lead for revenue and finance automation at Stripe.
Small businesses have added more automation over the past few years to accommodate the expansion of e-commerce and to serve new consumers and suppliers outside of their home markets. Meeting those needs is part of Stripe’s business model, and like most fintechs it’s looking to recover from a rough 2022.
Stripe’s valuation has declined from about $95 billion to about $50 billion, and like a lot of fintechs it has cut jobs. The company has maintained a busy development schedule. Since the start of 2023, Stripe has expanded coverage of softPOS, or the use of a smartphone to accept payments without add-on hardware, to nearly all mobile devices. Stripe is also looking for use cases for advanced artificial intelligence such as chatGPT, with customer engagement being one early focus.
The overall goal is to provide more products to businesses that may be new to digital commerce, or new to cross-border selling.
Stripe is diversifying its revenue streams to prepare for a future where payments are less profitable, according to Agustin Rubini, director analyst at Gartner.
“As payments technology advances and competition increases, margins on payments are likely to decrease,” Rubini said.
Visa and Mastercard both consider services to be a major pillar of their businesses, offering security, consulting and open-banking tools. Visa recently introduced a new strategy to migrate small-business owners from consumer cards to business accounts. Square, one of Stripe’s chief rivals, released more than 100 business products in April covering areas like subscription management and improvements in Square’s restaurant booking and ordering systems as well appointment and scheduling services for other business categories.
And dozens of banks and financial institutions have added merchant services to enhance card and payment processing over the past year.
Source American Banker
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BaaS Provider Archetypes
BaaS is a rapidly evolving space that includes a variety of players who bring a unique set of skills and capabilities to clients. The variety of BaaS providers in the market means that companies have a range of options to choose from when looking to integrate banking services into their own products or launch their own banking offerings.
Incumbent Banks
Incumbent banks are venturing into the realm of BaaS to capitalize on their regulatory assets, technology stacks, banking products, and process expertise by partnering with ecosystems. With their strong balance sheets, deep knowledge of how to navigate regulatory, legal, and compliance matters, diverse product offerings, and access to valuable customer data, they are wellpositioned to succeed in the BaaS space.
Challenger Banks
Challenger banks are entering the BaaS market, leveraging their digital-first approach and agility to offer banking services to other companies. These challenger banks have the advantage of being able to build their banking infrastructure from scratch, enabling them to offer modern, user-friendly services that are tailored to the needs of their customers.
Licenced Infrastructure
Banks These are licenced entities with a dedicated focus of offering BaaS offerings to clients looking to embed financial services. These players facilitate a direct access to regulatory assets as well as allowing clients to leverage their modern technology infrastructure to launch financial services and access underlying payment rails. Having a banking licence also allows them to offer a wide range of financial services and business processes to their clients.
BaaS Middleware
Platforms BaaS middleware platforms have emerged as a popular option, offering a flexible and scalable solution for companies looking to integrate banking services into their own products. These middleware providers act as intermediaries between banks and other companies, allowing them to access banking services through APIs.
Embedded Finance
Platforms Embedded finance platforms aim to provide a seamless integration experience to brands looking to embed financial services. These platforms also often integrate various features, such as onboarding tools, card processing, data analytics, customer journey design, etc. to facilitate an accelerated manner of launching embedded banking services.
Source Toqio
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Merchants in Singapore can payments via Whatsapp chat
This is great news for merchants as well as startup like botcommerce that are working on enabling social commerce for small and medium merchants.
Singaporeans will be able to pay local businesses right from their WhatsApp chat from today onwards. This will enable customers and businesses buy and sell directly on WhatsApp without having to go to a website, open another app or pay in person.
Supported by WhatsApp’s payments service provider partner Stripe, the new feature will enable Singapore residents (those with a WhatsApp number registered here) to pay using credit, debit cards or PayNow.
WhatsApp said that it will begin rolling out this feature to a small number of local businesses today, and it will be available to many more in the coming months.
The option to enable payments on WhatsApp in Singapore is available to local businesses using the WhatsApp Business Platform.
Other local businesses that are interested in offering this feature to their customers can work with one of WhatsApp’s business solution providers such as launch partners Vonage, Gupshup, 360dialog and Wati.io to get started.
The payment feature is currently available in two other countries — the first launch was in India in November 2020 and it was most recently made available in Brazil less than a month ago.
According to a statement by WhatsApp, this payment feature will be rolled out for more businesses and countries in the future.
Source Fintech News
