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Banks beware, outsiders are cracking the code for finance By Reuters


© Reuters. FILE PHOTO – An employee passes a Shopify sign in Ottawa (Ontario), Canada on October 22, 2018. REUTERS/Chris Wattie


By Anna Irrera and Iain Withers

LONDON (Reuters) – Anyone can be a banker these days, you just need the right code.

From Amazon and Mercedes (NASDAQ:), to IKEA (NYSE:), and Walmart (NYSE.:), global brands are cutting out traditional financial intermediaries and integrating software from startups in order to provide customers with everything they need, from insurance and banking to credit and financing.

Warning signs are beginning to flash for established financial institutions.

The so-called embedded financing, a term that refers to companies that integrate software to provide financial services to customers, allows Amazon to let them “buy now and pay later”. Mercedes-Benz drivers will be able to get their car to pay their fuel.

While banks still hold the majority of transactions, analysts and investors warn that traditional lenders could be pushed to the back end of finance chains.

This means that they will be less likely to have access to the vast amounts of information others collect about customer preferences and behaviors – which could give them an edge in the financial services industry.

“Embedded financial service takes cross-sell to new heights. This is based on deep, software-based data relationships with consumers and businesses,” Matt Harris, partner of investor Bain Capital Ventures said.

He said, “This is why the revolution is so crucial.” It means all of the risk will be transferred to embedded companies who know so much more about customers. The rest will go to insurance and banks.


Many areas of embedded financing are still a threat to banks’ dominance. Even though some startups have licensing for regulated services, such as lending and other financial products, these upstarts lack the resources or scale that banks enjoy.

Analysts say that if fintechs or financial technology companies can replicate their success at capturing a portion of the digital payments made by banks, and increasing their valuations as a result, lenders might have to react.

In March, Stripe was worth $95 billion. It is the payment platform that powers many websites with clients like Amazon (NASDAQ:), and Alphabet’s Google.

Accenture (NYSE) had estimated that in 2019, new players to the global payments market would account for 8% of total revenues. This share has increased over the last year, as digital payments have been boosted and traditional payments hit, according to Alan McIntyre.

The focus now shifts to lending. There are also complete, off-the-shelf lenders that can offer a range of products for businesses to integrate into their business processes.

“Most consumer-centric businesses will have the ability to launch financial products which will significantly enhance their customers experience,” stated Luca Bocchio of Accel, a partner in venture capital firm.

This is the reason we are excited about this area.

Data provided by PitchBook to Reuters shows that investors have invested $4.25 Billion in embedded finance startups this year. This is almost three times as much as the 2020 amount.

Klarna, a Swedish buy-now-pay later (BNPL), firm that raised $1.9billion is leading the charge.

DriveWealth sells technology that allows companies offer fractional share trading. Solarisbank was funded with $229m by investors. Solarisbank is a German digital bank licensed to provide a range of banking service software.

Affirm shares surged after it teamed with Amazon to provide BNPL products. Meanwhile, Square, a rival U.S. fintech, announced last month that it would be buying Afterpay, an Australian BNPL company, for $29 billion.

Square’s current value is $113 billion. That’s more than Europe’s top bank, HSBC at $105 billion.

“Big banks and insurers will lose out if they don’t act quickly and work out where to play in this market,” said Simon Torrance, founder of Embedded Finance & Super App Strategies.

Graphic: Venture capital investment in embedded finance leaps –


Many other retailers also announced plans for financial service expansion this year.

Walmart, along with Ribbit Capital, launched a fintech company in January that would develop financial products for employees and customers. IKEA also took a minority share in Jifiti, a BNPL business.

Automobile manufacturers such as Volkswagen’s Audi (DE:), Tata’s Jaguar Land Rover, and Daimler (OTC) have explored the possibility of embedding payment tech in their cars to make paying easier.

Roland Folz is the chief executive officer of Solarisbank, which provides financial services to 50+ companies, including Samsung (KS).

Embedded finance startups are not only targeting end customers. As fintechs, such as Shopify Canada (NYSE): crunch digital data from businesses, they tap on their shoulders.

The company provides software to merchants, and the Shopify Capital division offers cash advances based on an analysis that analyzed more than 70,000,000 data points from its platform.

We never get approached by merchants asking for loans. Kaz Nejatian is Shopify’s vice president of product and merchant services.

“We do not ask for business plans. We also don’t need tax statements. Income statements aren’t required. Personal guarantees are not requested. He said that they are not benevolent because it isn’t because of their belief in the chances for internet success.

Shopify spokesmen said that funding ranges from $200 up to $2 Million. This company, with $2.3 billion of cumulative capital advances, is worth $184 billion. Its value surpasses that of Royal Bank of Canada which is the largest traditional lender in Canada.


Shopify’s lending operations are, however still considerably smaller than those of the major banks. JPMorgan Chase & Co (NYSE:), for example, had a consumer and community loan book worth $435 billion at the end of June.

Regulators could limit major advances in finance made by other companies.

The Bank for International Settlements is a group of financial regulators and central banks that warned last month watchdogs to be aware of the increasing influence technology companies have in finance.

Bain’s Harris claimed that the Bank for International Settlements is assuming that banks are responsible for every transaction because they lack knowledge about how they regulate them. But that doesn’t mean they will stop fintechs from invading.

His words were: “They’re right that banks will always play a part, but it’s not one they are very happy with and does not give the customer much ownership.”

Jacob Morgan, a Forrester analyst said that banks must decide their place in the financial chain.

Is it possible to afford to compete for customers’ primacy or can they see more lucrative routes to market that allow them to be the ones who run the trains? He said. “Some banks will do both.”

Some banks are already fighting back.

Citigroup (NYSE:) has teamed up with Google on bank accounts, Goldman Sachs (NYSE:) is providing credit cards for Apple (NASDAQ:) and JPMorgan is buying 75% of Volkswagen’s payments business and plans to expand to other industries. 06:00:00

“Connectivity between different systems is the future,” said Shahrokh Moinian, head of wholesale payments, EMEA, at JPMorgan. “We are determined to lead.”