The fintech landscape today; Neobanks diversifying; Why Embedded Finance is a trend?;

In this edition:

1️⃣ The fintech landscape today

2️⃣ SEC charges founder of financial aid startup Frank with defrauding JPMorgan

3️⃣ PayPal introduced four new features for small and medium-sized businesses (SMBs)

4️⃣ Digital wallets driving e-commerce in the Middle East and Africa

5️⃣ Winning the Innovation Game in Banking

6️⃣ Why Embedded Finance is a trend?

7️⃣Neobanks diversifying

And many more….

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The fintech landscape today

With these three major waves of fintech innovation as context, we visualized today’s fintech landscape into a market map to help us better understand the current state of the market—as well as identify the biggest gaps for today’s founders to fill.

The infrastructure layer refers to traditional financial institutions: large banks, sponsor banks, card networks, acquiring and issuing processors, credit bureaus, and insurance carriers. (This is where we see the decades-old incumbents of the financial services industry.) This layer consists of the institutions that make money movement available and enable transactions to take place when you swipe your credit or debit card. Significant disruption at this layer is not expected, due to the regulatory nature of our industry.

The orchestration layer is where developer platforms wrap an API around traditional financial institutions to make powerful financial products and features available to companies at the application layer. Orchestration companies act as a go-between, so application layer players don’t need to spend time working directly with the legacy institutions at the infrastructure layer in order to offer their financial products.

Finally, the application layer includes anything end-user-facing. These are the apps individuals and companies use for daily financial transactions, from paying bills and doing their taxes to buying insurance and saving for retirement.

Companies included are illustrative and not exhaustive of players in the space.

Source M13

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SEC charges founder of financial aid startup Frank with defrauding JPMorgan

The U.S. Securities and Exchange Commission has charged Charlie Javice, the founder of student financial aid startup Frank, with fraud in connection with the $175 million sale of the company to JPMorgan Chase Bank in 2021.

JPMorgan filed a lawsuit against Javice in December, alleging that she had helped “fake millions of customers in order to induce the bank to buy her company.” That charge is the root of the SEC’s complaint today, which charges that Javice “made numerous misrepresentations” about Frank’s purported millions of users to entice JPMorgan.

The complaint alleges that as talks between the two parties progressed, JPMorgan pressed Frank executives for data associated with its customers. Javice allegedly sought the help of Frank’s director of engineering to generate synthetic data to make it appear as if Frank had 4.25 million customers. And when that director refused to cooperate, Javice then allegedly paid a data science professor $18,000 to manufacture the data “required to close the deal.” The young entrepreneur denies those claims and in turn filed her own suit against the bank, charging that the bank had let her go in November “in bad faith.”

For its part, JPMorgan claims that it found out about the alleged fraud when it sent out marketing test emails to a list of Frank’s customers provided by the company and more than 70% of them bounced back.

As part of the acquisition, Javice reportedly received $9.7 million directly in stock proceeds, millions more indirectly through trusts as well as a contract entitling her to a $20 million retention bonus as a new employee of JPMorgan Chase.

The complaint, filed in U.S. District Court for the Southern District of New York, charges Javice with violating the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. The complaint also names trusts held by Javice as relief defendants. The SEC seeks injunctive relief, an officer and director bar, disgorgement and prejudgment interest thereon, and civil penalties.

Since the lawsuit was filed, there has been a lot of back-and-forth between the two parties. JPMorgan Chase has since described the acquisition as “a huge mistake.” In January, the bank shut down Frank’s website. And in March, Javice filed a counterclaim, saying it was “implausible” that JP Morgan “was led to believe Frank had 4.25 million registered users when its website publicly claimed the company had helped more than 350,000 people access financial aid.” She also claims that the bank could not have been misled about the business, pointing to due diligence materials and valuation data.

Source TechCrunch / Mary Ann Azevedo

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PayPal introduced four new features for small and medium-sized businesses (SMBs)

- PayPal added Apple Pay as a payment option for Advanced Checkout, which offers more payment features and personalization than its standard checkout solution.

- Customers can save their cards to a specific merchant’s site for faster checkout. They won’t need a PayPal account to use the feature.

- PayPal added support for a real-time account updater and network token, which will let it automatically update account details for lost or stolen cards that are reissued.

