If Big Banks Win Embedded Finance Innovation Dies

Welcome to Fintech Brainfood, the weekly deep dive into Fintech news, events, and analysis. You can subscribe by hitting the button below, and you can get in touch by hitting reply to the email (or subscribing then replying)

Hey Fintech Nerds 👋

Had so much fun seeing those of you who came to M2020 in Vegas this year. I genuinely love this community of Fintech Nerds. Some notes this week instead of Things To Know.

ICYMI: I recorded another episode with Rex on Youtube, this time all about why Stripe spent $1.1bn on the Stablecoin startup Bridge.

Oh, and Alex Johnson is now everywhere, all at once.

Here's this week's Brainfood in summary

📣 Rant: If Big Banks Win Embedded Finance Innovation Dies

💸 4 Fintech Companies:

1. My FO - The back office for the Family Office

2. Kick - Self-driving bookkeeping

3. Axyon AI - Asset modeling with ML

4. Blanche - Fintech Oversight as a Service for sponsor banks

👀 Money 2020 Recap:

1. Issuer processors are churning customers

2. 1033 is all out lawfare

3. Everything is AI

📚 Good Read: Understanding Fintech and Bank partnerships (Incredible piece by Alex - I've added thoughts below too)

If your email client clips some of this newsletter click below to see the rest

Weekly Rant 📣

If Big Banks Win Embedded Finance Innovation Dies

The number of new Fintech programs peaked in 2021 and has fallen since then, in line with the rise in bank enforcement actions.

The age of being in production is 8 weeks after signing an agreement with a sponsor bank, and it is well and truly over. But there's a new winner in the market. It's the banks that can balance the tensions of being easy to work with and teach first on the one hand, with having robust compliance and risk management in place.

It sounds obvious when you say that out loud.

But the gap between knowing what to do...

And doing it successfully.

Here's how I think it will play out.

TL;DR

• The news will get worse before it gets better. What follows the consent orders will probably be some forced migrations.

• The big names have chosen their new dance partners. Check out the T&Cs of the big-name Fintech companies.

• Tenured sponsor banks are playing hard to get. If you're not under a consent order, you have a line of companies at the door and can afford to be choosey.

• The scale player banks are at the table, but Fifth Third has a strong lead.

• There are three types of sponsor banks, those exiting, those de-risking and the behemoths entering

• We will unlock room for more entrepreneurs with standards, and more direct regulator engagement

Things are about to get worse before they get better.

First, we're not out of the woods on the consent orders. Plenty of banks that entered during the Fintech boom still haven't had an action. Not all of them will receive one, but several more will be from here.

Second, what follows being under a consent order is often the forced migration away from their bank. While larger enterprise Fintech programs have successfully "de-risked" and gone multi-bank if you're smaller and forced to move within 90 days? Oof. That can be challenging!

There is hope on the horizon. The various requests for information from the FDIC into 3rd party relationships, and deposits should yield some sort of rule-making or outcome early in the new year. Many in the industry are waiting to hear what's in any new rules or guidance so we can reset and move forward.

Big Fintech names have chosen their dance partner.

The enterprise programs have migrated to new sponsor banks.

Stripe is no longer partnered with Evolve; they're with Newline by Fifth Third. Brex issued its credit cards via Emigrant Bank but now uses Fifth Third and Column for checking accounts (albeit not exclusively).

And they've started to act more like banks. The default position of most enterprise Fintech company chief risk officers is now that they must operate just as a bank would, including policies, controls, governance, and operations. (Trying to operate like a bank is one thing, but doing so with the oversight is another!)

There's also a hunger for direct oversight and engagement from these enterprise Fintech companies. While many companies have pushed back on moves by the CFPB to regulate wallets, Neobanks are interested in more direct dialogue with regulators. Their challenge is that they often hear things second-hand, interpreted by their bank partner, and miss the nuance of the regulatory conversation.

Tenured sponsor banks are playing hard to get.

There are now hundreds of Fintech programs, and nonbanks are scrambling to find their new bank partner. The banks that are not under a consent order but have experience sponsoring programs are in no rush to accept them.

A lot of that is because these companies might be risky, young, or lack good policies. But a lot of it harms innovation and the prospects of Fintech companies.

I heard a bank CEO say recently that they'd never onboard their best customers today because they look too risky in their earlier lives. This is a structural issue we need to fix through actual partnerships.

If we want no risk, then we have a world without transactions, partnerships, or opportunities.

Scale players are getting more involved.

Many were surprised when the news broke that Wells Fargo was the underlying sponsor behind the Bilt Rewards card and product. In reality, Wells, Barclays, and Citi are massive payment banks have sponsored card programs for decades.

If you crawl through LinkedIn, you'll find a "Head of Embedded Finance" at just about every top 20 bank in the US. "nonbank financial institutions" or NBFIs have long been lucrative for banks.

