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7 Key Themes from Money2020 Europe
Apple Pay Later: What We Know & What We Don't
Hey all, Jason here.
Wow — what a busy, fun, informative week. I spent the first three days of it in Amsterdam, meeting with folks and attending Money2020 (if I haven’t responded to your email yet — that’s why!). I have some additional content from the event I’ll be putting together and publishing in the coming weeks, so stay tuned for that.
I want to extend a huge thank you to the entire Money2020 team, the sponsors, exhibitors, and everyone I had a chance to meet with for making the event truly fantastic!
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7 Key Themes from Money2020 Europe
I had the chance to attend Money2020 here in Amsterdam last week. And, despite macro-economic uncertainty, dropping valuations, and layoffs, the energy and vibe among the crowd was generally quite positive, although phrases like “unit economics” and “profitability” suddenly seemed in vogue again.
Over the course of three days of keynotes, fireside chats, networking, and parties, I noticed seven recurring themes that were top of mind in banking and fintech.
It’s probably not a surprise that banking-as-a-service remains a hot topic. As consumer fintechs, like neobanks, BNPL, and lenders, have somewhat fallen out of favor with investors, fintech “infrastructure” has been ascendant.
And while I didn’t hear the phrase “picks and shovels” nearly as many times as in Vegas last October, the sentiment was certainly there.
The UK and European banking-as-a-service market has evolved somewhat differently than in the US. Before adopting the “as-a-service” moniker, in the US, fintechs worked with partner banks. Offering debit cards and, in many cases, loans required non-bank fintechs to find a charter-holding bank to work with.
In the UK and Europe, regulators have moved more quickly to develop new types of licensing, including e-money institutions and crowd funding/crowd lending. And obtaining a full banking license tends to be easier than in the US — Revolut, Monzo, Starling, bunq, and N26 have all secured full banking licenses in various jurisdictions, for example.
Examples of European banking-as-a-service providers include Railsr (formerly Railsbank) and Solarisbank. Railsr does not hold a license itself, but operates as a middleware on top of its bank partners. Solaris does hold its own banking license but, like recently launched Column, targets its offering to others looking to build on top of it, rather than directly to end consumers.
European BaaS providers enable a similar set of use cases as in the US, including deposit/transactional accounts, credit cards, BNPL, brokerage, digital assets, and rewards programs.
Embedded finance was also a prominent theme. I think of embedded finance as the yin to banking-as-a-service’s yang: BaaS enables embedded financial experiences.
Sometimes it seems like there is some mystery or confusion about what constitutes embedded finance, but there are use cases we’re all likely familiar with. The original formulation and UX of buy now pay later — credit embedded in a retail check out flow — is a quintessential example.
I would argue the Starbucks app — primarily a mechanism for ordering and rewards, but with a stored value and payments component — is another market-leading example of embedded finance done right.
The key to leveraging embedded finance is surfacing the right capability at the right time with the right incentives. A frequent shortcoming in embedded finance propositions is failing to go beyond a specific transaction or platform to understand where that activity fits in a user’s broader financial life.
For instance, a freelancer platform offering embedded accounting, tax, and banking functionality seems logical enough. But, if freelancers on the platform use it as one of multiple ways of making money, those embedded capabilities may be ineffective at meeting their overall needs.
It felt like “open banking,” though a distinct set of capabilities, was often mentioned in the same breath as embedded finance.
The open banking landscape in the UK and Europe has evolved quite differently than in the US.
While the US — 12 years on from the passage of Dodd-Frank — still lacks a regulatory framework governing open banking, the UK and EU have been in the vanguard of setting rules and standards for the industry. US open banking remains “read only” — through services like Plaid or MX you can access account data held by another institution, but that’s about it.
With the implementation of the Payment Services Directives (eg, PSD2) capabilities in European open banking are significantly outpacing those in the US. For instance, PSD2 enables account holders to authorize 3rd parties to initiate payments from their accounts without leaving an app’s UX.
