Adyen, Braintree and Stripe face off; Becoming a bank proves challenging for fintechs seeking survival; Embedding fintech means making hard tradeoffs;
In this edition:
1?? Adyen, Braintree and Stripe face off
2?? Becoming a bank proves challenging for fintechs seeking survival
3?? Mastercard, Visa step back from Binance card partnerships
4?? A Strategic and Financial Fail: How Goldman Sachs fumbled its consumer bet
5?? Digital wallets: Creating the next generation of super apps
6?? Shifting Strategies for Challengers
7?? Embedding fintech means making hard tradeoffs
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News
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Adyen, Braintree and Stripe face off
The processing giants are battling for market share in the U.S., with some cutting prices in their fight to win over merchants.
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Becoming a bank proves challenging for fintechs seeking survival
In an era of soaring interest rates and intense competition, fintechs are increasingly deciding they need to become banks to ensure their long-term survival. They’re also finding that doing so isn’t easy.
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Mastercard, Visa step back from Binance card partnerships
Mastercard and Visa stepped back from their card partnerships with Binance Holdings, distancing themselves from the cryptocurrency platform that’s under threat from regulators worldwide.
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Insights
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A Strategic and Financial Fail: How Goldman Sachs Fumbled Its Consumer Bet
When Goldman Sachs entered the credit card space in 2019 with a partnership with Apple, many consumer banks were concerned that a new competitor had emerged. But just four years later, the firm is pulling back. The banking giant’s move from Wall Street to Main Street came at a time when Goldman wanted to diversify its funding sources. It introduced a high-yield savings account with Marcus and rolled out personal loans. But what was the turning point that led them to start to retreat from this space?
WSJ explains why Goldman Sachs entered consumer finance and what the firm pulling back means.
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Digital wallets: Creating the next generation of super apps
There are three types of digital wallet technology, open loop, closed loop, and semi-closed loop. With closed-loop systems, digital wallet users can top up a specific spending account which is linked to a payment source, such as a credit card account. These sources are therefore linked to a specific merchant, meaning they are often used for in-store purchases. They can be used for online payments, however this is less common, as general multi-merchant payment systems are more common for online transactions. Due to this restriction to a single merchant, closed-loop digital wallets are primarily used for specific merchant offers, such as loyalty schemes, and discounts.
Semi-closed loop digital wallets allow users to shop using digital wallets and transfer virtual funds to another user who has an account in the wallet network. Merchants need to enter into an agreement with the wallet issuer to accept payments, with interoperability permitted only for full-KYC (Know Your Customer) semi-closed wallets. This type of wallet is not widespread, due to the need for both the sender and the receiver of a payment needing to have the wallet to enable a transaction. This limits the number of potential transfers a user can make. Another issue that presents is the fact that until wallets become widespread, they have limited useability. However, they are unlikely to become widespread until they offer the ability to facilitate more of the potential users’ transactions. As a result, there are very few major semi-closed digital wallets, with primary examples being Paytm and Mobikwik in India. Open-loop digital wallets are where stored cards and funds can be used on any site or merchant accepting the wallet or tapping a mobile phone at an NFC-enabled payment terminal. The impact of this technology can be seen in the fact that many of the largest digital wallets have emerged from eCommerce platforms that had to facilitate payments to multiple merchants, such as PayPal or Alipay. There are reasons that can lead to the popularity of a digital wallet not necessarily leading to merchant acceptance. One is the issue of data ownership, with the ownership being transferred to wallet providers from merchants. This reduces the merchant’s ability to utilise this data to improve its own business. Another potential issue is the charging of transaction fees by the wallet provider. This would be of particular concern for small businesses where higher profit margins must be maintained to ensure the financial viability of the business. There can also be information gaps in the evaluation of potential advantages and costs of accepting digital wallets. It is also worth noting that these advantages and costs will vary regionally, based on consumer expectations, available infrastructure, and regulatory framework.
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Shifting Strategies for Challengers
Challenger digital banks have not remained stagnant in their approaches; they have exhibited remarkable adaptability in response to evolving customer needs and the competitive landscape. Their contemporary focus transcends traditional banking services, instead centering on expanding their product offerings and fostering deeper customer relationships.
These innovative solutions span various domains, extending beyond traditional banking services:
Diverse Purchasing Opportunities: Challenger banks have ventured into realms like purchasing tickets for entertainment events, renting bikes or cars, and even availing product discounts based on geolocation.
Lifestyle Integration: With an emphasis on enhancing customers' daily lives, these banks offer services such as access to airport lounges, concierge services via their app, and facilitating peer-to-peer transactions.
Investment Ventures: The emergence of cryptocurrency operations, investment services, copy trading, and peer-to-peer transactions showcases their commitment to embracing the digital investment landscape.
Source C-Innovation
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Embedding fintech means making hard tradeoffs
2010 fintechs succeeded when they combined new tech, reg, and biz model elements into a cohesive and novel whole. 2020s fintechs will succeed if they can align a set of fragmented and complex incentives up and down the value chain.
These conflicting incentives are clearest when viewed through the lens of a platform that’s deciding whether to embed financial products for their end users. The platform’s incentives are a good lens because they’re literally in the middle of the value chain. They share some incentives with the embedded fintech provider above them and their users below them, and with their infra provider’s partners and users’ customers by extension.
Platforms must make trade offs between three factors when choosing an embedded fintech provider:
- Ease of ownership — Is it easy for the platform to implement and maintain the embedded fintech product? How much of the technical and regulatory burden do this have to bear? What kind of specialized functionalities (like risk, compliance) do they need to staff up?
- Good unit economics — How will the embedded product change the platform’s unit economics? This is more than the upside of revenue share, but the potential downside of credit and fraud losses. How is that shared across the value chain?
- High acceptance rate — This is a non-obvious one to many platforms who haven’t launched financial products before with credit, fraud, and regulatory risk. If a platform will promote a product, they want it to be available and accessible to a good portion of their users.
These factors are in tension with one another. You can’t change one without it affecting the others. This is what I call the “iron triangle of embedded fintech”: you can only optimize two factors at most at a time, and improving one necessarily degrades a third.
An embedded product that has low cost of ownership and good unit economics likely achieves that by cherry picking the lowest risk and highest profit users and rejecting the rest, leading to a low acceptance rate and thus a poor UX for a platform’s end users.
A product with a low cost of ownership and a high acceptance rate likely focuses on onboarding quantity over quality users, leading to losses and poor unit economics over time.
A product that has a high acceptance rate and good unit economics likely requires significant upfront work and ongoing optimization by the platform to make the financial product available to many users but also avoid losses, leading to a high cost of ownership.
Source Matt Brown