How embedded finance works: Square Banking Case; Google aims to bulk up wallet; Key Drivers behind the rise of Asian super apps;
In this edition:
1️⃣ Defying global trends, MENAP fintech will likely sustain its momentum
2️⃣ Key Drivers Behind the Rise of Asian Super Apps
3️⃣ Stripe wants to make it easier for businesses to access credit
4️⃣ The secret invasion of super apps
5️⃣ British digital bank Monzo hits monthly profitability for the first time
6️⃣ Google aims to bulk up wallet
7️⃣ How embedded finance works: Square Banking Case
And many more….
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Defying global trends, MENAP fintech will likely sustain its momentum
Global fintech valuations dropped in 2022. The Indxx Global Fintech Thematic Index lost more than 55 percent off its peak in 2021,16 compared with a 28 percent drop in the Nasdaq composite. Some of the biggest fintechs have seen their valuations drop by tens of billions of dollars. With inflation at the highest levels observed in decades and interest rates continuing to rise, it is not surprising that investors would begin to prioritize profitability over growth. Indeed, 90 percent of the MENAP fintech founders we interviewed have already responded to changed market expectations by reducing staff, extending runways, and refocusing product offerings.
Despite the mixed outlook for the global economy and the new funding constraints on the global fintech sector, the MENAP financial services ecosystem is well positioned to continue its strong performance. Two key factors support this positive outlook:
1. Strong economic fundamentals in MENAP. In contrast to weakening economic performance in most global regions, MENAP’s economic fundamentals have remained strong. Given high commodity prices, particularly oil for Gulf Cooperation Council (GCC) economies, the MENAP region is expected to grow faster than most large economies over the mid term. In the near term, year-on-year GDP growth for 2023 is projected to be between 2 percent and 5 percent across MENAP,17 compared with approximately 1 percent for Europe and North America.
2. Continued growth of the region’s banking sector. The average price-to-book multiple for the region’s banks exceeds 1.5,19 and investor confidence in the sector is strong. Analysis of data from McKinsey’s Global Banking Pools indicates that revenues for the MENAP banking sector could grow by approximately 7 percent annually over the next three years. Many banks in MENAP have significant potential to grow at low cost by leveraging fintech innovations to serve the region’s large segment of young consumers and by focusing on underpenetrated product groups, such as consumer and small-business lending (current penetration of less than 20 percent) and wealth management and insurance (less than 10 percent penetration).
Annual revenue for the MENAP fintechs is projected to reach between $3.5 billion and $4.5 billion in 2025, up from an estimated $1.5 billion in 2022. This estimate assumes that regional fintech penetration will increase from less than 1.0 percent of total MENAP financial services revenue in 2022 (Exhibit 3) to a point between 2.0 and 2.5 percent in 2025. Over time, that fintech penetration will likely reach 3 to 4 percent of the region’s financial services revenue pools, roughly in line with the global benchmark for fintech revenue relative to revenue for the total financial services sector.
Source McKinsey and Co
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Key Drivers Behind the Rise of Asian Super Apps
- Mobile-first internet users: The majority of internet users in Asia, especially in developing Asia, came in contact with the internet first via mobile or only through mobile; this helped create an internet culture largely centered around smartphones. Strong demand from Asian consumers seeking to access online services via their mobile phones has further encouraged companies to provide more services via mobile apps.
- Wide distribution of cost-efficient mobile phones: In a mobile-first culture, access to smartphones is critical not only for communication, but also for overall daily activities. As such, more affordable brands of smartphones, such as Oppo and Vivo, have quickly gained market share across Asia. These devices are designed to have lower memory storage due to their focus on cost efficiency. Hence, super apps, which occupy the memory space of a single app while performing the functions of many, have become widely popular relative to singlepurpose apps.
