Open Banking & Embedded Finance — Two sides of the same coin; Which technologies are shaping the future of fintech?; So what has the winning strategy for fintechs been over the last decade?;
In this edition:
1️⃣ No big fintech is going to IPO soon, says top European fintech investor
2️⃣ Apple Offers to Open Mobile Payments to Third Parties Amid EU Antitrust Case
3️⃣ N26 launches stock and ETF trading to complement its banking offering
4️⃣ Open Banking & embedded finance — Two sides of the same coin
5️⃣ So what has the winning strategy for fintechs been over the last decade?
6️⃣ Fintech investments significantly dropped in 2023
7️⃣ Which technologies are shaping the future of fintech?
News
No big fintech is going to IPO soon, says top European fintech investor
Creandum’s Simon Schmincke talks about the problem with the IPO window in 2024, M&A and what every fintech is discussing in its board room
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Apple Offers to Open Mobile Payments to Third Parties Amid EU Antitrust Case
Apple has agreed to let third-party mobile wallet and payment services in Europe use the technology behind its Apple Pay app in a move to allay competition concerns from European regulators.
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N26 launches stock and ETF trading to complement its banking offering
Berlin-based banking startup N26 is rolling out a new stock and ETF trading feature starting with Austria as the first market. This product launch marks a renewed focus on the startup’s core markets with a larger portfolio of banking products in those countries.
Insights
Open Banking & embedded finance — Two sides of the same coin
Open Banking, or the concept of FIs enabling third parties to access financial data, services, products and infrastructure through APIs, has served a key role in promoting competition and innovation in the financial industry. The breadth of APIs offered differs significantly between FIs, with payment and account information APIs still representing a significant share of available APIs.
However, a range of other data, services and products, within the space of accounts, cards, lending, insurance, trade and wealth management, are becoming increasingly API enabled. With this development, FIs further pave the way for Embedded Finance, providing the financial building blocks which are made available via technical service providers and/or directly at the point of need in an external, client- facing non-financial platform. FIs typically act as balance sheet providers within this emerging Embedded Finance value chain, whereas the client-facing platform acts as a distributor of the embedded financial service.
Key finding: rise of payment APIs
Since the initial OBM publication in 2017, both the number and scope of payment APIs have continued to increase. Payment APIs now account for 34% of all observed API functionalities as shown in Figure 2. This rise can be explained by the growth of specific payment functionalities that have been added over time. The types of payment APIs include cross-border payments, instant payments (via various schemes), Buy Now, Pay Later (BNPL), standing orders for recurring payments, scheduled payments, request-to-pay and batch payments. In view of the current regulatory developments surrounding instant payments in Europe and the related use cases, INNOPAY expects the number of payment APIs to continue to soar.
In particular, regulators in the EU are driving instant payment adoption throughout Europe as part of the payment sovereignty agenda. A similar development is ongoing in the USA, where the U.S. Federal Reserve (Fed) is launching its own instant payment service, ‘FedNow’, in July 2023. The work on this has already started, since the Fed began to formally certify FIs to implement instant payments in April 2023. Moreover, countries such as Brazil and India have already adopted instant payment schemes in the form of PIX and UPI respectively. As trends like these continue to spread around the globe, new use cases will continue to appear with payment innovations built on top of these real- time rails.
Source Innopay
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What would Apple’s banking suite look like?
In Apple’s banking suite, we expect the following features would be included:
Interest-earning, FDIC-insured checking accounts. This is the foundation on which all of Apple’s other banking products would be built: a checking account offered through one or more bank partners, insured by the Federal Deposit Insurance Corporation for up to $250,000, with a unique set of account and routing numbers.
Direct-deposit switch. If you want to identify someone’s primary financial account, just look at where they receive their paycheck. By that logic, if Apple wants to become their customers’ financial mission control, they should make it ridiculously easy for their customers to switch their direct deposits.
Fortunately, there are several software tools that enable just that; Argyle, Pinwheel, and Atomic are a few of our favorites.
