Pivotal trends shaping the financial sector

The Finterview - Fintech Exposed episode 16.

With a wealth of experience driving digital transformations within banking, industry veteran Jeff Parker, VP of Banking-as-a-Service at Marqeta shares unique perspectives on the pivotal trends shaping the financial sector today with Integrated Finance’s very own Daniel Cronin on the Finterview Podcast - Fintech exposed.

In this article, we delve into a series of compelling topics, starting from the rise of Banking-as-a-Service (BaaS), exploring the regulatory challenges of expanding globally and unlocking artificial intelligence's potential in financial services. Jeff’s insights provide a clear vision of how technology redefines financial services, offering a sneak peek into a future filled with technological advancements and boundless opportunities.

Keep reading for the key takeaways from the episode or 🎧 listen to the full podcast here.

The current Fintech landscape

Jeff believes we live in an intriguing era for businesses worldwide. Despite the departure from the thriving times of 2021, the present brings unique opportunities amidst challenges.

Drawing from his experience at Marqeta, Jeff asserts that companies with a solid foundation are well-positioned to navigate the market. They can continue to serve their customers effectively and spot chances to expand their coverage, capabilities, and, ultimately, their strategic vision. As he aptly puts it, "testing times, but I guess if it was easy, everyone would do it."

Jeff Parker's journey in financial technology

Jeff’s professional journey offers an intriguing glimpse into the evolving world of financial technology. He started his career in traditional banks such as JP Morgan, Morgan Stanley, and Macquarie. Later, he dived into the payments business by investing in OFX, an international payments company. As the COO of OFX, he played an instrumental role in the company's growth.

His subsequent journey took him to World First, a company at the forefront of offering what we now call virtual IBANs. They empowered small businesses and merchants to sell overseas on platforms like Amazon, using their accounts to collect money and handle conversions.

Eventually, Jeff found himself drawn to the world of card payments, a sector he once thought was dying out. But delving deeper, he discovered numerous opportunities, especially considering how digital wallets are linked to cards in the West instead of being tied to bank accounts in the East.
Today, Jeff works with Marqeta to expand their international business. He envisions an impending convergence of cards and non-card payments, providing a comprehensive one-stop solution for clients. His current endeavour reflects a promising stride towards an inclusive future.

The power of physical brand representation and embedded finance

Jeff believes that physical tokens like cards, though seemingly outdated in our digitised world, carry a significant brand value. For instance, a company like Monzo, recognised for its bright pink cards, has taken advantage of physical cards' visibility in everyday transactions. People notice, and curiosity is peaked when such tokens appear at bus stops, train stations, or fast-food counters. This visibility offers a unique branding opportunity for companies, and the trend doesn't seem likely to fade soon, despite the convenience offered by solutions like Apple Pay.

However, in the face of our digital world, there's another aspect that's gaining popularity - embedded finance. A good example is the use of virtual International Bank Account Numbers (IBANs), often referred to as multi-currency accounts. This tech-savvy innovation involves creating or leveraging local banking networks globally to open bank accounts, and all interconnected via a unique user interface.

For instance, a UK-based business or consumer could open an account and get a US dollar account based in the US, a GBP account based in the UK, and an Australian dollar account based in Australia. These accounts are made accessible through a single platform, displaying all these multi-currency accounts provided by different banks.

Financial transactions become integrated into non-financial services by embedding these accounts into various user experiences, such as a merchant checkout facility within an e-commerce platform. While somewhat invisible from a branding perspective, this integration can significantly enhance user experience and brand value by ensuring smoother, more streamlined financial transactions.

Jeff points out that it's a fascinating development with various attractions for both parties. The blend of physical tokens for visibility and embedded finance for ease and integration represents a unique approach to branding and user experience in the financial world.

Understanding embedded finance and its applications

Embedded finance, often called 'contextual banking,' involves incorporating financial services into areas where they weren't present. Jeff emphasises how almost all services or products have a financial side. Marqeta offers an infrastructure platform for developers to build products with integrated financial aspects. Consumers might not interact with Marqeta directly but benefit from its services via partners like Uber or Klarna.

Some cases on how this integration works:

• Ridesharing services: the hassle of paying after a taxi ride is replaced with seamless digital payments, making the process smoother.
• Online shopping: embedded finance offers flexible payment options like instalments at checkout.
• Real-time wage access: an innovative solution allowing Uber drivers to access their earnings instantly.
• Future automobile industry: car dashboards might soon serve as hubs for diverse financial transactions, from paying for fuel to purchasing insurance.

In Jeff’s view, we only see the dawn of the embedded finance revolution. It's here, and it's set to proliferate across every sector.

The future of traditional banks in the embedded finance age

According to Jeff Parker, there has been a shift in perception regarding the future of traditional banks. Early predictions anticipated their downfall, but now it's understood that their roles may evolve. Traditional banks will likely remain significant, especially those actively investing in digital transformation. For instance, JP Morgan's impressive strides in the Fintech space have positioned it as a frontrunner.

Adapting to the digital landscape

Several banks are pursuing partnerships with fintechs or corporates, enabling them on a larger scale. This shift was motivated by the high servicing costs associated with their legacy technology. They can maintain relevance by offering core services with a digital front end provided by a bank or a licensed EMI.

