Hype cycle for APIs 2022: Financial data APIs; Creating embedded finance solutions in Asia; 2023 Crypto Market Outlook by Coinbase;

In this edition:

1?? Hype Cycle for APIs 2022: Financial Data APIs

2?? Digital and traditional currencies will likely coexist

3?? All The Ways That Crypto Broke in 2022

4?? Digital wallets: the most popular next-generation payments option

5?? 2023 Crypto Market Outlook by Coinbase

6?? DeFi is superior: Code is Law

7?? Creating Embedded Finance Solutions in Asia

And many more….

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Hype Cycle for APIs 2022: Financial Data APIs

Banking API aggregators provide financial data APIs that connect to multiple banks, thus simplifying banking integration for application developers. Financial data APIs provided by banking API aggregators typically include balance verification and funds availability APIs. Customers of banking API aggregators include fintechs, lenders and banks themselves.

Business Impact

Financial data APIs boost application development by simplifying access to bank data and services; however, the impact and usage differs among banking industry participants:

- Large banks — prefer to directly control API access and not delegate access to a banking API aggregator

- Midtier or small banks — can avoid expensive API platforms by using data aggregators to publish financial data APIs

- Fintechs — can leverage banking API aggregators and reduce the cost of integrating with each bank individually

Drivers

- A wide variety of organizations, including lenders, e-commerce sites and fintechs providing services, require access to banking data, which drives the need for banking API aggregators to provide this data. Open banking, banking as a service and embedded finance are often the source for these needs.

- APIs are now the preferred mechanism to integrate with banks due to widespread developer skills and tooling support. Banks also favor APIs due to the ability to apply security and traffic throttling.

- Many banks do not currently provide financial data APIs, and where they do, they typically differ from each other. This drives the need for banking API aggregators to provide single APIs in front of multiple banks that may or may not have financial data APIs of their own.

Obstacles

- Some larger banks have reacted to banking API aggregators by blocking their connections. This is because they prefer partners to use the bank’s own APIs directly.

- Privacy is a concern when banking customers share their online banking credentials with banking API aggregators as a part of account linking. In jurisdictions with open banking regulations, this concern is addressed by permission-based account linking without password sharing, rather than the use of “screen scraping.”

- Banking API aggregators typically operate in just one country or one region; however, this is beginning to change.

User Recommendations

- Identify and inventory the differing financial data APIs required to support various initiatives, such as open banking, banking as a service and embedded finance.

- Evaluate banking API providers if your organization requires access to banking services, such as account verification, across different banks.

- Question banking API aggregators on their security and privacy controls.

- Compare the pricing models of banking API aggregators before choosing one provider, since they vary on their pricing models.

Source Gartner

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Digital and traditional currencies will likely coexist

Demand for digital currencies first developed through crypto use cases. Bain & Company’s recent Web3 Retail Tracker survey of 2,000 US adults finds that 13% currently own digital currencies. Of those who don’t already own digital currencies, an additional 10% of respondents would consider buying them even though the crypto market continues to be uncertain and underregulated.

Given future demand, the payments market could evolve under a variety of potential scenarios, which would differ by country depending on the competitive dynamics and stance of the central bank and government.

At one extreme, the status quo could endure, with digital currencies on the periphery or limited to niche use cases. At the other extreme, they could grow and be interchangeable with, or even replace, traditional currency. As the figure shows, some governments favor CBDC over stablecoin; others favor the reverse. We view the most likely scenario as multiple digital currency payments methods coexisting alongside traditional payments for the foreseeable future.

Source Bain & Company

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All The Ways That Crypto Broke in 2022

As 2021 came to a close, crypto enthusiasts were brimming with optimism. After all, it had been a banner year: Nonfungible tokens, or NFTs, had crossed into the mainstream. Casual investors were talking to their friends about the relative merits of Bitcoin versus Ether. Some people even pretended to understand algorithmic stablecoins.

Fast forward a year, and the primary topics of conversation among even the most devout of the crypto faithful were more likely to be about Sam Bankman-Fried, the disgraced crypto co-founder of the fallen FTX empire, or whether they’d ever retrieve the coins trapped on bankrupt exchanges and lending platforms after a series of big digital-asset collapses.