- Trust, brand, and scale: By offering a variety of services shaped around consumers’ everyday needs on a single platform, super apps in Asia have developed into mature ecosystems of affiliated apps or mini programs (also known as mini apps), each with expertise within a specific vertical. As a super app secures a large user base, the platform is able to attract more mini programs, thereby establishing a virtuous cycle of adding more functionality and users based on reliable brand power. As super apps grow, they benefit further from economies of scale and customer stickiness.
Source Citi
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Stripe wants to make it easier for businesses to access credit
The private financial infrastructure giant announced a new charge card program today from Stripe Issuing, its commercial card issuing product, Denise Ho, head of product for BaaS at Stripe, told TechCrunch exclusively.
The company originally launched its Issuing product in 2018, and since then it’s helped companies such as Shopify and Ramp issue more than 100 million cards in the U.S., the United Kingdom and the European Union. Today, the product is one of Stripe’s fastest-growing, Ho said — supporting half a million transactions a day. Fintechs like Klarna “build entire businesses on it,” the company claims.
Previously, Stripe-issued cards could only be used to spend money from a prefunded account. Its expansion into charge cards, according to Ho, will give companies the ability to create and distribute virtual or physical charge cards that allow their customers to spend on credit rather than using the funds in their accounts.
“Among our suite of products, Issuing has been doing really, really well,” Ho told TechCrunch. “And the №1 top demand within Issuing has been the ability for Stripe to enable our platforms to offer credit to their users.”
This has a twofold benefit for Stripe — giving it a new revenue stream as well as the option to offer new financing capabilities to their customers “with little additional operational cost,” Stripe touts. (Operational efficiency is in vogue, after all.)
For example, platforms that use Stripe Connect can white label products from Stripe and provide a range of embedded financial services, such as financial accounts, working capital loans and now charge cards as well, Ho said.
Further, she added, Stripe Issuing provides the core components of a charge card program — such as funds flows, network connections, printing, and integration APIs — and then aims to “streamline” all the necessary compliance, bank partnerships and ledgering.
Ramp, Emburse, Karat and Coast are among the current users of the charge card program, which is available in beta in the U.S. In the coming months, Stripe will launch charge card programs in the EU and the U.K.
For its part, she said Stripe is partnering with startups to help guide them through the process and help provide the necessary compliance and risk oversight so that they don’t get in over their heads.
When it comes to underwriting, Ho said that Stripe has received feedback that its clients ultimately want to own the underwriting decision.
Over time, Ho said its clients may want “more modules” to do their own underwriting, so that’s something Stripe will work on over time as it matures its offering.
For its part, Stripe will make money off of interchange fees, so as customers’ volume grows and users spend more, Stripe will earn more. There will also be compliance fees associated with the program.
Source Techcrunch
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The secret invasion of super apps
Any company that can become a go-to combined platform for online activities like search, commerce, and digital identification could gain a wide moat and act as a gateway to the digital economy — with an abundance of monetization opportunities.
But big tech players’ super app ambitions are not about making a WeChat clone. Instead, these companies are steadily sprawling out to control more aspects of consumers’ online lives across the following areas:
• Discovery (e.g., search, social media)
• Transactions and authentication (e.g., payments, messaging, digital IDs)
• Delivery (directly providing a product or service)
Search is a key battleground.
In December 2022, The Information reported that Microsoft is considering building a super app with its Bing search engine as the backbone. The company is looking to integrate features ranging from shopping to news feeds as it seeks to expand further into the consumer market and capture more advertising dollars.
Meanwhile, Google, which currently dominates global search volumes, is enhancing its search and product listing capabilities to keep users within its network. For example, it recently expanded its partnership with Shopify to YouTube (which it acquired in 2006) to enable merchants to showcase shoppable products directly on their YouTube channels.
For their part, social media platforms are now layering on commerce features as more consumers use them as de facto search engines.
For example, Meta’s super app goals may be clearest with WhatsApp, the messaging service it purchased in 2014. In November 2022, the company announced its “vision for bringing the entire shopping experience directly to a WhatsApp chat.”
