This is part 2 of a two-part look at finance and fintech. Be sure to read part one: A primer on embedded finance and “fintech as a service” – Part 1
The emergence of fintech “as a service”
As we discussed previously, an “as a service” market opportunity has emerged around enabling enterprises to outsource the capabilities and infrastructure required to deliver fintech products and services to their customers. The trend is not a foreign one in the technology industry. Just as many enterprises are choosing to work with a vendor like Salesforce Inc. instead of building their own CRM, or AWS instead of building their own datacenters, many are electing to leverage the infrastructure of fintech-as-a-service providers to abstract the complexity and resource investment associated with launching fintech products. This trend has begun to augment the go-to-market strategies and business models of many fintech vendors. A one-to-many model is increasingly viewed as a more effective and efficient way for fintech firms to scale.
Thanks to fintech as a service, it has never been easier to launch a new fintech product (or startup). Enterprises that partner with a fintech-as-a-service vendor can remain focused on their core business while expanding into fintech with enhanced speed to market and reduced up-front investments and operational requirements. Ultimately, this trend is reshaping the unit economics associated with offering financial services.
A variety of fintech-as-a-service categories are emerging across the full spectrum of embedded finance use cases. These categories are occupied by a rapidly expanding list of B2B2B and B2B2C vendors that offer their infrastructure and services on a white-label basis. Below, we highlight four key categories that compose the vendor ecosystem, with representative vendors participating in each category listed in Figure 1. Collectively, the private fintech-as-a-service startups featured in this table have raised more than $3.8 billion since the start of 2021, according to S&P Global.
Players in this category typically offer a comprehensive platform that encompasses all functions required to issue payment cards to customers or employees (e.g., issuer processing, card provisioning services for digital wallets, program management, card printing and fulfillment). Similarly, they provide connections into required partners (e.g., bank sponsor, network contracts), negating the need to source multiple relationships.
Examples of vendors in this category include:
- Marqeta Inc.
Firms in this category, including both banks and technology providers, enable organizations to offer money management accounts (e.g., a bank account, digital wallet). These accounts typically support a variety of traditional bank account functions, such as holding balances, sending/receiving funds, ATM access, interest and rewards. Vendors often offer a suite of capabilities, including compliance and identity verification tools (e.g., anti-money-laundering [AML], “know your customer” [KYC]), fraud and risk management tools, card issuance capabilities, and program management. Some even bring to the table their own banking licenses.
Examples of players in this category include:
- Green Dot Corp.
Vendors in this segment enable companies, typically software platform specialists, to offer payment-processing services to their customers. Deployment models vary, but among the most common is the hybrid approach, where resource-intensive tasks such as AML/KYC checks, PCI compliance and validation, licenses, and underwriting are generally handled by the embedded payments provider. Similarly, the embedded payments provider’s infrastructure (e.g., gateway, token vault, payout mechanisms, reporting tools) is utilized to enable payment acceptance and processing.
Companies in this category include:
- Payrix (FIS)
Companies in this sector enable organizations to offer various types of lending products, including BNPL, working capital, micro loans and credit cards (typically, vendors specialize in one or two lending products). They often offer a platform that includes underwriting, risk and compliance management tools, in addition to servicing capabilities and lender connections.
Examples of players in this segment include:
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