There are gaps in the US real-time payment system. Who will fill them? Why fintech innovators will power the next phase of global e-commerce growth;

In this edition:

1?? The Fintech Funding Crunch In 4 Charts

2?? Instagram and Facebook will force their checkout experience on Shops soon

3?? There Are Gaps In The US Real-Time Payment System. Who Will Fill Them?

4?? Why fintech innovators will power the next phase of global e-commerce growth

5?? Highlights from Railsr’s Bankruptcy Document and Lessons Learned

6?? Financial connectivity of identity & assets

7?? How Credit Cards Work In The U.S.

And many more….

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The Fintech Funding Crunch In 4 Charts

Fintech’s stellar rise — and fall

First, let’s chart the growth and decline in recent years.

Venture funding to financial services companies hovered around $10 billion per quarter on a global basis in 2019 and 2020, then shot up to $30 billion and then $40 billion in two back-to-back quarters in 2021, Crunchbase data shows. Fintech funding then settled for three quarters around $34 billion before slipping to $25 billion in Q2 2022 and then dwindling all the way back to around $10 billion in the fourth quarter.

Fintech funding dipped more than overall global venture funding in 2022, falling 40% year over year compared to overall global venture funding, which slipped 35%.

Q1 2023 was back up above $10 billion, but that was in large part thanks to a single massive deal: Stripe’s $6.5 billion raise.

Early stage grew too

The surge in fintech funding in 2021 was most noticeable at late-stage. But the increase also impacted companies at the early stages — and it wasn’t only large outlier deals. Median Series A fundings grew by 47% in 2021 and Series B by 85%.

Meanwhile, the number of companies funded in 2021 increased by around two-thirds for both early-stage (including seed above $1 million) and late-stage financings, compared to 2020.

Where’s the follow-on funding?

Now let’s look at companies that have raised funding — anywhere from seed to Series C — by year but have yet to raise funding in subsequent years. These are the companies in danger of running out of runway if they don’t get additional capital.

Around 900 seed fintechs globally that raised at least $1 million in funding have not raised funding since 2021, an analysis of Crunchbase data shows. Another 1,400 seed-stage companies raised at least $1 million in a single seed funding in 2022 and have not raised again in 2023.

Of the Series A through Series C funded companies that raised funding in 2021, about 1,000 — around 65% — have not raised since 2021. A further 1,100 companies from Series A to Series C raised funding in 2022, but not again.

For companies funded at seed through Series C in 2019 and 2020, by contrast, roughly a third did not raise funding in subsequent years. Those companies have had more years in which to raise follow-on funding, but were also funded in a climate where median fundings and the absolute number of companies funded were lower.

As venture investors pull back, how many of these companies will be able to raise in the next 12 to 24 months or face closure?

Source Crunchbase

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Embedded finance in action

Embedded finance is far reaching, impacting and facilitating financial operations for many businesses across a range of different and diverse industries.

Below, you can see a number of different household brands that embed a suite of financial products into their operations (via a licensed bank), along with the relevant use cases.

Source Sopra Banking

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Instagram and Facebook will force their checkout experience on Shops soon

Meta announced today that it will be phasing out onboarding of new Shops without checkout on Facebook and Instagram enabled. Beginning April 24 of next year, Shops without checkout on Facebook and Instagram enabled will no longer be accessible. This means that shops that direct people to an e-commerce site to complete a purchase, rather than allowing people to make a purchase directly through Facebook or Instagram, will no longer be accessible.

“In the U.S., we will focus on helping businesses add checkout to their Shop,” the company wrote in a blog post. “To ease the transition, we will continue to support Shops that link to a website until April 24, 2024. In select markets where we see a future opportunity to introduce checkout, we’ll continue to support Shops that link to a website to make the transition as easy as possible. All other markets will no longer be able to host a Shop on their Facebook or Instagram page or use product tagging in posts beginning on August 10, 2023.”

Businesses located in 21 international markets will continue to be able to use Facebook and Instagram shops without checkout enabled until further notice, Meta says. These markets include: Australia, Brazil, Canada, Denmark, France, Germany, India, Indonesia, Italy, Japan, Mexico, Netherlands, Norway, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, U.K. and Ukraine.

