Fintech Fusion: How Integration is Driving Change

In the landscape of financial services, a multitude of 'as a service' models have emerged, revolutionizing how both financial and non-financial institutions (such as retail and HR Tech) offer financial services to their customers. Gone are the days of complex, lengthy implementation and regulatory projects. Financial services can now be readily accessed through a diverse array of 'Embedded Banking' and 'Banking as a Service' (BaaS) solutions.

Within this expansive "finance as a service" ecosystem, companies offer varying layers of abstraction:

Card Issuing Processors, such as Marqeta, Enfuce, or ByQwest, remove the complexity of issuing cards and connecting to international payment schemes like VISA or MasterCard, or to card issue/personalization providers like Idemia or Tag Systems UK.
BIN Sponsors, including Stripe, Adyen, Swan, or Tresor (along with Marqeta and Enfuce), extend beyond card issuing processors by providing a card BIN range (a specific range of card numbers) at major card schemes and the ability to manage funds on the card.
Embedded Banking/Finance Players enable the seamless integration of various financial services (payments, credits, insurances, etc.) into non-financial journeys, effectively transforming any company into a fintech entity. This integration is facilitated through modern API integrations or plugins. The "customer" of these services only needs to focus on front-end integration, while the provider manages the rest. This category can be further categorized based on the type of service offered, e.g., embedded payments via PSPs like Adyen, Mollie, MultiSafePay, Buckaroo, MangoPay, or Stripe, accounts via embedded account providers like Shopify Balance, Gemba, or Treasury Prime, credits via embedded lending providers such as Banxware, Zopa, YouLend, Lendflow, or Capify, or via BNPL providers like Klarna, Affirm, or Afterpay. Insurances are offered by embedded insurance (InsurTech) companies like Qover, Trov, Cover Genius, Bsurance, or Wrisk.
BaaS Players not only provide payment, account, and card services but typically extend to other banking services and often come with their own banking license. This group can be divided into three sub-categories:
- The pure BaaS players, which launched their business specifically to offer BaaS services. Examples include Solarisgroup, Treezor, Contis, Railsr, Bankable, ClearBank, 11:FS Foundry, or Cambr.
- Traditional core banking software providers, who are now offering their solutions also in a SaaS and BaaS offering, e.g. Finastra, Temenos, Sopra Banking, Avaloq, Finacle (Infosys), FIS or BPC.
- Incumbent and neo-banks, which have white-labelled their own banking systems and operations to offer them to third parties, e.g., Fidor, BBVA, Starling Bank, J.P. Morgan, and Goldman Sachs.

However, all these companies are converging towards similar offerings:

BaaS players are making their rich offerings more componentized, allowing customers to choose and customize the products and services they require.
The other players are broadening their services from pure payment and card services to regulated accounts and value-added services like lending and investments, offering a more complete suite of services to avoid the need for customers to contract and integrate with multiple providers.

The customer (banks, fintechs, and non-financial companies wanting to offer financial services) aims to avoid the burden (i.e. the heavy lifting) of setting up the underlying infrastructure, which consists of three main components:

Banking Software encompassing both the initial implementation and ongoing software maintenance. For example, a gateway connected to the VISA or MasterCard scheme must regularly update its software to comply with mandatory releases imposed by the payment scheme.
Regulatory, Licensing and Membership Requirements: the financial services industry is heavily regulated, necessitating compliance with various rules, procedures, and requirements from governments, payment schemes, partners, suppliers, and customers. This includes
- Licenses: almost any type of financial service is regulated by the government, meaning that the institution needs to obtain a license from the regulator (e.g. National Bank) to execute the type of financial activity. As not every financial activity has the same risk level, several types of licenses exist, like an AISP/PISP license, a payment license, an EMI license, a credit institution license, an investment broker license or a banking license. These licenses are expensive to obtain and can take years of negotiation with the regulators. Additionally a license comes with a lot of regulatory overhead, like extra audits, regulatory reporting, capital requirements… Therefore building your service on top of an entity, which has already the necessary licenses, can be a huge cost-saver and reduce time-to-market enormously.
- Standards and certifications: banks need to be certified for several activities, e.g. ISO 27001 for managing information security risks and ensuring regulatory compliance, ISO 22301 for Business continuity Management or ISO 31000 for IT Risk Management. Additionally compliance with standards like PCI-DSS is mandatory for connecting to payment schemes.
  These standards and certifications are also costly, as every process needs to be carefully documented, improvements need to be made to all systems and the audit needs to be executed by an external auditing/certification agency. Additionally these certifications need to be renewed every X years.
- Memberships: financial institutions need to become members or partners of several entities in order to successfully do their business. These memberships can be very time-consuming and costly (both to become member, but also for the yearly membership fees). E.g. becoming member of VISA or MasterCard, becoming member of protocol-standards like CTAP or EP2, Swift membership…
Operational part: although automation plays a significant role, financial services still require substantial human involvement for validations, supervision, third-party interactions, and exception management. Moreover, certain operational services, such as AML and KYC/KYB, demand expertise due to their intricate nature and potential for significant financial penalties for errors.

