The Takeaway — August 2022
Every first Tuesday of the month we share some of the most important and exciting embedded finance, fintech, and banking news stories and tell you why they matter. In case you missed it, you can find our previous edition of the Takeaway here.
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1. Investors eyeing open banking and embedded finance:
Money 20/20 Europe in Amsterdam wrapped up last month, with conversations around where investors are most interested in putting their money, and where they’re not.
According to venture capitalists, they’re most excited about digital payments and how they can aid in removing friction for merchants and consumers. Coupled with that, the idea of “open banking” and its implications on digital payments and other data-driven financial services are piquing investor interest.
The importance of embedded finance and banking as a service was also underscored at the conference, with investors recognizing its role in helping small businesses to large conglomerates reach their customers in new and meaningful ways.
On the other side of things, investors expressed skepticism about crypto and B2C BNPL, although some believe that B2B BNPL may have legs.
The Takeaway: The embedded finance market is expected to reach a staggering $230 billion dollars in just a few years. Investors worldwide are continuing to understand how vital it is for any company to leverage banking as a service to become a fintech.
As investors inject more funds into the BaaS space, it’s an indicator that fintechs and non-financial enterprises interested in long-term growth have strong partners in the form of BaaS providers. As outlined in a recent blog post, BaaS providers can be the key to untapped channels of revenue, optimized business operations, and overall growth, even during trying economic times.
2. Examining Amazon’s expansion into financial services:
Amazon raked in over $33.3 billion in revenue in 2021, a 21% increase over 2020, and set a new record with this year’s Prime Day charting at $11.9 billion in sales. And a lot of that success can be chalked up to Amazon’s continued growth, investment, and bets on embedded financial services.
In the last decade, Amazon has been swinging big on essentially turning itself into a self-service bank for its merchants and customers. With Amazon Seller Wallet and Amazon Lending, the e-commerce giant has made it easier for merchants to control their finances while Amazon has already doled out $5 billion in loans to SMBs since launching the initiative in 2015. Similarly, Amazon has launched a slew of promising customer-embedded financial services like Amazon Cash as a means to store money for future purchases and Amazon Allowance for children to build healthy spending habits — this on top of an already successful white-labeled card program.
Despite catching flak for its warehouse work conditions, Amazon is still witnessing explosive growth with its financial services being targeted on international markets like Europe and Asia and filling more end-user gaps by digging into insuretech and biometrics.
The Takeaway: In many ways, Amazon puts many embedded finance best practices on full display. The tactics that Amazon has employed are taking advantage of what embedded finance does best: Removing friction. Amazon — like any other enterprise — is aiming to make it easier for merchants and customers to spend their money (and spend more of it) in an owned ecosystem, and it's doing a very good job.
While Amazon hasn’t hit a home run with every embedded finance venture, like its Amazon Local Register product — a card-reader meant for SMBs — Amazon has shown that innovation and investment in new embedded financial services can translate into increased business and revenue.
Though Amazon has more resources than most to launch these financial services, many smaller enterprises can do the same with the help of a BaaS partner.
To learn more about how a BaaS provider can enable your business to meet your customers at their point of need, contact us.
3. Heightened scrutiny and end of the CFPB sandbox:
The sandbox and no-action letter program are no more. Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra has discontinued the program that allowed emerging fintechs and other enterprises to test their products using a templatized approval through the CFPB’s sandbox.
The Office of Innovation, now dubbed the Office of Competition and Innovation by the CFPB, had hoped the sandbox program would spur more innovation and bring new products to market more quickly. The CFPB, now under the watchful eyes of Chopra, says the program was “ineffective” and that “firms participating in these programs made public statements indicating that the Bureau had conferred benefits upon them that the Bureau expressly did not.”
While the CFPB didn’t go so far as to say that a different sandbox program would be rolled out in the future, it did say that startups and other small ventures could file a rule-making petition to better define the guidelines to which they need to adhere when piloting a product.
