The rise of super wallets; What is happening with Russia and SWIFT?; How banks are engaging with modern embedded finance;
Perspective for today:
Super apps loom as advantaged competition that will finally arise in 2022 and embedded payments are sprouting all over
“Clearly, customers are drawn to the idea of a one-stop shop, which gathers up and organizes the best features of all their apps — like an operating system for their life,” states the JPMorgan Chase white paper, “Payments Are Eating the World.”?
The super app fulfills this desire, the white paper explains, bringing together both lifestyle and financial services functions, granting access and the ability to pay for many things people buy, with ease. The paper points out that this serves the needs of merchants too, giving them access to an audience and sparing some of the cost of acquiring customers.
Almost paradoxically, the Insider Intelligence report maintains that “super apps can solve a problem that consumers of all ages wrestle with: choice overload.” The paper notes Deloitte research that one out of three consumers feels they are drowning amid the multiple devices and subscriptions they maintain.
Insider Intelligence suggests that PayPal, Revolut or Block, through Square and its Cash App Pay service, could launch the first true U.S. super app in 2022. The paper says the first two have already got the financial part down, and what they need to do is increase the commerce part, pulling more choices under the app’s umbrella.?
Embedded finance is something like auto-minions for everyone. More and more purchases are and will be billed and paid automatically, says TD Bank’s Baird, from share-ride charges to buying gasoline. The payment instrument may be your phone, a transponder in your car, or a chip embedded somewhere.
This is actually a subset built around increasing connectiveness of automobiles, with data flowing back and forth all the time, according to research by McKinsey & Company. Payments for tolls have already become painless and invisible. The ability to orchestrate insurance payments through the vehicle itself — with potential for variability based on measured driver behavior — can now all be in the background as well.
Embedded finance and super app models usually go hand in hand one creating a ground for another one.
Which one of these will take off in 2022?
Why Berkshire Hathaway sold out of Visa and Mastercard
Berkshire Hathaway, as has been widely reported, sold more than $3 billion in stock in the payment giants Visa and Mastercard – but why?
According to a securities filing in the US, dated 14th February, the Berkshire Hathaway sold $1.8 billion in Visa shares and $1.3 billion in Mastercard stock.
At the same time, the company increased its participation in Nubank, the largest FinTech bank in Brazil that is highly active among the country’s Bitcoin investors.
In Q4 2021 (pre-earnings announcement), Berkshire trimmed its stake in Visa by more than 13%, selling about 1.27 million shares. Visa stock got off to a slow start this year but has been rolling since the company reported earnings results for the first fiscal quarter of 2022, which is the quarter ending December 31, 2021.
Visa reported earnings per share (EPS) of $1.83 for the quarter on net revenue of $7.1 billion, beating analyst estimates. Total payment volumes continued to trend nicely, while international payment volumes continued to recover as well.
Perhaps Berkshire see competition being a problem in the future. They may also foresee a post-pandemic world that relies less on travel.
But right now, it’s hard to see a future where Visa becomes irrelevant. Another possibility is that Berkshire simply didn’t like their total exposure in the space, which brings us to the next stock it sold.
Berkshire also reduced their position in Visa’s main competitor, Mastercard. Berkshire during Q4 sold more than 302,000 shares of Mastercard, reducing the company’s stake by about 7%.
This points to a concern about Berkshire’s overall exposure to the two largest payment rails and growing competition from technology like the blockchain.
Mastercard recently reported diluted EPS of $2.41 in Q4 of 2021 on net revenue of $5.2 billion, also beating analyst estimates.
So has Berkshire, still governed by the most successful investor of all time Warren Buffet, made a mistake? Have they gone to early in their sale?
Visa and Mastercard are also both well-positioned to take advantage as more payments convert from cash to digital.
While there is a lot of competition out there from alternative payment options, big dominant players like Visa and Mastercard should be able to buy the technology they need or develop it in-house to keep pace.
Berkshire still owns about $1.4 billion of Mastercard and $1.8 billion of Visa, as of year-end…
Block's Bitcoin revenue is up from the same quarter last year
Cash App—the popular mobile payment service developed by Block (formerly Square)—has become a highly popular vehicle for purchasing Bitcoin. According to a earnings report today, the company accrued $1.96 billion in Bitcoin revenue during the fourth quarter of 2021.
That figure comes from page 10 of the earnings report, which states that Block generated $4.08 billion in net revenue throughout Q4. The company says it had $2.12 billion in revenue “excluding Bitcoin,” meaning nearly half of the company’s inflows were thanks to Cash App’s Bitcoin purchasing service. That’s a 12% increase in Bitcoin revenue year-over-year.?
That said, only 2% of those revenues actually translated into profits for Block. The percentage is roughly equal to the transaction fee that Block charges on the average Bitcoin purchase. This garnered $46 million in profit for the company.?