Customers must strategically decide which services to keep in-house and which to outsource to external providers. This strategic decision involves trade-offs between speed to market, control, flexibility, cost, and focus on core business. Startups often begin by partnering with service providers for quick, cost-effective solutions. As businesses scale, they may consider insourcing certain services, ensuring a well-planned decoupling strategy from the outset to prevent excessive lock-in and loss of control over critical business aspects.

This trend is not unique to finance. In the realm of eCommerce, businesses can also choose from a spectrum of options, e.g.

You can build your website yourself and even integrate all payment methods yourself.
You can build a website using a website builder (e.g. Wordpress, Drupal or Wix) and use a PSP to easily integrate payment methods (e.g. Mollie, MultiSafePay or Buckaroo)
You can use a full eCommerce platform (e.g. Shopify, Magento, PrestaShop or WooCommerce), with also various levels of integration and value-added services. For example Shopify allows to setup easy an eCommerce webshop and even offers logistic services like stock management and fulfillment services and financial services like Shopify Balance (a bank account), Shopify Bill Pay (to pay your bills as a merchant) or Shopify Capital (to get financing).
You can finally even go one step further and not build a platform yourself at all, but leverage an established marketplace like Bol.com, Amazon, eBay to offer your products.

Similarly, financial service companies or non-financial entities looking to offer financial services now have a range of abstraction levels to choose from when engaging external providers to establish their financial services.

Check out all my blogs on https://bankloch.blogspot.com/

Comments

Transforming the insurance sector to an Open API Ecosystem

1. Introduction "Open" has recently become a new buzzword in the financial services industry, i.e. open data, open APIs, Open Banking, Open Insurance …, but what does this new buzzword really mean? "Open" refers to the capability of companies to expose their services to the outside world, so that external partners or even competitors can use these services to bring added value to their customers. This trend is made possible by the technological evolution of open APIs (Application Programming Interfaces), which are the digital ports making this communication possible. Together companies, interconnected through open APIs, form a true API ecosystem , offering best-of-breed customer experience, by combining the digital services offered by multiple companies. In the technology sector this evolution has been ongoing for multiple years (think about the travelling sector, allowing you to book any hotel online). An excellent example of this

Are product silos in a bank inevitable?

Silo thinking is often frowned upon in the industry. It is often a synonym for bureaucratic processes and politics and in almost every article describing the threats of new innovative Fintech players on the banking industry, the strong bank product silos are put forward as one of the main blockages why incumbent banks are not able to (quickly) react to the changing customer expectations. Customers want solutions to their problems and do not want to be bothered about the internal organisation of their bank. Most banks are however organized by product domain (daily banking, investments and lending) and by customer segmentation (retail banking, private banking, SMEs and corporates). This division is reflected both at business and IT side and almost automatically leads to the creation of silos. It is however difficult to reorganize a bank without creating new silos or introducing other types of issues and inefficiencies. An organization is never ideal and needs to take a number of cons

RPA - The miracle solution for incumbent banks to bridge the automation gap with neo-banks?

Hypes and marketing buzz words are strongly present in the IT landscape. Often these are existing concepts, which have evolved technologically and are then renamed to a new term, as if it were a brand new technology or concept. If you want to understand and assess these new trends, it is important to reduce the concepts to their essence and compare them with existing technologies , e.g. Integration (middleware) software ensures that 2 separate applications or components can be integrated in an easy way. Of course, there is a huge evolution in the protocols, volumes of exchanged data, scalability, performance…, but in essence the problem remains the same. Nonetheless, there have been multiple terms for integration software such as ETL, ESB, EAI, SOA, Service Mesh… Data storage software ensures that data is stored in such a way that data is not lost and that there is some kind guaranteed consistency, maximum availability and scalability, easy retrieval and searching

IoT - Revolution or Evolution in the Financial Services Industry

1. The IoT hype We have all heard about the "Internet of Things" (IoT) as this revolutionary new technology, which will radically change our lives. But is it really such a revolution and will it really have an impact on the Financial Services Industry? To refresh our memory, the Internet of Things (IoT) refers to any object , which is able to collect data and communicate and share this information (like condition, geolocation…) over the internet . This communication will often occur between 2 objects (i.e. not involving any human), which is often referred to as Machine-to-Machine (M2M) communication. Well known examples are home thermostats, home security systems, fitness and health monitors, wearables… This all seems futuristic, but smartphones, tablets and smartwatches can also be considered as IoT devices. More importantly, beside these futuristic visions of IoT, the smartphone will most likely continue to be the center of the connected devi