What's changed is how they serve this customer segment. Where before, they were quite happy to let smaller banks sweep up "risky" programs, some of those programs have grown into very interesting scale players.

Fifth Third's position is different. Newline is a separate business line that builds on 8+ years of intentional, gradual entry to serving nonbanks with a more distributed, tech-first supply chain. This is not classic co-brand cards or wallets where it's the bank product with a different logo. It's partnering with companies like Stripe and Brex.

This differs from someone like JP Morgan Payments, who's intentionally looking for marketplaces and tech platforms with more of a checking-account-as-a-service approach. The entire account is owned, ledger, and risk-managed by JP Morgan. It's still API-first, but it's also much more direct.

Both of these options are good.

They just suit different segments.

Where Fifth Third has built Newline to craft approaches for scale Fintech companies, JP Morgan might better suit marketplaces or any company in the flow of funds that wants to outsource worrying about ledgering completely. That might suit Stripe or Brex a bit less, but it could really work for many others.

For the existing banks who don't want to exit the space, they have to double down on their right to win. Some have long since specialized, like Pathward, Celtic, Web in lending, or Column in payments. The age of all things to all people might not be a right to win.

There are three types of sponsor bank now.

1. Those exiting because the cost of staying is too high (e.g. Five Star Bank), and many of the BaaS middleware platforms that have suffered bankruptcy have wreaked havoc.

2. Those maintaining position are trying not to do anything risky. Some are cautious. As Alex Johnson put it, those without a consent order are hiding in the bushes, trying not to get hit by the regulator next.

3. Big, scale players like JP Morgan's embedded finance product or Newline by Fifth Third, which focuses on massive enterprise partnerships, are entering the market.

Almost nobody is focused on the small Fintech company.

But that means today, we'd have nobody taking a risk on companies like Chime or Cash App that have changed the shape of the market and led to some genuine financial inclusion.

Is that the market we want?

Making a better embedded finance industry.

If we want innovation, we have to raise the bar. We can do that if we align behind best practices and standards, but there's a catch. Banks fear being associated with a standard or initiative because "if we do that, won't we look like one of the bad ones to the regulator?" It could be like putting a target on their back.

I don't think that's the case at all. The world of broker-dealers and securities has long had standards (e.g., ISDA) and codes of conduct and regularly gathers through trade associations to discuss non-competitive market structure issues.

The embedded finance market structure has fraud, AML, and third-party risk management problems. The good news is that several initiatives are available to start resolving those.

Opportunities to make the industry better

There's so much we can be doing.

• Standards

• Engaging directly with regulators

• Intelligence and risk data sharing

• Responding to calls for evidence

• Engaging with the trade associations

Standards: The Coalition for Financial Ecosystem Standards CFES initiative led by FS Vector. CFES is an industry-led effort to set operating rules that promote safety and soundness for nonbanks participating in financial services. Members provide input that ensures standards reflect compliance rigor that keeps up with evolving technologies and banking partnerships. It's early, and it's a great time to mold it.

• The whitepaper is available here.

Engaging directly with regulators: The Association for Innovation in Regulation (AIR) is hosting a series of events, Techsprints for direct regulatory engagement. It's like a "hackathon" of sorts, but with the regulators in the room, actively viewing market solutions and openly discussing best practices. If you want to be in the room with regulators, this is the best possible opportunity.

• The upcoming event in Washington can be seen here.

Intelligence and risk data sharing: The regulatory frameworks such as GLBA and FinCen 314b allow participants to actively discuss issues such as fraud, and AML and share data and intelligence without relying on informal channels such as email or PDFs shared in the clear.

• e.g. Sonar*

Responding to calls for evidence: The regulators have issued several RFIs on deposits and bank-to-Fintech "arrangements." Every single one of those comment leaders will be read and categorized, and any new rule-making that appears could be shaped (as many former regulators have experienced and lived).

Engaging with trade associations: The American Fintech Council (AFC) and Fintech Association (FTA) have done incredible work advocating for the Fintech industry. They host events, produce comment letters, and have proven their ability to change rules and future policies.

We have to act together if we want a growth industry.

The status quo of no new Fintech company formation means we're losing the opportunity for innovations that create financial inclusion, make it easier to start a business, and unlock growth.

If the big banks only serve the big companies, the existing BaaS banks continue to de-risk and be cautious. We won't get that. We'll get a market where entrepreneurs can't start a Fintech company, and any bank that dares to change receives a blizzard of consent orders.

Instead of accepting this status quo, there is plenty we can do to create the industry we want.

We can build standards and best practices, share intelligence, and engage directly with regulators. More than anything, as a community, we, the Fintech Nerds, can ensure any new sponsor bank or Fintech company is drowning in resources to do their job well.

Finance is the plumbing of the economy. Every company and person needs to pay, get paid and finance their lives. Innovation in finance impacts everything.

