The Amazonization of retail payments

The phenomenon of “Amazonization” refers to the wholesale disruption occurring across retail and eCommerce thanks to the leviathan-like presence of Amazon.com. Considering the platform shift happening in the retail payment space, I believe the same phenomenon of ‘Amazonization’ that happened to eCommerce will eventually happen to the retail Payments space. 

In this post you will find an analysis of the trend and its main consequences.

The dominant payment interface

Paying for things is a universal need and human beings adopted different technologies throughout history to satisfy this need (I won’t elaborate more on this here but if you want to dig deeper you can refer to these two amazing titles on the history of money: The Ascent of money by Prof. Niall Ferguson, Money changes everything by Prof. William N Goetzmann).

During the 20th century, cash payments remained the dominant interface to pay for things. 

The general financial habit of the average western citizen was the following: open up a bank account, eventually get a card linked to that but use the bank account as your payment hub. Bank accounts were essentially the acquisition channel for the payment service and cash transactions were still the most common form of retail transactions.

With the new millennium, mainly due to the Internet taking off, things started to change and the % of cash transactions started to fall.

A new interface has clearly taken over the retail payment space from cash: card. Similarly, the bank account lost its acquisition channel nature for the payment services. It’s not a coincidence that the most important consumer fintech unicorns around today (Monzo, Revolut, N26) started as a debit card services (there are also regulatory and operational implications to them starting up as cards and not full bank accounts, but I believe the main rationale was commercial – today it is much easier to attract users with a card than with a bank account).

More recently, another payment platform has been launched: Operative System Wallets.

Wallets are not that new, but they struggled to take off due to complexities in distribution and then adoption problems. Making the wallet a native feature of your smartphone, a key component of your OS experience, is solving these distribution and adoption problems. 

Considering the symbiotic relation that each individual has with their smartphone, I believe there are the conditions for a new paradigm shift in the payment behaviour of users: in 10 years the main entry points for payment services will be your OS wallet – Apple pay, Google pay or a proxy – not your bank’s card.

The first signals of this theory are emerging: the adoption of OS payments wallets is growing more than 50% y/y and the trend will relentlessly be reinforced as more people upgrade their smartphones to newer versions that support wallets.

Amazonization of retail payments

As the entry point for retail payment services will be the OS wallet and there are currently only two OSs in the market, the logical consequence is that aggregation theory will be applied to the retail payment space as well.

Source: Aggregation theory by Ben Thompson

Apple pay and Google pay will do to payment what Amazon did to ecommerce and Facebook did to news/content: they will be the only acquisition channels for payment services and all the ‘technical’ service providers will be battling on these platforms to get the users’ attention.

Aggregation theory in the Payment space

When such a strong gatekeeper emerges, it is very unlikely that it will not try to capture some of the market itself, exactly as Amazon did for e-commerce. My expectation is that many basic payment needs will be sorted out through one of these providers (Google or Apple) and it will be essentially impossible to compete with them, especially for basic needs very close to the platform level, as these (Apple and Google) will have operational efficiencies exponentially bigger than any other payment provider.

These basic payment needs will comprise a set of basic payment products and probably including also the identity of the user – I won’t be surprised if Apple will start KYC-ing users and then allow seamless switching between payment providers (similar to Apple SIM model).

PAAS (Payment-as-a-status) and the new payment scenes

There will be a second level competition, similar to the Amazon Marketplace model, where a group of brands, old and new, will be offering premium payment products and compete on top of the main wallet platforms for user attention. This is where neobanks will battle with incumbent banks, but also non-financial brands, to get their market share.

I expect that payment methods will converge towards being a status symbol of your social position, becoming a differentiator of your personality. The main value that they will provide to users will be social positioning, not very differently from brands like Rolex or Ferrari.

Users will be acquired through Apple pay or Google pay by Brand X, and then Brand X will upsell a better service, convenience or status (eventually through a physical card). 

In this context, Payment products will essentially be very similar to fashion products, they will appeal to different socio-economic demographics, focusing on specific niches and use cases, and their ultimate differentiator will be their brand.

In the past, this is something that only Amex was essentially doing, using its brand as a socio-economic status symbol, making it very appealing to corporate westerns. The differentiation, that was before an Amex monopoly, has been replicated for different target audiences, mainly millennials, by a plethora of new neobanks that are building differentiated consumer payment services for specific niches. 

