As the hammer of economics lands on fintech, multiple firms are getting acquired by incumbents, like banks. Last month, Fifth Third Bancorp acquired Rize Money, a payments infrastructure provider. For Fifth Third, embedded payments are a particular point of focus in their Treasury Management business which has been growing and is expected to hit $130 million at the end of this year.
Rize Money isn't alone though. Fifth Third has made multiple acquisitions over the past few years: these include the acquisition of Dividend Finance, which provides financing solutions for residential renewable energy and sustainability-focused home improvement at the point of sale. Fifth Third also acquired Provide, which offers a range of financial products needed to start and run a healthcare practice. In fact, another one of its recent acquisitions, Big Data Healthcare, sits at the intersection of payments and the healthcare industry. Big Data Healthcare provides tech solutions for healthcare payments and remittances.
The Rize Money acquisition seems like another move that builds on this streak of acquisitions for the bank. It is also telling that the bank has recently announced an expansion of its Treasury Management team on the heels of the Rize Money announcement.
While the bank is doubling down on its Treasury Management business, why did it choose Rize Money?
About Rize Money: From B2C to B2B
Rize Money’s origins lie in the world of B2C fintechs. “Consumer pain points about money were our expertise, but we discovered that building intuitive financial user experiences wasn’t merely a UI/UX problem — you couldn’t achieve “simple and intuitive” without first rebuilding much of the underlying financial infrastructure from the ground up,” said the co-founders, Kirk Voltz and Justin Howell while announcing their $11.4M Series A funding round at the end of 2021.
Realizing that the re-tooling they had to do for the backend infrastructure of their business could be spun into a B2B solution for other aspiring fintechs in the space, the founders pivoted the company to B2B. This is a familiar story in B2C fintech, for example, Petal spun off its B2B unit Prism Data, which now provides cash flow underwriting technologies to financial institutions and firms.
In the case of Rize Money, after its pivot, the company launched products like the Developers Toolkit which allows fintechs to build a full-fledged banking app in “under 30 minutes”. Through launching these kinds of products, the company wanted to build towards a “vision of self-service” fintech, said CEO and co-founder Howell, in a Fintech Leaders podcast.
Rize Money's core value proposition was building interoperability between traditionally separate custodial accounts (checking, brokerage) through a unified account. Additionally, the company also built compliance capabilities into its system. Its Series A funding round went into the company’s growing human capital needs. In the last couple of years, the firm also partnered up with a number of firms such as Astra Finance, MX, and True North.
The company also has multiple competitors in the BaaS space, names like Unit, Alviere, and Synctera to name a few. What sets Rize and Unit’s models apart is the simplification incorporated into the system – their customers don't have to worry about the nitty gritty, like finding a banking partner while getting into the process.
These types of models can work for fintech but may better fit non-financial companies which want to offer financial products. For example, DoorDash offering a gas rewards program to its riders or Lyft’s offering of a debit card to its drivers is an example of a non-financial company offering financial products. Unlike non-financial and SaaS companies, fintech has a more involved role in financial products and is thereby more concerned with the details of models.
This is inherently different from BaaS providers like Synctera and Treasury Prime. These companies want to facilitate relationships between banks and fintechs, unlike Rize Money which doesn’t need the client to go out and search for banking partners and processors.
Consolidate, consolidate, consolidate:
Despite the injection of funds at the end of 2021, Rize Money ended up being consolidated. And it isn't alone, Bond, a startup that focused on embedded finance was recently acquired by the fintech giant FIS.
As far as Fifth Third is concerned, the bank saw an increase in the opening of new commercial accounts after the fall of SVB. “88% of our commercial deposit balances are attached to relationships that utilize TM services today, and the average age of our commercial deposit relationships is 24 years,” said Chief Financial Officer of Fifth Third Bank, Jamie Leanord.
Apart from strengthening these commercial relationships, one aspect of Rize Money that is of particular interest to Fifth Third Bank is its integration of risk management tools within its systems. These are expected to play an integral role in the bank's expansion in Treasury Management in the future. Moreover, the expansion may increase Fifth Third Bank’s service charges on deposits and total fee income. The company’s service charges on deposits and fee income are expected to reach $566.9 million and $2.84 billion, respectively.
By making acquisitions that enhance its base banking product, Fifth Third Bank is padding out its income growth from service fees, hoping to avoid the negative impacts of rising interest rates that may impact its revenues.
There is no guarantee that recent acquisitions will work out for acquiring companies. After all, FIS’s acquisition of Worldpay is seeing its last days as the company seeks to spin off the UK-based payment processor. FIS has lost more than half of its share value following the acquisition and is also undergoing significant cost-cutting measures.
Fifth Third’s acquisition of companies like Dividend has already started to yield results. Last year, the bank’s loan balances grew by $750 million between July and September.
Perhaps what this acquisition will allow Fifth Third to do is position itself as a complete package of compliance, risk management, development, and banking needs for non-financial companies looking to dabble into embedded finance without undertaking the attendant technical lift. Not only will this boost the bank’s service fee revenues but will allow the bank to enter a space that could be worth up to $124 billion by the end of 2025, according to Accenture.