Among the things you'll learn:
- The revenue opportunities for banks and their partners across the swiftly evolving embedded finance landscape.
- How to establish an embedded finance model that mitigates operational risk and ensures adherence to regulatory compliance.
- Optimizing partnerships by working with BaaS providers and end brands with demonstrated track records of sound operational risk processes, compatible, scalable technological infrastructures, and transparent data management.
Transcription:
Aaron Byrne (00:09):
Maybe first off, thanks to Michael to doing a precursor for us around embedded finances. He talked about what citizens was doing and how they're looking at it as a strategy. I think overall, everybody in the banking payments and even the brand space understands the potential of embedded finance and how it's really growing as a market and the overall growth potential if you can tap into it. So really honored to be here today with this amazing group of panelists. And we thought what we would do is just have each person start off with a little bit about who they are and how they fit in their organization and what they're doing in embedded finance. So maybe Lia, we'll start with you and work down.
Lia Cao (00:47):
Oh, great. I thought it was the other way around. Good morning everyone. My name is Lia Cao. I lead our JP Morgan payments embedded finance and solutions team, which is a global product and engineering team. Quick summary of what we do. We are building a full suite of embeddable payment services to enable, we call it multi-party commerce clients. So think of those as marketplaces or social media ecosystems where we can enable our clients to bring the payments experience that includes the pay in the payout liquidity management, FX fraud services and whatnot. So full suite of microservices that they can incorporate into their own ecosystem.
Oban MacTavish (01:37):
Hi everyone. My name is Oban MacTavish. I'm the Co-Founder and CEO of Spade. At Spade, we provide real-time merchant intelligence to card issuers and banks and financial institutions. And what that means is we can help card issuers and other payment facilitators deeply understand their payments data. We can do things like help card issuers understand the exact latitude, longitude of any card payment in the US under 50 milliseconds. We can help banks figure out who's actually attaching direct deposit or where they're sending money to help them stop fraud and we power rewards, experiences, and pretty much anything you'd ever want to do with your payments data. We've been around since 2021. We're a small team, but we recently closed to Series A and we're backed by people like Andresen Horowitz and other blue chip investors.
Richard Kang (02:18):
Hi everyone. I'm Richard Kang. I'm the SVP of Business Development and Commercialization at Pathward. Pathward Bank is an OCC Chartered National Nationwide Bank that is probably best known as a FinTech sponsor bank. We have no branches of our own, we don't serve customers directly, but we work purely through FinTech partners and embedded finance partners to enable the financial services part of the experience that they want to enable. And so we work with some of the best that you can imagine in the country. One of the things that's unique about us is that we've been a FinTech sponsor for many, many years. We've been doing this for the last 20 years, and so we are amongst the most mature in the space, and so we are powering some of the very, very best.
Aaron Byrne (03:08):
Thanks all. So I think what's really interesting is we have a broad range of participants all the way from Oban and a startup to Richard from more of a sponsor bank perspective, and then Lia overall mega bank. So one of the things that always comes up that banks ask when they start to venture into embedded finance is around how do I manage the risk and how do I think about risk and what are the things that I need to consider if I really want venture into this space? So hey, first open, start with you, just the perspective you get when you're engaging with banks around the risk side of data.
Oban MacTavish (03:45):
Yeah, absolutely. I think we all understand how valuable data can actually be for financial institutions. It's really the underpinning of so many products that we like to engage with every day, whether it be authorizing a card transaction or moving money and sending it to another bank account. And one of the things we've seen is that with the rise of embedded finance, it means more and more participants are sort of one step removed from whichever financial institution is powering that experience. And we really believe, and we work really closely with our partners to help make sure that whomever is moving the money, whether that be the sponsor bank on the backend or the platform themselves can deeply understand the actual participants involved in financial transaction. Because with the rise of, I think fraud is becoming a bigger problem for so many financial institutions and broadly in the ecosystem that we really fundamentally believe that observability and the ability for financial institutions to understand where money is going is just so important and it really is one of the requirements I think in this next generation of embedded finance. We can't just be sort of flying by night around those situations anymore.
