The platformification of finance: Conclusions from the Tearsheet Embedded Conference

It’s no longer a battle between incumbents and upstart players, but which platforms will meet client needs as quickly and easily as possible.

Among the conclusions:

The future of embedded finance is about enabling platforms instead of single-product offerings.

Fintech 1.0 companies, as some participants described them, were single-product companies that sought to take market share from incumbents. They often developed in-house tech stacks on top of infrastructure provided by partner banks.

“We used to enable what I call Fintech 1.0 businesses, [I think of] brokerages that went after the incumbents and tried to take market share,” said Itai Damti, CEO of Unit, a fintech platform company. “What we're enabling this time around is what I call Fintech 2.0, which is companies that are in the business of software, which have engaged audiences and are looking to expand into financial services.”

Over the past decade, Fintech 1.0 businesses garnered significant user adoption. However, there are significant challenges bringing these products to market, particularly with the need to build tech and compliance layers on top of partner bank architecture. That amounts to a significant investment for many upstart fintech players, and many Fintech 1.0 companies failed because they could not mimic the scale and customer reach of incumbents, participants argued. By contrast, platforms which let companies integrate into an ecosystem of services argue that plugging into their networks can be cheaper and more efficient for fintechs and brands looking to roll out embedded offerings.

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Platform businesses see opportunities as fintechs and brands zero in on specialized customer groups.

“When [1.0] fintechs want to launch a financial product,  they need to go build it themselves, which involves a lot of plumbing, finding the sponsor bank, getting the right processors and vendors, such as KYC vendors, and building that plumbing,” said Roy Ng, CEO of Bond, a company that helps brands incorporate banking and financial services into broader product and service offerings. “Being Fintech 2.0 is [about] leveraging platforms, so that the fintechs and brands can focus on their customers, and leave the plumbing pieces to us.”

Among embedded financial services components, payments continue to be a growth area.

Platform providers are enablers that form a middle layer between banks and the brands that want to incorporate financial services. Payment players are enabling new brands to grow through startup fintechs, incumbents and non-financial brands.

Card issuing and processing startup Marqeta, which is reportedly planning to go public at a $10 billion valuation, said it serves various use cases through an API-based tech stack. Examples of embedded solutions it supports include e-commerce, on-demand delivery, expense management, disbursements and lending. In the financial services sector, Marqeta serves three core areas, including payments solutions (e.g. virtual cards for point-of-sale lending, and ‘tokenization as a service’); using its tools to support incumbents’ efforts to launch their own challenger banks; and helping legacy institutions in efforts to “disentangle themselves from monolithic tech stacks.”

“Our approach has always been to provide the tools necessary for banks to provide that infrastructure, and let them decide how they want to build the entire user experience -- everything is API-based and modular,” said Jason Wee, head of digital banking at Marqeta.

For SoFi-owned payments infrastructure company Galileo, a key differentiator is the speed and ease of integration, supported by the Galileo Instant offering. Galileo Instant is a tool set launched earlier this year which allows developers  — including fintech, marketplace, e-commerce and gig-economy businesses — to undertake instant issuing, using the company’s open APIs.

“Within a matter of minutes, you can be doing what used to take somewhere between six and 18 months to do, and that is creating an environment where these innovative ideas can really begin to germinate,” said Galileo CEO Clay Wilkes.

Beyond the startup ecosystem, banks are also spinning off capabilities to avail third-party companies of a menu of payments capabilities. To that end, Central Payments, which is owned by the Central Bank of Kansas City, differentiates through its chartered bank status.

“Our charter is one of the value propositions of the platform, and our customers really fall into two basic categories: early stage fintechs, and others that are established brands that desire a one-stop [payments] shop and come to us to connect to our open API platform.”

Brands with significant reach have opportunities to build on their customer bases by adding embedded financial services, participants said. As a result, banks face competition not only from fintechs, but large tech players (Google, Amazon, Shopify and others) and non-financial brands.