The rise of Fintech

Parker applauds emerging firms like Monzo, Starling, Revolut, and Oaknorth for demonstrating profitability. However, it's noteworthy that their income is primarily driven by lending or interest earned on balances held. This doesn't fundamentally alter the banking landscape. Fintechs are akin to an institutional sales desk for a traditional bank; they find customers, and the banks provide the services.

The lingering power of legacy banks

Despite the Fintech boom, Parker recognises the enduring inertia of legacy banks. People often retain accounts opened during childhood, providing these banks with a sizable customer base. Yet, these relationships may change as digital transformation accelerates, leading to an even more seamless banking experience.

The role of Fintech in financial inclusion and social impact

Embedded finance presents enormous opportunities to address financial inclusion and social impact. As per Jeff Parker's insights, Fintech solutions can serve small to medium enterprises (SMEs) that play a crucial role in the economy but are underserved by traditional banks.

Financial inclusion

Around 2 million people in the UK, 13 million in Europe, and over 10 million in the US lack access to bank accounts. This is primarily due to outdated credit assessment procedures that rely on factors like mortgages or credit cards. In contrast, embedded finance combines financial and non-financial services, giving a richer view of a customer's risk profile. This innovative approach could expand financial services to a larger audience.

Credit builder products

Marqeta, for instance, is developing "credit builder" products that use non-traditional data points to assess risk profiles. A reliable payment history for services like a Netflix subscription could indicate a customer's ability to effectively manage financial services or products.

Accelerated wage access

Parker also notes that around 40% of the UK adult population has less than a hundred pounds in savings, indicating the need for more accessible financial options. To cater to this, embedded finance can provide accelerated wage access, allowing people to access their earned money before their scheduled payday. This approach can help individuals manage their finances more effectively and avoid high-interest predatory loan products.

Parker believes that while financial technology can't solve all problems, it can significantly improve lives when collaborating with other systems. The opportunity to make a real difference in people's lives is massive, and the industry is just beginning to tap into it.

The impact of increased data on credit accessibility

The availability of large data sets has revolutionised many industries, including the lending sector. However, questions arise concerning the possible drawbacks of this trend, specifically, its potential to amplify existing biases in loan approvals and further marginalised disadvantaged populations.

Parker believes that while lending companies are proficient at assessing risk, their expertise primarily applies to a specific population segment. The danger, he contends, lies in the potential for this knowledge to be applied universally, thereby unintentionally perpetuating existing bias and further penalising marginalised communities.

However, the growth in data does offer potential benefits:

1. Transactional underwriting: Instead of assessing the business's general ability to repay a loan, lenders can evaluate the viability of individual transactions. For example, if a business seeks to purchase machinery for $5,000, lenders could underwrite this specific transaction, assessing how the machinery contributes to the business's objectives.
2. Enhanced education and transparency: With greater visibility, individuals can better understand what they need to do to improve their credit standing.

Despite these significant potential benefits, Parker doesn't deny the possibility of misuse or mishandling of data. He suggests that robust guidelines and oversight can help create more positive than negative outcomes in using data in lending.

In conclusion, although inherent risks are involved, increased data access could result in positive changes in credit decisioning if approached correctly.

Leveraging AI and data in financial services

Artificial Intelligence (AI) isn't new, but its applications in the financial sector are gaining momentum. AI offers potential benefits, but there are instances where it's failed to deliver on high expectations. Based on the insight provided by Jeff Parker, the applications of AI in financial services are manifold and are beginning to alter the landscape of the industry.

Key applications of AI in financial services

• Financial inclusion: AI can help tailor personalised solutions by leveraging data more effectively. This has immense potential for financial inclusion, extending services to unbanked populations.
• Credit underwriting: AI can enhance credit underwriting by enabling more informed decision-making.
• Customer service: AI, specifically chatbots, can improve customer service.
• Product development: AI can aid A/B testing to optimise user experiences. Large language models can process customer data in real-time to understand customer preferences.
• Fraud and risk management: proprietary risk management engine using AI to assess customer transaction data and predict possible fraudulent behaviour.

Potential risks and future opportunities

Parker believes AI can be the next stage in allowing humans to do value-added activities. Although some jobs may be replaced, others will arise. For example, many jobs we do today didn't exist a hundred years ago. The same may be true for the future.

With AI, companies could eliminate inefficiencies caused by asynchronous communication, resulting in significant time savings. AI can take over monotonous or dangerous tasks, freeing humans to focus on more meaningful work, potentially in new jobs that haven't yet been conceived. AI's influence will be felt across various sectors, making it an exciting space to watch in the coming years.

In conclusion, the technology-driven shift in financial services, the rise of digital banking, and the growth of fintechs are redefining how the industry functions. While regulatory hurdles remain, innovative firms like Marqeta are pioneering the change, leveraging technology to improve efficiency, inclusivity, and service personalisation.

In the realm of Artificial Intelligence, the industry stands at the precipice of significant transformation. From improving customer service to enhancing risk management and product development, the potential of AI is vast, albeit fraught with challenges.

As we step into this exciting future, it's crucial to remember the importance of the human element amidst the digital revolution. The future beckons with opportunities for those ready to innovate, adapt, and lead in this dynamic landscape of financial services.

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