Navigating the Storm: Understanding the Decline of Payment Stocks; Building a credit card payment processing platform on AWS — Part 3; Binance CEO CZ steps down as part of $4 Billion settlement;
In this edition:
1️⃣ Alphabet fund spells bumper valuation for UK digital bank Monzo
2️⃣ Petal Card, the fintech backed by Peter Thiel’s Valar Ventures, goes up for sale
3️⃣ US Is Seeking More than $4 Billion From Binance to End Case
4️⃣ Navigating the Storm: Understanding the Decline of Payment Stocks
5️⃣ Regulatory Challenges Threaten the Foundation of Europe’s Fintech Boom: The Unraveling Business Model of Banking-as-a-Service
6️⃣ The journey and implications of a banking license
7️⃣ Building a Credit Card Payment Processing Platform on AWS — Part 3
News
Alphabet fund spells bumper valuation for UK digital bank Monzo
Alphabet, the $1.7trn (£1.4trn) technology behemoth which owns Google, is in talks to take a stake in Monzo, one of Britain’s biggest digital retail banks.
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Petal Card, the fintech backed by Peter Thiel’s Valar Ventures, goes up for sale
Petal Card is seeking a buyer as doubts loom about the fintech’s survival, according to five private equity, venture and banking sources.
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Binance’s Zhao pleads guilty, steps down to settle US illicit finance probe
Binance chief Changpeng Zhao stepped down and pleaded guilty to breaking U.S. anti-money laundering laws as part of a $4.3 billion settlement resolving a years-long probe into the world’s largest crypto exchange, prosecutors said on Tuesday.
Insights
Navigating the Storm: Understanding the Decline of Fintech Stocks
The once-innovative fintech industry is facing challenges, with major players experiencing a downturn in stock prices. Rising interest rates, intense competition, macroeconomic uncertainties, and reevaluated valuations are reshaping the landscape.
🔍 Deep Dive into Key Factors:
1️⃣ Rising Interest Rates and Impact on Fintech Stocks: Explore how the Federal Reserve’s aggressive interest rate hikes are affecting fintech companies, impacting their profitability and growth prospects.
2️⃣ Increased Competition in the Fintech Sector: Discover the surge in fintech startups globally and how heightened competition is driving up customer acquisition costs, squeezing profit margins.
3️⃣ Valuation Concerns and Their Role in Fintech Stock Decline: Understand the factors contributing to the adjustment in valuations, from global economic uncertainties to increased competition and realistic growth expectations.
4️⃣ Company-Specific Issues and Their Impact: Delve into challenges faced by individual companies, such as regulatory scrutiny and management turnover, and how these issues are influencing market perceptions.
Read the full deep dive in the latest edition of Fintech Wrap Up. Let’s navigate the evolving fintech market together! 🚀
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Regulatory Challenges Threaten the Foundation of Europe’s Fintech Boom: The Unraveling Business Model of Banking-as-a-Service
Europe’s fintech success, marked by significant funding and a high number of unicorns, now faces a potential setback as regulatory restrictions target Banking-as-a-Service (BaaS) providers according to the article by Sifted. These providers, essential for the quick establishment of fintech businesses, offer banking and payment licenses, enabling companies to launch financial products without the need for extensive infrastructure development or obtaining their own licenses.
The BaaS model, utilized by around 82% of European fintechs, is under scrutiny due to compliance issues affecting major players. Regulatory restrictions have hit prominent BaaS providers, such as Railsr and Solarisbank, jeopardizing their ability to onboard new customers. The asymmetry in the BaaS model is becoming apparent, as fintechs rely on providers for speed and scalability, while the providers face regulatory consequences if customers breach compliance laws.
Investor confidence in the sector has waned, with BaaS startup funding plummeting by 94% from 2021 to mid-2023. Compliance challenges, service outages, and product delays have plagued fintechs using BaaS, leading to a potential reevaluation of the BaaS business model.
Moreover, the Financial Conduct Authority (FCA) recently imposed restrictions on Modulr, affecting its ability to onboard new partner clients, exacerbating concerns within the fintech ecosystem.
Fintech founders express anxiety about the misalignment of risk and reward in the BaaS model, prompting discussions about its sustainability. Some predict that the model may not survive in its current form. As a response, certain fintechs, like Weavr and Swan, are exploring alternatives by bringing compliance processes in-house, despite the higher costs involved.
While this shift may address some of the compliance challenges, questions linger about the scalability of such an approach. The article suggests that the “next generation” of banking software providers may need to prioritize compliance as a primary use case rather than an afterthought to ensure long-term sustainability.
As the regulatory landscape evolves, the fate of the BaaS model and its impact on the broader fintech industry remain uncertain, with potential ramifications for the rapid growth and innovation witnessed in recent years.
Source Sifted / Amy O’Brien
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The journey and implications of a banking license
Fintechs have a choice to make when it comes to licensing: they can apply for a banking license, an Electronic Money Institution (EMI) license, or operate under a banking-as-a-service (BaaS) provider. The decision of which license to apply for will depend on a number of factors, including the fintech’s business model, its risk profile, and its regulatory goals.
📌 Banking license:
A banking license allows a fintech to accept deposits and lend money. This can be a lucrative business model, but it also comes with a high degree of regulation. Fintechs that apply for a banking license must meet strict requirements for capital, liquidity, and governance.
