Revolut’s US payment flaws allowed thieves to steal $20mn; China wraps up fintech crackdown with big fines on Tencent, Alibaba;
In this edition:
1️⃣ Revolut’s US payment flaws allowed thieves to steal $20mn
2️⃣ US fintech Clair raises $175m towards earned wage solution
3️⃣ Consumer payments show us the potential for embedded finance
4️⃣ China wraps up fintech crackdown with big fines on Tencent, Alibaba
5️⃣ Neither evolution nor revolution
6️⃣ What’s going on in the checking account market?
7️⃣ Is Paze ready to fight Apple and PayPal?
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Fintech News
Revolut’s US payment flaws allowed thieves to steal $20mn
A flaw in Revolut’s payment system in the US allowed criminals to steal more than $20mn of its funds over several months last year before the company could close the loophole, according to multiple people with knowledge of the episode.
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US fintech Clair raises $175m towards earned wage solution
After developing a free earned-wage advance offering for frontline workers two years ago, fintech company Clair is back with a new tool to help workers get paid after completing a shift and receiving $25 million in new equity funding.
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Pleo harnesses Yapily’s open banking to adopt VRPs
Danish spend fintech Pleo is extending its partnership with open banking leader Yapily as it branches out further across Europe and adopts variable recurring payments (VRPs).
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China wraps up fintech crackdown with big fines on Tencent, Alibaba
The regulatory crackdown that has shaken up China’s fintech industry since late 2020 appears to be coming to a close with the imposition of hefty fines on the country’s two digital payments giants.
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Fintech Insights
Consumer payments show us the potential for embedded finance
Embedding consumer payments has worked well. It’s easy to understand how embedding payments into a check-out process can improve customer convenience, increase conversions and grow net take. In the case of marketplaces, it’s easy to see how introducing a seamless payments experience can grow revenues. Examples of platforms that have benefited strongly from embedding payments are Lightspeed, Toast and Shopify, the last of which generates more than 50% of its revenues today from payments.
Furthermore, the provider landscape around embedded payments is also relatively mature. Put (very) simply, for brands there are three principal payment service providers to choose from in an ecosystem.
- Modular payments-as-a-service providers, who orchestrate between the companies and platforms embedding payments and the underlying payment infrastructure and, increasingly, the (international) payment methods. An example here would be Stripe Connect, which is the full-service product of Stripe. This space is also populated by smaller operations-focused orchestrators like TrustAp. They are all connected by the same value proposition: merchants and platforms can connect to get an end-to-end payment service including the necessary operations like customer service and KYC;
- There are the digital payment service providers (PSPs), which might move to adjacent verticals like Adyen (accounts) or Stripe (treasury); and,
- Payment technology providers, such as Finix and IXOPAY, which are providing technology, enabling brands to become payment facilitators.
These software providers play in an ecosystem with payment methods (bank networks, credit card networks, wallets) and leverage different gateways either online, hosted or POS. Additionally, the ecosystem is complemented through services like credit checks, invoicing or KYC, to finalize the entire journey with external providers.
Source Ben Robinson
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Neither evolution nor revolution
Within financial services organizations, AI is nothing new. In his 2022 letter to shareholders, JPMorgan Chase CEO Jamie Dimon famously wrote that the bank was spending “hundreds of millions of dollars” on AI and seeing identifiable returns on its tech bets (spending $12 billion on technology in 2021 alone). Of course AI hasn’t been reserved for only the largest organizations either: a 2022 report published by NVIDIA on the state of AI in financial services described AI use as “pervasive,” reporting that across all sectors of financial services — capital markets, investment banking, retail banking, and fintech — over 75% of companies utilize at least one of the core accelerated computing use cases of machine learning, deep learning and high-performance computing.
If AI is nothing new for financial services organizations, why is generative AI getting so much attention? The “traditional AI” that financial services firms have effectively deployed for the last 40 years is very good at some tasks, but has its limits. Simply put, generative AI can do things that “traditional” AI cannot because it’s more flexible, both in terms of the data inputs required and the tasks performed.
