Fintech Infrastructure 101 - Overview & Market Landscape

Financial Technology (“Fintech”) startups are companies targeting all of the core financial applications including Banking ($7T), Wealth Management ($75T), Capital Markets ($74T), Lending ($8T), Real Estate ($8T), Insurance ($5T), Payments ($2T), and Remittances ($800B). 

While diverse in scope, all of these activities are interconnected and largely facilitated through traditional financial institutions including: JP Morgan, Wells Fargo, HSBC, BNP Paribas, MUFG, Bank of America, Bank of China, Industrial & Commercial Bank of China, Citigroup, and many others.

However, many of these new startup fintech startups are being built by developers, who are a very new customer segment for traditional banks and who are changing the needs of the underlying financial infrastructure itself. Before diving into how the infrastructure ecosystem is changing, I will cover the major trends that are the root cause of this change.

Major structural trends in the fintech landscape

1. Increasing global customer bases

2. Embedded Fintech

3. Unbundling of Financial Institutions

4. Developers as the end customers

Increasing global customer bases

Financial services companies historically have dealt with a limited set of customers across known geographical barriers. Traditional banks started with local, city, regional, state wide, and country-wide offices and worked with international correspondent banks to transfer money across jurisdictions. 

Banks were not set up to handle international customer bases, and the regulatory and compliance overhead of sending international payments is a huge sunk cost within the current system. On average it costs ~7% to send remittance payments internationally between retail customers.

In contrast, digital commerce platforms are required to handle international customer bases from day one. For example:

• Apple - 1.4B active apple device users across every major continent worldwide. 

• Airbnb - 650,000 hosts, 150M renters, 2M bookings per day, across 191 countries. 

• Shopify - 600,000 merchants across 175 countries with $15B in GMV for 2019.

• Uber - 3M drivers and 75M riders across 80 countries, with $40B in GMV for 2019.

• Binance - 15M users across 180 countries, with $1T in trading volume on the platform and $1B in cumulative profit in 1.5 years of operation. 

The financial infrastructure platforms of today must be able to handle customers across all jurisdictions, all exchanges of value, all types of use-cases (producers, distributors, consumers), and all from the start.

Embedded Fintech

The financial sector and fintechs have historically been thought of as a vertical industry serving specific use-cases (banking, lending, trading, etc.). However we are now seeing the rise of “embedded fintech.”

Rather than standalone applications, financial features are being embedded into all of the consumer and business applications that people are using already. Here are several examples:

• Uber - Launching Uber money to allow drivers to collect earnings in real time & issue credit/debit cards to spend their balance. 

• Grab - Created their own digital wallet to be able to hold and spend value in their digital wallet (similar to WeChat pay). 

• Google - Now offering checking accounts through Citigroup and Stanford Federal Credit Union.

• Facebook - Is trying to launch Libra, one of the more ambitious bets to develop their own digital currency. 

• WeChat (owned by Tencent) - Has 1B users and does $1B in total daily payment transaction volume via WeChat Pay. 

Unbundling of Financial Institutions

Financial companies historically were large monolithic applications that served the entire suite of financial products to all of their customers. For example, Wells Fargo provides all of these services across these segments: 

• Consumer - Checking accounts, savings accounts, debit cards, credit cards, FX, remittance, and payments. 

• SMB - Business checking and savings, debit and credit cards, business lines of credit, loans, merchant services, credit card processing, and PoS systems.

• Enterprise - Commercial checking, financing, real estate, employee benefits, institutional investment, investment banking, securities, and treasury management. 

Original image created by Tom Loverro: https://tomloverro.com/post/102797126721/banking-is-under-attack-heres-a-screenshot-of

As fintech companies started gaining traction, they largely targeted narrow verticals and customer segments. Here is a good visual representation showing how each fintech company is attacking a very specific product segment that Wells Fargo provides: 

Traditional financial companies are feeling the pressure from large competitors and small fintechs across every single segment and product category they serve.

Developers as the end customers

Financial institutions were built to on-board people as customers (retail) or business owners as customers (SMB); however, today there is a new class of users needing access to the underlying financial infrastructure these banks use - developers.