Aaron Byrne (04:41):
Thanks Oban. And maybe Lia from a larger bank's perspective and then Richard from the perspective of sponsor bank.
Lia Cao (04:48):
Yeah, totally agree with what Oban said. I think when we think about embedded finance, risk management is the most important consideration That starts from all the way there are all kinds of risks when we really enable our ecosystem. We have to think about whether there's a licensing requirements, whether the platform is a license or not. Is there money transmitter license, can they move money, can they be in the funds flow, all the whole suite of regulatory compliance considerations. And then also from the product perspective, leveraging data to detect fraud. What's the confidence level of confidence that we have to enable the platform and the platform participants, as I said, it's one level removed from the direct clients. So it's our clients and our client's clients, the platform and the sellers, like how comfortable are we enabling the pay in and payouts all the AML, right? Sanction screening and whatnot. The pattern recognition hugely important. So that's why we're building different modules. Think about the front end is the SMB digital onboarding type of capabilities to support our embedded finance host suite. And then the whole data insights, analytics, fraud detection pattern that just embedded in our product and solutions.
Richard Kang (06:06):
Good point. So when we think about embedded finances, the regulated financial institution typically partnered with a FinTech and or more parties. The most important thing to us is being able to have the right, I would say the number one, choosing the right partner. Choosing a partner who has an incredible consumer experience but also has the right posture and thinking about the importance of regulation and why those things are important for the long-term stability of their business. And so choosing the right partner is one of the keys to us thinking about risk. The other is really having the correct capabilities within the bank. So again, I mentioned we've been FinTech sponsored bank for the past 20 years. We have a very mature platform and a mature set of infrastructure around regulation and compliance. And so being able to work with third parties is ingrained into our culture and into our business model as well. And so really thinking about how can you choose the right partners and then also as the bank have the right infrastructure and capabilities to be able to manage risks through a third party well.
Aaron Byrne (07:27):
Thanks Richard. So maybe let's flip the discussion a little bit from the risk side to the customer side. Obviously a lot of what's driving embedded finance is the desire of different types of customers, be it SMBs commercial or even consumers wanting much more seamlessly integrated experiences. Maybe Lia ask the question to you first. Where do you see that heading? Where do you see customers kind of pushing in either of those veins and driving further growth and demand for embedded finance?
Lia Cao (07:58):
Yeah, that's a great question. I think for us at JP Morgan, our starting point is really serving the platform clients. So think of those as the huge marketplaces and ecosystem clients and they in terms serve their clients, their participants. Could be consumers, could be sellers, could be hosts, could be drivers and whatnot. So I think that's where we start and as we look at the value proposition, why are we investing in this space? It really it's to provide a better growth trajectory and better experience for the platform clients so that they can provide better experience for their sellers. For example, the few key drivers, one is marketplaces. They want to own that seller experience to end. So today a lot of the marketplaces, they actually use a whole suite of fintechs for the pay in, for the payout, especially cross border payments. But as they mature, as they grow, they want to own that experience end to end so that they can really have that seller frictionless experience, the seller loyalty. I think that's the main driver why a lot of our clients want to incorporate these functions in-house. Second is about data and security and really the seller data, the insights, the you follow the money flow, you can gain so much and know so much about your sellers, their preferences, who are their suppliers, where do they pay to? That's the insight that you only can gain by having the entire value chain, at least having the visibility of the entire value chain.
(09:27):
And the third one is really profit. We said the hidden profit, I mean there is revenue driver for the platforms. If the platform owns more of the value chain, you can add more value for the sellers and charge for those, right? It could be cross-border fx, could be real-time payments, could be liquidity, which is huge, right? Today's interest rate environment, if those funds, the seller funds are stored within the marketplace ecosystem, there's benefit for the platform and for the sellers fund.
(09:58):
So I think for those reasons, we see tremendous demand from our client base for the whole suite of these embeddable services.
Aaron Byrne (10:07):
Thanks Lia. And then maybe if we think about it, we talked a little bit, you mentioned the kind of overall integration of the stack relative to owning the whole life cycle. When you think about that maybe Richard for yourself and the economic benefits for the institution, how do you think about this as a bank being a sponsor bank and how you drive actual economic benefit for your institution?
