Fintech Fire Alarms: March, 2021

The payroll land rush, neobanks for underserved communities, and more.

Fintech moves fast and there's plenty of hype.

What's real? What should you pay attention to? What should you be worried about? What should be on your roadmap?

What's just smoke and what's fire?

Here are the five fintech trends, from March 2021, that should be setting off alarms in your organization.

1.Fraud Management Providers Pivot to Platform

What happened?

Fraud management and ID verification vendors raised almost half a billion dollars in venture capital financing in March.

So what?

There are two types of vendors in the fraud management and ID verification space; those that are pursuing a comprehensive platform strategy and those that have not yet pivoted to a comprehensive platform strategy.

The inherent challenge in fraud management and ID verification is that no company can succeed, long term, by building a better mousetrap. Fraud changes too fast and has too many different attack vectors for any one solution, no matter how clever, to dominate the market for long.

The real money is in providing the platform that facilitates fraud management and KYC decisions, often through integrations to various point solutions. Companies in this space that are raising money likely have their eyes set on building out comprehensive fraud management and KYC decision facilitation platforms.  

2.The Payroll Land Rush

What happened?

Competition in the payroll API space ratcheted up with the introduction of Plaid’s first payroll data-powered products for income verification and direct deposit switching.

Moving beyond APIs for accessing payroll data, a number of new startups are now competing directly with legacy payroll providers like ADP and Paychex. Wrapbook focuses specifically on solving the unique payroll and accounting challenges in entertainment industry. Puzzl and Check, by contrast, have built payroll-as-a-service APIs that can be embedded in other software platforms, allowing those companies to differentiate their platforms with bespoke payroll functionality tuned to their customers.

So what?

Payroll systems (and the data they contain) sit a level above the bank infrastructure that fintech companies have already begun to unbundle. As such, there is a lot of value waiting to be unlocked by digitizing the payroll process and making it accessible via APIs.

That process began with payroll API providers unlocking read/write access to the data held in legacy payroll systems, which is enabling use cases like payroll-attached lending, direct deposit switching, and income verification.

By moving even further up the stack and competing directly with legacy payroll system providers, companies like Wrapbook, Puzzl, and Check will unlock even more innovative, vertical-specific use cases in which embedded accounting functionality and embedded financial services functionality can be combined in creative new ways.

3.Bank vs. Fintech Reaches an Inflection Point

What happened?

Established fintech companies are taking a number of steps to establish a more mature presence in the financial industry — from forming new industry groups like the American Fintech Council and the Financial Technology Association to applying and/or acquiring bank charters — a marked difference from the early days in which regulation and lobbying were seen more as distractions from fintech companies’ core businesses rather than strategic imperatives.

Meanwhile, financial industry incumbents are finding themselves increasingly playing defense — from Visa facing regulatory scrutiny over debit card routing (on the heels of the Plaid acquisition antitrust lawsuit) to executives at JPMorgan Chase and Santander complaining about the unfair competitive advantages enjoyed by fintech — a marked difference from the early days in which incumbents’ attitudes towards fintech startups would be more accurately described as dismissive.

So what?

In terms of scale, valuation, and (most importantly) influence with customers, the largest fintech companies — Chime, Square, SoFi, Plaid — are now on a level playing field with financial industry incumbents.

These fintech companies are increasingly shifting their resources to overcoming the remaining competitive moats enjoyed by banks, namely bank charters and influence with industry regulators.

After decades spent behind these moats, financial industry incumbents are reacting to this new competitive environment by arguing that the playing field has suddenly become tilted against them. The question for incumbents is where will they focus their time and resources moving forward? Complaining to regulators? Or building products and experiences that can compete with fintech companies?

4.Neobanks for Underserved Communities

What happened?

Fintech companies building digital banks for specific, underserved communities are raising money, establishing strategic partnerships, and building awareness in the market.

  • Mastercard partnered with Deserve and Seneca Women to launch a card that rewards users for shopping at women-owned businesses.

  • Cheese raised $3.6 million to build a digital bank for the Asian American community.

  • Greenwood, the neobank for communities of color, raised a $40 million Series A.

  • First Boulevard, a neobank for Black Americans, raised $5 million in seed funding.

  • Plaid announced its inaugural fintech incubator class, which includes Guidefi (connecting communities of color to vetted, culturally attuned financial advisors) and OfColor (Enterprise financial wellness platform for employees of color).

So what?

Community banks have historically defined their communities in geographic terms, which is a natural byproduct of a branch-based distribution channel. However, with the mass adoption of digital channels, banks can now be built to serve communities based on affinity and identity. This is especially important when you consider that many communities (LGBT+, African American, Asian American, etc.) have traditionally been underserved by mainstream financial institutions.

Companies utilizing this new digital community banking model can produce higher levels of profitability and customer engagement by delivering products that are tailor-made to address the unique financial challenges of their customers. They are also demonstrating a willingness and ability to drive large-scale economic value back to their communities by, for example, rewarding customers for shopping at community-owned businesses.

5.Merchants Ready to Ride the Fintech Wave

What happened?

Merchant interest in and engagement with the fintech industry is continuing to accelerate.

BNPL is red hot, with Klarna raising $1 billion for a $31 billion valuation, BNPL firm Zip partnering with BigCommerce, and Swedish fintech Zaver raises $5 million to bring cardless payments and BNPL to the 'durables' sector.

More significantly, Walmart expanded on the earlier announcement that it was creating its own fintech startup by hiring two Goldman Sachs executives (Omer Ismail and David Stark), who played critical roles in the development of Goldman Sachs’ consumer bank, to run it.

So what?

Merchants have no interest in becoming banks or competing with banks. They have, however, repeatedly dabbled in financial services and fintech, with the goal of lowering their costs, improving conversion rates, and creating deeper and stickier relationships with their customers.

More often than not, these fintech experiments have failed and been shut down. Sometimes in spectacular and embarrassing fashion.

This does not mean that merchants’ investments in fintech are always doomed to fail. The maturation of fintech, particularly fintech infrastructure and embedded fintech, has made it much easier and more cost effective for non-banks to develop and launch financial products and services. Banks that underestimate Walmart’s fintech ambitions or the rise of BNPL do so at their peril. 

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson