The retail and tech firms that could upend mainstream banking

April 12, 2021 12:01 AM

Walmart may be in the spotlight for its "Hazel by Walmart" financial services trademark application, but the big-box retailer is not alone, as non-financial companies with a strong e-commerce operation are adding banking services for their large customer bases.

Advancements in payment technology and pandemic-era trends toward automated commerce provide these firms with the ability to register and store credentials for hundreds of millions of users internationally.

The firms can also use open banking API connections to build a stack of services that not only resemble a traditional bank, but can actually provide a broader menu of offerings.

"Companies with no previous financial products are taking customer-centricity to a new level, introducing services like financing and integrated payments that deepen their relationships with customers at the expense of banks," writes Sandeep Sood, CEO of Kunai, in a recent PayThink column.

The embedded finance market will generate more than $1 trillion in yearly market value in the U.S. and $230 billion in transaction revenue by 2025, according to Lightyear Capital, levels that are both exponentially higher than current levels. In embedded payments alone, yearly transaction revenue will jump to $140 billion in 2025 from $16 billion in 2020, according to Lightyear.

What's particularly threatening to legacy banking is most of the firms that are taking advantage of embedded payments have core brands that have little to do with financial services, but are still recognizable and regularly used, creating regular habit-forming usage that's transferable to banking.

Gig economy brands have proven adept at accumulating large user bases of stored payment credentials to serve as the foundation of a full service stack.

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Walmart

Walmart has emerged as one of the leaders in embedded finance.

The retailer recently hired two former Goldman Sachs executives, Omer Ismail and David Stark, to help run its fintech venture. Ismail and Stark are already veterans of the embedded payments trend, with Ismail driving development of the Marcus banking app at Goldman Sachs, while Stark helped lead Apple Card.

Walmart is expanding its Walmart+ subscription service, and has partnered with BigCommerce to extend its online marketplace. Walmart is working with Ribbit Capital on its fintech venture, with hopes to serve smaller markets where Walmart is often the largest employer and one of the largest retailers.

Ribbit Capital's portfolio includes dozens of fintechs, and dozens of potential partnerships for Walmart to tie financial apps to its e-commerce platform or in-store experience.

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Amazon

Amazon's scale is so massive, it's generated a market of financial technology companies to serve the third-party sellers that use Amazon's fulfillment to reach buyers worldwide.

Fulfillment is one of dozens of ways Amazon is using shopping technology to attract consumers for add-ons like Amazon Prime and the e-commerce company's ever-expanding roster of shopping and payment technology, such as checkout-free stores.

Amazon has added at least two payment products in recent years. Amazon Payment Services offers installment payments, while Amazon Pay has partnered with acquirers such as FIS to build a merchant network. Amazon additionally offers a secured credit card as well as conventional co-branded payment cards.

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PayPal

At PayPal's recent investor presentation, executives from the payments company detailed a mobile app that would cover shopping, and traditional PayPal functions like payment processing. But the app will also be designed to pay bills, access payroll, transfer funds, cash checks and perform other tasks associated with banking.

PayPal has long offered lending to merchants based on future sales revenue. PayPal was also part of the Paycheck Protection Program.

PayPal's future plans include using its popular Venmo transfer app as an enrollment tool to push deeper into consumer banking, offering incentives, managing authentication through what President and CEO Dan Schulman refers to as a "super app."

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Square

After years of fits and starts, the payment company in 2020 acquired an industrial bank license and this year debuted Square Financial Services, which offers deposit accounts and loans to merchants.

Square's advantage is its large merchant base, which for years has already used Square to access capital and pay back loans through future payment flows. The bank license creates a direct connection between Square and its merchants for lending and other services, with Square able to avoid the bank partnerships that most fintechs require.

That direct merchant connection also potentially applies to Square's other businesses, such as its Cash transfer app that both merchants and consumers use; and Square's fast-growing bitcoin business. Square can additionally earn a greater share of fee revenue via its banking license and can use its lending arm to compete with both fintech and traditional merchant acquirers.

Stripe

Investors have poured billions of dollars into Stripe, pushing its valuation to near $100 billion, a trend that's accelerated during the pandemic.

The funding has allowed Stripe to build new products designed to reach merchants that traditionally did not use e-commerce, as well as expand authentication and build a potential lending product to compete with merchant credit products from Square and PayPal.

This also allowed Stripe to launch a treasury management service, Stripe Treasury, which allows businesses to embed financial services through Stripe's APIs. Stripe has partnered with Evolve Bank & Trust in the U.S. at launch, and also works with Citibank and Barclays.

The small businesses that make up a large part of the base for firms like Stripe and Square suffered mightily during the pandemic, creating a need for liquidy, lending and financial services. By providing banking-as-a-service, Stripe and Square can build relationships that last beyond the crisis.

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Apple

The concept of embedded finance has existed for years, but was given new life by Apple Card, a collaboration between Apple and Goldman Sachs.

Apple uses its devices to enable fast deployment of credit, prepaid, P2P, debit and other Goldman Sachs-affiliated banking products quickly. And unlike banks, Apple's other businesses allow a direct link to incentive marketing tied to streaming media, the App Store, and other digital content that has little to do with traditional banking.

Apple's advantage is people are generally buying iPhones and adding functions and apps, with payments and banking belonging to a much broader menu. It's a mix that's hard for incumbent banks to match. And fully digital application and onboarding is also a differentiator.