Richard Kang (10:35):
Sure. So Pathward supports a variety of different verticals. We sponsor people who are doing issuing sponsor merchant, acquiring, sponsor lending, and a variety of different faster payments capabilities as well. And we think about it at the bank as both being able to carry or support all of these different functions allows us to drive some operational efficiency, both for us but also for our partners. I think what we find increasingly is that fintechs have desire to be able to work with one financial institution as they broaden the scope of their capabilities and as they do so again, it's also driving profits for them, it's driving operational efficiency for them and it allows them to create scale with their partners. So because it's good for the partners, it actually is good for us. So we want to be able to support them across multiple verticals for those same reasons, operational, efficiency and profit. And it allows us to support the fintechs in their innovation journey. So what we are finding across fintechs in the US is that they start off doing something and then as they see the market evolving and they continue to look for opportunities to be innovative or unique or to have differentiation, they want to enable new functionality and new capabilities to offer to their consumers or new capabilities to create operational efficiency, et cetera. And so we see ourselves as being able to support innovation across our partners as well.
Aaron Byrne (12:17):
Thank you. So in order to be able to do this, you have to have a level of technological sophistication. You have to have the ability to really be able to drive integrated in seamless services. And Lia, something you brought up was the data and security element, how important that really is in all of this. Maybe Oban, do you want to spend a second about how do you help empower that as a capability serving institutions?
Oban MacTavish (12:45):
Yeah, absolutely. I think it, it's a very interesting time to be working with any financial institutions of all sizes. We have customers ranging from small startups with tiny teams to multinational corporations who are operating across multiple jurisdictions. And it's never been a better time and I've never been more excited to be working directly with chartered financial institutions and people who are sort of coming into a world of transitioning to the cloud, like the folks citizens or investing in their own internal technical capabilities because I think we're in a pretty amazing time to be working with financial data. And one of the things we see is that as if you start wanting to work with tech companies, the speed at which these tech companies want to operate is it's very fast, which comes at a cost. I think the ability for financial institutions to have really strong observability is just so important because if you're going to be carrying that risk associated with moving money, if you're going to be helping people create bank accounts, store money, you can't be sort of relying on a company who is incentivized by the venture ecosystem and the tech universe we all operate in to move very fast and break things and onboard as many customers as possible, which really does run against some of the expectations financial institutions and those who are maybe responsible for that compliance piece are facing.
(13:57):
We get really excited because we're seeing more and more financial institutions sort of I think come to the realization that investing in technology capabilities themselves unlocks value for their customers. No longer is it just about white labeling a solution from your core. It's about building your own engineering talent and maybe building your own tools or finding partners and really getting those customized solutions that allow for that observability, especially as you start supporting companies who broadly operate in a very different compliance universe and have very, very different expectations and incentives when it comes to how they treat their customers. And I think we're really excited that when we work with people, someone at the intersection of this like a stripe issuing, we're able to see a combination of the technical nuance and capabilities and speed with the responsibility and compliance. I think observability technology and investing in your own tech stack has never been more important, is only going to continue to be more important as embedded finance goes from being something that is supported by a handful of players to hopefully something that's even more mainstream.
Aaron Byrne (15:01):
Thank you. Another thing that's really core to setting an overall strategy for embedded finances, the verticals or the sectors that individual banking institutions might serve or how they might serve them differently. And I think the demand side for what the ultimate user of the embedded finance is seeking is different based on their value chains. So maybe let's take it from two different perspectives. If you had to recommend how you think a bank should think about where they focus their time around sector verticals, what would your perspective be? And maybe Lia, I'll start with you and then Richard come to you.
Lia Cao (15:43):
Yeah, no, happy to. That's a great question and that's why actually our group is called Embedded Finance and Solutions. So when the solution part really means industry solutions.
