Banks fear Amazon and other big companies’ foray into integrated finance

Banks Fear Finance Fintech

Traditional banks are not calm with the new threat they see on the horizon. Global brands ranging from Amazon and Walmart to Mercedes or Ikea are leaving their financial intermediaries behind and hiring the software of technology startups to offer customers all kinds of financial services: banking, credit, insurance…

It is the universe of so-called integrated finance, a term that defines the passage of these large companies to incorporate that software that allows them to offer customers the services that previously had to be required from a bank. The underlying idea is to strengthen ties with the client and simplify processes.

While Amazon raises its customers the possibility of ‘buy now, pay later’ directly when they make their purchase, Walmart launched a fintech in January with investment firm Ribbit Capital to develop financial products for its employees and clients. IKEA, in turn, has recently acquired a minority stake in the ‘buy now, pay later’ company Jifiti.

On the other hand, car manufacturers such as Mercedes, Audi, Volkswagen or Jaguar Land Rover have experimented with incorporating payment technology in their vehicles to facilitate them.

“Customers expect services, including financial ones, to be integrated directly at the point of consumption and to be convenient, digital and immediately accessible,” Roland Folz, CEO of Solarisbank, which provides banking services to more than 50, told Reuters. companies, including Samsung.

Given this scenario, the risk for traditional lenders is clear. Investors and analysts agree that this dynamic will cause the usual entities to become progressively further away from the mountains of data that these companies are accumulating on the preferences and behaviors of their clients, crucial data when it comes to taking advantage of banks by offering different financial services

This displacement could end up leaving the ‘leftovers’, that is, the ‘bad risk’ to the bank. “That is why this revolution is so important. It means that all the good risk will go to these integrated companies that know so much about their customers and what is left over will go to the banks and insurers,” Matt Harris told Reuters, partner of investor Bain Capital Ventures. “Big banks and insurers will lose out if they don’t act quickly and figure out where to play in this market,” says Simon Torrance, founder of Embedded Finance & Super App Strategies.

For the moment, the bank holds, but there are many threats. If fintech is able to continue snatching a portion of digital payments from banks – and raising their valuations in the meantime – regular lenders would be in a major slump.

According to data from Accenture, in 2019 these new participants in the payments market had accumulated 8% of revenues globally, a percentage that has risen in the last year due to the pandemic that has boosted digital payments. So far in 2021, investors have poured $4.25 billion into integrated finance startups, almost triple the number in 2020, according to data provided by PitchBook to Reuters.

Among the names that are making their fortune, the Swedish firm Klarna is the one that has raised the most so far: 1.9 billion dollars. Square is now worth $113 billion, more than Europe’s most valuable bank, HSBC ($105 billion). Stripe, the payment platform behind many sites with clients like Amazon and Google, was valued at $95 billion in March.

DriveWealth, which sells technology that enables companies to offer fractional stock trading, attracted $459 million, while investors put $229 million into Solarisbank, a licensed German digital bank that offers a number of banking services software. Shares in Affirm rose last month when it partnered with Amazon to offer ‘buy now pay later’.

But this competition is not limited to ordinary customers. In addition to final consumers, these integrated finance companies are beginning to turn to other companies to offer their services. This is the case of the Canadian company Shopify, which provides software for merchants and whose Shopify Capital division also offers cash advances.

For now, names like Shopify remain overshadowed by giants like JP Morgan Chase and the threat of greater regulation may clip their wings after various voices from the Bank for International Settlements (BiS) have sounded the alarm. At the same time, some big ones are fighting back: Citigroup has partnered with Google on bank accounts, Goldman Sachs is providing credit cards for Apple, and JP Morgan is buying 75% of Volkswagen’s payments business and planning to expand into other industries.

“They are right that banks will always have a role, but it is not a high paying role and it involves very little customer ownership,” says Harris of Bain. Forrester analyst Jacob Morgan stresses that banks have to decide where they want to be in the funding chain. “Can they afford to fight for the primacy of the customer or do they see it more profitable to become the rails on which others run?” He asks. “Some banks will opt for both,” he concludes.