Throughout the whole of 2021, Cash App reports just over $10 billion in Bitcoin revenue and $218 million in gross profit from selling the coin, up 119% and 124%, respectively, from the previous year. The company cites Bitcoin’s price appreciation as a primary driver for the increase, alongside the growth of active Bitcoin users. However, 2022 tells a different story so far, with Bitcoin’s price stuck below $40,000 and active addresses on the decline.
The asset’s poor performance since touching $69,000 in November has been a bad look for Block’s balance sheet as well. After purchasing $50 million of Bitcoin in Q4 2020, and another $170 million in Q1 2021, the company was forced to report a $71 million impairment loss for the year.
Cash App started allowing users to buy and sell Bitcoin with their balances in 2017. However, the company has refused to allow access to other cryptocurrencies like Ethereum or Dogecoin since then.
The rise of super wallets
Traditional physical wallets are primarily for making payments, carrying our cards and cash — and otherwise disconnected from other areas of our financial lives.?
In contrast, digital “super wallets” are giving users access to a much wider range of financial resources and tools. They can still make payments, but they can also help make investments, take out loans, track accounts, and more.?
What are super wallets?
Mobile wallets today are, in essence, a way of organizing existing financial accounts. The standard mobile wallet works as a safe, virtual storage for tokenized credit cards, debit cards, and bank account information.
But as the payments landscape evolves, a growing number of digital wallets are moving beyond the single-function app approach, adding on financial offerings that go beyond facilitating payments — such as loans, insurance, investing, and digital banking. Different features can help players differentiate themselves in the already crowded mobile wallet market, and avoid becoming just another payments app on a user’s phone.
The result increasingly looks like what we can call a financial super app, or super wallet: a connected ecosystem where users can manage payments, savings, investments, crypto, budgets, loans, insurance, and more, all in one place.?
But first — what’s at stake?
Why it matters: Digital wallets are transforming the way people manage every aspect of their lives. A growing number of companies are striving to become the go-to app for all things finance — combining a wide range of payments, banking, credit, investment, and insurance products in a single platform — while others are allowing users to store important documents and access cards on their smartphones for everyday use. With a wide reach and daily touchpoints, the digital wallet category is poised to have a substantive impact on individuals’ day-to-day lives — but only if new solutions can deliver on reliability, scale, and convenience.?
Why now: Innovation within the digital wallet space is being driven by customer demand for convenience, automation, and customization, as clients increasingly seek to manage all their financial matters in one place. The Covid-19 pandemic has also accelerated the need for contactless money management and ID solutions, resulting in the growing adoption of mobile solutions in payments, banking, and other financial services categories.?
The players looking for an edge: The future of the wallet is largely being shaped by fintech players like SoFi, Venmo, MoneyLion, @Block, M1 Finance, and Revolut, which offer easy-to-use, mobile-friendly platforms. Tech giants like PayPal and Apple are also aiming to become the go-to money management apps, and looking to leverage their vast user networks, brand recognition, and UX expertise to gain quick traction among users.
What is happening with Russia and SWIFT?
There are talks on cutting Russian banks off from SWIFT, a messaging network used by 11,000 banks in 200 countries to make cross-border payments.
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SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. SWIFT does not actually move money. Instead, it is a secure, encrypted messaging system that tells financial institutions how much money to move where.
Ejecting Russia from SWIFT would effectively expel the country and its businesses from the international economy. There is no well established rival to the SWIFT network, so Russia would have to either set up a rival communications network or develop ad hoc arrangements with countries and between companies if it wanted to trade internationally. That would be costly and time consuming.
UK Prime Minister Boris Johnson is leading the calls internationally for Russia’s ejection. Poland and Lithuania are said to favour the move. US President Joe Biden has supported the proposal, though has said he will only back it fully if European leaders are on side.
Many EU countries are wary of ejecting Russia from SWIFT because of the blowback it would have on their own economies. Germany and Italy are said to be the most vocal opponents. This stems from their dependency on Russian oil and gas. These countries use SWIFT to pay Russia for the energy supplies and ejection could disrupt that flow.
Russia would suffer huge economic damage if it was kicked out of SWIFT. Capital Economics estimates that current sanctions will knock about 1% off Russia’s GDP but expulsion from SWIFT could take that number to 5%.
Over the longer term, ejection from SWIFT could also push Russia closer to China. It would help China court any country with uneasy relations with America looking for alternatives.?
As we can see there are consequences for every country involved in this process.
How banks are engaging with modern embedded finance
Celent identified five main approaches financial institutions are using to engage with embedded finance ideas.??
Technology-led
Making it easier for partners to integrate the bank’s product into its partners’ digital experiences. A good example of this is Wells Fargo, which developed a Software Development Kit (SDK) and a set of APIs for its co-branded credit cards. Historically, this segment was served through co-branded programs and partnerships via a traditional white-label approach, with credit offered via in-store kiosks or paper applications provided at the register. Later evolutions online were accomplished through interrupted flows with customer journeys redirected to partner sites. The co-brand credit card SDK makes it easy for Wells Fargo merchant partners to integrate and offer credit seamlessly in their digital experience at the point of need, for example, during shopping cart check-out, while the bank acquires new customers.?
