Open Finance datasets to support small businesses; How Mastercard Plans To Beat Visa; The value of embedded banking for platforms;

In this edition:

1?? Open Finance datasets to support small businesses

2?? The value of embedded banking for platforms

3?? The future of retail report by Klarna

4?? Infographic: Paypal Q1 2023 and FY 2022 Performance Assessment

5?? The Future Of Digital Money | Paradigms For A Changing Competitive Landscape

6?? How Mastercard Plans To Beat Visa

7?? What's at stake for Revolut if its UK banking licence isn't granted?

And many more….

***

Open Finance datasets to support small businesses

Open Finance is an extension of Open Banking that goes beyond the scope of data and allows trusted TPPs to access greater financial data to provide better tailored propositions across a wider range of financial services products and other services.

While Open Banking applies only to transactional data, Open Finance will apply to all, or most financial services accounts, such as savings, insurance, mortgages, and investments. This is part of the Government’s broader Smart Data initiative to enable secure and consent-driven cross-sector data sharing with TPPs, starting with finance, energy, and communications.

The industry experts we engaged with considered Open Finance to represent the evolution of Open Banking, but views on the scope and data sets to be included in an Open Finance ecosystem were varied.

The specific areas / data sets that were highlighted included:

- Data that small businesses need to report on, such as accounting and tax related data (which could also relate to product data).

- Digital Identity / ID&V (which was highlighted as a critical omission from the Open Banking framework).

- Financial products that small businesses use, such as insurance, loans, mortgages, credit cards, pensions, and investments.

- Non-financial products using smart data, such as energy and other utilities.

- Customer related data, trading performance, sales transactions and payment data.

- Invoice data (e.g. amounts, payee, date issued, date paid).

- Company and director profile data.

- Smart data such as geolocation (to enable linking location to products and services).

Open Finance is expected to be regulated by the EU Commission, which has announced that an Open Finance regulatory framework will be presented in 2023, which in turn will pave the way for a phased Open Finance implementation in late 2023 or 2024. This framework may mandate Open Finance by law in the same way PSD2 did for Open Banking. Any regulatory framework is expected to address the potential risks posed by Open Finance, such as security and fraud, financial exclusion, poor consumer outcomes, and operational resilience.

UK authorities acknowledge they need to ensure coherence between Open Finance rules and other Financial Services and cross-sector rules, such as consumer and data protection, or the digital ID trust framework. Stakeholders interviewed for this report also expressed the need for authorities to clarify the next steps and timings concerning the other key building blocks necessary for Open Finance to become a reality, which includes an Open Finance implementation entity, common APIs, user experience standards, and a fair liability model between different ecosystem participants.

Source Whitecap Consulting

***

The value of embedded banking for platforms

If you’re a platform or marketplace that accepts payments without offering your customers embedded bank accounts, you’re missing a big opportunity.

While you may earn some revenue by marking up these transactions, the lion’s share of the money passes through your platform and is deposited in external bank accounts.

The problem with what you’re doing today

What’s wrong with sending money to your customers’ external bank accounts?

The problem is that it represents three missed opportunities. Companies like Square and Shopify that offer embedded finance ultimately capture more:

- Revenue. When you send your customers’ funds to their external bank accounts, you miss out on five robust revenue streams (see table below). When you deliver more value to existing customers, you also generate more revenue.

- Data. If you’re sending funds to your customers’ external bank accounts, you’ll never know how they spend their money—or how they manage their finances, more generally. As a result, you’ll never be able to help them build a budget or qualify for a loan.

- Loyalty. When you offer embedded finance, customers are more likely to choose your platform—and stick with it. In fact, Wethos found that 91% of their banking customers were retained after twelve months, a rate 6x higher than for non-banking customers.

Shopify is a prime example of a platform that’s winning with embedded finance. In 2020, they launched “Shopify Balance,” a suite of financial services for their merchants. Today, Shopify earns more than 73% of their revenue from merchant solutions, the vast majority of which are embedded financial products.

Source Unit

***

The future of retail report by Klarna

What did the world of retail look like 18 years ago? In the early 2000’s, online shopping was in its infancy and very different to what we know today. Rife with fraud and scams, it was widely regarded as unsafe and consumers were hesitant to share their credit card information and bank details online. In-store was king and it was the era of high street dominance, big retail parks and shopping centers.

As the new ‘digital’ kid on the block, Klarna created “Buy Now, Pay Later” a way to bring the in-store and online shopping experience closer together. The premise was simple, only pay for the item once it has arrived, you know the quality and you know you want to keep it. This innovation brought a whole new level of trust and security to the online experience. By guaranteeing buyers’ protection and enabling shoppers to try before they buy, our safe and easy payments solution became a catalyst for e-commerce growth.

Over the next 18 years, Klarna grew at pace, expanding from our Nordic homeland to over 45 countries around the world, we partnered with over 500k retailers and brought our vision of a better, safer shopping experience to over 150m consumers. Along the way, we had a relentless focus on innovation, and elevating the retail experience for consumers around the world. We spoke to consumers about their retail pain points, introducing new products such as the ability to spread your payments and an app where you can search and compare to nd the best price of a product.

