The Takeaway — July 2022

Welcome to the second edition of The Takeaway. Every first Tuesday of the month we give you a compilation of some of the biggest and most interesting embedded finance and banking news — and we tell you why it all matters. In case you missed it, you can find our inaugural Takeaway round-up here.

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1. Corporate appetite for digital banking tools grow:

New survey data of mid-market U.S. companies report a continuing pronounced effort on providing more digital services. These corporations are looking to their banking partners to lead the charge on these innovations, including “better tools for digital payments and embedded finance.” 

With a focus on digital innovation, banks are facing stiffening competition with fintech and neobanks, with 16% (and growing) of SMBs working with neobanks instead of traditional financial institutions like regional banks, which account for 18% of SMB clientele. 70% of bank respondents also reported fears that their data capabilities were becoming less competitive.

The Takeaway: The onus on innovation isn’t only on the companies looking to diversify their portfolio of offerings. There is a growing expectation that the banks that they work with will not only lead the tech innovations but also be an expert advisor on what to innovate in the first place.

This is where the importance and capabilities of a banking as a service provider is underscored. While banks report that they fear their tech is becoming less competitive, a BaaS provider like Treasury Prime can modernize their tech stack and make it easier for them to work with enterprises.

It’s clear that embedded financial solutions are only going to become more popular, and banks that aren’t ready to accommodate that demand may very well get left behind. Heare more about this from Treasury Prime ceo and cofounder Chris Dean in his recent interview with PYMNTS.

2. A potential win for crypto amidst sizable losses:

A new bipartisan bill, dubbed the Responsible Financial Innovation Act, could be a bright spot in very dark recent months for the crypto industry which saw a combined $400 billion dollar decrease in value in June alone. 

The bill was introduced by Republican Sen. Cynthia Lummis (WY) and Democrat Sen. Kirsten Gillibrand (NY). The senators aim to provide more clarity and structured regulation to digital currencies like crypto. Some of the bill’s provisions include:

• Delineating digital assets and commodities, empowering crypto firms to determine what their regulatory obligations are, and providing regulatory bodies a foundation for enforcing policy.

• Regulatory authority given to the Commodity Futures Trading Commission (CFTC) instead of the U.S. Securities and Exchange Commission (SEC)

• Optional framework for banks and credit unions to issue payment stablecoins, which would guarantee its holders the equivalent in fiat money if redeemed under this new law.

The bill is aligned with long-standing crypto perspectives that the industry needs more defined rules and regulations and shouldn’t be under the thumb of the SEC.

The Takeaway: Crypto currency is an emerging industry that continues to gain in popularity despite the tumult around its long-term value. An official law endorsed by both sides of the aisle may provide the protections and regulations that can stabilize the crypto industry and make more banks apt to work with crypto firms and fintechs. This stability — and potential rebound for crypto — could spell good news for the nearly 60 million Americans who have invested in crypto currency already.

“The proposed legislation reflects a growing shift to impose greater regulatory scrutiny on traditionally unregulated industries like cryptocurrencies and bitcoin.” Sheetal Parikh, associate general counsel and vice president of compliance solutions at Treasury Prime said. “The disclosure requirements in the bill highlight the continued emphasis on consumer protection even amidst innovation. In my view, themes of responsible innovation will continue to arise as fintech growth continues.”

3. Cannabis left high and dry:

In our previous edition of The Takeaway, we covered the Secure and Fair Enforcement (SAFE) Banking Act, which would provide protections for financial institutions that work with cannabis businesses. The SAFE Act was seen as a chance to give cannabis businesses vital access to banking options as banks would receive federal protection from working with legal cannabis ventures.

However, the cannabis industry will have to keep waiting as the SAFE Act has had its latest setback, being excluded from the America Competes Act — a bill aimed at regulating large-scale manufacturing and innovation to compete with other world economic giants.

Despite being passed in the House six times as part of larger legislation since 2013, lawmakers continue to exclude the SAFE Act for consideration in the senate.

The Takeaway: Cannabis businesses are facing a spike in robberies due to cash-bloated brick-and-mortars as industry advocates continue to push for pro-cannabis legislation.

With cannabis projected to be a $91.5 billion industry by 2028, a majority of banks are missing out on a potentially lucrative — and growing — revenue stream due to a lack of federal protections.

While more states are legalizing cannabis, it’s likely cannabis businesses will continue to struggle to find viable banking options, including the ability to offer embedded finance services. For cannabis enterprises, it’s even more important to find a BaaS provider with a large network of banks to accommodate the specific industry needs of cannabis. Treasury Prime is the BaaS provider with the largest network of banks for its enterprise and fintech clients to choose from.

4. Apple goes fintech:

Just last month, Apple unveiled forthcoming new features to the Apple Wallet, including Apple Pay Later, a buy-now-pay-later payment option. This new feature will allow customers to split a purchase into four equal installments to be paid over six weeks with no fees or interest. Apple Pay Later will be available wherever Apple Pay is accepted both in-store and online. 

While many suspected Apple Pay Later, or some form of BNPL to be part of Apple’s upcoming repertoire of new features, the unveiling still sent Affirm shares down 5% as many speculate Apple to be a big player in BNPL, competing with the likes of the already established Klarna and Afterpay.

The Takeaway: Apple’s expansion of its product ecosystem into more financial services is a perfect example of the payoff of embedded finance. 

With deflated Apple Pay and Apple Card usage, a BNPL service like Apple Pay Later is a low-cost acquisition tool poised for quick adoption. Woven into the checkout experience, BNPL encourages iPhone owners to use Apple Pay more often for a wider range of purchases, and those users become strong candidates for other offerings like the Apple Card. The use of embedded financial services makes Apple an even stickier experience.

Apple Pay Later keeps existing users within Apple’s own ecosystem, reducing payment friction, even for big-ticket items. Apple Pay Later also requires no extra backend work for the merchants and card issuer. And with roughly half of the country already owning an iPhone, it’s clear why Apple is seen as an rising figure in the BNPL space. 

Interested in learning more about how to embed financial services into your product or app? Contact us and we’ll be happy to answer any questions. 

5. Embedded finance emerges as recession darling:

There have been talks of an impending recession for months as inflation climbs, spending slows, valuations drop, and layoffs become a routine occurrence — particularly among fintechs and startup enterprises.

And while fintechs are experiencing a downturn, venture capitalists are looking at embedded finance companies as the promising next wave of financial trailblazers. For investors, financial products themselves aren’t necessarily the next “big thing”, rather it’s the companies that are changing the financial infrastructure itself.

Embedded finance and banking as a service companies are not only shaping the way money flows in this country but act as a catalyst for struggling fintechs to be a part of that change.

The Takeaway: There’s only an upside for Fintechs that partner with a strategic BaaS provider. Embedded finance solutions enable fintechs and other enterprises to diversify their offerings, makes their product/service and platform more delightful to use, and simplify its daily operations (just look at Apple and our customer, First Dollar). At its core, embedded finance allows fintechs to reach end-users where they need to be met without having to overhaul their entire tech stack or drain their internal team’s bandwidth.

And a lower daily burn rate not only benefits the fintech, but looks more attractive to prospective investors.

“Having an embedded finance creates a stickier product,” Treasury Prime Vice President of Operations Remy Carole said. “It reduces operational cost. It's really about increasing efficiency as a business, which helps you weather the storm of recession.”

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Treasury Prime has the largest bank network in the BaaS industry, giving you the most flexibility and affordability at scale. If you want to be the next unicorn, you need a direct bank relationship and the best Baas company. To discuss how we can help your company scale, contact us here. Want to learn more about our process? View our API reference or play around with our Developer Sandbox.