London: Anyone can be a banker nowadays, all you need is the right code.

global brands of mercedes and heroine IKEA and Walmart are cutting out the traditional financial middleman and plugging in software fintech startup To provide customers with everything from banking and credit to insurance.

There are warning signs for established financial institutions.

So-called embedded finance—a fancy term for companies integrating software to offer financial services—means what Amazon can give to customers.Buy Now Pay Later“Mercedes drivers can get their cars to pay for their fuel when they check out.

To be sure, banks are still behind the majority of transactions, but investors and analysts say the risk for traditional lenders is that they will be pushed further away from the front end of the finance chain. And that means they’ll be further away from the mountains of data others are roaming around about their customers’ preferences and behaviors—data that could be crucial in giving them an edge over banks in financial services.

“Embedded financial services takes the cross-sell concept to new heights. It is based on a deep software-based on-going data relationship with the consumer and business,” said Matt Harris, partner at investor Bain Capital Ventures.

“That’s why this revolution is so important,” he said. “That means all the good risk is going to go to these embedded companies that know a lot about their customers and what’s left will go to banks and insurance companies.”

where do you want to play?

For now, many areas of embedded finance are barely bucking the dominance of banks and even though some upstarts have licenses to offer regulated services like lending, they have the scale and deep funding of the largest banks. Pool is lacking.

but if the fintech firm, or

Analysts say startups can match their success in grabbing a portion of digital payments from banks and increasing their valuations in the process.

Stripe, for example, the payments platform behind several sites with customers including Amazon and Alphabet’s Google, was valued at $95 billion in March.

Accenture estimated in 2019 that new entrants to the payments market accounted for 8% of revenue globally – and that share has risen over the past year as the pandemic fueled digital payments and impacted traditional payments, according to Accenture. Senior Banking Industry Director Alan McIntyre said. .

Now the focus is on lending, as well as complete off-the-shelf digital lenders with a variety of products businesses can choose to embed in their processes.

“Most consumer-focused companies will be able to launch financial products that will allow them to significantly improve their customer experience,” said Luca Bocchio, partner at venture capital firm Accel. “That’s why we feel excited about this location.”

So far this year, investors have invested $4.25 billion in embedded finance startups, nearly three times the amount in 2020, data provided to Reuters by PitchBook shows.

• Leading the Way is Swedish Buy Now Pay Later Firm Klarna that raised $1.9 billion.
• DriveWealth, which sells technology allowing companies to offer fractional share trading, attracted $459 million, while investors invested $229 million in SolarisBank, a licensed German digital bank that offers banking services. Offers an array of software.
• Affirm shares jumped last month When it teamed up with Amazon To offer BNPL products.
• Social class said last month was buying it Australian BNPL Firm Afterpay for $29 billion. Square is now worth $113 billion, which is $105 billion more than HSBC, Europe’s most valuable bank.

“If the big banks and insurers don’t act quickly and know where to play in this market, they will be at a loss,” said Simon Torrence, founder of Embedded Finance and Super App Strategies.

You need a loan!

Several other retailers have announced plans to expand into financial services this year.

Walmart launched a fintech startup with investment firm Ribbit Capital in January to develop financial products for its employees and customers, while Ikea took a minority stake in BNPL firm Jiffity last month.

Automakers such as Volkswagen’s Audi and Tata’s Jaguar Land Rover, in addition to Daimler’s Mercedes, have experimented with embedding payment technology in their vehicles to eliminate the hassle of payments.

“Customers expect services, including financial services, to be integrated directly at the point of consumption and to be convenient, digital and instantly accessible,” said Roland Folz, chief executive of SolarisBank, which provides banking services to more than 50 companies, including Samsung. .

It’s not just the end consumers being targeted by embedded finance startups. Businesses themselves are being tapped on the shoulder as their digital data crunched by Canadian fintechs Shopify.

It provides software for merchants and its Shopify Capital division also offers cash advances based on analysis of over 70 million data points on its platform. “No merchants come up to us and say, ‘I want a loan.’ We go to merchants and say, ‘We think it’s time for you to get funding’,” said Kaz Nejetian, Vice President (Products) , merchant services), Shopify said. “We don’t ask for business plans, we don’t ask for tax details, we don’t ask for income statements, and we don’t ask for personal guarantees. Not because we’re philanthropists, but because we think it’s a success on the Internet. There are bad signs for the prospect.”

A Shopify spokesperson said funding goes from $200 to $2 million. It has provided $2.3 billion in cumulative capital advances and is valued at $184 billion, well above Royal Bank of Canada, the country’s largest traditional lender.

Connected future?

However, Shopify’s lending business is still dwarfed by the big banks. For example, JPMorgan Chase & Company had a consumer and community loan book of $435 billion at the end of June.

Major advances in finance by firms in other sectors may also be capped by regulators.

Officials from the Bank for International Settlements – a consortium of central banks and financial regulators – last month warned regulators of the growing influence of fintech startups.

Bain’s Harris said financial regulators were taking this approach because they don’t know how to regulate tech firms, they’re insisting there’s a bank behind every transaction — but that doesn’t mean banks are fintechs. prevent encroachment. “They are right that banks will always have a role but it is not a very beneficial role and involves very little customer ownership,” he said.

Forrester analyst Jacob Morgan said banks will have to decide where they want to be in the finance chain. “Can they afford to fight for customer primacy, or do they really see a more profitable path to market that others follow on top?” he said. “Some banks will choose to do both.” And some are already fighting back.

Citigroup ties up with Google on bank accounts, Goldman Sachs is providing credit cards for Apple and
JPMorgan is buying 75% of Volkswagen’s payments business and plans to expand into other industries.

“Connectivity between different systems is the future,” said Shahrukh Moinian, EMEA’s head of wholesale payments at JP Morgan. “We want to be leaders.”