Imagine you wanted to start a software company 20 years ago. You would have to buy a server and physically hook everything up yourself. Today, that’s unnecessary. You can get an AWS account in five minutes and be off to the races.
The same is now true of financial services. You can easily use a company like Marqeta to offer credit cards, a provider like Plaid to connect customers to their banks, or any other number of platforms to easily collect payments or offer credit. Fintech startups are bypassing banks and shaping the future of banking.
Embedded finance isn’t new. Retailers like Costco and Walmart have provided their own closed-loop credit cards for decades, and even old-school store credit looked a lot like the embedded finance we see today because it kept money out of banks. The difference now is that the internet enables a fully integrated banking experience on a massive scale. Once this experience is built, it can be infinitely replicated thanks to existing fintech infrastructures.
It’s not a matter of whether embedded finance will disrupt banks, but when.
For a glimpse into the future, China’s Alipay may offer some insight. Alipay is Amazon competitor Alibaba’s ubiquitous mobile and online payment platform. Today, people across China use it to pay for everything from train fare to retail products, online or offline. The platform saw $15 trillion in transactions last year, and its parent company, Ant, is set to make an IPO of over $200 billion.
You could make the argument that compliance requirements and regulations in the U.S. will keep nonbanks out of the banking game for decades to come. That would make sense if only fintech startups were involved, but Facebook is the fourth-largest internet company in the world, and big tech has a history of using resources to lobby for legislation that favors them.
Massive companies like Google, Apple, Uber, and others on similar trajectories have the advantage of intimate customer data and relationships, as well as influence. It’s hard to imagine they’ll let embedded finance be regulated like banks without a fight.
And if you’re a traditional bank, it’s time to start gearing up for a battle of your own—one that isn’t necessarily going to be on home turf.