Beginning June 5, onboarding of new shops via Commerce Manager and Shopify will only be with checkout on Facebook and Instagram enabled. By August 10, onboarding of new shops via all other partners will only be with checkout on Facebook and Instagram enabled.

Meta notes that businesses without checkout-enabled shops will no longer be able to use features associated with Shops, including organic product tagging in posts and creating new custom/lookalike audiences derived from people who visited a Shop.

“Beginning August 10, 2023, some businesses without checkout-enabled Shops on Facebook and Instagram will no longer be able to tag their products via the Content Publishing API,” the company wrote in a blog post. “This will impact both API and native interfaces, and will remove tags to products from previous posts. Deprecation will happen in some markets beginning August 10, 2023. After this date, some users will receive an error when attempting to tag an ineligible product, and impacted product tags on previous posts will not be returned from the API endpoint.”

Separately, Meta announced that on June 5, 2023, if your Facebook page has not yet been updated to the new Pages experience, it will be updated automatically.

The change indicates that Meta is doubling down on its checkout experience and focusing on being the sole checkout provider for Shops on Instagram and Facebook.

Source Techcrunch / @aisha malik

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There Are Gaps In The US Real-Time Payment System. Who Will Fill Them?

1) Bank Adoption and Network Connectivity

As with social networking, an instant payment network becomes exponentially more valuable as more banks are plugged in. But if the last bank to join the network benefits the most, no one has a strong incentive to be first. Systemic upgrades to payment systems, core dependencies, and technology constraints are costly, and legal, risk, compliance, and audit factors are operationally challenging.

2) Regulatory Power

In the US, banks are regulated by state and federal governments. At the federal level, the Federal Reserve, the FDIC, and the OCC all function as regulators, with different parts of the biggest banks scrutinized by different bodies. So while the Federal Reserve wants to implement FedNow, it doesn’t have the same regulatory heft as its peers elsewhere in the world. And even if it did, a new system would have to comply with the laws of fifty separate states.

3) Consumer Protection and Fraud Management

In the US, there doesn’t seem to be political appetite to adopt a national digital identity. The Fed may host a directory of public account identifiers, or provide banks with a link to existing directory services to allow transactions without exchanging users’ account information. It may also include embedded fraud mitigation and identity authentication features. In the absence of a universal standard, every bank must solve identity on its own, creating large gaps in the US real-time payments system through disparate user experiences.

4) Third-Party Integration and Productization

Anywhere real-time payments are occurring, startups have built engaging UI layers to facilitate their use among consumers. For example, Chinese market leaders like Alipay and WeChat use QR code vouchers to integrate instant payments and add loyalty elements to a mobile wallet. Across China, India, Singapore, and Thailand you’ll find retailers, street food vendors, and motorbike taxis displaying QR codes for instant payment. For now, FedNow is definitely more of a back-end system than a front-end experience — and it remains to be seen who will be the first to productize its user experience.

5) Backend Integration

Historically, liquidity challenges have been a hurdle to RTP adoption, particularly for smaller FIs. Businesses and banks that participate in the FedNow schedule need to reset their mindset about fully loaded liquidity. To enable true real-time payments they need to move funds to a federal reserve bank account and have all the required funds before they pay out.

6) Interoperability

For its part, FedNow will only support domestic transactions. It remains to be seen who will connect the US with international rails, and how banks will manage both RTP and FedNow after the latter’s launch.

Source Forbes / Rocio Wu

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Why fintech innovators will power the next phase of global e-commerce growth

Sitting between buyers and suppliers with access to rich customer data and transaction histories, platforms are ideal venues for underwriting loans. But credit availability for both buyers and seller can also dramatically increase potential GMV and spend made on platforms. Indeed, for B2B transactions where buying and paying on terms is standard practice, credit is often a requirement for commerce to take place online — which is why we’re so excited by the opportunity ahead of our portfolio company, Billie.

