Apple vs. Banks: The Digital-Wallet War; The fintech market opportunity and 3 major breakthroughs; Disequilibrium in Banking;
In this edition:
1?? Disequilibrium in Banking
2?? Apple vs. Banks: The Digital-Wallet War
3?? How Asian banks are rethinking the payments game
4?? OpenAI has partnered with Stripe to enable payments for ChatGPT Plus
5?? What remains for fintech after a modern-day banking crisis
6?? The fintech market opportunity and 3 major breakthroughs
7??Open Banking Intermediaries Switch Focus From Aggregation To Adding Value
And many more….
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Disequilibrium in Banking
The uncertainty that we see in the US may spread to Europe, underscoring several enduring truths about the financial system:
- Liquidity is a critical driver of bank failures. Many participants may have had a false sense of security given that banks were well capitalized; there is always room for greater capital discipline.?
- All participants are interconnected. Central banks, government regulators, and lawmakers set and enforce policy; businesses and individuals pursue their own interests; banks and financial intermediaries respond to client demand as they optimize risk and return. The choices made by each group create feedback loops in all parts of the system.
- Bubbles born from overly permissive monetary conditions often burst when policy shifts or trends revert. When this happens, the resulting disequilibrium reveals weaknesses (and strengths) among all the participants.
- While bank failures may be isolated, they often signify systemic stresses such as asset-liability mismatches. The feedback loops created by even a single bank failure can have consequences globally.
To be sure, the current situation differs from past crises. It’s marked by a retreat from globalization, the end of capital superabundance, and an era of shifting demographics. While we don’t see signs yet of a broader financial crisis, there are still distortions in the system that must be resolved. Credit concerns are now emerging alongside the widely anticipated recessionary pressures. Once the banking system and wider economy return to equilibrium, we will enter a new cycle characterized, at least initially, by higher interest rates, greater consolidation and competition, and more divergence in profitability.
Source Bain & Company
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Apple vs. Banks: The Digital-Wallet War
Digital wallets like Apple Pay are continuing to grow in popularity. Banks are worried they’re losing ground to tech companies eager to gain market share in consumer payments.
One of traditional finance’s biggest threats is Apple. Here’s how big banks are fighting back.
Source WSJ
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How Asian banks are rethinking the payments game
Historically, payments has been a core banking business, and it remains a vital function. Payment interactions are banks’ most frequent touchpoints with their customers and account for 40 percent of bank revenues on average.1 But in recent years, banks have encountered challenges to this longheld strength.
Increasing competition comes from incumbent payments specialists (such as global processors and card networks), fintechs with targeted techdriven offers, and big tech players seeking to expand their customer relationship into payments and financial services. This competition exerts pressure on the margins of traditional transactionbased payments revenues. Perhaps more significantly, there is a threat of banks being disintermediated and losing a direct relationship with the customer.
These trends have influenced share market performance. On average over the past decade, payments companies’ return to shareholders has markedly exceeded that of banks and other financial institutions.2 And during the COVID-19 pandemic, growth in e-commerce and digital payments has allowed tech-enabled payments “attackers” to accelerate growth in customer base and revenues, thereby achieving further outperformance in the share market.
Leading payments specialists have been able to win over customers through a more focused approach emphasizing customer experience and innovation to serve unmet needs. As they have scaled, they have built global technology platforms with investment envelopes that dwarf those of most domestic banks.3 In general, payments specialists face lower regulatory and compliance obligations than banks, and recent entrants are not burdened by legacy technology issues. In Asia, payments specialists have been bolstered by rapid growth in digital payments and some markets’ adoption of new, more open real-time payments infrastructure.
That said, changes in the macroeconomic environment and investor expectations have brought about a sharp decline in the valuation of payments specialists—tech-enabled attackers in particular— over the past year. But while their rate of growth has slowed, payments specialists are still expected to achieve annual revenue growth exceeding 10 percent per year.
Despite these threats, banks retain key traditional advantages in the battle for value in payments. They have large existing bases of customers with high levels of engagement and trust. They can also combine payments with core banking products such as deposit accounts and lending, enhancing the customer proposition and offering a proven path to monetization.
Source McKinsey & Company
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OpenAI has partnered with Stripe to enable payments for ChatGPT Plus
What does Stripe bring to the table for OpenAI?