- The company also introduced an interchange++ (IC++) pricing model for SMBs. Previously, PayPal charged a flat fee for Advanced Checkout, but IC++ can be a good alternative for medium-sized businesses with higher sales volume, Nitin Prabhu, PayPal’s VP of Merchant Experiences and Payment Solutions told TechCrunch.

The opportunity: PayPal’s new features can help it in three ways.

1. They can help improve the customer experience. Even though Apple Pay competes with PayPal’s own buy button, adding the popular payment method gives customers increased checkout convenience. Forty-four percent of US consumers said they preferred shopping from retailers that offered multiple payment options, per Jungle Scout. Enhancing the customer experience can lead to repeat purchases, which benefits both merchants and PayPal.

2. The features can also boost conversion. Letting customers save their card information and automatically updating account details for reissued cards helps reduce checkout friction, which can support higher conversion rates.

3. They can also help PayPal compete more aggressively. The online checkout space is getting more competitive as new entrants enter the fold. For example, last year Amazon introduced Buy with Prime and Block expanded Cash App Pay beyond the Square ecosystem. By introducing enhanced features, PayPal can drown out noise from rivals and maintain its checkout dominance.

Why it’s worth watching: The enhancements align with PayPal’s push to invest in “high-conviction projects.”

These projects include passwordless checkout, one-click in-app experiences, and supporting advanced checkout flows with data and AI capabilities, all of which CEO Dan Schulman highlighted during the firm’s Q4 earnings call. PayPal recently underwent a cost restructuring—including layoffs—to free up funds for high-potential growth initiatives, even as the firm takes a more cautious approach to spending in 2023.

Source Insider Intelligence / @adriana nunez

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Digital wallets driving e-commerce in the Middle East and Africa

FYST shows that consumers and merchants across the Middle East and Africa are becoming more comfortable with making online transactions through a range of methods.

Encompassing two continents stretching from South Africa to the Arabian peninsula and north to Turkey, the Middle East and Africa regions show wildly varying differences in ecommerce infrastructure from country to country. But the common denominator driving ecommerce as a whole is mobile commerce, with Africa forecast to surpass half a billion ecommerce users by 2025, with mobile commerce set to comprise 70% of online transaction value by 2025 in the Middle East and North Africa (MENA) region.

For ecommerce to be viable and successful, it requires high levels of internet and mobile network penetration, widespread supply chain logistics and transport infrastructure development, and the ability to accept digital payments through a range of methods. Thanks to the vast improvements to mobile and internet infrastructure over the past decade, there are opportunities for in-country and cross-border ecommerce merchants in these regions to expand online sales with the right payment acceptance strategies tailored to local markets.

FYST’s exclusive proprietary data, gathered across 10 countries (Turkey, Israel, Qatar, Kuwait, United Arab Emirates, Pakistan, South Africa, Nigeria, Cameroon, and Kenya) shines a light on the proportion of cards, bank transfers, digital wallets and other methods used for online purchases in each country. Crucially, we also outline which payment methods and card types are used in each country, demonstrating how important it is for merchants to be able to accept a wide array of locally-used payment methods to maximise transaction conversion rates and boost revenues.

In the MENA region, credit cards are the most widely used online payment method across the MENA region, followed by bank transfers and cash-on-delivery. But with digital wallets gaining in popularity, and currently making up around 20% of online spending, we can expect to see their usage quickly catch up to and overtake credit cards over the next few years.

For instance, in Turkey, smartphone penetration was around 70% in 2021, and nearly 70% of ecommerce purchases in 2021 were conducted via mobile apps. Turkey’s ecommerce market is currently growing at around 25% annually. The domestic card payment scheme TROY is widely used alongside Visa and Mastercard for online transactions.

In Israel, around 70% of online merchants accept digital wallets, while BNPL/instalment payments are now comprising around 30% of online transaction value. However, in Kuwait, although ecommerce usage is growing, currently most Kuwaiti companies don’t sell online to consumers. The majority of ecommerce transactions are made through cash-on-delivery.

Source FYST

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Winning the Innovation Game in Banking

So why have incumbent banks struggled to innovate as quickly or frequently as their non-traditional competitors? Certainly, it isn’t a lack of commitment or investment. In fact, Prophet research found banking respondents were more likely to cite “innovation and new products/services” as the top goal for digital transformation, compared to other industries. I

nnovation programs typically have ample resources. But the stakes are high, with innovation leaders under intense pressure to deliver results as quickly as possible. Banks that don’t get it right may lose their confidence to innovate, falling farther behind competitors — losing relevance over time.

