Everyone’s a fintech now
Embedded financial services are everywhere you look.
When one hears the word fintech, hip offices full of young engineering whizzes designing a next gen investing app comes to mind. The harsh lights and stacked aisles of a Walmart in rural America are far from anyone’s idea of a technology trailblazer. Yet, with last week’s announcement of a joint venture with Ribbit Capital, Walmart outlined its intention to build its own fintech startup.
First, it is not immediately clear what the startup will do. According to a Walmart spokesperson, “The new company is being developed to create a suite of digitally enabled financial products that are tailored to our customers’ and associates’ unique needs.” Like any large company, they already have a major digital platform that handles all manner of operations. Now, it appears Walmart will take its digital efforts a step further and capitalize on its massive customer base.
More interestingly, the quote above sounds like it could have come from the founder of a neobank. Fintech, as it is typically understood, encompasses all manner of payment apps, crowdfunding platforms, roboadvisors, and virtual currencies. Our evolved understanding of fintech means we primarily think of AI-powered, consumer-facing products. Products that were once the reserve of financial institutions, branches, or professional investors are now in the hands of everyday people. But the term "financial technology" originally referred to the back-end systems that powered financial institutions. By that definition, given the size of Walmart and the financial services infrastructure required to support it, it has been a fintech for years. This newest venture just represents a natural progression into the consumer-facing space.
It is no secret that online sales were growing pre-pandemic. But the shock and nature of the pandemic sent online transactions through the roof in 2020. Retailers and businesses simply have no choice but to sell online. Selling online requires the ability to digitally process orders and receive payments, in real time. It is why Shopify - with its suite of payment, marketing, and shipping services for online retailers – has seen its stock more than double since the start of 2020. However, partnering with external companies like Shopify can involve hefty fees. As a result, companies are deciding to chart their own financial services path.
When you combine the continuous hunt for new revenue streams with more transactions taking place online, the result is a wealth of data and payments that can be turned into a new source of value. Just as Visa, Mastercard, and American Express have battled for years to be the payment rails at every in-person POS machine (with Visa and Mastercard essentially establishing a duopoly), fintechs are now battling over the online sales pie. Instead of ceding this ground to the Paypals and Shopifys of the world, companies like Walmart or Facebook figure they can create their own financial services, doing their best to ensure that money doesn’t leak out of their coffers.
It’s of a piece with a trend we see in many industries: embedded fintech. All over the world, what we consider to be non-financial companies are incorporating financial services into their offerings. Wechat and Alipay, originally social media companies, account for 94% of mobile payments in the world’s largest economy. GM, the American automaker, is seeking its own banking charter. Sber in Russia, is going the opposite direction. They dropped the word bank from their name and intend to become much more than a financial services company, competing with the tech giants of the world.
In one sense, embedded fintech might be a transformative trend in the business world. If looked at differently though, many of these new ventures often appear to be a rebranding exercise in which we dub every digital or financial services initiative to be a “fintech venture.” Any company, regardless of the industry, that reaches a certain scale in the 21st century is going to have major digital elements. And given the potential revenues in the financial services space, many will create their own offerings. But Apple, previously only a maker of consumer electronics and software, did not “completely reinvent the credit card” with their Apple Card, as they claimed. It is a credit card with rewards and cash back, features that have been around for decades. There are numerous other examples of this type of rebranding.
Whether everyone is a fintech or it is just the mot du jour, it is unquestionably true that our old notions of industry differentiation have been scrambled. Car companies are banks. Banks are tech companies. Social media companies are payment processors. And so on. Financial transactions, often times more so than the actual exchange of goods and services, are driving value creation in our digital economy. With people spending records amount of time online, the scramble to claim newly created value won’t slow down any time soon. There are likely to be many winners in this financialized economy we have created. They just might not come from the industry you expect.