Examples include: metal card by N26, Wooden card by Treecard, Wooden card by Tomorrow, Crypto-backed card by Bitwala, Gold-backed card by Glint. Even though their main product today is still a physical card, they are selling something else: a status-symbol (Metal card by N26), a financial service (Gold-backed card by Glint), a political statement (Wooden card by Treecard or Tomorrow).

Their proposition, that today is embodied by the card, goes obviously beyond a pure payment one.

In this model, leveraging the wealth of financial infrastructure businesses emerging, many non-financial payment providers will join the bandwagon and will successfully compete against old payment providers: if people are willing to pay thousands of $ for a Louis Vuitton bag, why won’t they activate a LV card on Apple pay and then upsell to a luxury Louis Vuitton diamond card to exhibit every time they pay? 

Traditional banks will suffer: as hybrid organizations, that are not tech companies and are not marketing-driven companies, they won’t necessarily have the flexibility and the user understanding to become fashion brands, and they won’t have the technological capabilities and the strategic positioning to build competing wallet platforms. Traditional banks will share the fate of  newspapers in the Facebook era – they will compete against so many providers that only a handful of them will manage to profitably stay in business.

Conclusions

I believe that OS wallets have the potential to fundamentally change the Payments landscape over the next decade. I’m convinced that general purpose payment services belong to the past and they will entirely be captured by a handful of global tech platforms. 

Leveraging the huge wave of financial infrastructure services, payments will probably become a business of branding and it will be crucial for anyone willing to stay in the retail payment space to fully understand the type of user they are catering to and focus on serving them much better than anybody else. 


Resources

  • McKinsey Payment report 2020 – LINK
  • The Ascent of Money by Prof. Niall Ferguson – LINK
  • The History of Money by Jack Weatherford – LINK
  • Money changes everything by Prof. William Goetzmann – LINK
  • Statista Digital Wallet penetration – LINK
  • Ben Thompson’s aggregation theory – LINK

A neobank stack

Over the last few years I’ve spent a lot of time building lending and banking stacks. What used to require vast resources only 10 years ago, is today a much simpler and more inexpensive job, thanks to the enormous number of financial infrastructure businesses born in the last decade.

The goals of the following 2 posts are: to highlight which are the key functional components of these stacks, to point at who are the main providers around and, more in general, to share what are some of the key learnings I gathered working hands-on on their development.

An overview

The core assumption behind this architecture is that a retail bank is not in the business of making mobile apps, nor it is in the business of issuing debit/credit cards. A bank operates in 2 problem spaces:

  •  the business of trust (liability side) – a bank is an institution selling trusted repositories where users can store their value. It must convince people that it is a trustworthy institution.
  •  the business of selling liquidity (asset side) – a bank must make a profit out of the funds it gathered, correctly setting the price of the liquidity, based on the risk profile of its clients – on the asset side

The average banking product is simply an interface optimised for the current state of the technology: today it is a smartphone application, in the past it was a branch, in the future it will likely be a different interface. What won’t change are the fundamental problems that a bank will solve, as shown in the architecture designed below.

Banking channels

This module includes multiple elements: from domestic payments to branches, from ATMs to cryptos. These apparently very different pieces have one core characteristic in common: they enable the movement of money inside and outside of the user account. Each one is a different touchpoint which covers different use cases for different demographics, but they all ultimately enable money movement.  

I believe this module is probably the most affected by the modern banking evolution, putting together today things that were completely different in the past, such as Cards and Branches. Take branches, for example. As the retail banking space evolved, the branch-centric approach has been totally surpassed and branches pushed to the margins of the banking architecture. 

Branches today are to banks what CDs are to songs: once the physical embodiment of the service, now they are nothing more than a nice accessory, interesting to some, but definitely not a central component of the related business model.

In the banking channel alone, there are literally hundreds of companies trying to build more modern API-based experiences which requires minimal effort to integrate with and guarantees adequate support.

Payments space: Adyen, Stripe, Marqeta, coinbase

Fincrime

The Fincrime module is in charge of filtering out potential fraudsters and money-launderers from the flow of total movements. It is logically a clear extension of the banking channels component, because it operates on top of those transactions.