As generative AI has exploded onto the scene, we’re seeing that financial services organizations are experimenting with generative AI while maintaining their investments in more traditional forms of AI. Generative AI cannot replace the role of traditional AI within financial services organizations because:
1. The technology is not well set up to perform the same tasks;
2. Language models are not great at math — traditional models have proven to be much better for quantitative tasks like revenue forecasting, pricing predictions, etc.; and
3. The technology is more expensive, so you’d overpower the problem and waste resources. Another way to think about it: You don’t want to use a sledgehammer to drive a nail into a wall.
In this way, generative AI is neither an evolution nor a revolution. While evolution is the gradual development of something, especially from a simple to a complex form, revolution is the overthrow of the current system in favor of a new one. In both cases, the assumption is that it’s out with the old and in with the new. That’s not the case here. It is expect generative AI to coexist with and complement traditional forms of AI within financial services organizations for the foreseeable future.
Source Bain Capital Ventures
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What’s going on in the checking account market?
- Digital banks and fintechs dominate new checking account opening. Digital banks and fintechs captured nearly half (47%) of all new checking accounts opened so far in 2023.
- Digital bank/fintech growth is coming at the expense of large banks. Since 2020, digital bank’s and fintech’s share of new accounts grew from 36% to 47%. Over the same period, the megabanks’ share dropped from 24% to 17% while regional banks’ share declined from 27% to 21%. Community banks’ and credit unions’ share has remained stable.
- Chime and PayPal dominate the digital bank/fintech category. Combined, Chime and PayPal represent 43% of digital bank/fintech account openings and 20% of all new checking accounts opened in 2023.
- Winners and losers: SoFi and Wells Fargo. In 2020, SoFi accounted for 1% of new account openings and Wells Fargo’s share was 8.1%. In the first half of 2023, SoFi’s market share quadrupled to 4% while Wells Fargo’s share dropped by more than a half to 3.5%.
- Young consumers shape the market. Not surprisingly, a far higher percentage of young consumers are in the market for new accounts than older consumers. Of Americans who have opened a checking account so far in 2023, 72% are Gen Zers or Millennials (i.e., 21 to 42 years old).
Are Megabanks Feeling the Pain?
Despite their loss in market share of new account openings, the megabanks may not be feeling the pain for a couple of reasons:
- Consumers increasingly have more than one checking account. Consumers may be opening new accounts with digital banks and fintechs, but that doesn’t mean they’re closing out accounts with megabanks and regional banks. Of the consumers who have opened a checking account in 2022 or 2023, six in 10 have more than one checking account.
- Megabanks attract a more affluent consumer. More than half (52%) of consumers opening an account with a megabank in 2023 earn more than $75k. Among new digital bank/fintech customers, just 21% earn that much.
Source Forbes / @Ron Shevlin
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Will BNPL pass the test?
Avenues of growth
After first gaining traction in European and Australian markets about a decade ago, the installment trend took off in the U.S. during the pandemic’s e-commerce surge. BNPL allows consumers to make a purchase and pay for an item, or service, over a set period of time, often involving four payments with no interest attached.
Use of BNPL is still growing, although it remains a niche product, consultants and investors said. This year, BNPL is estimated to make up about 2.2% of the volume of U.S. e-commerce, compared to 2% last year and 1.7% in 2021, said Zachary Aron, Deloitte Consulting’s global and U.S. banking and capital markets payments leader.
Regulation looms large
BNPL’s rapid growth hasn’t gone unnoticed by regulators, and it’s only a matter of time before the CFPB takes action to monitor companies, attorneys and professors said.
In its own BNPL report last September, the CFPB identified concerns with consumers overextending themselves and companies engaging in data harvesting. The bureau said it was considering “interpretative guidance” to ensure BNPL providers are held to the same standards as credit card companies. BNPL isn’t covered by the Truth in Lending Act. The CFPB has also expressed concern with consumer disputes of BNPL transactions.