Developers not only want access to the data (“Open banking”) of financial institutions, but more importantly want access to the underlying functionality that banks provide. 

Prior to fintech platforms, if a developer wanted to start a new fintech company it typically took 2+ years to develop a partnership with a bank before getting up and running. Now we see developers using fintech platforms (ex. SynapseFi, Sila, etc.) to spin up new fintech apps in a matter of hours. This reduction of effort is leading towards a rise in the number of fintech applications in the marketplace. 

My prediction is we will see a further continuation of this trend and the financial infrastructure platforms themselves work across a whole network of financial networks including banks, financial institutions, and up and coming digital wallets. These developer platforms will abstract away all of the complexity of working across multiple financial partners, and allow applications of all types to embed fintech services within their products (both fintech and non-fintech apps).

Fintech Infrastructure 

All of the above fintech trends and more are pushing the requirements of fintech platforms, most notably by the developers who are building fintech apps on top of the legacy and next-generation financial infrastructure.

Below is a market map of this new fintech financial infrastructure space:

Traditional Financial Institutions

This category includes all of the traditional banks working with fintech companies on a business level (white-label banking), developer level (banking-as-a-service), and the legacy core banking infrastructure providers (FIS, Fiserv, etc). Many of the early adopter banks have been smaller community oriented banks, with the exception of BBVA who developed their platform through the acquisition of Simple. 

Banking-as-a-service Platforms

This category is primarily other startups who are trying to provide the entire functionality of a bank (Deposit, Savings, Send, Withdraw) to developers to allow them to build financial features within their own applications.

Banking Connector API’s

This category is primarily platforms and services that allow users to connect their own bank accounts (Chase, Bank of America, Wells Fargo, Citi) through API’s that developers can embed into their own application.

Lending as a Service

This category are platforms who are proving end-to-end lending solutions which can be embedded within fintech applications or work within lenders & financial institutions. This includes some of the traditional players in addition to new startups offering these services via API.

Card Issuing API - Targeting developers

This category is primarily platforms that allow developers to issue cards (Credit card, virtual cards, and prepaid cards) within their applications to their end users.

Brokerage Infrastructure API’s

These are API’s that allow developers to offer stock trading & brokerage services within their fintech applications.

Other Financial Infrastructure API’s

Here are a few examples of other fintech infrastructure companies allowing developers to build stock trading, marketplace, and other complex forms of payments within their applications.

Banks vs. Developers

Many of the tools, API’s, and infrastructure created for financial applications were originally created for internal banking customers; however, now with the rise of consumer and business fintech applications, we are going to see outside developers as the new emerging customer.

Plaid, a fintech infrastructure company recently acquired by Visa for $5.3B, stated in their M&A report that they have 2,600+ fintech developers on the platform. As we see more and more products embedding financial features into their own applications, we’re going to see a huge expansion of “fintech developers” across all market segments and verticals.

Thanks

A big thank you to Charley Ma, Mengxi Lu, Edith Yeung, Jason Choi, David Gogel, and Kim McCann for helping to review and provide feedback on this post.

Appendix

“Future evolution of fintech infrastructure”

Fintech applications are most commonly thought of as being built on top of existing banking systems.

However, as this infrastructure layer is solved there are new banking rails which are still in their infancy - most notably digital assets. This includes Bitcoin, Ethereum, and most interesting of all, the variations of Stablecoins (USDT, USDC, etc.).

Given digital-assets are programmable in nature, many of the first order problems are already solved from day one. Digital assets are stored in a common data layer (the blockchain), with a shared interface (UXTO’s or ERC20’s), and build on inter-operable protocols (assets can be stored among any digital wallets). 

There is a huge open question whether digital-asset first platforms (Coinbase/Binance) will be able to bridge these divides first, or whether traditional fintech apps will move down the digital stack first. 

This cross-section is one of the most interesting areas we are paying attention to closely. 

Remittance Market— Primer and Landscape

This post was originally written on May 25th, 2019 on Medium.

Note — I originally wrote this writeup on the Remittance industry in April 2019. I’m releasing a redacted version of this writeup publicly. All of the numbers and stats in this article were from April.

