Banks beware, foreigners are cracking the finance code

  • Investments in integrated finance jump in 2021, data shows
  • Buy now, pay later, offers take center stage
  • Fintech market valuations overtake banks

LONDON, September 17 (Reuters) – Anyone can be a banker these days, all you need is the right code.

Global brands from Mercedes and Amazon (AMZN.O) to IKEA and Walmart (WMT.N) are cutting out the traditional financial middleman and plugging in software from tech startups to deliver everything from banking to credit to customers. assurance.

For established financial institutions, the warning signs are flashing.

So-called integrated financing – a fancy term for companies integrating software to offer financial services – means that Amazon can allow customers to “buy now and pay later” when they upgrade. checkout and Mercedes drivers can charge their cars for their fuel.

While banks are still at the origin of most transactions, investors and analysts say the risk for traditional lenders is that they are far from the beginning of the financial chain.

And that means they’ll be further removed from the mountains of data others are collecting about their customers’ preferences and behaviors – data that could be crucial in giving them an edge over banks in financial services.

“Integrated financial services take the concept of cross-selling to new heights. They are built on an ongoing, software-based data relationship with the consumer and the business, ”said Matt Harris, partner of investor Bain Capital Ventures.

“This is why this revolution is so important,” he said. “This means that all the good risks will go to these integrated companies who know so much about their customers and what is left will go to the banks and insurance companies.”


For now, many areas of integrated finance are barely shaking the dominance of banks and although some new entrants are licensed to offer regulated services such as lending, they lack the scale and funds to build on. deep financing from the biggest banks.

But if fintech firms, or fintechs, can match their success by grabbing a portion of banks’ digital payments – and upping their ratings in the process – lenders may have to respond, analysts say.

Stripe, for example, the payment platform behind many sites with customers including Amazon and Alphabet (GOOGL.O) Google, was valued at $ 95 billion in March. Read more

Accenture estimated in 2019 that new entrants to the payments market had amassed 8% of global revenue – and that share has grown over the past year as the pandemic has boosted digital payments and impacted traditional payments, said Alan McIntyre, senior director of banking at Accenture, said.

Now the focus is on loans, as well as off-the-shelf digital lenders with a variety of products that businesses can choose from and integrate into their processes.

“The vast majority of consumer-centric businesses will be able to launch financial products that will significantly improve their customer experience,” said Luca Bocchio, partner at venture capital firm Accel.

“This is why we are so excited about this space.”

So far this year, investors have invested $ 4.25 billion in integrated finance startups, nearly three times the amount in 2020, according to data provided to Reuters by PitchBook.

Swedish company BNPL (buy now pay later) Klarna, which has raised $ 1.9 billion, is leading the way.

DriveWealth, which sells technology that allows companies to offer fractional stock exchanges, has attracted $ 459 million while investors have invested $ 229 million in Solarisbank, a licensed German digital bank that offers a range of software banking services.

Shares of Affirm (AFRM.O), meanwhile, surged last month when it partnered with Amazon to offer BNPL products, while US rival Fintech Square (SQ.N) announced the Last month it bought Australian company BNPL Afterpay (APT.AX) for $ 29 billion.

Square is now worth $ 113 billion, more than Europe’s most valuable bank, HSBC (HSBA.L), at $ 105 billion.

“Big banks and insurers will lose out if they don’t act quickly and figure out where to play in this market,” said Simon Torrance, founder of Embedded Finance & Super App Strategies.

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Several other retailers have announced plans this year to expand their financial services.

Walmart launched a fintech start-up with investment firm Ribbit Capital in January to develop financial products for its employees and clients while IKEA took a minority stake in BNPL Jifiti last month.

Car manufacturers such as Volkswagen’s Audi (VOWG_p.DE) and Tata’s Jaguar Land Rover (TAMO.NS) have experimented with integrating payment technology into their vehicles to facilitate payment, in addition to the Mercedes by Daimler (DAIGn.DE).

“Customers expect services, including financial services, to be integrated directly at the point of consumption and to be convenient, digital and immediately accessible,” said Roland Folz, Managing Director of Solarisbank, which provides services. banking services to more than 50 companies, including Samsung. .

It’s not just end consumers who are targeted by integrated finance startups. Businesses themselves are strained as their digital data is processed by fintechs such as Shopify of Canada (SHOP.TO).

It provides software to merchants and its Shopify Capital division also offers cash advances, based on analysis of over 70 million data points on its platform.

“No merchant comes to us and says to us, I would like a loan. We go to the merchants and say to them, we think it’s time to finance you,” said Kaz Nejatian, vice president, merchant products and services. at Shopify.

“We don’t ask for business plans, we don’t ask for tax returns, we don’t ask for tax returns and we don’t ask for personal guarantees. Not because we are benevolent but because we believe that these are bad on the odds of success on the Internet, ”he said.

A Shopify spokesperson said the funding ranged from $ 200 million to $ 2 million. It provided $ 2.3 billion in cumulative capital advances and is valued at $ 184 billion, well above the Royal Bank of Canada (RY.TO), the country’s largest traditional lender.


Shopify’s lending business is still overshadowed by the big banks, however. JPMorgan Chase & Co (JPM.N), for example, had a portfolio of consumer and community loans worth $ 435 billion at the end of June.

Major advances in financing companies in other sectors could also be constrained by regulators.

Officials from the Bank for International Settlements, a consortium of central banks and financial regulators, warned watchdogs last month to tackle the growing influence of tech companies in finance. Read more

Bain’s Harris said financial regulators take the approach that because they don’t know how to regulate tech companies, they insist there is a bank behind every transaction – but that doesn’t mean banks would prevent fintechs from encroaching.

“They are right that banks will always have a role but it is not a very rewarding role and it involves very little customer ownership,” he said.

Forrester analyst Jacob Morgan said banks need to decide where they want to be in the financial chain.

“Can they afford to fight for the primacy of the customer, or do they actually see a more profitable path to the market to become the rails that other people run on?” ” he said. “Some banks will choose to do both.”

And some are already fighting.

Citigroup (CN) has partnered with Google on bank accounts, Goldman Sachs (GS.N) provides credit cards to Apple (AAPL.O) and JPMorgan is buying 75% of Volkswagen’s payments business and plans to expand to other sectors. read more 06:00:00

“Connectivity between different systems is the future,” said Shahrokh Moinian, wholesale payments manager, EMEA, at JPMorgan. “We want to be the leader.”

Reporting by Anna Irrera and Iain Withers; Editing by Rachel Armstrong and David Clarke

Our standards: Thomson Reuters Trust Principles.

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