“Crypto winter” is the industry term for the chill that descended on the market in 2022, and contagion was the name of the game. After the collapse of the TerraUSD algorithmic stablecoin, major crypto players fell like dominos: Three Arrows Capital. Voyager Digital, Celsius Network, FTX, BlockFi.

The hits kept coming, but it wasn’t all downside – at least at first. The Super Bowl, one of the largest sporting events in the US, featured splashy, celebrity-filled commercials for crypto companies including Coinbase, Crypto.com and the aforementioned FTX, which was still riding high. There were crypto conferences in the Bahamas and Miami, with sessions about the future of Bitcoin by day and glitzy parties by night. And the industry’s prominence grew in Washington, as lavish political giving and an army of lobbyists signaled its increasing influence there.

Still, crypto prices kept falling. Bitcoin – the largest token by market value – plunged more than 60%, leading a rout in digital assets that erased some $2 trillion in total market value from the highs reached in November 2021. Bankman-Fried went from being described as a modern John Pierpont Morgan to being arrested and accused of multiple crimes including fraud. And NFT prices fell back to earth.

Source Bloomberg news

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Digital wallets: the most popular next-generation payments option

Since they’re often used to digitize a consumer’s existing debit or credit card, digital wallets straddle the worlds of traditional and online payments. Three out of four (75%) digital wallets are linked to a credit or debit card and use traditional card rails rather than replacing them. The introduction of a convenient next-generation experience on top of a card which the customer already owns has helped to drive significant adoption.

Consumers who participated in Accenture's survey are already making more use of digital wallets than credit cards. More than half (56%) of respondents use digital wallets more than five times a month to transact, compared to 48% who use their credit cards that often. Most (60%) consumers who use digital wallets use more than one, due to individual use cases offered by wallet providers.

Wallets from major retailers or hospitality brands, for example, offer perks such as loyalty rewards and may only be used to purchase products and services from those brands. Wallets such as PayPal, Apple Pay and Google Pay can be used at a far wider range of merchants. Much of the innovation in digital wallets has been driven by non-banks, such as the bigtechs.

Major digital wallet players are continuously expanding their solutions to be more competitive. PayPal, for example, has come to market with a BNPL solution. In the third quarter of 2022, it processed nearly $5 billion in BNPL volume, up 157% from the prior year.

Fintechs like Revolut are also driving innovation. Revolut offers a single app that enables users to exchange currencies, send money through social networks and spend with a multi-currency card everywhere Mastercard is accepted.

The pioneers in digital wallets are continuing to innovate, adding new products and valued services to their wallets in an effort to grow their share of their customers’ spend. Apple, for instance, has added a digital card to Apple Pay. Apple Pay is also a contender in the BNPL market and has rolled out tap-to-pay features to compete with other contactless payment providers.

Source Accenture

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2023 Crypto Market Outlook by Coinbase

Key takeaways

- Digital asset selection will transition towards higher quality names like bitcoin and ether based on factors like sustainable tokenomics, the maturity of respective ecosystems, and relative market liquidity.

- Investors’ willingness to accumulate altcoins has been severely impacted by the deleveraging in 2022 and may take many months to fully recuperate.

- The next market cycle in digital assets will be shaped in significant part by the development of standards and frameworks for regulated entities.

Source Coinbase

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DeFi is superior: Code is Law

DeFi, unlike opaque centralized finance, is not an empty house of cards. Its foundations are rock-solid, rooted in immutable code, and totally transparent. In some cases, DeFi removes human subjectivity entirely from, e.g., financing decisions. Parties agreeing to conduct transactions openly and transparently on the blockchain — as opposed to backroom deals by opaque, human (i.e., fallible), potentially interest-conflicted financial actors — is the vision we should be striving for, rather than clinging on to inefficient centralized financial systems.?

DeFi has never “sinned”. The rules of engagement are coded into the smart contract. You do not need to trust a counterparty who may be incentivized to twist the truth, nor rely on trust to engage in financial transactions. The code just executes what both parties agreed to.

