Anyone can be a bank … really?

Hmmm … the wonderful Anna Irrera posted an update on Reuters, stating that anyone can be a bank these days, along with her colleague Iain Withers. The article is about embedded finance, a term I dislike. I prefer invisible finance but hey, you win some, you lose some. The article notes that Accenture estimated in 2019 that new entrants to the payments market had amassed 8% of revenues globally. Cool. Banks are losing payments revenues.

They note that Square is now worth $113 billion, more than Europe’s most valuable bank, HSBC, on $105 billion. Cool. FinTech’s are worth more than banks, because investors look at different growth metrics and long-term views.

Investors have poured $4.25 billion into embedded finance startups, almost three times the amount in 2020, data provided to Reuters by PitchBook shows. But some big banks like JPMorgan invest $11 billion a year in tech, and investors overall put almost $100 billion into FinTech in the first half of 2021 so, is this significant?

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

The article then focuses upon ‘embedded finance’ champions like Shopify and Stripe.

Shopify “has provided $2.3 billion in cumulative capital advances and is valued at $184 billion, well above Royal Bank of Canada, the country’s biggest traditional lender”.

Interesting ... but, as the article notes, big banks usually sit behind invisible, embedded finance.

Shopify’s lending business is, however, still dwarfed by the big banks. JPMorgan Chase & Co, for example, had a consumer and community loan book worth $435 billion at the end of June.

And they also note that banks are still behind most of the transactions but investors and analysts say the risk for traditional lenders is that they will get pushed further away from the front end of the finance chain.

So, let’s just clarify on this one.

One, most FinTech is fixing what banks cannot do well on the network, like merchant online checkouts and SME lending. I loved this comment from Shopify:

“No merchant comes to us and says, I would like a loan. We go to merchants and say, we think it’s time for funding for you,” said Kaz Nejatian, vice president, product, merchant services at Shopify. “We don’t ask for business plans, we don’t ask for tax statements, we don’t ask for income statements, and we don’t ask for personal guarantees. Not because we are benevolent but because we think those are bad signals into the odds of success on the internet,” he said.

Different thinking. It’s the same different thinking as buy now, pay later, or Stripe’s simple plug-and-play code for checkout. It’s different thinking and different code. However, the hard-line is that it does not replace banking. It fixes what banks do badly on the network or don't do at all.

This leads to the second point: it does not replace banking. Banks will always be around, but they are becoming invisible. That’s why I refer to this movement as invisible finance rather than embedded:

• Embedded is the inside-out view: how can I put a financial transaction into this process?
• Invisible is the outside-in view: how can our customers find this easy?

So, what’s the problem with banks becoming invisible? They lose their brand? They lose the customer relationship?

Possibly, but it’s more than this. They are seeing customers diversifying their relationships. They still know who they bank with and why, but they have started using other services for other things. It is not surprising to find people and companies using multiple bank accounts for different things. Most consumers are using their main bank for their salary, mortgage and complex transactions like overseas payments and loans; whilst they use their challenger bank for their everyday spending and their everyday life.

This is the new world and then, within this new world, there are 1000’s of firms providing niche services in the ecosystem of platform players. So yes, Shopify and Stripe are doing amazing well, but they are specialists in the system; Revolut and Chime are doing well, but they are not challengers to old banks, they are everyday banking; meantime, good old banks are doing their good old banking things, but it’s diluted as margin on FX, transactions, everyday banking and more is going to the new players.

So yes, everyone can now do banking things, but good old banks still have to do their banking thing. Thing is that it’s now just not making as much profit.