And while there have certainly been some shortcomings in the regulatory regime, policymakers are looking to iterate and improve: the European Commission recently launched consultations with stakeholders as it develops PSD3.
Building on the above themes, account-to-account payments were also a popular topic. While card schemes in the UK and Europe are substantially less expensive, owing to caps on interchange, A2A payments still have competitive advantages to offer — namely instant settlement and cheaper pricing.
In some European countries, such as the Netherlands, A2A payments are already the primary payment mechanism for ecommerce. Combined with the aforementioned trends, you can imagine a push to use A2A payments at the physical point of sale as well.
Solving the problem of proving your identity online remains complex. Most services still rely on a KYC process that revolves around capturing a physical, government-issued credential, such as a passport or ID card.
While the technology and UX around these processes has improved, they all suffer the inherent limitation of bridging the analog (a physical credential) with the digital.
While various European countries have nationally-based digital ID schemes, these “eIDs” often cannot be used outside of their issuing country. The types of services that accept them also vary country to country.
The European Commission has proposed an EU-wide European Digital Identity, though progress towards realizing its vision has been slow. The EC envisions using such a credential for a wide variety of public- and private-sector services, including:
public services such as requesting birth certificates, medical certificates, reporting a change of address
opening a bank account
filing tax returns
applying for a university, at home or in another Member State
storing a medical prescription that can be used anywhere in Europe
proving your age
renting a car using a digital driving license
checking in to a hotel
The EC paints a future where such a digital document “wallet” would substantially streamline financial services tasks, such as applying for a loan.
While there was broad agreement at Money2020 that a digitally-native identity scheme is sorely needed, opinions on who should set standards, implement programs, and custody credentials varied widely.
Like at Money2020 US in Vegas last October, I took notice of the strong presence of crypto-related vendors in Amsterdam last week. Both on the stage and the exhibit hall floor, crypto was everywhere. One attendee told me a full 20% of exhibitors were crypto-related companies.
And, from what I heard, they were taking the “crypto winter” in stride.
Peter Smith, the CEO of Blockchain.com, said his perspective was that the industry has already been in a bear market for some nine months, and he believes it will continue for awhile.
Smith reiterated commonly heard talking points that, just because prices are down, doesn’t mean people aren’t continuing to invest and build. In fact, it may be a good thing, as it could be a forcing function on the industry to re-focus on fundamentals and developing products that actually add value, instead of serving primarily as a venue for financial speculation.
Stripe co-founder John Collison had similar sentiments — that crypto goes up, crypto goes down, and people are used to this.
I suppose Stripe, which recently re-engaged with the crypto world after dropping bitcoin as a supported payment method years ago, is somewhat insulated from the volatility in crypto world, given it primarily provides fiat on-ramps for crypto companies.
Valuations and Profitability
And, despite the general good cheer, there was broad acknowledgement that the macro environment and investing climate have changed substantially since the start of the year.
Inflation, rising interest rates, fading COVID stimulus, the war in Ukraine, China’s lockdowns — banking, fintech, and even crypto are far from immune to the effects.
As multiples have compressed and raising new capital has become more difficult, there has been a recalibration from the “growth at all costs” to a “profitability matters” mindset.
Still, I don’t expect that all the pain is behind us. The coming months likely hold more tech layoffs, down rounds, M&A, and, perhaps, outright failures. It’s part of the lifecycle, and fintech will survive — even if it looks a bit different coming out the other side.
The silver lining? Traditional VCs and crossover investors have plenty of dry powder — and they need to deploy that capital. The balance of power has swung back toward investors from founders, and that is likely to mean lower (more reasonable?) valuations and stronger assurances of VC’s returns (ratchets, liquidation preferences, etc.) that all but disappeared in the last couple of years.
Apple Pay Later: What We Know, What We Don’t, What Comes Next
It’s finally here — Apple’s buy now, pay later offering, dubbed Apple Pay Later.
Frequent readers of this newsletter might recall that I predicted this as far back as December 2020 — so what took Apple so long to get this to market?