It is a fairly recent innovation which became necessary when banking lost its personal touch and became a machine-first, more than a person-first, business.

Fincrime is one of the spaces where artificial intelligence and machine learning techniques are seriously delivering value: it would be inconceivable for a modern bank to manually or semi-manually scan all the transactions.  

Products engine

The product engine is probably the flagship element of modern core banking platforms. It is a product configurator where a bank can easily configure standardized products like overdraft, checking account or loans and immediately distribute them to its customer base.

It is usually bundled together with other modules in a wider core banking offering (ledger).

NB. In my abstraction, the product engine does contain the creation of the loan, credit line and overdraft products, but doesn’t include the decision lending stack, which I’ll present in a future post.

Ledger

Ledger technologies have been the foundation of any banking businesses since the northern Italian city states invented banking just after the Middle Ages. A ledger is nothing more than a glorified database, and it represents the ultimate source of truth on the account balance and, in general, on any banking activity within the company. 

A ledger must be extremely reliable, secure, easy to integrate with and easy to query. 

Startups in the core banking space: 10x, Mambu, Railsbank, ncino, ThoughtMachine

Being blockchain a ledgering technology, this domain is constantly mentioned as being a domain ripe for innovation. My opinion is that blockchains, before being ledgers, are primarily systems to align incentives and I’m very skeptical about the real benefits of permissioned chains. For this reason I believe that DLT doesn’t really make sense today as a ledgering technology for a bank, especially in a permissioned context and without a proper ecosystem built around it.

API Aggregator

API aggregators are new-comers to banking. Before open banking took off, this element wasn’t even a theoretical concept in banking ecosystem. 

Today, almost every bank is integrated to at least one banking information aggregator which shares data about customers gathered from other financial institutions.

The role of API aggregators is still in its infancy but, being banking a business of information, I believe that their role will become more prominent over the next years.

Financial aggregators: Plaid, Quovo, TrueLayer, Tink

Identity hub

I decided to aggregate Onboarding, KYC and CRM because they represent to me different phases of the same user’s lifecycle, as they all build different aspects of the identity of the user in the bank’s eyes.

As user onboarding moved from a branch-based approach to remote, KYC providers acquired an enormous space and there are a lot of companies doing KYC cheaply and very reliably in the vast majority of geographies.

KYC providers: jumio, alloy, onfido, veriff

Identity is surely a banks’ key asset but its value still remains largely untapped, as no bank built a business on top of the constellation of information gathered on the users, nor on facilitating dedicated identity services to other providers.

Treasury

Putting the capital gathered in its deposits to a more productive use is one of the key activities of a bank. This is a crucial activity for bank profitability, but this also requires skills completely different from the ones typically available in a consumer-focused neobank. All the recently funded neobanks tend to be very user-centric and customer-service focused: they are 21st century technology companies more than traditional financial companies, therefore scaling up this function can be extremely defocusing in the growth phase, when the goal of the bank is to create a solid customer base of depositors.

In this scenario, many of these companies can outsource their treasury investing/activities to some of the many investment vehicles around or can, more traditionally, use softwares to internally manage their liability side.

RegTech

The financial industry is one of the most regulated industries in every country and a tremendous amount of resources is spent on this activity. Lots of companies are working in this space. 

Conclusions

In this brief post I wanted to present some high level modules that I believe are essential elements in building a modern bank. 

All the brands and companies mentioned are only a small subset of the incredible number of good solutions in circulation and most of them cover more than one aspect, but this is not factored in in my architecture.

In my next post you will find a similar exercise for the other crucial stack of a bank: the credit decision stack. Stay tuned.

Shopify, e-commerce eats finance

The last session of the Fintech Product Guild `10k-a-month club` was centered around one the most interesting companies in circulation: Shopify.

Shopify was established with the goal of making e-commerce very simple for anybody: the company provides a set of tools to bootstrap an online shop and essentially remove a lot of technical hurdles from the setup of an e-commerce, letting entrepreneurs focus on the commercial side of the venture.

Recently, they started adding a comprehensive set of financial features to their product, embodying the paradigm of embedded finance that I already touched in one of my previous posts.

The goal of this post is to deep-dive into these features and analyse their strategic impact.

Financials analysis

Income statement

Shopify grew massively in the last 12 months, reaching over 1 million merchants on the platform and a GMV (Gross Merchandise Volume) of more than $60bn. 