Neobanks should find their niche to improve their profitability

The last 5 years dozens of so-called neo- or challenger banks (according to Exton Consulting 256 neobanks are in circulation today) have disrupted the banking landscape, by offering a fully digitized (cfr. "tech companies with a banking license"), very customer-centric, simple and fluent (e.g. possibility to become client and open an account in a few clicks) and low-cost product and service offering. While several of them are already valued at billions of euros (like Revolut, Monzo, Chime, N26, NuBank…), very few of them are expected to be profitable in the coming years and even less are already profitable today (Accenture research shows that the average UK neobank loses $11 per user yearly). These challenger banks are typically confronted with increasing costs, while the margins generated per customer remain low (e.g. due to the offering of free products and services or above market-level saving account interest rates). While it’s obvious that disrupting the financial ma

Beyond Imagination: The Rise and Evolution of Generative AI Tools

Generative AI has revolutionized the way we create and interact with digital content. Since the launch of Dall-E in July 2022 and ChatGPT in November 2022, the field has seen unprecedented growth. This technology, initially popularized by OpenAI’s ChatGPT, has now been embraced by major tech players like Microsoft and Google, as well as a plethora of innovative startups. These advancements offer solutions for generating a diverse range of outputs including text, images, video, audio, and other media from simple prompts. The consumer now has a vast array of options based on their specific output needs and use cases . From generic, large-scale, multi-modal models like OpenAI’s ChatGPT and Google’s Bard to specialized solutions tailored for specific use cases and sectors like finance and legal advice, the choices are vast and varied. For instance, in the financial sector, tools like BloombergGPT ( https://www.bloomberg.com/ ), FinGPT ( https://fin-gpt.org/ ), StockGPT ( https://www.as

Can Augmented Reality make daily banking a more pleasant experience?

With the increased competition in the financial services landscape (between banks/insurers, but also of new entrants like FinTechs and Telcos), customers are demanding and expecting a more innovative and fluent digital user experience. Unfortunately, most banks and insurers, with their product-oriented online and mobile platforms, are not known for their pleasant and fluent user experience. The trend towards customer oriented services , like personal financial management (with functions like budget management, expense categorization, saving goals…) and robo-advise, is already a big step in the right direction, but even then, managing financials is still considered to be a boring intangible and complex task for most people. Virtual (VR) and augmented reality (AR) could bring a solution. These technologies provide a user experience which is more intuitive, personalised and pleasant , as they introduce an element of gamification to the experience. Both VR and AR

From app to super-app to personal assistant

In July of this year, KBC bank (the 2nd largest bank in Belgium) surprised many people, including many of us working in the banking industry, with their announcement that they bought the rights to broadcast the highlights of soccer matches in Belgium via their mobile app (a service called "Goal alert"). The days following this announcement the news was filled with experts, some of them categorizing it as a brilliant move, others claiming that KBC should better focus on its core mission. Independent of whether it is a good or bad strategic decision (the future will tell), it is clearly part of a much larger strategy of KBC to convert their banking app into a super-app (all-in-one app) . Today you can already buy mobility tickets and cinema tickets and use other third-party services (like Monizze, eBox, PayPal…) within the KBC app. Furthermore, end of last year, KBC announced opening up their app also to non-customers allowing them to also use these third-party servi

Eco-systems - Welcome to a new cooperating world

Last week I attended the Digital Finance Summit conference in Brussels, organized by Fintech Belgium, B-Hive, Febelfin and EBF. A central theme of the summit was the cooperation between banks and Fintechs and more in general the rise of ecosystems. In the past I have written already about this topic in my blogs about "Transforming the bank to an Open API Ecosystem ( https://www.linkedin.com/pulse/transforming-bank-open-api-ecosystem-joris-lochy/ ) and "The war for direct customer contact - Banks should fight along!" ( https://www.linkedin.com/pulse/war-direct-customer-contact-banks-should-fight-along-joris-lochy/ ), but still I was surprised about the number of initiatives taken in this domain. In my last job at The Glue, I already had the pleasure to work on several interesting cases: TOCO ( https://www.toco.eu ): bringing entrepreneurs, accountants and banks closer together, by supporting entrepreneurs and accountants in their daily admin (and in the f

PFM, BFM, Financial Butler, Financial Cockpit, Account Aggregator… - Will the cumbersome administrative tasks on your financials finally be taken over by your financial institution?

1. Introduction Personal Financial Management (PFM) refers to the software that helps users manage their money (budget, save and spend money). Therefore, it is often also called Digital Money Management . In other words, PFM tools help customers make sense of their money , i.e. they help customers follow, classify, remain informed and manage their Personal Finances. Personal Finance used to be (or still is) a time-consuming effort , where people would manually input all their income and expenses in a self-developed spreadsheet, which would gradually be extended with additional calculations. Already for more than 20 years, several software vendors aim to give a solution to this , by providing applications, websites and/or apps. These tools were never massively adopted, since they still required a lot of manual interventions (manual input of income and expense transaction, manual mapping transactions to categories…) and lacked an integration in the day-to-da

Bankloch

Search This Blog