Stripe supports and facilitates more than 25 payment methods for OpenAI.
OpenAI uses Stripe Billing to set up subscriptions to ChatGPT Plus and usage-based pricing for DALL·E. It is also deploying Stripe Checkout to accept payments via a prebuilt payments page.?
By using Stripe Link, which saves and auto-fills payment and shipping information for Stripe customers, so they don’t need to enter their payment details manually, OpenAI customers check out 40% faster, driving increased conversion and revenue.
“OpenAI isn’t just capitalizing on Stripe to bolster its sales. In fact, the tech firm is building an entire engine for commercializing these products with the payments firm — in a move to manage its revenue with Stripe as much as earning it,” said Emily Glassberg Sands, Stripe’s head of information.
As it grows its international footprint, OpenAI is also using Stripe Tax to facilitate its sales tax calculations.
Furthermore, closing the month-end books as fast as possible is one of the most common ― and time-consuming ― challenges companies have to face. To better manage its finances, OpenAI is tapping Stripe’s Revenue Recognition product to keep its accounting data organized, ensuring all monthly transactions are accounted for.
What does it mean for Stripe itself?
For Stripe, pooling its resources for the purpose of accomplishing specific tasks means adding value for its existing customers.
"GPT-4 will help us build better products and experiences for our millions of users,” said Sands.
The firm is starting by integrating GPT-4 into its developer documentation, Stripe Docs, which is a big part of how Stripe’s clients interact and grow.
The documentation has a three-column layout for organizing navigation, content discovery, and live code snippet execution. While the top navigation breaks down the documentation into Stripe’s different product areas, such as payments, business operations, and developer tools, the left-hand side navigation offers a corresponding Quickstart guide for developers to get started.
Is ChatGPT in financial services ‘scary’ after all?
ChatGPT gained 1 million users in just five days after launching. However, it is still in the early stage of verifying its industrial value and still has a long way to go before gaining ground in banking and financial services.
Stripe is currently exploring and experimenting with the GPT-powered model on a limited number of products to better assess its impact on its consumers and different areas of the business – operations, and services.
Source Tearsheets
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What remains for fintech after a modern-day banking crisis
Within just the first quarter of this year, the fintech industry has already witnessed what seems to be a never-ending list of doomsday signals.
Most notably, that includes the downfall of four substantial banks—Silicon Valley Bank, Silvergate Capital, Signature Bank, and Credit Suisse. But we've also seen Stripe's valuation drop 47% in a down round, Block shares plunge on fraud accusations, embedded finance darling Railsr reach insolvency, and much more.
It's therefore no surprise that fintech valuations have remained depressed. At the end of Q1, the median EV/NTM sales multiple for public neobanks, brokers, and crypto companies was 1.9x, compared to 4.2x for the prior year period. For multiples of high-growth fintech and payment companies, the trend was similar.
Fintech isn't dead, however.
Ample dry powder remains to be deployed from the sidelines, and VC fintech activity isn't far off from pre-2021 levels. VC deal value may have declined 39% YoY in 2022, but it was still up by 43% and 42% compared to 2020 and 2019 levels, respectively.
And there's still a multitude of reasons why fintech funding will stay healthy going forward.
Whether in retail or enterprise, there are several large underserved and underbanked communities. Digital lenders and neobanks around the world have attempted to solve for this in the last several years, but they haven't cracked the code quite yet.
Critical gaps also remain to be filled in capital markets, B2B payments, know-your-customer and anti-money laundering, and infrastructure. Investors are certainly recognizing these opportunities, given B2B fintechs captured 62% of total VC in 2022.
It's most important, however, to remember that some of the greatest fintechs can rise in times of crisis. Looking back, Stripe, Venmo, and Square (now Block) all emerged from the ashes of the global financial crisis.
New opportunities are already presenting themselves following SVB's collapse, including sweep networks and better treasury management solutions. In addition, tough economic conditions can also amplify opportunities in specific segments.
Current market conditions for fintech may be frightening, but it's still an exciting time for fintech. History has shown us that in the wake of financial catastrophes, there will always remain several founders sharing the same thought: "There has to be a better way."