Custom metal debit cards. A breathless public has greeted the arrival of past Apple products: iMac, iPod, iPhone, Apple Watch. Apple has already produced one well-reviewed metal card, so expectations for the design of their new debit card would be high.
Mobile wallet integration. This is a bit of a no-brainer. After all, Apple popularized the mobile wallet, a way to securely store accounts and cards in the cloud and use them to pay via a mobile device. So a seamless integration between Apple’s banking suite and Apple Pay is de rigueur.
ACH, wires, and in-network payments. As mentioned above, this may be the single most compelling reason for Apple to get into banking. By leveraging ACH, wires, and book payments (fee-free transfers between accounts held at the same bank), Apple has the potential to become a payments network. Apple could dramatically simplify transfering money to friends, family, or merchants, whether they are other Apple users or not.
Fee-free ATM access. Because Apple lacks bank branches, they would need to provide fee-free ATM access so that their customers can get cash. Rather than negotiate access agreements with hundreds of regional ATM operators, they would likely prefer to go through a network like Allpoint or MoneyPass.
Checkbooks & mobile check deposit. Let’s face it: some people still use checks. Rather than leave these customers out in the cold, Apple could offer them the ability to print checkbooks or send checks. By the same token, they would almost certainly enable their customers to deposit checks using their phones.
Connectivity to financial apps and services. Plaid Exchange is a way for financial institutions to help their customers connect their bank accounts to financial apps and services (e.g., Venmo, Acorns, Coinbase). By integrating with Plaid Exchange, Apple can ensure that their logo pops up when customers are searching for their Apple bank accounts.
Source Unit
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So what has the winning strategy for fintechs been over the last decade?
(1) Start with a wedge product that expands accessibility for new segments. In the last decade, many fintechs used new platforms (Square’s use of mobile hardware and App Stores) or business model innovations (Robinhood’s payment-for-order-flow, SoFi’s peer-to-peer lending) to serve new segments and make certain financial products more accessible. Think Square’s farmer’s market sellers, Robinhood’s twenty-something casual investors, or Stripe’s early-stage startups.
(2) Improve cost over time with scale. As these companies grew, most used their scale and/or network effects to expand product value and improve cost. As the cost of Square’s readers dropped, they became increasingly accessible and adopted by a wider and wider array of businesses (farmer’s market stalls to food trucks to brick and mortar restaurants, etc). Since the line between accessibility and cost is blurry, many companies started straddling both and just honed both value props as they grew.
(3) Expand to two or more adjacent products, especially if their value props can subsidize one another. This is the phase most fintech winners have been in for the last few years as part of the classic unbundle/bundle cycle. Whether it’s to increase customer LTV, defend their core business, or for some other reason, nearly all have started bundling adjacent financial products that span product values. For example, this is SoFi expanding from cost-focused lending to multiple lending products to investing, savings, and even insurance products, or Robinhood going from investing to savings.
It’s often easier to provide multiple product values when expanding products within a single platform. If a customer is already trading stocks on your platform, then onboarding to trade crypto can be easier than if on a standalone crypto trading app, for example. Because products can be up/cross sold to the same user, they can be discounted because the platform has already paid the CAC for them.
What’s after the wedge?
The new winning strategy will likely be (1) shifting “accessibility” to “convenience” and (2) going multi-product much sooner. The new winning strategy will touch a little on cost, but not overly optimize for it. Customers won’t necessarily seek the cheapest option, but the most convenient. Companies will serve this by bundling much more, much sooner.
The winning companies won’t start or stick with a narrow wedge, but will quickly bundle multiple products, both fintech and SaaS, to expand their LTV and compete with a sea of point solutions. This means vertical SaaS / VERP companies not lingering on “SaaS + payments”, but quickly adding other products like banking and issuing. It means fintech infra companies expanding beyond their core offering to other complementary ones, like Unit adding lending.
Source Matt Brown
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Fintech investments significantly dropped in 2023
Global investment in FinTech reached $51.2 billion across 3,973 deals in 2023, a steep drop from $99 billion in 2022. Deal count also declined 38%, whilst the average deal size remains strong at $12.9 million, an indicator of investor confidence in the FinTech industry.