(15:52):
Because we think about the evolution of embedded banking or embedded finance, I think first we look at the ecosystem platforms, marketplaces, those and also SaaS players. We start usually the horizontal ones, which is not particularly focused on a particular industry. Think of, I dunno, eBay or Amazon, Etsy, which industry is it? It's everything. Also, you think about SaaS, a lot of the A RP SaaS players, they're also horizontal SaaS, but more and more what we're seeing, especially in the last several years is the vertical SaaS, right? And that's growing really, really fast and a lot of the SMBs are powered by the vertical SaaS players, right? Think of restaurant toast or touch bistro means read to consumer retail like Miracle or Vitex or what have you. So I think that's really important for us to serve our clients in a way that's specialized to serve their industry.
(16:47):
So we saw the trend and we start to invest quite heavily in addition to the horizontal SaaS and the marketplaces, the SaaS. So two examples. One is healthcare industry. We look at the huge huge addressable wallet and the complexity of that ecosystem and the compliance requirements of that ecosystem, the whole HIPAA compliance, how do you handle patient data and all that. That's why we bought Insta years ago and start to integrate Insta into our ecosystem as our industry solution. And then we continue to expand that platform using our embedded finance infrastructure, right? Think about the whole revenue management cycle with the hospitals and dentists and what have you. That's the pain, the payout, the funds management. So we use our embedded finance platform to enable and turbocharge that healthcare solution. Another example will be in the mobility space. You think about EV charging and charging points and what have you.
(17:47):
The US is kind of behind, but you look at Europe and you look at China, you look at Asia, it is really, really growing very fast. So we're investing in that ecosystem, say, okay, what are the specific vertical solutions that can enable payments in that area? And we did a JV with Volkswagen Pay and we continue to power that JV using our embedded finance modules. So I think hopefully another theme I think you mentioned is the whole buy partner built approach. I think as a huge bank we're more open opening up our own ecosystem. In the past it's like we need to build everything. We need to own everything. Now it's more of okay, we have the infrastructure, we have the global payments platform, but we want to bring the best solutions to our clients. So we are very open. We can integrate niche or point solution into our stack so that we have the best solution.
Aaron Byrne (18:41):
Yeah, it's amazing.
Richard Kang (18:42):
Certainly as a bank, we all think about when we think about verticals, we think about the inherent risks associated to different verticals and so on and forth. But I think one of the benefits of being a partner oriented bank like path word is that we have the benefit of being able to work through our partners who are the very best in their particular field. So it allows us to enable innovation across all verticals, if I can call it that, and enable the very best consumer experiences, certainly compliant experiences across all of these different verticals. So we have the benefit of being able to work with payments companies, fintechs, embedded finance companies of all sorts and sizes who have interesting capabilities that they need a bank to partner alongside them and to work with them. So we have that benefit of orientation across the industry.
Oban MacTavish (19:40):
I think one thing I just would be remiss if I didn't say is something we spend so much time in people who are operating the fintechs operating the actual embedded finance product, selling directly is just that rise of vertical SaaS is very real SMB technology. I mean I was speaking to another founder the other day and they operate like a waste management company and the plurality of their revenue is coming from payments. Now you see that in large companies like Shopify whose revenue mix is looking more and more like a payments company and more and less and less like a software company. And I think this is a macro trend that if we're, you're thinking about beginning to tap your feet into embedded payments, finding capital heavy businesses who their customers are interested in having access to capital because that's really where many of these software companies sort of lack the capabilities.
(20:28):
It's not that they can't build a great platform that could convince a construction company to onboard. They probably could, but they don't have the capital, they don't have liquidity, they don't know how to run the compliance. And those are the opportunities. I think that from a tactical perspective represent a huge near term opportunity because they are hungry for capital and they are unable to offer those services. That's where embedded finance can really shine is sort of bringing the expertise of the financial institution and the capital and risk management and combining that with a beautiful front end that maybe your corporate card can't look the same way as someone else, but if ServiceNow server side or we work with people like Core Pay, obviously very, very large logistics companies, those are huge distribution opportunities for payments. And I think that's where from a tactical perspective, there's a huge near term opportunity in what we're seeing on our side.
Aaron Byrne (21:16):
So maybe we'll leave a little bit of time for questions, but on the backend before we close up from our side, as you think about where we are in embedded finance today, and I would argue even though many would say embedded finance has been around for decades, this isn't new that we're actually still at the very beginning and I see this going on for another decade if not more, and just becoming more the way we interact with finance and the way that the financial value chain operates. So as you envision kind of forward from your vantage points, what you think embedded finance will become, what would be your perspective? Lia, I'll start with you.