Part of the reason may be that Apple chose to develop much of the underlying capabilities to power the offering itself.
Unlike the Apple Card, where Apple serves primarily as a marketing and UX frontend for Goldman Sachs, Apple is providing far more of the functionality tied to Apple Pay Later.
According to reporting from Bloomberg:
“Apple Inc. will handle the lending itself for a new “buy now, pay later” offering, sidestepping partners as the tech giant pushes deeper into the financial services industry.
A wholly owned subsidiary will oversee credit checks and make decisions on loans for the service, which is called Apple Pay Later. The business — Apple Financing LLC — has necessary state lending licenses to offer the feature, though it operates separately from the main Apple corporation…”
While Apple is in-sourcing capabilities it relied on Goldman for with the Apple Card, it’s still dependent on the bank for some of the capabilities that power Apple Pay Later.
Apple needs Goldman, its network partner Mastercard, and, presumably, its processor CoreCard, to handle some elements of the payment processing.
What’s less clear is how attractive the economics of this approach will be for Apple.
When a user chooses to split pay a transaction, in the background, Goldman is likely issuing a virtual card for the amount of the purchase.
While invisible to the user, that virtual card is used to process the transaction and pay the merchant. The transaction generates interchange income, most of which would go to Apple, but some of which, presumably, would get shared to Goldman, Mastercard, and the payment processor.
Further, because Goldman holds more than $10 billion in assets, it is not exempt from the Durbin Amendment’s cap on debit interchange — meaning the income earned could be lower than if Apple partnered with a smaller bank on the program.
The average interchange fee of a covered transaction is just $0.23 — about half the average fee of Durbin-exempt debit transactions.
Apple then collects repayment from the user via their linked debit card — and pays processing fees to do so.
While fraud losses should be significantly lower for Apple Pay Later vs. a standalone BNPL provider, given the authentication and additional data Apple holds on users, they’re unlikely to be zero.
Apple will conduct a soft credit check, presumably when users initially enroll in Apple Pay Later. And Apple customers skew higher income and higher credit score than the overall population. But while credit losses are likely to be lower than other BNPL providers, again, they are unlikely to be zero.
Can Apple make these economics work? With the information we have, it’s impossible to say — hopefully, future disclosures can shed additional light on the interchange revenue, payment processing costs, fraud, and credit losses.
Even if the unit economics work, it’s unclear how significant the BNPL offering could be in the US market.
While consumers have certainly shown a willingness to use BNPL, that may not generalize to Apple customers or the UX of how Apple is deploying this — as an extension of Apple Pay, as opposed to integrated in merchants’ shopping experience, as is the common approach of BNPL providers.
Doing some quick back of envelope math, there are something like 113 million iPhone users in the US. But estimates of the proportion that actually use Apple Pay are low — as low as 6% in one survey.
Of the ~7 million US Apple Pay users, how many could be convinced to use the Pay Later functionality?
Higher earning, higher credit score Apple customers have access to a variety of payment and financing mechanisms — namely, credit cards. Using Apple Pay Later, which can only be linked to a debit card, would mean foregoing credit card rewards points.
For users who don’t typically carry a credit card balance, convincing them to use Apple Pay Later may be an uphill battle.
That winnows the population most likely to consider Apple Pay Later to iPhone users, who use Apple Pay, who are willing to trade credit card rewards points for short-term (6 week) financing — neither the largest TAM, nor the most compelling value proposition.
Still, Apple Pay Later may attract more people to use Apple Pay who previously had not. And it is likely to make those who use it even stickier (and more profitable) users of the overall Apple ecosystem.
Apple has shown patience in building new business units, like its services and media properties. Surely, Apple Pay Later is but a waypoint on Apple’s larger financial services journey.
Other Good Reads
Open Banking Bipartisanship (Fintech Takes)
Which Banking App Has the Best Mobile App (Ron Shevlin/Forbes)
Top 3 Key Fintech Developments in Q2 2022 (Fintech Blueprint)
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