Defunct centralized finance companies like Celsius and BlockFi did business with counterparties that then invested those funds in DeFi protocols.? In fact, you could say that DeFi, due to its discipline for over-collateralization, protects you from CeFi. Celsius was forced to prioritize paying down its $400+ million DeFi loans on Maker, Aave, and Compound to prevent its collateral from being liquidated. There is no ability to “re-structure”/renege on smart contracts. In DeFi “a deal is a deal” – you can’t back out. All centralized finance companies are forced by smart contracts to pay back the DeFi protocols.

On the flip side, centralized finance companies like FTX can lie to and ghost their own clients. These failed centralized finance companies (but just so happened to be crypto-asset focused) have gone silent to their customers. Unfortunately, their customers are unlikely to recover their money.

With DeFi, the outcome is different. Customers can monitor the protocols on the blockchain and be certain that the code will execute their transactions. Centralized finance clients have only vague website spin to believe in.

Part of why FTX failed was because Alameda allegedly had preferential accounts. Additionally, Alameda was allowed to trade with no auto-liquidation mechanics when they were overleveraged. There are no backdoors or preferential treatment in DeFi. Avoiding backdoor dealings and sweetheart deals was exactly what we pointed out in July’s Blockchain Letter as something that DeFi is structurally unable to allow (as opposed to CeFi). In DeFi, the same rules apply to everyone and protocols cannot structurally deviate from them.

DeFi is the future of finance, and although it has some of its own unique early hiccups, it most certainly is the solution for the risks and limitations of centralized finance of old, such as the lack of transparency, the risks of backdoor dealings, sweethearts deals, insolvency, money mismanagement, fraud, etc. This is part of why DeFi is emphasized in our broader investment thesis.?

Source Pantera Capital

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Creating Embedded Finance Solutions in Asia

Approaches to embedded finance can be bucketed broadly into three buckets.

- Capturing Value of Existing Services

First, companies typically look to capture some part of the existing financial services value chain. Nearly three decades ago, Bill Gates was quoted as saying “banking is necessary, but banks are not.” Today, a myriad of companies are following that mantra by building solutions into their platforms aiming to muscle in on the banks’ markets and capture value from some more elementary financial services like payments or foreign exchange (FX).

This first step is perfectly exemplified by ride hailing apps such as Grab and Gojek who routinely process payments at the click of a phone button. Traditionally, these payments would have been the domain of banks and other large financial institutions as well as payment service providers (PSPs). Today, more platforms are bringing payments in-house, effectively becoming their own PSP either through their own payments license or a partner's.

- Provision of Complementary Products

The second step of embedded finance is providing financial products which are complementary to an existing non-financial offering. For example, the ability for a customer to borrow, or obtain insurance at the point of sale when purchasing a non-financial good or service. This allows the platform to provide a more seamless service to its customers while also capturing a portion of the financial product revenue.

An example of this can be seen in the partnership between bolttech and dtac, a large Thai mobile operator. The partnership allows dtac’s customers to access relevant insurance products and services more easily in a convenient manner directly on the dtac platform. By collapsing the need for multiple platforms or apps to complete tasks into a single touch point with which consumers are often more engaged, the user experience is enhanced.?

- Launching Full-Service Banking

The third and final step for many participants is the sale of completely new financial products and services, often as part of a more comprehensive digital banking offering. In this case, clients are channeled to new services which may be different from the business’ current offering, thus creating a brand-new revenue stream. For example, a platform offering a full-service bank account to customers where previously minimal or no financial services were on offer.?

Sachin Sharma, CPCO at Standard Chartered nexus business highlighted this using bank's partnership with Bukalapak, an Indonesian e-commerce platform, where a white labeled bank account is opened on Bukalapak using technology provided by Standard Chartered’s nexus. The partnership allows a user on Bukalapak to open, via a sister app, a full-service bank account which is equivalent to that offered by a traditional bank without the need for the usual physical banking infrastructure.?

Source Kapronasia