📌 EMI license:
An EMI license allows a fintech to issue electronic money and enable electronic payment transactions. This is a less regulated option than a banking license, but it also means that fintechs with an EMI license cannot accept deposits or lend money.
📌 Banking-as-a-service (BaaS) provider:
A BaaS provider is a bank that offers its banking infrastructure to other fintechs. This allows fintechs to offer banking products and services to their customers without having to apply for a banking license.
Key considerations for fintechs when choosing a licensing model:
✅ Business model: Fintechs should consider their business model and the products and services they want to offer when choosing a licensing model. For example, if a fintech wants to offer deposit accounts and loans, it will need to apply for a banking license.
✅ Risk profile: Fintechs should also consider their risk profile when choosing a licensing model. Fintechs with a higher risk profile may be better off applying for an EMI license or operating under a BaaS provider.
✅ Regulatory goals: Fintechs should also consider their regulatory goals when choosing a licensing model. For example, if a fintech wants to expand into new markets, it may need to apply for a banking license.
The decision of whether or not to bank is a complex one for fintechs. There are a number of factors to consider, including the fintech’s business model, its risk profile, and its regulatory goals. Fintechs should carefully consider all of their options before making a decision.
Source Mouro Capital
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The possibilities of Account-to-Account (A2A) payment rails
Account-to-account (A2A) payments facilitate money movement from one account to another, removing the need for intermediaries at the time of the transaction as with payment cards.
There are two types of account-to-account payments:
📌 Push payments allow you to transfer funds manually to another account on a one-off basis. These include bank transfers and instant payments. In the context of Open Banking and payment initiation, APIs also enable push payments to be triggered by sending notifications of actions in the customer’s banking environment.
📌 Pull payments are used to withdraw funds from customer accounts. This model is widely used by companies for recurring payments, such as telephone subscriptions or subscriptions to electricity suppliers. This type of payment requires the customer’s consent by completing a direct debit mandate, for example.
These new payment rails are networks that facilitate the movement of money from one bank account to another. However, there is no single global, standardized payment rail; each country or regional organization is responsible for building and configuring their own account-to-account (A2A) payments. In recent years, a number of central banks have launched innovative projects to build A2A payment rails. Some countries, such as Mexico, Australia and the Netherlands, have developed regulatory sandboxes to encourage the creation of new and innovative offerings to promote the use and interest of these new payment rails.
The possibilities and benefits of A2A payment rails are very real and will continue to transform the payment landscape in the coming years.
Enhanced customer experience: The emergence of Open Banking means that companies are able to offer a smoother user experience. You no longer have to integrate your payment card data. APIs will facilitate the ability to accept instant one-time or recurring payments.
📌 Changing needs and real-time payments: Increasingly, consumers want more convenient and time-saving payment alternatives, and are turning to these new, faster payment methods, whilst maintaining convenience and reliability. There is an awareness that card payments offer too few advances or new innovations compared to account-to-account payments.
📌 SCA and fraud reduction: SCA, or strong customer authentication, is a regulatory requirement for reducing fraud in digital transactions. By proving their identity via knowledge (password or code), possession (a phone) or a personal characteristic (biometrics), customers can conduct secure transactions while enabling businesses to be compliant, to reduce fraud (payment card fraud causes more than $24 billion in losses annually), all without compromising their payment experience.
Source Skaleet
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Building a Credit Card Payment Processing Platform on AWS — Part 3
AWS reference architecture for issuing authorization
In the issuing processing flow, the card network relays the payment authorization request, using a socket connection, to an Issuing Bank or a Processor (IBP) by sending a payload. Payment Network Interface Processor (PNIP) implemented either on a rack-mounted in an on-premises or a co-location receives the TCP/IP traffic from card network. IBPs can use AWS Direct Connect to connect from an internal network to an AWS Direct Connect location over a standard ethernet fiber-optic cable. AWS Direct Connect with AWS Transit Gateway aids in building a network transit hub that connects multiple VPCs and on-premises networks.
Traffic from incoming authorization requests is routed to the Tokenization VPC via Network Load Balancer over AWS Transit Gateway. Network Load Balancer operates at the connection level (Layer 4), routing connections to the target containers within customer VPC based on IP protocol data. Tokenization VPC tokenizes the sensitive card information, the cryptography operations such as validate, verify operations on card data must be performed on a scalable, resilient service as AWS Payment Cryptography. The information will be stored in the Cipher Database and can be retrieved in Amazon ElastiCache instead of relying on databases.
The request is transferred to Auth Payment Processor VPC for further processing. Authorization containers can be natively integrated with Amazon Elastic Kubernetes Service (EKS) to deploy applications.
The Authorization container appends additional information to the authorization request based on the card type for business validation checks. Business Process workflow engine runs multiple checks such as Fraud, Risk, Velocity, Account and various policies that include chip, pin, token, limit, and cash based on card type. Business Validation response is streamed to Amazon Managed Streaming for Apache Kafka (MSK) topic, the Authorization container processes the response and stores the information in Amazon DynamoDB. The IBP then sends an authorization response (such as an Approve or Decline response) back to the Card Networks then to the acquiring processor before it finally ends up back at the merchant terminal.
Payment processors have valuable customer data and can derive customer insights using Amazon Comprehend, including sentiment analysis and analysis of product reviews. Real-time personalized recommendations such as product rankings, specific product recommendations, and customized direct marketing can be leveraged using Amazon Personalize.
Source AWS