“The advance of technology means our clients fundamentally are becoming technology companies, and their banking services, in large part, are fundamentally becoming commoditized,” said David Donovan, executive vice president of financial services at Publicis Sapient.

Embedded providers are supporting efforts to reach niche customer groups.

Instead of going after a broad, general audience, fintechs, banks and non-financial brands will tap embedded solutions to pursue specialized industry categories and customer groups. 

“[Embedded solutions] will come about in areas that we're not really even thinking about right now. Could that be agriculture, or education, or commercial banking? How about in shipping?” said Galileo’s Wilkes. “All of these areas have a lot of opportunity for optimization through embedded finance.”

Other industries that are opportunities for embedded providers include health care and insurance, participants said. In the realm of business-to-business (B2B) payments, embedded solutions are adding value for small businesses through tools like earned wage access, virtual cards and automated expense management. Another important B2B example includes the fusion of financial services into other business workflow platforms like Mindbody and Toast.

Target audiences

Embedded payment solutions are helping fintech startups reach new audience segments, noted Visa.

“Fintechs are really expanding the pie for us. One area is around digitizing payments, and we're also connecting previously closed loop payment ecosystems to open loop ones,” said Terry Angelos, senior vice president and global head of fintech at Visa. An example he raised was the addition of a Visa payment credential to M-Pesa wallets in Africa, allowing users to enhance the utility of their M-Pesa balances.

Visa, through its embedded solutions, is also supporting the entry of early-stage fintechs into the payment ecosystem through its Fast Track program. Some of these companies cater to specialized audiences, including Daylight, a recently launched LGBTQ+-focused neobank.

“One of the trends we were seeing is kind of the rise of the new community bank,” said Angelos. “There are a number of banks focused on the African American community; a number that are focused on immigrants; there’s an emerging set of neobanks focused on online influencers; and [there’s] a really exciting neobank focused on the LGBTQ+ community — that's 30 million people in the U.S. that are underserved in a variety of ways.”

Banks can differentiate through experience, technology and vision.

Goldman Sachs, through its TxB APIs, allows enterprise clients to embed banking services into their products and software platforms. It offers its clients security, scalability and real-time data alongside core banking services such as payments, liquidity management and integrated accounts. Goldman said it sees demand for these offerings from a range of client types, including fintechs and other digital commerce companies.

In the embedded finance market, Goldman differentiates itself through its banking infrastructure, its ability to operate in multiple markets, and its legal and regulatory expertise. While fintech companies excel at technology, they often rely on small, regional banks as partners which sometimes struggle to deliver technology solutions. Goldman’s pitch is that it offers the best of both fintechs and banks through its experience and tech-forward approach, explained Luc Teboul, head of engineering at Goldman Sachs Transaction Banking.

“Our play [is] we have better technology than the last bank, because we started from a blank sheet of paper, and we have better financial capabilities than the smaller banks and the fintechs,” he said. “What we're trying to do with our banking-as-a-service offering is to provide the best of both worlds — the modern technology and the Goldman Sachs capabilities and expertise.”

Other banks are deepening their offerings for specialized customer groups. For RBC-owned City National Bank, a focus on the entertainment industry defined its tech and acquisition strategy. Last year, the bank acquired FilmTrack, a scalable, cloud-based platform that manages royalties and residuals. In 2018, the company acquired Exactuals, a service provider that helps companies process high volumes of payments through its automated payment system PaymentHub, and in 2010, City National acquired accounting software company Datafaction.

City National intends to continue to expand offerings for this target market.

“We don’t want to be all things to all people; we pick niche industries and we go deep with them,” said Linda Duncombe, executive vice president and chief marketing, product and digital officer at City National. “[Our competition] is not going to be other banks, it’s going to be some really sharp fintech that comes in and starts to chip away at what we do, and our [clients] are comparing us to companies like Google or Amazon.”