This is obviously an insane number, but it’s still less than a third of what Amazon generates through its Marketplace business, and less than 20% of Amazon’s entire GMV .

Shopify vs Amazon GMV – Source: MarketplacePulse

That GMV translates into $ 1.5 B revenues split between subscription and merchant solutions.

The subscription product is essentially the access to the e-commerce platform and was crucial to jumpstart the company, but the merchant solution is where the company is investing more and where they probably expect to build a moat.

Shopify Income Statement common size analysis

Merchant solutions now accounts for 59% of Shopify’s revenues, and counting. This line includes a constellation of extra services that support the merchant in many non-commercial activities, such as:

  • Shopify Payments 
  • Shopify Shipping and Fulfillment
  • Shopify Capital

Balance Sheet

Shopify’s balance sheet is really a fortress with minimal leverage and a lot of cash available.

Shopify Balance Sheet common size analysis

Statement of Cash Flows

Shopify’s statement of Cash flows is very insightful, as it really shows a company in its growth phase: the financing flow started to go down but is still very strong, the operating flow starts to take off and the investing one is diminishing but still deeply negative.

Shopify statement of cash flow, in the company-stage SCF curve

Leveraging the platform: embedding finance

The last Shopify Reunite saw a number of announcements with Money and Financial features at the centre of the stage. Many of their products pose a direct threat to many incumbents and pure Fintech startups:

FeatureThreat to:
Shopify balance: A business banking account and loans for merchants. No fees or minimum balances. This will include a Shopify customized virtual and/or physical debit card and cash-back cardsRetail banks, neobanks for SME. Any new e-commerce will probably use either Shopify or Amazon. They will easily be acquired also on the banking side.
Shopify Capital: The company expanded their lending infrastructure. Lent $1 billion to merchants so far, in ticket sizes ranging from $200 to $1 million.Retail banks, SME lenders.
See above, only for lending (with better underwriting opportunities).

They also announced some customer-facing features that want to rival with more customer facing brands:

  • Installment payments via Shop Pay, with the option for users to break purchases into 4 even payments at 0% interest.
  • Shop App: Less fintech and more Amazon competitor, with better merchant features and 16 million users so far.

To be honest, I’m very skeptical about this consumer-facing twist: first, building a consumer brand that rivals Amazon or even Facebook is extremely complex and defocusing for a platform company; second, and more important, this also introduces a mismatch of incentives between Shopify and its customer base: the merchants. 

One of the perceived value of Shopify over Amazon, is the fact that Shopify is considered a tech partner that doesn’t want to screw you up because it doesn’t consider your margin its opportunity. This partnership narrative may be at risk in a more prominent D2C role.

Looking ahead

Shopify is an extremely solid company, with a great outlook for the future. They are placing themselves at the center of the future of commerce, providing a comprehensive infrastructure that makes the life of the merchants much easier, and let the company focus on serving customers better and with minimal financial and logistic hussle.

Their focus on financial features is the nth signal that embedded finance is a key trend that also other platforms are embracing (see Amazon partnership with Goldman Sachs). 

In this world, incumbents and pure fintech startups have to find a way to clearly define themselves, but I’ve already tackled this point 🙂 .


Resources

Fintech 2.0, how to survive when your product becomes a feature

The most important narrative in the fintech ecosystem nowadays is arguably that of fintech-everywhere, more formally known as embedded finance.

The essence of the embedded finance concept is that, over the next few years, a significant part of the consumer financial services available today will not be distributed anymore by financial institutions; they will instead be natively embedded in other non-financial products and simply become an extra feature to the product. In other words, financial services will become features of other macro-products. To give an example, Uber may offer a checking account or a credit card to its drivers who, consequently, may not need a Barclays account anymore.

A lot has been written on the topic and you can find some useful links in the Resources at the end of the post. In this post, I want to reflect on where fintech consumer startups will sit in this new world, and what is a viable strategy for them when their products are being transformed in a feature.

The new unbundling: embedded finance

Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.

Jim Barksdale

The current fintech ecosystem was born in the last decade through the unbundling of the financial industry: every startup focused on one specific problem and solved it orders of magnitude better than existing institutions, mainly banks, would.