An increasingly wide variety of embedded lending models are emerging to help platforms provide credit for their users. Use cases range from growth capital, to inventory financing, invoice financing, and not least BNPL and point-of-sale lending. The market is developing rapidly — vertically-focused vendors are already appearing, as well as lending-as-a-service providers that are giving fintechs and platforms toolkits to build bespoke embedded credit products by bundling access to real-time transactional data, customer data and credit analytics.

We have every expectation that this market will grow — not least, in the B2B space which is a huge growth opportunity for fintechs. Bain has estimated that just c.$12bn in B2B loans transact via embedded finance today out of a total $400bn, and expects this to increase 5x by 2026 as credit is pushed into channels where SMEs are already working and transacting.

With this position, embedded lenders will enjoy cost and margin advantages over traditional lenders given lower distribution costs (reaching businesses at the point of need), more granular data to support more optimised risk-adjusted pricing, and more flexible collections structures. And we will no doubt drive deeper development of specific B2B checkout solutions that incorporate KYB, underwriting, insurance, flexible terms, invoice issuance and reconciliation within a seamless checkout flow in the coming years.

So the potential opportunity is eye-wateringly large. And again, it will be innovative financial infrastructure enablers that power the next phase of global e-commerce growth.

Source Dawn Capital

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Highlights from Railsr’s Bankruptcy Document and Lessons Learned

Railsr’s bankruptcy reinforces a number of lessons learned for fintechs (noting that these are not necessarily specific to Railsr):

- Particularly in the “as a Service” segment, serving fintechs at large with a broad and/or generic offering is insufficient. Success requires sharp product and vertical focus.

- Aggregating multiple vendors to enable an end-user offering via APIs is undifferentiating. Value creation requires strong underlying tech assets coupled with unique and/or vertically-specific product features.

- Controlling costs and having a firm grasp on unit economics is critically important. As we illustrate in a recent article here, many fintechs are challenged by balancing growth and expense management.

- M&A has the potential to be transformational, but for early or growth stage fintechs, risks being too large and/or distracting to properly digest.

- Geographic expansion requires a well though-out strategy.

- Following the customer can be effective if the customer’s path accelerates the overall strategic vision, but if done incorrectly, far-flung geographic expansion dilutes valuable effort and resources.

Most importantly, Railsr is only the tip of the iceberg. The combination of adverse market conditions, over-supply in many segments, and challenging cash flows will lead to a wave of fintechs coming to market in 2023 in an effort to stave off bankruptcy.

This creates a welcome environment for strategic buyers seeking to acquire strong product, tech, and geo expansion assets at reasonable valuations. For financial investors, 2023 will be an excellent time to acquire bolt-on assets for core portfolio companies, and to acquire new core assets to execute classic expense optimization and go-to-market improvement strategies.

Source Flagship Advisory Partners

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Financial connectivity of identity & assets

Every consumer should have full access to and authority over their financial identity. This means giving fintech apps the ability to provide a universal verification process for consumers and the ability to move assets across apps.

For example, say a user wants to use the balance in their Venmo account to buy stocks or cryptocurrencies on an investing platform like Robinhood. Right now, this requires them to transfer the Venmo balance to their bank account, then use bank funds to make transactions on Robinhood. An underlying interconnectivity solution would instead allow them to seamlessly transfer money and identify information directly between Venmo and Robinhood.

Financial connectivity empowers users to own their own information by giving them the ability to take their identity and assets wherever they go, without relying on a central institution as a middleman.

Where the opportunity lies: As the regulatory environment continues to shift asset ownership toward consumers, there will be a need for financial connectivity between multiple fintech platforms, especially around identity verification. We see particular promise in KYC/AML, where traditional solutions fail to allow consumers to create financial identities that can be used across multiple providers.

This will enable consumers to “Bring Your Own Brokerage” (BYOB) inside any app and execute trades, as well as transfer cash, assets, liabilities, and crypto across apps. In turn, this will spur new use cases in social investing, digital wealth management, tax optimization, cash flow underwriting, and crypto payments enablement.

Why we see potential: This is a pro-consumer area: simple, flexible, and focused on easy cross-application use.