Lia Cao (22:01):
Sure. From our perspective, I think we as a huge bank, we always have operated in the past as we own all the platforms and clients come to us, log into our system and access our payments platform, I think that that mindset is shifting.
(22:20):
To me, that's a pretty transformational thinking for us now. We think that we need to enable our platform clients in their ecosystem. So how do we modularize our payments capabilities and liquidity and lending and all that and bring those to our clients? What are the ways to bring those to our clients? It could be pure API driven, so we're completely invisible. It could be hybrid, it could be a wireframe and they can drop in UI to their ecosystem. It could be completely white label hosted. Some of the clients, they don't have the tech team, they don't have tech expertise. We can absolutely host that experience for our clients, but the logo is our client's logo. So I think to me that's the fun part is we are building, we have the foundation and we're building up the value chain. We're building the skyscraper. We're not there yet, but we're building that building built on a really, really scalable global leading payments platform. And that's really, really fun. So I think I see tremendous growth opportunities in embedded finance for JP Morgan payments. And I think the rise of the vertical SaaS is a huge, huge, huge to open for.
Aaron Byrne (23:31):
Thank you. Oban, from your view.
Oban MacTavish (23:33):
I think there's an adage like software is eating the world and that idea has continued to roll on and payments is becoming, I think so many software companies are realizing that at the next stage of their growth as they reach some peak market penetration payments represents a massive, massive opportunity to grow the revenue base. And with that comes partnering with people who are a lot better at payments than what software companies traditionally are. And I think we get really excited by the fact that every new type of payment, every new medium of data exchange is new opportunities for people. There's new risks that are presenting themselves. And I remain incredibly bullish because every time we wake up, every time we talk to new customers, the number of times we speak with people who are just launching, just stepping their foot into payments at a publicly traded company scale who's been around for decades and they're like, Hey, we're just now thinking about how we want to deploy this new medium. It is shocking to me and I think that's not going to slow down. It just represents one of the biggest growth factors in software. And for us that means one of the biggest growth factors of potential customers. And I think to be part of that wave is incredibly important to position yourself to capture what I expect to be one of the largest growth factors of revenue and value creation and tech and financial services future.
Aaron Byrne (24:52):
Thanks Oban. Richard,
Richard Kang (24:54):
If you allow me, you said something that sparked a thought, which was that embedded finance arguably has been around for a long time and in some of our discussions we talked about, one example of the fact that it's been around for a long time is one of our partners is HR block and HR block, if you don't mind, if you don't mind, I'll give you a use case here or an example. We have all seen H and R block tax preparation stores across the country and we're fortunate to partner with them to issue their prepaid debit card. And so I'm not sure how many of you knew this, but vast numbers of customers of theirs will get their tax preparation done. And when it comes to that question that they need to fill out that says, do you want us to mail you a check or where do you want us to direct deposit your refund?
(25:51):
Somebody will say, oh, I don't have 'em bank account. And so we enable H and R block to be able to issue a prepaid debit card on the spot and have that direct deposit, have that refund sent to that direct deposit account and routing number and issue a prepaid debit card. So arguably, this is an example of embedded finance that's been around for a long time and we're fortunate to work with a great partner like HR Block. But with that also we're incredibly excited about the future of embedded finance and we see more and more innovative use cases being presented to us by our partners. And something we talked about earlier is that we are certainly widening the use cases that we're able to support and we're modularizing those so that people can use smaller bits and pieces of those to enable some kind of capability, some experience, some use case that perhaps previously would've been part of a whole set of capabilities. Now you can use just this one payment function to enable whatever it is that you're trying to create from a user experience or operational efficiency standpoint. So we're really excited about the future of embedded finance and see that modularization and that broadening being able to enable others to create more innovative user experiences.
Aaron Byrne (27:14):
Thanks so much. So we have just a little bit under three minutes, so we'll open it up to questions and see if there's any questions from the audience on topics related embedded finance you'd like to ask.