An Introduction to Remittances

Remittance is the capital flow between individuals in two different countries, typically by foreign workers to individuals in their home country. According to the World Bank, the total remittance market is comprised of $550B in total flows, 80% of which are within emerging economies.

Because of globalization, remittances have increased sharply worldwide and have increased 5x from 2000 to 2018. Remittance is a significant activity and can be as high as ⅓ of the total GDP of various countries and is 3x the value of developmental aid.

The global average for sending $200 worth of value between countries is 6.94%. This means that ~$48B is taken directly out from remittance transfers through fees, middlemen, and financial institutions. These exact rates are highly regionalized, and will be discussed further below.

The goal of this document is to give a short introduction to the remittance market, a landscape of existing participants within this market, and how the blockchain could impact this market sector.

Primer on the Remittance Market

Remittances sit within the larger market of cross border payments, which includes all forms of payments between consumers and businesses

Zooming in on the remittance category, the majority of remittances payments are handled by traditional banks & credit unions and specialized money transfer operators (MTO) which specialize in cross border payments. Some of the largest providers in this space include Western Union, UAE Exchange, MoneyGram, and up-and-coming operators such as TransferWise.

Because of the macroeconomic forces of globalization & migration,remittances have been growing 10% on average worldwide. Three key reasons why the remittance market is growing faster than worldwide GDP are:

1. The number of migrants grew faster than world population, in total there are 266M international migrants (240M migrants workers and 26M total refugees). This means they are proportionally more people likely to send remittances.

2. Migrants were able to earn higher incomes, because of relocation towards higher earning countries.

3. It has become cheaper to send remittances, falling from 10% on average to 7% on average. This reduction in cost is likely to have allowed migrants to send a larger fraction of their incomes.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook

For remittances, sending money abroad has traditionally been an expensive task (vs. domestic transfers), with a never-ending supply-chain of middle men, paperwork, and hidden fees. On top of this, it is estimated that 80% of these remittance payments are still handled via physical cash.

Below is a diagram showing just how complex the movement of money internationally can become:

Source: Bank for International Settlements — Cross-border retail payments report

In terms of the overall market, remittances are highly fragmented based on geography and by specific corridors, which is the combination of 2 countries: where the money is sent and received.

Below are the largest receivers of remittances and the top coordinators worldwide.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Source: World Bank — Migration Remittances Factbook

The business model of cross border transactions is primarily a mix of two variables: direct fees and foreign-exchange (FX) fees.

• Direct Fees — Direct fees include all of the fees related to the transfer itself. Examples include: a flat fee, transfer fee, % of transaction fee, outgoing fee, amendment fee, bank-to-bank fee, etc.

• Foreign-Exchange Fees (FX) — The FX fee is the difference between the mid-market rate, and the actual rate money is exchanged into. Many remittance companies charge a premium on top of their internal FX rate and keep the difference.

These two factors combine together to create the ultimate margin the money transmitter takes. Today the worldwide average is about 7%. Western Union, for example, had a split of 70% and 27% between fee and FX revenue respectively in its 2016 results.

Below are some example mixes of fees + FX charges from some of the highest cost corridors in the world.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Remittance Market Landscape

Money Transfer Operators (MTO’s)

MTO’s dominate the remittance market and make up the majority of remittance volume worldwide.

Financial Institutions
For traditional financial institutions & banks, international remittances make up a relatively small portion of their overall product offerings; however, on average, banks charge a much higher rate (11% vs. 7%) for international money transfers.

Fintech Startups
Fintech startups have targeted the remittance market due to their large incumbent market share, although with the exception of TransferWise, very few have broken out. In addition, these startups mostly target digitally savvy customers with bank accounts vs. cash agents — which is the lion share of the market.

Blockchain Specific Fintechs
Blockchain technology has the potential to dramatically lower sending rates and add much needed transparency into the market. Although for the time being it does not seem like any of the new startups have dented the overall market yet.

Incumbent Advantages

Brand, Agents, Cash, Compliance, and Acquisition.

While on the surface, incumbents like Western Union looks like a great target for disruption, there are deep structural reasons why they are still maintaining their lead.

