Why developers are a new customer segment for banking.

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Chris McCann identifies four key trends that are contributing to major changes in financial architecture. We’re going to work from this list and add a few recent details as well as our perspective on these trends:

• Growing digital-first customer base
• Non-fintech businesses adopting embedded finance
• Developer infrastructure for new fintechs
• Unbundling of banking and financial institutions

A fifth trend that McCann adds as a postscript to his article is the rapid adoption of decentralized finance (DeFi). At the end of the blog post, we give our take on the future of DeFi.

Growing digital-first customer base

Global internet users have climbed to 4.95 billion at the start of 2022, with internet penetration now standing at 62.5 percent of the world’s population. Companies like Uber, Airbnb, Binance, Shopify, and others are serving a global customer base from day one. The younger the consumer the higher their digital expectations.

Historically, banks have been limited to local brick-and-mortar business models. New fintechs like Monzo, Revolut, and N26 in the UK and EU have paved the way for digital-first banking products since 2013. Based on their growth, it is clear that consumers love it! Take Revolut as an example. According to Statistica, their customer base grew from 1.5 million in February 2018 to 8 million in December 2019.

As McCann points out, traditional financial services companies were built to serve a limited set of customers within established geographical limits. They started as local institutions and slowly expanded across international borders.

In contrast, new companies like Uber, Airbnb, Binance, Shopify, and others are serving a global customer base from day one. Global internet users have climbed to 4.95 billion at the start of 2022, with internet penetration now standing at 62.5 percent of the world’s total population.

Digital access to money is further reinforced with government mandates all over the world. For example, India has introduced bold policies to go digital by wiping 86% of cash with a 4-hour notice in 2016. During the peak of Covid in 2019, Cash App saw a surge in usage by making it easy for customers to accept their stimulus checks and unemployment benefits in the USA.

In developed countries we predict all financial services will be fully digital within the next decade. Digital adoption in emerging countries should not be discounted. The recent rise of Paystack, Snapscan, Yoco, Stitch, Root, Pineapple, Sendwave, and Flutterwave in Africa is a testament to this. There is a big opportunity to bring financial inclusion to these economies through the use of digitization.

Embedded finance

In our previous blog post, we looked at the growing opportunity for businesses to add fintech elements into their business models. This drives customer engagement and increases revenue. Infrastructure and tools are now becoming readily available for businesses to incorporate finance features in existing products.

Angela Strange from A16Z takes it further by saying that every business will be a fintech business. Smaller businesses are better positioned to drive customer engagement than traditional banking channels.

A key argument for embedded finance is the ability to offer a more unified customer experience by combining existing products with added financial offers, e.g. point of sale lending. The offering is made when it is most relevant, the user is engaged and it’s tailored to the user based on the data gathered by the appropriate channel. The sale is frictionless since the user’s information is already on the platform and therefore conversion is only a click away.

Rather than standalone products, businesses can adopt embedded finance to unlock new revenue streams, save on transaction fees, increase sales, retain customers better and gain direct insight into customer spending patterns.

At Rehive we have identified three types of embedded finance models:

• White-label applications — A complete standalone application next to your existing business. Rehive specializes in helping businesses launch standalone applications.
• Affiliate programs — Embedded features in your existing application. This can be done either by building on APIs or embeddable widgets. A great example of this is the Wyre checkout widget on Metamask.
• Referral programs — A more traditional experience where a business is referred to a finance partner, for example, a car reseller recommending a specific insurer. An example is Uber’s partnership with GoBank to create a checking account and debit card for drivers to receive payouts and special cashback rewards at selected merchants.

Unbundling of banking

Banks have established incredible moats over centuries and service broad market segments:

• Consumers: payments, checking and saving accounts, debit and credit cards, forex payments, remittance, cash backs, cash withdrawals, and more.
• SMBs: business checking and savings, debit and credit cards, lines of credit, loans, credit card processing, and PoS systems.
• Enterprise: Commercial checking, financing, real estate, employee benefits, institutional investment, investment banking, securities, and treasury management.

Unbundling of banking services refers to immerges of new fintechs providing competing banking products or services, but with a more niche and tailored value proposition for the customer. Tom Loverro clearly illustrates the unbundling of Wells Fargo’s services by highlighting new players in the U.S. banking market.

CBInsights have created a similar illustration of the unbundling of Bank of America:

Fintechs gain traction by pursuing narrow verticals and market segments. Examples:

• Mercury — Banking built for startups.
• Moves — Banking for the gig economy.

Developer infrastructure

Banks aren’t positioned to move fast and respond to the market need of digitization and niche market segments. New fintech startups are aggressively going after these low-hanging opportunities. As a result, there is a growing need for fintech infrastructure providers to abstract banking capabilities as developer tools.

A new market segment has opened up with a focus on developers. Some refer to the movement as the “Amazon Web Services of finance”. Again, Chris McCann demonstrates developers as a customer best with the illustration below.

Not only do developers want access to data, but, more importantly, they also want access to the underlying functionality that banks provide. For example, being able to open a customer bank account via an API instead of needing a banker behind a branch computer to do so.

Providers like SynapseFi, Wyre, Sila and Treasury Prime in the U.S. are making it easy to build a finance product without needing to invest time and money to secure a bank partner.

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