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Google

The latest in a series of Google Pay redesigns in late 2020 added new financial management and incentive marketing features, following an earlier launch that uses the mobile wallet to scale P2P and other banking products. That followed an earlier Google partnership with Citigroup and Stanford Federal Credit Union to offer instant card issuance.

The partnerships allow Google Pay users to create a mobile-focused bank account called Plex that's offered through other banks and credit unions — only with Google controlling enrollment and acting as the distribution channel. That allows Google to counter Apple Card and to make its stand in embedded finance.

The search giant has since added BBVA USA, BMO Harris and more than a dozen others to the Plex network.

It's also a way for Google to serve as a partner to the financial institutions in reaching younger consumers with a growing menu of banking that includes payments, bill-pay and other activities that provide data for Google to inform cross-selling, marketing and advertising strategies.

Signage is displayed outside Facebook Inc. headquarters in Menlo Park, California, U.S., on Tuesday, Oct. 30, 2018. Facebook Inc., which had warned of rising costs and slowing growth, reported quarterly revenue roughly in line with expectations and profit that beat analysts' forecasts. And despite scandals around fake news and election interference, it added more users, too. Photographer: David Paul Morris/Bloomberg

David Paul Morris/Bloomberg

Facebook

The social network has several products and strategies that draw on its international reach and large number of users to add financial services and payments.

Diem, the Facebook-affiliated stablecoin project that's expected to launch later this year, has drawn a lot of attention due to the initiative's regulatory pushback. Diem could increase merchant acceptance of cryptocurrency for payments, and the project's managers also hope to contribute to financial inclusion in emerging markets and use Diem as a springboard for other services. Stablecoins can additionally provide a way to build onto payment apps with less involvement of banks or other third parties, slicing time and expense.

Beyond Diem, Facebook is also making other forays into financial services. Facebook is testing an accounts center that allows users to post content across Facebook, Instagram, and messenger, and save payment details across the platforms. The center also supports Facebook Pay, which allows transactions from the different platforms as part of the same experience.

An additional partnership adds Shopify's checkout and payment processing to Facebook platforms.

Dov Marmor, COO of North America for Railsbank.

Railsbank

The London fintech has made several moves to tap embedded finance, including acquiring the U.K. division of Wirecard in the wake of Wirecard's accounting scandal.

In an earlier interview, Dov Marmor, COO of North America for Railsbank, said that while Wirecard as a company had issues, it also had technology and expertise in open banking that could aid Railsbank's embedded financial services project.

Railsbank recently partnered with Sydney-based challenger bank Volt to support account management, card and payment products through Volt's banking-as-a-service platform. That will allow Railsbank to offer embedded finance in Australia, a country where open banking is advancing after delays. It's also a way to compete with Apple in Australia, where Apple Pay controls two-thirds of the national mobile payment market, providing a base for Apple Card.

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Ride sharing

Like Apple, Uber and Grab have come to represent the recent spat of embedded finance deployments.

Both ride-sharing apps have consumers who store payment credentials for recurring trips, making it a natural stepping stone for value-adds. Uber and Grab have added financial services over the past three years, with Grab launching its own financial services platform. Uber in late 2020 partnered with open banking company Marqeta to support a payment card for drivers with the promise of further collaboration in the future. Mastercard recently certified Marqetaas a digital card issuer in Europe, opening new possibilities.

Grab's forays into financial services include a prepaid card and a lending program for small businesses in its target markets. But the tie-ups aren't necessarily a slam dunk. Barclays in 2020 stopped taking new applications for a credit card in partnership with Uber.

The Instacart website on a laptop computer arranged in Hastings-on-Hudson, New York.

Tiffany Hagler-Geard/Bloomberg

Instacart and DoorDash

The promise of embedded finance also plays well outside of ride-sharing with both Instacart and DoorDash closing in on partnerships with JPMorgan Chase.

Instacart's deal with the bank includes a credit card that's expected to launch early in 2022, with both companies hoping to take advantage of a pandemic-era shift to remote grocery shopping.

JPMorgan Chase is also working on a card partnership with food delivery app DoorDash, building on an existing relationship that powers incentive marketing. Digital shopping, payments and delivery in the food industry have expanded quickly during the pandemic, creating an opportunity for delivery and shopping apps to expand their networks and ability to use open banking to tap financial services.

Quick Response (QR) codes for digital payment services Alipay by Ant Group, an affiliate of Alibaba Group Holding Ltd., center left, and WeChat Pay by Tencent Holdings Ltd., right, are displayed inside a store in Hong Kong, China, on Tuesday, Sept. 1, 2020. Billionaire Jack Ma's Ant Group is poised to pull off what could be the biggest initial public offering ever by simultaneously listing in Hong Kong and Shanghai. Photographer: Chan Long Hei/Bloomberg

Chan Long Hei/Bloomberg

Alipay and WeChat Pay

The Chinese payment apps have served as a model for combining shopping, payments and financial services in a single mobile experience.

Alipay and WeChat have gained an international base by allowing travelers from China to pay in their own currency while shopping at merchants or e-commerce sites outside of China. But they've also used their scale to diversify services.

Ant Group, which operates Alipay, recently introduced an investment advisory service that builds on an existing partnership with Vanguard and is part of a strategy to bring Alipay users to the robo advisory industry. WeChat's diversification has included partnerships with banks on other continents such as Africa to extend payments enrollment and financial services to new markets.

WeChat and Alipay's "super app" has drawn interest from fintechs in other markets, such as France, where P2P app Lydia has used a transfer and payment app to build investment and savings accounts, among other products.