The CFPB signaled this month that it plans to propose a larger participant rule that could increase regulation of big tech companies active in consumer payments, such as Apple, Google and PayPal. The CFPB has also said it plans to use the “risks to consumers” provision under the Dodd-Frank Act more extensively. The CFPB could rope in BNPL companies by way of either, said Eamonn Moran, senior counsel at law firm Norton Rose Fulbright specializing in consumer financial services.
All eyes on profits
Financial institutions have sought to create their own BNPL products, rather than risk acquiring a BNPL company, given regulatory concerns and the lack of profits, said Capco Managing Principal Daniela Hawkins.
Klarna was last profitable in 2018, and is pledging to achieve that again in the second half of the year. Still, its annual loss last year widened over 2021, to 10.4 billion Swedish kronor, or about $1 billion. In the first quarter of this year, the company halved its loss, compared to the same quarter a year earlier.
As for Affirm, a spokesperson pointed to Levchin’s comments in the company’s May quarterly shareholder letter that says Affirm intends “to grow responsibly” as it strives to become profitable, on an adjusted operating income basis, by the end of the fiscal year ending June 30.
Risley expects the BNPL providers will ultimately survive as industry pricing competition moves away from what is currently a desperate battle to lure merchant customers. As the BNPL market rationalizes, that could end up being a smaller group of providers.
Source Payments Dive
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Digital identity rollout critical for digital wallet confidence and growth
63% of UK organisations either currently use digital identity or have plans to incorporate digital identity solutions into their operations, with 61% of those planning to do so within the next year.
Additionally, 52% of UK firms have plans to incorporate new and emerging identity solutions.
UK consumers are also displaying a growing familiarity with digital wallets, with 58% of consumers currently using them and half of consumers that don’t currently use digital wallets considering them in the future.
The report entitled “Plotting the Roadmap for Digital Identity” surveyed 200 IT decision makers (ITDMs) in the UK and US as well as 1,000 consumers to better understand the rapidly changing digital identity landscape.
This report comes as the UK government has introduced a new trust framework for digital identities.
The report reveals that 60% of organisations surveyed expect identity to have a transformative impact on their industry, with financial services (89%) and health (86%) seen as industries set to benefit most from latest innovation in this area according to ITDMs.
Finance (62%), retail (61%) and travel (46%), were the most popular services used by consumers with digital wallets.
Financial institutions (38%) are current leaders in public trust when it comes to storing personal data in digital wallets, followed by medical providers (35%), whereas the government (22%) and transport providers (17%) were the least trusted, according to the research.
Source Payments Cards & Mobile
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Is Paze ready to fight Apple and PayPal
Early Warning, the bank-owned operator of the peer-to-peer payments platform, Zelle, officially entered the digital payments gold rush earlier this year when it announced plans to create a new digital wallet called Paze.
The new service will compete directly with an increasingly crowded field of digital wallet providers including the likes of PayPal, Apple and Google.
According to J.D. Power data, the percentage of Americans that said that they used a mobile wallet for a purchase at some point in the previous three months increased from 45% in 2021 to 51% in 2022.
Despite the growing consumer interest and the huge boost Paze will have from its bank backers, the service will still have its work cut out for it when it comes to building customer awareness.
Overall, PayPal is the most recognized brand of digital wallets at 82%, followed by Apple Pay at 64% and Venmo at 60%, according to J.D. Power data.
However, when it comes to consumer preference, PayPal is the most preferred digital wallet brand for online purchases (37%) while Apple Pay is most preferred in-store (33%).
Google Pay follows just behind the leaders when it comes to brand awareness, with 53% brand recognition, but its point-of-sale consumer preference scores are considerably lower, with just 6% customer preference for online transactions and 7% consumer preference for in-store transactions.
The other half of the equation, of course, is availability.
Merchants need to accept these payment methods, and as digital payments platforms proliferate, that means making every payment option available at every point of possible interaction from the corner convenience store to the e-commerce website to the municipal parking meters that are increasingly fed with apps instead of quarters.
Early Warning will need to double-down on consumer brand building, merchant relationship development, and perhaps incentives before Paze can become an entrenched part of rapidly changing patterns of consumer behaviour.
Source Payments Cards and Mobile