In 2025, we'll get new rules and start to reach an equilibrium where bank-to-Fintech "arrangements" are well understood and clearly regulated. Our opportunity is to create a better market in the process.

Lets unlock finance.

By unlocking embedded finance.

ST.

4 Fintech Companies 💸

1. Kick - Self-driving bookkeeping

Kick auto categorizes transactions, imports CSVs, matches receipts, and reconciles fees against transactions. It takes actions on behalf of finance. It will auto-prepare key deductions (like a home office and vehicle) and move personal transactions to business.

🧠 Everything is accounting AI rn. If Notion was the missing half of Slack, then Kick is the missing half of SMB accounts like Novo or Payhawk in Europe. Mid-sized e-commerce businesses and freelancers are still drowning, and finding a good accountant is incredibly hard. AI is the ideal solution.

2. My FO - The back office for the Family Office

My FO provides a dashboard to organize data, decisions, and documents. It provides a portfolio overview, scenario planning, and "stakeholder management." The goal is to save time for analysts gathering data and modeling potential investment decisions.

🧠 Family offices are often smaller and don't have a team of analysts like an investment house would. Reducing their admin burden makes sense, but how big is this TAM?

3. Axyon AI - Asset modeling with ML

Axyon predicts assets that will outperform (like equities, ETFs, or Forex). They provide a time horizon for performance and build off-the-shelf or custom strategies based on a fund's goals.

🧠 While many companies focus on LLMs doing data aggregation grunt work, Axyon is looking for alpha in the possible investments space. I've seen several of these platforms, and they're essentially quant-as-a-service. They're often as good as the team behind them's ability to continue building models, which is good for smaller funds that don't have that capacity.

4. Blanche - Fintech Oversight as a Service for sponsor banks

Blanche provides a real-time audit to banks on the compliance data of their sponsored programs. It helps verify policies have been implemented and are being actively used. Get this; it also provides a full reconciliation.

🧠 Third-Party Risk Management as a Service? Not quite. So much of risk management is situational and requires judgment. However it's a big step towards streamlining that process and making the job of compliance officers 10x more effective. You have to love that transaction reconciliation feature. This space has certainly evolved in the last few years amirite?

(PS, I'd be remiss if I didn't mention, Cable, Themis and of course Sardine* who play in this space too)

M2020 Recap 👀

General impressions: This year’s Vegas show was a blast. The Sunday “content only” day means most content sessions were a sell-out. Unquestionably, if you do something on stage, that’s the day to do it.

Market readout 1: The issuer processors are churning. I spoke to several industry folks who had just left their issuer processor to go to someone younger or someone else. This was the quiet-out-loud rumor mill conversation of the week.

Market readout 2: 1033 is all out lawfare. The “Sunday night live” approach to keynotes and fireside was exceptional. Alex Johnson's interview with Director Chopra of the CFPB was a massive highlight.

Market readout 3: Everything is AI. The AI sessions were the busiest, and the AI start-ups have the fastest-growing revenue. While few can articulate their use cases, there are companies on an absolute tear for revenue. Twelve-month-old companies with 8-figure revenue are not uncommon.

Bonus readout 4: Everyone wants more engaging content. The sunday night sessions away from the expo hall were the best attended. The happy hours were filled with live podcasts. We ran an event as newsletter writers with Sardine* on embedded finance, and the feedback was, “This was the best thing all week.” - People want more than corporate platitudes. (That’s not really the fault of event organizers tbf, it’s the nature of making panels that feature companies with logos that will sponsor an event)

Good Reads 📚

1. Understanding Fintech and Bank partnerships

Alex perfectly covers the culture clash between technology companies and banks. For a nonbank, winning meant grabbing as much available margin as possible from banks and serving the widest audience. "Winning" high margin as a software company might force a bank to take excessive risk. "Winning" a software company as a client might mean exposing yourself to risks that come back to bite later. Goldman and Apple are classic case studies here.

The regulators have bitten back, forcing banks to push a lot of risk management and costs to their Fintech "partners." Alex says this could be overplaying their hand.

🧠 You can have zero risk if you do zero business. The winners always manage that tension well.

🧠 I've spoken to several bankers who are gleeful at the line of prospects waiting outside their front door, that they can make jump through hoops. This moment in the sun won't last. The big banks see the opportunity and are moving. They'll get it right, and they'll come for those prospects.

🧠 This market has to unfreeze eventually. Those willing to move quickly but precisely with solid risk management will be the winners when it does.

Tweets of the week 🕊

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees.

(2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a *. None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.

(3) Any companies mentioned are top of mind and used for illustrative purposes only.

(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held

(5) Citations may be missing, and I've done my best to cite, but I will always aim to update and correct the live version where possible. If I cited you and got the referencing wrong, please reach out