Furthermore, while the total of global investment in FinTech represents a decline from the previous two years, it is 10% higher than the last pre-covid year of 2019 (investment in UK FinTech in 2023 was 11% higher than in 2019). Q2 and Q3 2023 reported circa $10 billion each of investment, the lowest since early 2020, although Q4 2023 saw a quarter-on-quarter increase of c.13%, the first notable increase since Q3 2021 (excluding the impact of the Stripe deal in Q1 2023).
But what does the data say about both founder and investor behaviour?
“Macro uncertainty meant that any company that has the option to defer fundraising”, says Tim Levene, CEO of Augmentum, “through runway extension either by cutting costs, rising bridge funding, or both — chose that route. The stabilisation of interest rates in Q3 and Q4 marked the first sign of a shift in market sentiment towards a more positive outlook. Rates are expected to remain elevated through 2024 and it will undoubtedly be a challenging year on many fronts, but with confidence starting to return to public and private markets we look forward to a return in investment activity.”
While macroeconomic uncertainty persists, pockets of seed stage resilience hint at ongoing innovation amid adversity, with 17% of total funding, higher than pre-Covid levels. Though allocation of funding is more selective, sustained activity into promising ventures might indicate a self-correction of markets towards realistic longer-term growth.
The UK Landscape
As a major player on the global arena, the UK — like the US — has witnessed investment fluctuations that fall in line with macroeconomic conditions.
The UK attracted $5.1 billion across 409 deals in 2023, a significant drop from $14.6 billion in 2022. However, the average UK deal size for 2023 sits at $12.5 million, well ahead of all years up to 2020. The Covid periods of 2021 and first half of 2022 saw some well documented market froth before the fall in investment over the last 18 months, but 2023 proved challenging. 2023 finished with a well-received $122 million capital raise for Atom Bank, and market talk of potential investment in Monzo by Alphabet’s investment arm. These may be signs that the market is now getting back on track. London continues to be a leading global FinTech investment hub with $4.5 billion received in 2023, down 56% from 2022.
Source Innovate Finance
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30 generative AI trends to watch
Generative AI is rapidly evolving, and staying up-to-date with the latest trends is critical for businesses seeking to leverage this technology for competitive advantage. In recent years, the development of new generative models and advancements in natural language processing (NLP) have opened up new opportunities for innovation and creativity. These trends are driving the creation of highly realistic images, videos, and audio, and expanding the use cases for Generative AI in fields such as entertainment, healthcare, and finance.
1. Increasing AI-generated art and culture
2. Increasing personalized experiences
3. Rising ethical and moral concerns
4. Increasing public acceptance and changing perception
5. Rising privacy concerns
6. High levels of bias and discrimination
7. Advancing Natural Language Processing (NLP)
8. Increasing edge computing
9. High level of AI-generated content detection
10. High level of Human-AI interaction / Interfaces
11. High level of algorithmic improvements
12. Rise of multimodal AI
13. Rise of Web3-enabled Generative AI
14. Advancing blockchain-based decentralized AI marketplaces
15. High level of job displacement and new job creation
16. High protection of intellectual property and royalties
17. Rise of AI-as-a-service
18. Increasing democratization of AI
19. Investment in AI research and development
20. Rise of green AI
21. High level of environmental monitoring
22. High level of resource optimization
23. Increasing sustainable design
24. Contributions to the renewable energy transition
25. Rise of national AI strategies
26. Increasing intellectual property and trade rules
27. High level of ethical guidelines and standards
28. High level of international collaboration
29. High level of cybersecurity and national security
30. Increasing geopolitical competition
Source Creative Dock / Rohrbeck Heger
Reports
Which technologies are shaping the future of fintech?
Over the next few years, we predict that the following seven technologies will advance fintech development while shaping the competitive landscape of finance:
✅ Artificial intelligence (AI) will propel massive value creation.
✅ Blockchain.
✅ Cloud computing.
✅ The Internet of Things (IoT).
✅ Open-source software, serverless architecture, and software as a service (SaaS).
✅ No- and low-code development platforms.
✅ Hyper-automation.
