Big Tech, financial solutions and BaaS in the New Normal
If the trend for Big Tech to embed financial solutions into their platform is nothing new (think Uber), it is becoming ubiquitous and in…
If the trend for Big Tech to embed financial solutions into their platform is nothing new (think Uber), it is becoming ubiquitous and in fact has been accelerating with the onset of COVID-19. Whether offered by traditional banks or by fintechs, BaaS allows tech companies to embed financial solutions via APIs for their clients to use directly on their platforms. As with the first wave of fintechs, payments and lending have been the first in line to be disrupted (again).
Shopify announced a partnership with Affirm to offer a “Buy Now, Pay Later” financing option to clients of its platform. Affirm’s Max Levchin (co-founder of Paypal, the mother of all fintechs) stated that this new service should help Shopify reach new customers, particularly Gen Z and Millennials (the desired Grail for most companies). From my perspective, the big value-add of offering financial products is to increase the share of wallet for existing customers (similar to the value created by an airline loyalty program or Amazon Prime). In my experience, it has been very difficult to attract new retail customers based solely on the availability of financial solutions (financing option notwithstanding). Hence, the 80–100% increase in volumes due to the BNPL option, mentioned by Levchin in Barron’s, is likely to be with pre-existing clients increasing their consumption on the platform. Kaz Nejatian, the VP and GM of Shopify’s Financial Solutions Team, focused on the value to their merchants in alignment with Shopify positioning to be the anti-Amazon — as a side note, I actually invested in Nejatian’s previous fintech startup, KA$H, back in 2015; a payment company that was acquired in 2018 by a large financial player.
It has actually been interesting to witness how analysts and reporters have pitched Shopify against Amazon in terms of their respective relationships with merchants. As always, looking at history brings significant insights re why things are the way they are. Amazon started as an online retailer; Jeff Bezos decided to add third party merchants to the platform; despite strong opposition from his managers, years after the launch of the company. The current polemic on Amazon “leveraging its trove of data to copy bestsellers and sell them on its platform under its own brand” is not different than what brick and mortar retailers have been doing for decades — think of Walgreens’ brand for basics. Shopify, on another hand, started as a marketplace for merchants, a very different place, monetization model and philosophy vs. Amazon. We can caricature that Amazon is putting its end-clients first with low prices that squeezes its merchants (similar to the criticisms addressed to Walmart pre e-commerce), while Shopify is putting its merchants first by increasing the average shopping basket with the BNPL financing option that incites the end-clients to take on debt to shop on its platform. The value chains are different due to the DNA of the firms and arguing that Shopify is “philosophically better” than Amazon is now getting more difficult with this new financial nudge.
Goldman Sachs Q2 2020 earnings call showcased its Big Tech partnerships with Apple (Apple Card) and Amazon (SMB lending — the other side of the equation of the Shopify <> Affirm partnerships), as well as with JetBlue (POS solution). CEO David Solomon commented on the opportunity for GS to leverage its proprietary digital underwriting decision platform with these partnerships. In my view, considering the challenges to underwrite businesses and individuals due to the uncertainty prevailing across the globe, increased exposure to lending (which includes credit cards) seems like a risky option at this time, especially with new partners and end-clients. Another curve ball for Goldman might come from the conclusions of the congressional hearing with both Amazon and Apple facing the same line of questioning — are they abusing their enormous power as gatekeepers of their respective marketplaces.
On the other hand, the rise of e- / contactless payments makes partnerships on the payment side extremely attractive for large North-American banks. Keep in mind that banks who have been providing payment solutions to merchants have been hit extremely hard first by the new crop of competitors (think Square) and now by COVID-19. They are now actively focusing on adding new value-added services to their payment solutions (via partnerships), as well as commercializing their infrastructure which would not have been a topic of discussion just a few years ago. From my perspective, every bit of technology, processes and expertise should be monetized and large FIs are sitting on monumental opportunities in every area of their organizations; the billion dollar question is when will they deliberately and purposefully do something with these assets. We are just witnessing the beginning of a wave that could become a tsunami if supported by the right incentives, mindset and will.
Coming back to Uber, it is one of the merchants running on arcus’ Fintech as a Service (FaaS) platform using its payment processing capabilities. Banks such as BBVA and Santander leverage the platform in other ways such as liabilities data and cards to drive a bigger share of wallet. Fintechs and retailers are also using arcus’ platform to offer mobile bill payments, mobile top-ups or debt repayment to their customers. I invested in arcus back in 2015 (Regalii at the time) and its philosophy of “Any business can be a fintech business with the right technology” is becoming more and more relevant across the Americas and across industries, so expect to see more financial solutions offered across the board… not just by Big Tech!
In the video-interviews series of financial experts covering the New Normal in Financial Services, as well as at the panel of fintech investors at FFCON 2020, there were many mentions of strategic partnerships between Fintechs, Financial Institutions and Big Tech. Here is a selection of some of these videos:
Darryl Hicks, Founder & CEO of Flexpay
Future Vision of Fintech panel FFCON2020
Zemfira Khisaeva, Head of Technology and Enterprise Strategy at ScotiaBank
Alex Norman, Partner at AngelList & N49P, co-founder of TechTo
Takeaways on financial solutions becoming ubiquitous in Big Tech… and elsewhere:
- Investment opportunities in fintech infrastructure companies from early-stage private (Arcus), to growth private / pre-IPO (Affirm), to public companies (Square);
- Monetization opportunities for companies in the financial services space to commercialize directly or indirectly their capabilities (such as financial solutions, technology, process, expertise);
Value creation opportunities for traditional FIs to offer value-added services via partnerships in conjunction to their current offerings (such as merchant payment solutions).
For an in-depth discussion on FinTech, transformation, and the future of financial services and solutions, check out my podcast on First Name Basis:
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