Bank Fintech Partnerships: The Takeaway
Every first Tuesday of the month we compile some of the most important and interesting embedded finance and fintech news stories and tell you why they matter. If you’re interested in revisiting some of our top stories from 2022, read our December issue of The Takeaway here.
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1. Report expects slowdown in fintech investment but increased bank partnerships
Seed-stage fintech investing firm Restive Ventures released its State of Fintech 2023 report. The report highlights the slowdown in fintech investing, an uptick in regulatory activity, and stable or increased partnerships between fintechs and legacy financial services firms.
Although the 2022 contraction primarily affected mid- and late-stage deals, Restive expects that to continue trickling down to the early stage: The report finds that fewer than 25% of investors planned to participate in post-Series A financing rounds. Cash balances have also been decreasing, with companies earning more than $50 million in annual recurring revenue seeing the steepest decline.
The Restive report says that the surveyed investors remain “excited to invest” in certain areas. Investors remain interested in small business tools, B2B payments, regulatory technology and compliance, and embedded fintech infrastructure, among others.
The report expects financial regulators to continue the “enforcement” trend, particularly in areas regarding consumer privacy and data access.
The Takeaway: It’s important to note that, compared to 2020, global fintech funding in 2022 was up 52%, according to CB Insights. 2021 was a record year for the industry, driven by pandemic-fueled digitization. Experts say what we’re seeing now is a natural market correction. Despite the fintech funding crunch, opportunities in certain niche areas still show promise. Embedded finance is designed to help businesses of all sizes by allowing them to lower costs, remove payment friction, and increase customer lifetime value.
When it comes to regulatory concerns, it’s important for fintechs to take ownership of their own compliance in order to meet and remain up-to-date with changing regulations. Treasury Prime was founded by people with deep knowledge and experience in the financial industry, and provides tools, resources, and that expertise to help clients adapt their compliance program to their own risk needs.
2. 77% of banks feel the need to partner with fintechs
Global financial technology company Sopra Banking Software released its second annual Digital Banking Experience Report. Some key findings indicate that legacy banks struggle with digital transformation and therefore will rely more heavily on third-party vendors to enable their ambitions.
Threats of an economic recession and unforeseen macroeconomic developments have forced banks to shift their investments to better “future-proof.” One of the areas is embedded finance; banks are looking to integrate more products and enable API access, leverage digital payments and money transfer, and regulatory technology.
Due to the shuffling of resources, banks are also relying more on the expertise of these third-party vendors to achieve their goals, instead of building their own solutions, according to the report. 76% of respondents said they are looking at collaborative business models due to high consumer expectations and new legislation, and 74% agreed that as-a-service models will become leading deployment models in the future.
The Takeaway: Banks that partner with fintechs are primed for revenue growth — especially those that utilize BaaS. Cornerstone Advisors estimates that a bank that supports a mix of consumer and commercial accounts on BaaS can add up to $40 million in additional revenue.
The problem before was that legacy banks primarily used BaaS as a way to strengthen their internal processes instead of as revenue generation, according to Cornerstone Chief Research Officer Ron Shevlin. But with the economic downturn, he says banks are increasingly feeling the pressure to not only utilize but rely on these third-party providers to achieve their growth goals.
3. VCs say fintechs need to fix their business models
During a Strictly VC panel discussion, three fintech venture capitalists outlined the challenges and opportunities in the fintech sector. Jillian Williams of Cowboy Ventures mentioned that some firms need to restructure their business models, citing examples such as companies that spent too much on marketing, or ones that were too loose with their underwriting standards. Victoria Treyger of Felicis elaborated that latter point, saying that 2023 will see large lending losses due to economic conditions.
The economic downturn means that executives will cut down in non-critical areas, which Treyger says will then be refocused in areas such as reducing fraud and improving payment reconciliation.
The Takeaway: The pandemic caused an unforeseen boom in the fintech industry in 2020 that is now leveling out, as evidenced by the fintech funding crunch. Coupled with a looming recession, fintechs are starting to see the holes in their business models.
The ones with strong partnerships and foundation will survive, according to the panel, while others built on flimsier and riskier models are more likely to flame out. Those that remain in the game will put out products and services in areas like compliance that will strengthen their usefulness and relationships with legacy banks and customers alike.
Want more insight into embedded banking products for B2B SaaS companies? Download our ultimate guidebook.
4. Twitter working on new feature "Coins"
After Elon Musk took over Twitter, he announced his intentions of turning Twitter into a WeChat-like “everything app.” Twitter has already registered with the U.S. Treasury as a payments processor in November of last year, and, according to sources in the Financial Times, Twitter hopes to complete its U.S. licensing within a year. Eventually, Twitter plans to gain international regulatory approvals.
Data miner Jane Manchun Wong also claims that Twitter is working on a feature called Coins, which users can send to creators in the form of “Awards.” Wong says that Coins can be purchased through Stripe; although there is no mention of cryptocurrencies, Stripe does accept crypto as payment, which means users may be able to buy Twitter Coins with it.
The Takeaway: Big businesses clearly see immense value in embedded finance–but they have be strategic in how they roll things out if they want to do it successfully.
When Twitter first registered as a payments processor, Treasury Prime CEO Chris Dean suggested that the smart move for Twitter would be to introduce micropayments like peer-to-peer payments first, and that appears to be what the company is currently working on. Creating a digital wallet like Coins will not only help reduce regulatory issues, but can also help increase revenue via transaction fees and deposits.
5. Treasury Prime announces $40m Series C
Treasury Prime announced it raised $40 million in Series C funding, bringing its total fundraising to $73 million since it was founded in 2017. The Series C round was led by new investor BAM Elevate, with The Banc Funds Company, Invicta, and current investors Deciens, QED, and SaaStr also participating.
Since its $20 million Series B funding in 2021, Treasury Prime has grown its revenue by nearly 400% and accounts by 450%. With the new funding, the company plans to continue building out its industry-leading multi-bank network solution and to develop new products and services, including a lending option and an integrated product partner marketplace solution.
The Takeaway: The overall fintech industry may be in a crunch, but those who have a strong product and solid business model can still attract investors. Fintechs, enterprises and banks need each other, and Treasury Prime CEO Chris Dean believes that the best outcomes are when they work together: “You should let each one of them do their own thing, and that’s in some ways what embedded banking means,” he said to TechCrunch. For example, enterprises can help with building and marketing products, while banks can help with risk management compliance.
BAM Elevate’s Norman Chen notes that financial services providers are looking for “best-in-class partners.” Treasury Prime’s network of banks and fintechs gives firms the flexibility to find the right partner for their ever-changing objectives and needs.
Wondering how embedded banking could help your business? Contact Treasury Prime — we have a true multi-bank network, the deepest bank core integrations, and extensive compliance experience. Tearsheet named us the Best Banking as a Service company for the second year in a row. Talk to the best embedded finance team in the industry.