Meanwhile, others are going after payments, a key enabler of super app functions. Apple Pay adoption has taken off in the US, with an estimated 75% of iPhones having the service activated. In May 2022, Google rolled out its digital wallet app for Android phones, which stores credit cards, transit documents, tickets, and more.
Apple and Google are also among the companies eyeing the digital ID market. Credibly establishing who users are online could be a boon for super app ecosystems as consumers could more seamlessly access sensitive services like banking and healthcare. These companies would also find themselves at the center of even more daily interactions in consumers’ lives — both online and offline. While Google’s ID feature for its Google Wallet is still in the works, Apple’s Wallet IDs are now supported at several TSA checkpoints. Patent filings recently surfaced by Fintech Business Weekly indicate where Apple may head next with its identity credentials: know-your-customer (KYC) checks, peer-to-peer (P2P) transactions, and possibly voter identity verification.
Source CB Insights
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British digital bank Monzo hits monthly profitability for the first time
Monzo on Wednesday said it hit profitability for the first time this year, in a major milestone for one of the U.K.’s most prominent digital banks.
In its annual report for the year ending February 2023, Monzo reported net operating income of £214.5 million ($266.1 million), almost doubling year-over-year from £114 million.
Losses at the bank nevertheless came in at a substantial £116.3 million — though this was slightly lower than the £119 million net loss Monzo reported in 2022.
Still, the company managed to reach profitability in the first two months of the year.
Lending growth
Monzo’s strong revenue performance was driven by a bumper year for its lending business. This came against a backdrop of pain for U.K. consumers, who’re grappling with a harsh cost-of-living crisis as inflation soars.
Total lending volume reached £759.7 million, almost tripling year-on-year, while net interest income spiked by 382% to £164.2 million. That was as usage of overdrafts, unsecured personal loans, and the Monzo Flex buy now, pay later service grew sharply.
Yet credit losses also surged dramatically, as the bank set aside a mountain of funds to deal with a sharp climb in anticipated defaults. Credit losses swelled to £101.2 million, a more than sevenfold increase from £14 million in 2022.
It comes as consumers are increasingly turning to unsecured credit, such as credit cards and personal loans, to offset the impact of the rising cost of living. Research from consulting firm PwC indicates U.K. household debt exceeded £2 trillion for the first time in January.
UK ‘not holding us back’
The fintech sector has experienced increasing scrutiny since it grew in prominence after the 2020 Covid outbreak.
“From our perspective, this is a country where we got licensed, this is our home market; we’ve clearly learned this is where we can build a business of scale,” Monzo’s Anil said. “It’s not holding us back, I don’t think of it like that at all.”
Source CNBC
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Google aims to bulk up wallet
Many of the new features aren’t available yet, though Google expects them to be later this year. The company launched its wallet in 39 markets around the world last year and since then it has expanded into 25 more markets, Kim said.
Google is taking on other technology and payments behemoths, including Apple, Amazon and PayPal, that have also been vying to develop and enhance digital wallets on smartphones to draw consumers to their app ecosystems. PayPal touted efforts to add more wallet applications over the past couple of years, and Apple bulked up its wallet with more payments services, including adding buy now, pay later options earlier this year.
In Google’s wallet upgrade, the health insurance card capability will come with additional security features that distinguish it from the other types of “cards” consumers might have in their wallet, such as those for a fitness gym or loyalty club. In addition to the connection to Humana, Google also seeks to let users in the United Kingdom add their government-issued national insurance number to the wallet.
Google is also adding a feature that will let users access airline boarding pass information or train tickets from their messaging app, though that feature will initially only be available for Vietnam Airlines. Google is in talks with other carriers about adopting the option, Kim said. It’s also working with a Spanish rail operator, Renfe, on linking tickets to the wallet.
Finally, Google is also working on allowing users to take a picture of membership cards, refund cards or any other cards that have a barcode or QR code, so that they can store those credentials in the Google wallet. That feature will be available “soon,” the company said.