So what does the future hold?

In 2023, 18 years into our journey we are excited about exploring what the future could hold, leveraging AI to develop the next generation of technology that both elevates the shopping experience for consumers and accelerates commerce. We’ve redeveloped our App to have a personalized feed powered by Klarna’s in-house developed AI product recommendation engine, giving consumers a feed of highly personalized product recommendations to help them nd and shop for items that are most relevant to them. The feed updates in real time with a range of products and deals and becomes increasingly tailored, as it learns more about the user’s preferences.

Trying to predict how consumer preference will evolve within shopping and payments in 18 years time is not an easy t on the premises that technological innovation will be driving and shaping new preferences. Just to put this into perspective, if we go back 18 years ago, some of the leading mobile phone manufacturers launched models that not only had buttons instead of touchscreens - they even had antennas.

Source Klarna

***

Infographic: Paypal Q1 2023 and FY 2022 Performance Assessment

- PayPal lost ~$155 B in market cap with ~70% decline in share price since Jan ’22

-Share price hit a 6-year low on 12 May this year

- Pace of M&A clearly slowing with potential for divestitures (i.e., Xoom sale being explored)

- GAAP EPS recorded a net loss of ~$0.45 related to PayPal’s strategic investments in Q2 ’22

- Returned $4.1B through share repurchases in the last 12 months, FY ‘23 expected to reach ~$4B

- International gross revenues were impacted by FX fluctuations in FY ’22. Revenue loss in the EU from Q2 ’21 to Q3 ’22. Any single country, except for US, accounts for less than 10% of Revenue

- VAS revenue decreased by 4% from FY ’17 to FY ’20, but has since rebounded well with a 23% CAGR from FY ’20 and growth of 39% in Q1 ‘23, driven by interest revenue

- Opex as a % of gross profit was flat from 2017 to 2022, which means the business achieved no scale efficiencies across those five years (influenced by declining gross margin). FY ’22 guidance incorporated $900M cost savings with the annualized benefit of ~$1.3B in FY ’23

Source Flagship Advisory Partners

***

The Future Of Digital Money | Paradigms For A Changing Competitive Landscape

The future of money isn't preordained. A vast number of market participants are working to reshape that future. Blockchain and digital native startups are developing innovative products and services that have the potential to disrupt traditional financial systems. Incumbent institutions like banks are investing in new products, such as digital asset custody and settlement solutions. Fintech firms are already making significant inroads in transforming the way money moves globally. Big tech firms are also exploring the potential for their own digital currencies and payment systems, leveraging their massive user bases and data analytics capabilities. Central banks are researching the potential for digital currencies to complement traditional ones. Finally, regulators will play a critical role in shaping which commercial propositions are both viable and safe.

The future of money and payments can take radically different directions depending on the forms of money that gain scale, the technology designs issuers choose and use cases they target, how incentives are incorporated, and whether the regulatory and policy environment is favorable, among other factors.

Changes to money itself can have a profound impact on the financial system at large. To help industry executives and policymakers frame their thinking, we introduce four paradigms based on the types of institutions that could produce solutions that scale. These paradigms are meant to support scenario planning and are likely to coexist. They are not comprehensive and do not cover every possibility, such as a future in which cryptocurrencies like Bitcoin become a major part of the payments system.

Source Olyver Wynam

***

How Mastercard Plans To Beat Visa

Mastercard is the second largest card network in the U.S., accounting for more than a quarter of all purchase volume using a payment card. As the world transitions to a more cashless society, Mastercard’s value has continued to soar. Shares of the company have seen nearly 100% gain over the past 5 years, outperforming American Express, Discover and even Visa. So how is Mastercard able to generate so much revenue and how does it set itself apart from the rest of its competitors?

Source CNBC

***

Indonesia’s Fintech Industry: Fintechs outperform traditional banks on overall usage

Fintech players have a slight edge over traditional banks in terms of overall usage. They also surpass banks in providing financial incentives, such as promotions and discounts, as well as access to additional financial products through cross-selling and value-added services. While an edge in cross-selling is a source of competitive advantage that fintechs should aim to maintain, overreliance on incentives could undermine the long-term view of the industry, and non-incentivized usage may be much lower for fintechs.

Research also indicates that the user interface and user experience gap between fintechs and banks is narrowing. Banks are catching up in customer experience metrics where fintechs had previously outperformed them, such as seamless onboarding journeys. To preserve their lead over banks, fintechs need to adopt a more innovative approach to user-friendly delivery while reducing their reliance on incentives and product promotions.

Encouraging new user adoption is a critical factor in fintech growth. Our research identifies three key barriers that must be addressed among retail customers:

- Too many apps to choose from. Customers face initial challenges in selecting the appropriate platform to begin, with a wide array of choices and lack of meaningful differentiation.

