Why Open Banking And Embedded Finance Gives An Edge To Fintech Startups Over Traditional Banks

Open banking has offered fintech startups the chance to alter the global finance industry by putting financial services at consumers’ fingertips through user-friendly apps and websites on their smartphones and PCs. Last year alone, 2.5 million people were using services that sat on open banking interfaces. This year it’s expected to be more than four million.

The open banking mandate requires banks to share data via application programming interfaces (APIs), making it one of the most significant disruptions to traditional banking in our era. As a result, fintech startups that have been approved can connect to people’s accounts and provide them with a variety of services. In addition, banks no longer possess exclusive rights to data management.

The European Parliament passed the updated Payment Services Directive (PSD2) to support open banking in October 2015. Open banking, which is already well-established and gaining popularity worldwide, has aided in the growth of embedded finance, but is this a risk-free strategy to improve the customer experience?

 

Embedded finance

Embedded finance can energize marketplaces, increase sales, and simplify consumers’ lives. Financial services and fintech are about quick access, simplicity, transparency, affordability, and being able to please your consumers. But unfortunately, because finance is ingrained in everything we do, it is becoming invisible.

Fundamentally, embedded finance incorporates financial services within a non-financial company’s product, such as lending or payment processing. Embedded finance can come in various shapes, including embedded credit, payment, and insurance.

By 2025, embedded finance, according to Lightyear Capital, could generate $230 billion in net new revenue. According to them, the change will be advantageous to businesses that have a “digital mindset” and can take advantage of chances in other financial innovation-related fields.

All Tesla customers who purchase a Tesla have inbuilt insurance, allowing them to drive their new car out of the dealership fully covered and without any additional paperwork. In addition, Uber provides embedded payment, allowing users to access their bank information (with their permission) so they don’t have to enter their credit card information each time they book a ride.

Embedded financing, often known as embedded credit, enables customers to purchase now and pay later (BNPL). Swedish finance business Klarna is a market leader in offering this type of embedded credit. With its “pay-in-four” plan, available in some regions of Europe and the USA, Klarna offers short-term, point-of-sale loans for purchases across its portfolio of shops. This allows customers to divide their balance into four installments to be paid every two weeks.

 

Risks and benefits

Businesses like Klarna help their registered retailers increase sales by dividing payments over time while easing the financial burden on consumers. With its “pay in four” financing scheme, Klarna doesn’t impose interest. However, late payments cost users money. Some of Klarna’s retailers offer more extended repayment arrangements. Retailer-specific interest rates might be up to 25%. Even more, it is charged by some BNPL service providers.

Fintech startups, dubbed “digital loan sharks” in some regions of the world, have drawn attention for charging high-interest rates and using abusive collection practices, prompting more robust controls.

Although any consumer can go into debt, those most at risk are frequently people who live in developing nations, are in extreme need, and have little access to conventional banks. Users of BNPL services run the same risk of identity fraud as users of any data-sharing program. However, banks and fintech startups have demonstrated they can work together to produce a secure and advantageous retail experience for customers when adequately regulated.

The CEO of venture capital firm Dubai Future District Fund, Sharif El-Badawi, is upbeat about the prospects for fintech startups. When the cooperation is at its best, “banks meeting halfway with these startups is truly delivering us—as consumers and businesses—the most value,” says El-Badawi. As a result, we get the security and safety of a bank. Additionally, we get the user experience, as well as bells and whistles, from the startup. “I think the wonderful moment for us as consumers is the extensibility of those two functions together.”

 

The Bottom line

Fintech startups are not going to topple the titan banks overnight. But their threat can certainly not be ignored. As a matter of fact, it should not be perceived as a threat but as an opportunity. This is a sign for all conventional giants to revamp their processes and evolve.

It is time to adopt the digital evolution. Fintechs understand this. So should banks. For this, you will need reliable resources and dependable service providers. That’s precisely what we at signzy emphasize. Check out Signzy’s API Marketplace for more.

 

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com.

 

Written By:

Mahesh Mohan

Mahesh Mohan

Mahesh is a Creative Writer intent on learning and sharing knowledge. He ensures to deliver well-researched and precise information to the reader without squandering their time or tag. He is well versed in financial technology and digital marketing with a passion for stories of all forms.

 

 

 

Fintech Startups Or Traditional Banks – Will The New Financial Entities Replace The Traditional Banking Titans

There are 6,636 fintech startups in India, which has one of the fastest-growing fintech sectors in the world. The market for Indian fintech is expected to be worth $150 billion by 2025. But while the industry soars, traditional banking is the one that takes the hit. As a result, conventional methods are dropped for improved digital solutions. 