Source Payments Dive
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A challenging environment for SMEs
A wide variety of macroeconomic and microeconomic factors shape the financing landscape for small and medium-sized enterprises (SMEs), which constitutes the backbone of European economies. What is striking is that many of these factors are currently coalescing to make external sources of finance less accessible and affordable for SMEs.
Moreover, assessing SME risk is challenging for many banks due to asymmetric information. Therefore, lending to them is often commercially less attractive. Many SMEs also do not conform to the risk appetite of most banks. Moreover, the costs to serve SMEs are rather high, as they have similar fixed costs to larger clients but offer less revenue potential. Furthermore, regulatory requirements such as the Basel III & IV regulation, SREP (Supervisory Review and Evaluation Process) and TRIM (Targeted Review of Internal Models) are further limiting the availability of capital and thus loans, including to the SME segment. The patchwork regulatory picture across Europe is also making it more difficult for international financial product providers to operate across different jurisdictions.
Meanwhile, current economic circumstances are placing immense pressure on the financial stability of many SMEs. Rising inflation and high energy costs are constraining their budget. Shortages and disruptions in global supply chains have raised working capital requirements, as companies have had to increase their inventory to reduce uncertainty across their supply chain. Indeed, according to an Ifo survey, 73% of SMEs have increased their inventory since 2020, and at a higher cost too.1 The imminent recession is also adversely affecting revenue, driving down SMEs’ profit margin further. To compound matters, default rates are rising among SMEs’ customers, with a negative impact on realized revenues. Meanwhile, the evident increase in delayed customer payments lengthens the cash conversion cycle for SMEs.
According to recent Ifo research, approximately 30% of German SMEs seeking financing reported a limited supply of loans from banks.3 When we consider the heavy reliance of SMEs on bank financing, this is an alarming finding. It is all the more concerning when we take into account that the share of external financing emanating from bank loans in Europe is around 70%, compared to 40% in the United States.4 One in four SMEs in Europe now report severe difficulties in accessing finance, and others point to a liquidity squeeze.5 As a result, the issue of underfinancing has become a substantial concern for the wider economy.
Source Strategy&
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How embedded finance works: Square Banking Case
To show why embedded finance is so valuable, let’s use a real-world example: Square Banking
Square launched Square Banking in July 2021 as a way to “help small-business owners easily manage their cash flow and get more out of their hard-earned money.” Ever since then, Square merchants have been able to apply for bank accounts (offered through a partnership with Sutton Bank) directly in the Square app. The vast majority are approved in a matter of moments.
Square Checking accounts work like other bank accounts: they come with cards, statements, and FDIC insurance. The main difference is that all account activity takes place on Square’s platform. Square has visibility into it and generates revenue from it.
- For Square’s customers, embedded finance is a game changer. It enables small-business owners to run their ecommerce businesses from inside Square’s platform rather than requiring external bank accounts and software tools. It eliminates many of the banking fees that small-business owners are routinely assessed. Finally, it enables small-business owners to get paid out within moments of completing a sale.
- For Square, embedded finance generates a lot of revenue. In fact, in Q4 2022, Square’s gross profits from its merchant segment were up 22%, to $801M. It has also resulted in increased loyalty: merchants who use 4 or more of Square’s products (including embedded financial products) are retained 8–15x more than those who use a single product (typically payment processing).
How does Square generate revenue from its embedded financial products?
- They earn revenue from the interest paid on their customers’ deposits.
- They earn interchange fees whenever customers make card purchases.
- They earn financing revenues from Square Loans to their merchants.
Source Unit
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Open banking-based business models: overview
- Open banking provides an overall basis for these new methods of banking. At its core, open banking is the exchange of financial data between banking institutions and third-party providers (TPPs).