Investing in “write” functions (as opposed to read-only solutions, which can read financial data but not facilitate financial transfers) can lead to new use cases in assets and liabilities transfer. We’ve also seen recent regulatory tailwinds around open banking, as CFBP Director Rohit Chopra highlighted in his remarks about open finance and consumer data ownership at the most recent Money 20/20 conference. There is also potential for players in this area to allow connectivity between web2 and web3 financial systems.

Other considerations: This category is in the early innings, and there is low consumer tolerance for failure when it comes to user privacy and security. Existing applications may be hesitant due to worries about data leaks from their own ecosystems, while walled gardens (banks and massive asset holders) may be reluctant to shift financial identity ownership to consumers.

Source M13

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How Credit Cards Work In The U.S.?

CNBC Marathon takes a look at how credit cards work in the U.S., including major industry players like Visa , American Express , and Discover

$6.7 trillion. That is how much Americans spent using their debit or credit cards in 2019. More than 60% of those purchases were made using cards from Visa, a company that has long dominated the payment card industry. As payment cards become more essential in our daily lives, Visa has quickly grown to become one of the most valuable companies in America. So how exactly does Visa make money and why does it dominate the payment card industry?

Clarification: The 10% mentioned in the video at 12:30 refers to 10% of the average 2.2% of the swipe fee charged to merchants.

And armed with impressive rewards and a loyal customer base, Amex has achieved impressive growth over the years. The company’s revenue has increased over 32% since 2017 and shares of the company have shown resilience and growth in a tumultuous market. Yet Amex is far from dominating the credit card industry compared to the likes of Visa and Mastercard. So what is the secret to Amex’s success and where is it headed next?

Credit scores, which represent how likely a person is to pay his or her bills, affects almost every aspect of an American’s financial life. One key benefit built into the credit scoring system is its nondiscriminatory practice of using just numbers to determine a person’s creditworthiness. “Credit scoring when it was first developed was an advancement,” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “It is better than having some banker sit across from you and judge you and read the information in your credit report, because they bring a lot of their subjective analysis and their own life experience into the analysis.” But despite the good intentions of credit report companies, many experts argue that the current system is still discriminatory.

Lastly, Discover is one of the largest credit card issuers in the U.S. and consistently tops a customer satisfaction survey. However, the stock has mostly underperformed that of the S&P 500 and its credit card competitors. So how does Discover stack up to its competitors and what’s unique about its business model? Watch the video to find out.

Source CNBC

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Four strategic plays for banks

By adopting a fresh perspective on customer relationships with these three pivots, banks could unlock latent value from customer relationships. This would open the door to four strategic plays, each of which could contribute to reinvention of the enterprise.

Going beyond the bank’s traditional four walls—the blue portion in Figure 3—will not only generate new growth opportunities, but more importantly enable banks to gather more data about customers’ financial and lifetime needs. Used correctly, this data can help banks deepen their customer relationships, offer more tailored traditional banking solutions, and power their core business. This is J.P. Morgan’s rationale for building its travel booking offering, which has the explicit goal of fueling its banking business

1. Improve banking as we know it

The greatest opportunity for banks lies in doing what they have been doing for centuries—selling traditional financial services to customers through established channels—but doing it a lot better. Across all their products and channels, banks need to create experiences that surprise and delight their customers. A number of leading banks are already driving this change in important ways.

2. Embed banking in new channels

Today, banks already generate a substantial proportion of their revenues from non-banking channels. Accenture research20 shows that at least 30% of banking industry revenues relating to traditional products such as payments, personal loans and credit cards are sourced through non-banking third parties, a figure which is expected to increase further.

3. Offer non-financial products Industry convergence is taking place in all sectors.

For example, leading Middle East telco provider Etisalat has partnered with health and wellness platform Vitality Global to enter the consumer lifestyle sector. Launched in November 2022, the partnership increases customer engagement and expands the range of products offered, creating up-selling and cross-selling opportunities and new potential revenue streams.

4. Explore new frontiers

The final category of opportunity for banks involves boldly transforming their customer relationships by engaging with them in completely new channels, such as the metaverse, and providing completely new products such as NFTs.

Source Accenture