Hence the question arises, “Will fintech startups replace traditional banking?” Well, to answer that, we must fully understand the entire scenario. So let’s have a look at it.

 

Valuing Fintech Startups

The approach used to value fintech businesses relies on various factors, including the industry they serve and where they are in their lifecycle.

Traditional approaches, such as the discounted cash flow method, comparable transaction method, price-to-earnings ratio of comparables, etc., can be used to value mature companies with an established company and stable cash flows.

There are specific approaches that can be used for valuing investments for very early-stage fintechs if they have not yet attained a critical mass or market share in a particular area or niche market. This can be the scorecard valuation method, Berkus method, risk factor summation method, venture capital method, etc.

Specific multiples can be applied for the valuation of a fintech that has visibility based on the business segment. For instance, a fintech business with a loan portfolio can be valued using the enterprise value to loan book ratio. A company involved in payments can be valued using a multiple for transaction value or a comparable ratio of enterprise value to the number of active users. A fintech business in asset management can be valued using the enterprise value to assets under management ratio, etc.

 

Fintech Startups Are Sweeping Into Traditional Banks Territories

According to statistics, traditional banks in India have lost one-third of new revenue due to current fintech startups. Apart from the payments business, which is how the fintech space started, many segments, even in the Indian fintech space, offer solutions in specific financial areas like peer-to-peer lending, insurance, wealth management, and digital payments. All of these have enormous growth potential.

Therefore, for firms functioning in the fintech category, it is not about EBITDA or profitability but instead being in a sector with an addressable market, much like conventional startups.

Because of this, a purely low-margin payment business may not have much value and may not be bought out by businesses looking to create an ecosystem or established companies looking to gain a technological edge. This was the case when Axis Bank bought Freecharge, and Bajaj Finance launched Bajaj Pay while simultaneously launching five marketplace products to become a fintech eventually.

We can also observe that the time of only operating in the payments sector is finished, as many fintech has moved on to creating an ecosystem. Once a fintech has an ecosystem, there is a significant chance to cross-sell due to the big addressable market.

 

Based Valuation For Fintech Startups

The optimum method will be to evaluate these firms on a SOTP (Sum Of The Parts) basis for businesses having varied risks and rewards, depending on the sub-sectors of the industries like payments, lending, investments, etc.

A fintech could represent various sub-sectors, yet under current law, none of these may call for a banking license. In addition, several industries don’t need a banking license, like wealth tech, insuretech, peer-to-peer lending, etc. Therefore, the majority of financial startups are emerging in these industries. For example, consider Cred, a fintech with a fantastic data bank to use the data for cross-selling.

Fintechs provide P2P payment services despite not possessing a banking license; however, this is restricted by the fact that they cannot store customer funds as deposits. On the other hand, banks constantly lose consumers to these fintech companies. Banking as a Service (BaaS), which enables banks to share their infrastructure with these fintech businesses, is thus emerging due to the collaborative atmosphere between banks and fintech players.

We can see why having a banking license could benefit fintech by giving them a technological advantage, allowing them to grow up more quickly, and giving them access to a vast data mine for cross-selling.

 

Where Fintech Banking Is Headed

Several fintech businesses have applied for and been granted licenses to operate as banks during the past couple of years. An instance in point is the recent purchase of a Small Finance Bank by PhonePe and Centrum. The fintech industry aims to challenge the status quo through innovation, agility, and quick decision-making.

Although it may seem illogical for these businesses to choose the traditional banking route, one must keep in mind that these fintechs are disruptive because of the technology they provide, which is precisely what the traditional banking system lacks.

As a result, fintech companies are creating more than just ecosystems. They are also creating marketplace platforms for fintech companies, such as the insurance platform Policybazaar, which recently announced partnerships with Paytm, Ola Financial, private sector lender IndusInd Bank, and a small group of consortium participants. This was to create a New Umbrella Entity (NUE) for a national payments infrastructure company.

 

In Conclusion

As previously stated, many major banks have made attempts to partner with or buy fintech startups to develop their digital products. Meanwhile, fintechs are presently attempting to resemble banks. As a result, we may observe a wide range of fintechs across areas working toward gaining a banking license, from payment businesses to lending marketplaces.

It is important to note that all financial institutions must improve their financial processes. If you represent a financial enterprise, we might be able to help you with quality resources. Signzy’s AI-driven No-code products and services can improve your processes.

 

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

 

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com.

 

Written By:

Mahesh Mohan

Mahesh Mohan

Mahesh is a Creative Writer intent on learning and sharing knowledge. He ensures to deliver well-researched and precise information to the reader without squandering their time or tag. He is well versed in financial technology and digital marketing with a passion for stories of all forms.