- Embedded banking, which is one type of embedded finance, refers to the practice of folding banking products and services into other customer transactions, such as e-commerce (think of buy-now-pay-later (BNPL), a type of short-term financing for purchases as an example). Customers benefit from a more seamless experience when the financial service is almost invisibly built into the journey. Banking as a service (BaaS) is a slightly more specific type of embedded banking, where the bank is in the background and invisible to the end customer, typically offering its license, balance sheet, and white-labeled products to the integrating business B2BC business.
- Platform banking has become an integral business model in both financial services and the overall economy. It is important to differentiate among two types of platforms — the latter reflects the purpose applied in this Viewpoint:
- Transaction platforms, such as eBay, are exchange platforms where buyers and sellers meet. The platform’s value is inferred from the transaction itself.
- Product platforms (platform banking or banking as a platform). The bank, with its license, tech stack, distribution channels, and client base, serves as a place where third parties can connect to and enrich the offering for the end customer.
- Ecosystems. Working with partners, ecosystems orchestrate offerings to achieve new, upgraded value propositions that are superior to and more comprehensive than what the bank can offer alone. Ecosystems are guided by a target value proposition and are usually built around a theme such as housing. The main difference between an ecosystem and platform banking is that the former is more strongly steered by a target value proposition.
- Beyond banking grows from an ecosystem that contains offerings that expand from traditional banking products and services and addresses areas such as real estate, transportation, travel, healthcare, and shopping. This definition of beyond banking, while narrow, helps differentiate between the assorted models.
Source Arthur D. Little
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Metaverse and Money
Key Findings
About 25% of American adults under 40 own a virtual reality headset.1 In 2021, Bloomberg catalogued more than one thousand stories containing the term “metaverse,” while there had only been seven in all of 2010s.2 One of the most notable metaverse companies, Roblox, led for its Initial Public Offering (IPO) in October 2020. As of February 2023, Roblox has a market cap of $26 billion and nearly 60 million daily active users. Facebook famously changed its name to Meta to reect its strategic pivot and expansion into this space. Apple is set to release a mixed reality headset in June 2023.3 Statista projects the revenue in the metaverse market to reach 17.48 billion in 2023.4 McKinsey estimates that the metaverse could be worth $4–5 trillion by 2030.
The current focus of the metaverse is gaming, so it is not surprising that most of our survey respondents play games (95%) and identify as gamers (89%). Even before the advent of metaverse, mobile devices have already made gaming far more ubiquitous. In a 2022 survey of women in the U.S. and UK, nearly 75% of respondents said they play mobile games once per day, and more than 67% said mobile gaming is a key part of their downtime or “me time”.
Interestingly, only half of respondents identied as metaverse users, which underscores that gaming and metaverse are not considered as synonymous to consumers. Survey respondents who are metaverse users in the U.S. spend an average of 12 hours per week in the metaverse. Over four in ve (83%) who are not current users say they are interested and expect to start using the metaverse in the next year. The usage of cryptocurrencies, NFTs, Decentralized Finance, and VR by both metaverse users and non-users is worth exploring (see Chart 1 below).
Generally, adoption of cryptocurrencies, NFTs, DeFi, and VR is higher among metaverse users relative to metaverse non-users. 80% of metaverse users and 62% of non-users currently use cryptocurrency. 50% of metaverse users and 24% of non-users own NFTs. 23% of metaverse users and 14% of non-users currently use decentralized nance (DeFi) products. Lastly, 67% of metaverse users and 34% of non-users currently use virtual reality.
Over 75% of survey respondents dene the current metaverse as a virtual reality space (78%) that allows users to interact with each other (76%) and play games (73%). Looking forward, they see the metaverse as a place to meet new people (88%), socialize with friends and family (85%), play games (84%), shop for physical goods (82%) and shop for digital goods (84%).
When it comes to money in the metaverse, there were three overarching observations that apply across all 10 surveyed markets:
1. There is a significant amount of money that is currently spent and held in the metaverse;
2. There is a need for interoperability for money in the metaverse;
3. There is a need for greater security around money in the metaverse.