• Brand — Incumbent providers have huge brand & awareness advantages across the globe with 90%-100% brand awareness in all of the top remittance corridors across the world.

• Network — Incumbent providers have a huge embedded network of local MTO operators in countries globally, Western Union has 204 regulatory licenses, 500K retail locations, 100K ATM’s, 150M customers, covering every major currency & corridor around the world today. Many of these retail locations are also binded to exclusive contracts to Western Union as well.

• Cash — It’s estimated that of the total remittance volume worldwide, 80%+ of this is handled via cash payments which also require MTO’s to have both physical presences & cash inventories. For the most part, fintech startups are not serving this segment of the market.

• Compliance — What most startups don’t realize is the cost of transfering money is not the most expensive part, but rather compliance costs. It is inherently difficult to ensure money is being sent compliantly in multiple jurisdictions 24/7, which is why 20%-40% of the remittance cost is due to compliance alone.

• Acquisition — On top of compliance, since the remittance market is an established market, incumbent players are willing to spend $15–70 per customer depending on the specific corridor they are targeting.

Demand Side: Satisfaction?
For all of these costs, fees, and friction in sending money cross-border — users of incumbent services are generally satisfied with their experience.

On top of this, as mentioned a few times, the majority (80%+) of remittance payments are processed via cash — either on the receiving, sending, or both ends. Even when people have bank accounts remittance senders prefer cash for a few reasons:

• Many migrant workers are undocumented.

• Many migrants are afraid of being deported

• Avoiding taxes by sending cash to family members

• Not wanting to fill out paperwork to setup bank accounts

Core Value Proposition
In my opinion, most startups are touting cheaper fees, when that is not the main motivating factor for most remittance senders or receivers. Instead new startups should focus on:

• More transparency (TransferWise)

• Ability to track payments

• Lower compliance costs

• Unique acquisition channels

• Focus on underserved corridors

The biggest strategic questions any new startup needs to decide on is if they want to focus on more affluent customers first (where all the startups are today) or focus on the larger (but harder) cash market.

Why now?
In the ideal world, sending money cross border should be as easy as sending a message via WhatsApp to anyone across the world. In theory you can send a digital currency, like Bitcoin, quickly and at low cost; however, anything that interfaces with the banking system (especially cash) adds many complications and cost.

There is a massive opportunity to roll up all of these regional players into one large international payments company. Expanding from there to business payments, etc. also massively expands the total adjustable market these new companies can service.

Appendix

Future Evolution of Remittance
Remittances today is most commonly thought of in the most basic function — sending money overseas.

As this fundamental layer is solved digitally, new services can be offered to this customer base, blurring the lines between remittance, checking, and business accounts, etc.

Average Transactions Amounts by Providers
Among remittances specialists, average transfer size is much smaller depending on core customer segments. For CurrencyFair and TransferWise that mostly target expats from developed countries, the average transfer size could be few thousands of dollars. For money transfer companies targeting migrants from developing countries, the average transfer size is usually a few hundreds.

• CurrencyFair — $5,500

• TransferWise — $2,300

• Remitly — $500

• Transfergo — $400

• WesternUnion — $300

• WorldRemit — $200

• Large banks

• JP Morgan — $15,000

• BofA — $10,000

• Citi — $7,000

• Wells Fargo — $2,000

Additional reading

• Cross-border retail payments (By the Bank for International Settlements)

• A vision for the future of cross border payments (by McKinsey)

• Global payments 2018: A dynamic industry continues to break new ground (By McKinsey)

• Migration and Remittances: Recent Developments and Outlook (By the World Bank)

• Migration and Remittances: Recent Developments and Outlook Presentation (By the World Bank)

• Migration and Remittances: Fact Book (By the World Bank)

• Western Union: permanent leader of international money transfer (By SaveOnSend)

• Money Transfer Startups: race against time? (By SaveOnSend)

• Xoom Money Transfer: The Disruptor That Wasn’t (By SaveOnSend)

• MoneyGram: whack-a-mole of money transfers? (By SaveOnSend)

• Western Union: Investor Day Presentation 2016

• Western Union: Investor Day Presentation 2016 (Cross Border Platform)