At the core of this struggle are structural challenges that make it harder for banks to achieve breakthrough results or sustain strong innovation programs over time. Even the most capable leaders encounter deeply entrenched organizational and cultural barriers that impede or derail innovation efforts.

And now, in the face of uncertain economic times, budgets intended for innovation are at risk of being dismissed as “discretionary” and redirected toward optimizing gross margins. Understandably, banking executives are concerned about a gloomy economic outlook.

But some of the greatest consumer-friendly products were launched during recessions (like Square and Venmo in 2009, for example). Firms that go on offense and keep their innovation commitments may be able to take advantage of lower opportunity costs and easier access to talent, finding themselves with a clear edge as the economy returns to growth cycles.

Source Prophet

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Why Embedded Finance is a trend?

Embedded finance is a major trend in the financial services industry, as it allows for more seamless and user-friendly access to financial services.

On the consumer side, both business and retail users are busy engaging with a large variety of apps, platforms and digital service providers on a daily basis. For example, in a study conducted by Ross Republic, we found that the majority of SMEs active in the e-commerce segment actually prefers to get loans via the tools they use to run their business, such as e-commerce marketplaces or payment providers, in case they enable a more seamless customer journey and faster time-to-yes. Embedded finance allows them to access financial services directly through these channels, increasing convenience and efficiency when it comes to managing their finances.

On the distribution side, embedded finance allows banks and financial services providers to both increase their sales interface and offer more personalised services to their customers. Once they have opened up specific financial products or capabilities for external parties, usually via application programming interfaces (APIs), they can allow any third party to integrate their service and often to tailor it to their use case, as they will likely have access to much more data about their customers than a bank could have on its own. This allows them to tailor their services to better meet the needs of their customers. As shown on the diagram below, typically embedded finance providers either focus on remaining in the background as a regulated entity or balance sheet, enabling other service providers or fintechs to compete in embedded finance, or also taking on the role of being the enabler itself by offering integrable services via API platforms and consultations.

Due to the reasons stated above, embedded finance is growing rapidly and has the potential to revolutionise the financial services industry. It allows for more seamless and efficient access to financial services, more personalised user experiences, and the ability to offer a wider variety of financial services that is tailored to the needs of specific segments. Embedded finance could also lead to a more competitive marketplace, as more players will branch out into the financial services industry and be able to offer more competitive pricing and services to their customers by leveraging proprietary data or assets.

Source Ross Republic / @adrian klee

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Neobanks diversifying

Since their inception around eight years ago, neobanks have garnered hundreds of millions of pounds in funding, helping them become some of the most valuable fintechs across Europe.

But many in their early stages have been heavily reliant on card transaction fees as a primary revenue stream, a strategy which is unsustainable in the long-term and precarious amid an economic downturn given its reliance on customer spending.

Cognisant of this, over the past few years, neobanks have been broadening their businesses launching new revenue streams.

Revolut, which began life in 2015 offering cheap foreign exchange fees, has ambitions to be a “super-app” and now has its fingers in multiple pies, including banking services, currency exchange, stock trading, crypto, peer-to-peer payments, travel, insurance and even instant messaging.

Its push into crypto appears to be bearing dividends, with its latest financial figures for its foreign exchange and wealth division (which includes crypto) making up over half (55 per cent) of total revenues in 2021.

Starling has made a big push into SME banking and now holds 8.9 per cent of the UK market share for SME banking, as well as shifting its business into mortgage lending.

Monzo, meanwhile, has vaulted its business into subscriptions, launching Premium and Plus offerings, with subscription revenues jumping to over £11m by last year from launch in 2021.

N26, which is in 24 countries, now spans subscriptions, insurance, crypto and other banking products; likewise, Vivid Money says premium subscriptions are a “major revenue” driver.

Bunq, which bills itself as a sustainable bank, offers banking services, lending products and a real-time budgeting initiative. Lunar, which has a presence in Sweden, Norway and Denmark and counts Hollywood star Will Ferrell as a brand ambassador, is eyeing up a push into mainland Europe.

Source Tech EU