License-led
Being the regulatory license holder, and often BIN sponsor, to support financial services propositions launched by neobanks and other fintechs that don’t have their own banking licenses. For the banks involved, it is a way to attract deposits and earn a share of the card interchange income. Buy Now Pay Later (BNPL) propositions from fintechs, such as Klarna, PayPal, and others, many of which have their own technology platforms but partner with WebBank to extend financing to their US customers would be in this category.
Technology- and license-led
Combining a banking license with a modern technology platform to offer a full BaaS package. Most, but not all, banks in this category have a BaaS proposition to brands and fintechs and offer banking services to their own customers directly. Another difference is how the bank acquires the technology; we see examples of all typical approaches, from building their own to partnering to buying.
B2B2C Collaboration and Cocreation
collaborating with third parties, often large brands, to help develop tailored products for their customers. Examples include Apple partnering with Goldman Sachs for Apple Card, Green Dot Bank enabling Uber Money, and Google’s upcoming Plex accounts, with 11 partner banks and credit unions, including Citi, Seattle Bank, SFCU, and others.
B2B2B2C Collaboration and Cocreation
Collaborating with technology firms to support their BaaS propositions to their B2B clients. For example, Goldman Sachs and Evolve Bank & Trust in the US are partnering with Stripe to offer Stripe Treasury, a financial services proposition for platform partners, such as Shopify, which in turn offer financial products to their merchants. Stripe is also working with Citi and Barclays to support its international expansion.?
Coinbase and other crypto exchanges say, however, that they're complying with sanctions
Coinbase "will not institute a blanket ban on all Coinbase transactions involving Russian addresses," despite a request from a Ukrainian government official to do so.?
Over the weekend, Ukraine's country's vice prime minister and Minister of Digital Transformation, Mykhailo Fedorov, publicly appealed to "all major crypto exchanges to block addresses of Russian users." Fedorov tweeted in English: "It's crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users."
Coinbase joins a list of other cryptocurrency exchanges that have declined to meet the Ukrainian government's request.
Binance, the world's largest cryptocurrency exchange by trading volume, told CNBC on Monday: “Crypto is meant to provide greater financial freedom for people across the globe. To unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists.”
Kraken Digital Asset Exchange CEO Jesse Powell wrote on Twitter, "Our mission is better served by focusing on individual needs above those of any government or political faction. The People's Money is an exit strategy for humans, a weapon for peace, not for war."
Crypto.com declined to comment on the matter to Decrypt, while FTX founder Sam Bankman-Fried, who has several times testified before Congress about blockchain technology, has not yet responded to a request for comment.
Coinbase, which is not available to Russian users, nonetheless doesn't restrict its clients from transacting with Russia-based addresses. The spokesperson said, "We will continue to implement all sanctions that have been imposed, including blocking accounts and transactions that may involve sanctioned individuals or entities."?
Envisioning a new stack for the post-bank era
Envisioning a new stack for the post-bank era according to Anish Acharya, a16z fintech general partner
A decade ago, there was a sense that fintech companies would soon replace all aspects of consumer banking. Instead, we have seen fintechs gain tremendous traction on the customer-facing, demand side of the ecosystem (banking, payments, overall customer experience), with traditional financial institutions continuing to enable the supply side that is largely dependent on capital (deposits, lending).
But what might the future of consumer banking look and feel like as the roles of these players continue to evolve? There are seven areas across the consumer banking stack with the potential to yield some of the biggest yet-to-be built companies in fintech.
Your personal money button
An internet company (“neobank”) serves as your primary interface to access all aspects of your money for a flat subscription.
Every individual is a business of one
Every account also comes with SMB functionality so you can issue invoices and accept payments to support new-found freedom and flexibility in pursuing solo business ventures.
New, dynamic portfolio theory
Rather than adhering to the classic 60/40 stocks/bonds portfolio model, you have the ability to invest via self-directed stock picking (Robinhood), actively managed funds with trading updates via video from your fund manager (Titan), zero cost passive funds (Wealthfront), Defi and other private companies + funds.
Lending as an auction
Lending on a “per card-swipe basis” done via auction to whatever bank will give you the lowest cost of capital. A consumer does not have to know who they are since the internet company handles it all behind-the-scenes. Loans are refinanced when lower rates are available in real time.
Income streaming
Your employment history and paycheck is seamlessly integrated so you can get paid daily and borrow against it.
Configurable reward
Interchange comes back as flexible, customizable rewards – such as crypto, fractional investing, merchant discounts, or lottery.
Yield chasing across countries + asset classes: Savings yields driven by Defi and a new “Stone Castle” global yield chasing network, with the option to sweep money into brokerage accounts for even higher yields.
Multiplayer
Culture, community, and social become core components of financial institutions (ROSCAs, share exchanges, Partyround, DAOs).
Founder at Fintech Wrap Up | Payments | Embedded Finance | Wallets
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