(27:41):
If not, then we cans.
Audience Member 1 (27:46):
I have a good question. So I'm just curious, do you see that more of a trend that's happening within very specific sector, the organizations that have the ability, the half of all the investment power to go ahead and actually our opinion forward where you see this happening on global basis markets like plus Europe since it's widespread or cherish focus right out with organization let's say, and the fortune 500,
Aaron Byrne (28:20):
I can start on that front. So this is global in nature. I think the global forecast presently is that it'll be about $228 billion market and by 2028 largely the embedded finance, as Lia was alluding to before, is very far along in Asia almost to the point that it's eons beyond the United States. I would argue that the United States is the furthest behind in terms of embedded finance. And there's a lot of different things that are driving adoption in more emerging markets and places like that where the banking system isn't as broad or as robust. So it is global. I think the growth is expected to be exponential over the next several decades, and it's not really in specific verticals. However, some verticals, the growth probability is much higher, right? You see much higher adoption in consumer and retail, as Lia mentioned, healthcare, transportation. So certain verticals are more inclined. And I think it also comes back to the point that Oban was making about the fact that software proliferation is really what that's all. And as ISVs and the verticalization occurs, it really depends how deep is that already occurring in a particular sector. But anything you guys would add.
Lia Cao (29:41):
Yeah, totally agree. I think in terms of regional capabilities, I think Asia, China way ahead, you think about the live streaming, it's only happening here now, but you think about TikTok, and Alibaba, and that's where payments just native in that as the influencer do the live streaming, you click the link and you buy the merchandise right there. You don't go to a bank account and link. They don't want you to get out of their ecosystem. So payments are completely embedded for years and years. US is, I think US is head of Europe in terms of the embedded finance trends, but more in the tech segment, e-commerce, consumer retail, omnichannel players, restaurants. So there is some industry differentiation, but it's pretty widespread and Europe is happening as well.
Oban MacTavish (30:31):
Yeah, I can't imagine. I mean from the software company side, I think there's no limit to the interest to embed payments as a growth vertical for them. I think what is interesting on the other end is that when these software companies are inevitably looking for partners, it's incredibly stiff competition. I think we saw that with selecting an issuing bank or a banking as a service layer going direct. There's just so many different options. And I think the biggest question, at least from my side will be from a proliferation perspective, is how many of the banking partners can succeed in such a competitive environment. It seems almost obvious to me that from a software side, I think it's a completely global phenomenon and is only going to become bigger as we see more and more embedded companies embedding payments across the globe.
Richard Kang (31:16):
The only thing I would add is that, my guess is that historically embedded finance was for the few and more challenging and increasingly over time the tools become more accessible and more accessible and easier to implement. And broader sets of companies is probably driving a lot of the growth that we see, at least in the US. And so I think the more from the bank's perspective that we become modularized and work with great partners who can then pass those on to others, et cetera, I think it becomes more accessible and that's probably driving a lot of growth.
Aaron Byrne (31:52):
Other questions?
Audience Member 2 (31:57):
Mentioned how clients don't want to get out of their own ecosystem and like you that all within their control. What are your thoughts on Gaming iGaming from a bank sponsor perspective? The fact to invent finance is the top.
Lia Cao (32:14):
I can jump in. That's a great question, right? Gaming, iGaming, eSports, growing really, really fast, actually believe it a lot. Gaming is very heavily regulated. Extremely heavily regulated. Geolocating where you can bet where you cannot bet. So I think as a whole sector, definitely we do look at gaming and think about how we can power the entire gaming ecosystem is not only this online gaming, there's the physical casinos and whatnot, but then there's also the related, the hotels and the recreation entertainment and all that. So we view that as one vertical and think about where we come in to touch the non-gaming flow as well as the gaming flow. I think the key there is risk management and control and be comfortable with who we partner, who are our clients, what's their control system, how do they monitor the gaming or the gaming activities. So we're very selective from the JP Morgan perspective. We're very selective of who we serve in that vertical, but we do compete and grow and see tremendous growth in that vertical.
Aaron Byrne (33:20):
I think we're at time, but thank you all. This has been helped. Thank you.