Source Pitchbook
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The fintech market opportunity and 3 major breakthroughs
Breakthrough #1: The acceleration of digital banking
The days of physically visiting a bank branch are falling behind us, spurred by technological advancement in the space as well as increased demand for digital services brought on by pandemic-era social distancing protocols. Today, nearly two-thirds of the US population uses digital banking services, with almost 80% of millennials leveraging the tech.
The ubiquity of smartphone banking apps, followed by the birth of the iPhone in 2007 and the release of the first banking app in 2011, has shifted what consumers expect from their banks. Mobile apps for direct deposit, bill payment, money movement, and more have become table stakes for the average smartphone user.
Breakthrough #2: The unbundling of financial services
In the mid-2010s, as consumers grew used to the intuitive design and personalization of social apps like Facebook, they began to expect the same seamless user experience in other areas—including financial services. With narrower offerings and nimbler teams, fintech apps could offer sleeker, more user-friendly financial experiences than incumbent banking apps.
Consumers began to adopt these fintech apps to spend, save, invest, borrow, and generally manage their money. For instance, rather than rely on their bank for everything, a user might routinely use Mint for personal finance management, Venmo for peer-to-peer payments, and SoFi for managing their student loans.
Breakthrough #3: The rebundling of financial services
As consumers used more fintech apps, they were also becoming overwhelmed by the number of apps required to carry out various financial functions. Subsequently, consumer behavior shifted away from single-use fintech apps and toward financial super apps across three key categories:
Digital wallet apps (PayPal, Venmo, Cash App, ShopPay)
Investing & banking (SoFi, Chime, Robinhood, Coinbase)
Buy now, pay later (Affirm, Klarna)
Having a few banking super apps to perform a range of financial services became preferable to single-use fintech apps.
The tech stack powering this rebundling are orchestration companies that enable application companies to embed powerful financial features into their products across several categories:
Banking-as-a-Service: Provides high-interest, FDIC-insured checking and savings accounts (Unit, Treasury Prime, Green Dot)
Payments: Allows users make and receive payments (Adyen, Stripe, Checkout.com )
Cards: Providing fully programmable, high-interchange debit cards (Marqeta, Galileo, Lithic)
Brokerage: Enables stock trading (Apex, Drive Wealth)
Crypto: Enables crypto trading (ZeroHash, Paxos)
Source M13
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Open Banking Intermediaries Switch Focus From Aggregation To Adding Value
These days, using an intermediary is less likely to be for compliance with open banking standards and more likely to underpin ambitions in an open finance future. Intermediaries, now an established part of the landscape, are responding to growing interest in and adoption of open banking among both consumers and businesses and are pivoting toward open and embedded finance.
As a result of these trends, open banking intermediary customers should look for providers that:
? Align most closely to their current needs — and offer future flexibility. Coverage of markets still matters, but the variety of capabilities offered by intermediaries is broad, from API gateway architecture through to packaged end-user-facing SDKdelivered services. Match vendors to your functional and coverage requirements, but also evaluate with your firm’s future open finance ambition in mind, considering planned enhancements and scalability needs. While the market solidifies, be mindful that vendor specialization and focus may evolve.
? Can help them elevate open finance within their firm. Previously, we noted that many financial services firms lack the executive focus or internal skills needed to fully exploit the open finance opportunity. Several vendors are responding by investing heavily beyond developer-facing services, offering consultancy for data science or sales optimization through to user experience design support. Match what you need to what is on offer — for example, if you lack implementation capacity, prioritize vendors that have systems integrators on standby.
? Are clear about their future direction. While Forrester now sees the market as “mature,” this varies greatly by region; North America and the UK have some of the most mature providers, but a degree of fluidity persists. The market continues to consolidate following the high-profile acquisitions of Aiia and Finicity by Mastercard and Tink by Visa, and this will continue for the foreseeable future. Align vendors with your strategic direction, and be sure to monitor the market for consolidation; if it presents a risk for you, probe for this in selection.
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Why Do U.S. Banks Keep Failing?
The collapse of Silicon Valley Bank, Signature Bank and Credit Suisse were a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk. Over 550 banks have collapsed since 2001, according to the FDIC. So what exactly causes a bank to fail? And what implications does it have on the U.S. economy?