ING-DiBa, N26, revolut: fairly good incumbents and FinTech re ...

At the end of this first round, some clear winners emerged in each vertical: N26, Monzo, Revolut, Transferwise, Lending Club, Funding Circle, SoFi, Robinhood.

Over the last few years a different process, of rebundling, took place: many startups started to rebundle other financial products on top of the original core proposition, mainly attracted by easier upselling and revenues expansion. Neobanks like N26 or Monzo added lending products, a lender like SoFi added a savings account, Revolut expanded to trading, and so on.

The recent embedded finance trend looks to me like a new iteration of the eternal bundling and unbundling cycle. This time financial services are not unbundled by a new or younger financial institution, but rather decomposed into atomised features that are added to existing products by large consumer brands and technology giants.

How to survive when fintech is everywhere

Most of the fintech startups who succeeded so far did it essentially by using the same recipe: building a better and more modern user experience on a new distribution channel (smartphones) for an extremely focused product. This has been the real value brought by most fintech unicorns.

In a world of embedded finance, a better native mobile UX won’t be enough for them to survive, simply because that UX won’t be the best in class anymore.

In a world where Uber offers a bank account natively integrated in the app to its drivers, a shiny banking app with a fantastic user experience will inevitably be less competitive because it adds friction to the overall user journey.

First, the user will have to switch apps and remember how to navigate that app, with an obvious additional cognitive load. Second, and even more important, Uber will definitely have more margin to offer competitive pricing than any fintech startup, because the acquisition cost of that bank account will be much lower than that of a startup and also because the financial feature can be used as a loss/leader to subsidise the core product.

In this new world, I believe there are 2 possible moves for most of the existing fintech consumer companies:

  • Move down the stack – become an infrastructure provider
  • Move up the stack – become an aggregator

Move down the stack: Infrastructure provider

The financial infrastructure wave is exploding at the moment. “We are building a new piece of financial infrastructure” or “We are the Stripe of X” is the new “We are the Uber of Y”, and definitely one of the most powerful pitches to raise funds today.

In this scenario, startups will have to move down the stack, building a B2B product that will allow consumer facing brands to offer financial products with a trivial integration and with minimal resources. They would essentially expand the Stripe or Adyen model to other categories (more here on Adyen).

The assumption here is that essentially anybody who has a direct relation with the user will monetise also through a financial product, but won’t change its core business to refocus on finance. They will use a payment-as-a-service or banking-as-a-service provider to power these financial features (more here).

In this hypothesis, a plethora of B2B fintech companies will battle to enable the creation of financial services for more customer facing brands.

I believe this is the way forward for extremely specialised, mono-feature companies with low-frequency interactions product: firstly challenger lenders like Lending Club or Funding circle, or even an hyper focused product like Transferwise.

In low frequency interaction products, it will be very hard to compete with companies that interact with users on a daily basis, so they will probably have more chance of growth switching to become full stack service providers for more customer facing products.

They will have the experience in vertical (lending, cross-border money transfer, etc..), they are modern enough to be API first and they are young enough to adapt to mutated market conditions.

Move up the stack: Aggregator

For more customer-facing startups it will be extremely hard to battle only with the current approach, but I believe they can reposition themselves upper in the stack.

If people will directly take loans or create accounts through other large consumer products, then an emerging need will arise for the re-aggregation of these constellations of accounts and products under one single umbrella. Somebody will necessarily become the single financial touchpoint of the user: the aggregator of a fragmented experience.

To win this aggregator role, it would be essential to actually provide an extra value to the user, beyond the simple aggregation of multiple accounts: probably autonomous money and ecosystem creation will be crucial. A first flavour of this model is what Credit Karma started to build on Autonomous finance (more on CK vision on autonomous money here).

I imagine essentially all the neobanks will fall in these categories, as ultimately consumer businesses and for which a pivot to an infrastructure product would be technically, but even more, culturally, too complex.

Moving forward

The new shift in consumer behaviour is not very visible yet, but a number of new initiatives (Shopify ReUnite being only the most recent one) will only accelerate this trend. It is crucial for any company competing in the space to start moving down or up the stack now, as in a few years the first winners will start to emerge and it will probably be too late.


Resources

Bundling/Unbundling:

Embedded finance/Fintech everywhere:

Autonomous Finance