The Takeaway: This move from the CFPB comes on the heels of the agency already exercising its dormant authority to examine non-bank institutions. It’s clear that the CFPB is taking a more aggressive stance on the fintech space and the regulatory policies that surround it.
Fintechs shouldn’t necessarily be scared off by the CFPB’s recent actions; they should be preparing for what the future of fintech regulation will look like. Fintechs who aren’t staying up-to-date on shifting federal regulations or owning their own compliance framework may find themselves in a difficult position in the future.
We recently explored the benefits of a fintech owning its own compliance and finding a BaaS provider that provides the tools and resources to make that a reality. Learn more here.
“The reality of this space is that it's so regulated, partly because you're dealing with people's money and people's data,” Treasury Prime Associate General Counsel and VP of Compliance Sheetal Parikh said. “These two areas are so highly protected and regulated that this idea of, ‘I don't want to deal with it,’ or ‘I want somebody else to do it for me’ is not a sustainable model in the long run because regulatory compliance is inextricable to the core of a fintech’s business.”
4. What’s next for crypto regulation?:
In our previous Takeaway editions, we’ve been following the fallout from the so-called Crypto Winter and the path of the bi-partisan crypto regulation bill from Senators Kirsten Gillibrand and Cynthia Lummis.
Most recently, the Responsible Financial Innovation Act has landed on the desks of Gillibrand and Lummis’ colleagues in the Senate. However, they expressed that the bill would likely remain there until next year given the complexities around crypto and the time needed for senators who aren’t well-versed in crypto to fully understand the implications of the bill.
While the entire bill may have an uncertain future until 2023, the senator duo believes that certain parts of the bill may be passed through more quickly or be rolled into other legislation. One example is the bill’s recommendation for the Commodity Futures Trading Commission (CFTC) to be the regulating body over crypto instead of the Securities and Exchange Commission (SEC). This has already become a point of contention as some senators believe the SEC should be playing a bigger role as the SEC claims some digital currencies to be securities and not commodities, and other senators and industry insiders claim the SEC has been too aggressive in their current regulatory behavior towards the crypto space.
The Takeaway: With the crypto industry already tumbling $2 trillion in value over the last few months and many crypto customers fighting legal battles to reclaim lost funds, the Gillibrand-Lummis bill could offer a light spot. Already embroiled in an ambiguous regulatory landscape and federal lawsuits, it’s been even harder for crypto enterprises to operate and find a way out of this crypto cold front.
It’s clear that the government hasn’t fully considered the implications of digital currency, and crypto firms have been caught in the middle of it all. Up and coming crypto enterprises can find a bank partner best suited to working with crypto businesses to give them the best shot at growing amidst vague and amorphous regulatory policies.
Treasury Prime has the largest network of banks with some ready to work with enterprises in the crypto and cannabis spaces. Contact us to learn more.
5. Fintechs’ obligation to social good:
Fintechs seem to have captured the hearts (and wallets) of venture capitalists because of the potential for social impact, receiving nearly $250 billion in impact related funds.
Many fintechs tout their mission of not only providing a strong product, but a commitment to improving financial wellbeing and connecting the underbanked to modern tools to help control their finances. Unfortunately, a recent look at what these fintechs are actually accomplishing has been mostly opaque with the likes of Visa and Shopify providing little data on the impact of their work.
Critics say fintechs have huge potential to positively affect the state of finance and banking for many people in this country, but they still have quite a bit of work to do. Better defining goals, improving data tracking, and emphasizing a commitment to financial inclusion are all steps for underdelivering fintechs to take.
The Takeaway: Ethics aside, fintechs who align themselves with a just cause can use that as positioning to retain and attract more customers.
This idea is already taking off in Europe, where a recent study found that 60% of survey respondents would be more interested in banking with a financial institution that was committed to addressing climate change.
The notion that a fintech’s commitment to financial inclusion or another social good cause is ancillary shouldn’t be the case. For many modern consumers, aligning with a social issue can be a deciding converting factor, and that commitment can more readily be defined as a marketing and product tactic.