- Concerns over safety and security. Customers lack trust in non-traditional institutions, particularly when it comes to holding funds.

- Higher costs compared to banks. Customers associate fintechs with higher costs, and would prefer to stick to perceived cheaper alternatives provided by traditional players.

In addition, to drive greater adoption, fintech companies must take into consideration the desires of their customers. According to our survey, consumers have three key aspirations :

- Assurance on security. 40% of consumers would like to see concrete assurances on the safety of their funds.

- One-stop-shop. 21% of customers want their financial needs addressed in a single app.

- Attractive financial incentives. 26% of consumers want to see lower costs for services through fintechs.

These findings illuminate some important imperatives for the future growth of Indonesia’s fintech industry. Firstly, investing in platform safety and security should be a top priority to instill confidence in consumers and alleviate any apprehensions they may have regarding the trustworthiness of financial service providers. Secondly, fintech companies must adopt a multi-product strategy and work towards offering a comprehensive range of financial services to cater to diverse customer needs. Lastly, consumers continue to expect attractive financial incentives from fintechs, and therefore there continues to be a play wherein finechs can grow their user bases through aggressive pricing.

Source BC

***

Ubiquitous wallets

Next-gen digital wallets will be vital in managing our identities and assets, including a wide variety of tokenized valuables. They will feature prominently throughout our daily lives, enabling access to services and payments in any environment.

While consumer demand for simplified and seamless journeys is evident, using wallets today is often a fragmented experience. Consumers routinely need multiple tools to transact or gain access to a service, including physical wallets, identity documents, digital wallets and bank apps, to name a few. Adding further fragmentation is the onset of wallet-like capabilities built into internet browsers, IoT devices and crypto wallets, which can often be challenging to leverage due to complex onboarding.

As innovation targets these frictions, digital wallets will evolve into a single point of control for an expanded set of services and activities. Advances include a better way to authenticate any credential, not just payments — portending a day when the wallet will play an outsized role in our increasingly digital lives. The wallet of the future will let users verify identities and manage their data, provide customized financial insights, and act as an "in-store remote" enabling personalized online and in-store experiences. This development, driven by the continued digitization of the economy, is leading us towards always-on, ever-present and ubiquitous wallets. Tomorrow's wallet will consolidate how we use cards, digital identity, house keys, office access cards, passwords, driver's licenses and more.

Global wallet growth

Many entities are pursuing the digital wallet that does it all. While tech players have led digital wallet use, the phenomenon of super apps has continued to expand globally. It is emerging as the next battleground for players such as Amazon, Rappi and Grab as well as tech giants Apple and Google. Meanwhile, global banks are teaming up to launch competitors, such as the recently announced wallet managed by EWS, a fintech co-owned by Bank of America, Chase, Wells Fargo, Truist, Capital One, PNC and U.S. Bank.

Source Mastercard

***

What's at stake for Revolut if its UK banking licence isn't granted?

A UK banking licence refusal would “hamper Revolut's long-term ambition to become a global banking provider”, Pitchbook analyst Nalin Patel tells Sifted, and give it fewer ways to make more money.

As a regulated e-money institution in the UK without a full banking licence, Revolut can't offer lending products like mortgages. It’s also harder for Revolut to become a primary bank account for UK customers, as it lacks customer deposit protection.

Revolut investors hope that a licence — and the trust that comes with it — would help the bank win new customers, and also incentivise existing customers to hold larger deposits with the neobank, including salaries.

These are more consistent, predictable revenue drivers than things like crypto trading, which helped Revolut achieve its first full year of profit in 2021.

If its UK licence were refused, it’s likely that the company would shift its focus to outside the UK in the hope of better luck with regulators.

Revolut was granted a full banking licence from its European regulator in Lithuania in 2021, which works as a passport across the EU, allowing it to offer full banking services in several countries.

European banking is already proving lucrative for Revolut: in 2021 European revenues (￡432m) were more than double UK revenues (￡195m), according to its most recent company accounts.

That’s despite the fact that many countries in Europe have been slower than the UK to adopt neobanking apps, and that on the continent Revolut has a number of already-established rivals, like N26, which has significant market share in France, Germany and Italy.

Revolut has also applied for banking licences in the US and Australia, and has appointed country CEOs in Mexico, Brazil and India — large markets it’s hoping to crack.

Why is Revolut in this position?

One of Revolut’s biggest shareholders says the size of the business is slowing down its banking licence application, which it applied for in January 2021. (The investor refused to be named because of the sensitivity of the application.)

Revolut offers some 50 products and services to its 28m retail and 500k+ business customers, which is a whole lot of paperwork for regulators to get through. Its licence-holding competitors were much smaller when their applications were approved; Monzo was got a full banking licence in 2017 and Starling in 2016.

"Regulators like firms that are focused and vanilla, not firms expanding globally at lightning speed, launching 20+ products a year, involved in crypto, etc,” a source close to the company tells Sifted.

But that’s not all that will be turning regulators off.

Source Sifted