What do Fintechs have to do with the cereal aisle? Tune in to this episode of Payments on Fire: Fanning the Flames to hear the answer to that question and more, as Glenbrook’s Chris Uriarte and Drew Edmond prepare for MRC Vegas 23.

If you are attending, we’d love to connect! Please reach out to Chris or Drew on Our Team page or connect directly on LinkedIn.

Yvette Bohanan:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends, in its evolution. Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for this episode of Payments On Fire. In this episode, we are fanning some flames, folks, with Glenbrook’s very own Chris Uriarte and Drew Edmond. Chris and Drew are attending the MRC 2023 Conference, March 6th through 9th in Las Vegas, called Vegas 23, to meet with our industry colleagues and to present a session entitled Help, I’m Becoming a Payments Fintech. For those of you who are not able to attend the conference this year, or if you’re listening after the conference but didn’t catch this illustrious session, I wanted to sit down and talk with Drew and Chris about this topic. You have to admit, it is a catchy title. So Chris, Drew, welcome to Payments On Fire.

Chris Uriarte:

Thanks, Yvette. Good to be here again.

Drew Edmond:

Good to be here.

Yvette Bohanan:

Okay. So, Help, Am I Becoming a Fintech? Let’s start at the very beginning with a little level setting. Chris, before we get into the question about becoming a Fintech, perhaps you can start us off by defining what a Fintech is, and it might be a loaded question.

Chris Uriarte:

Well, it’s a really basic question I think, Yvette, particularly since Fintech is a big buzzword that we use very often in the industry these days, but I think if you ask 100 people in the industry what a Fintech is, you’d probably wind up getting 100 different answers, but really, in the scope of today’s conversation, what we’re really talking about is a company that’s offering payments and financial products as their core service. They’re making money from payments, they’re making money from financial services, contrasting that to a typical merchant who’s just a consumer of those services and often looks at payments as a pure cost center, a pure cost to their business. While the concept of making money from financial services and technologies definitely isn’t a new one, the number of options that are out there today and the speed at which these services can be brought to market is far, far more advanced compared to where we were, say, five years ago.

Yvette Bohanan:

Looking at that lens of timeline and five years ago versus now, this idea came from an observation that you made, that the work we do for our clients in our consulting practice, there is an evolution that’s occurring where merchants are transitioning from businesses who are just selling things to businesses that are also offering these financial services as part of their product suite. What do you think is driving the evolution?

Chris Uriarte:

There’s really one primary driver here. It’s quite simple. It’s innovation. As companies begin to imagine new use cases for their existing products and services or as they dream up completely new products and services, they’re often finding that embedded payments and financial products are just necessary to make those services work. As I said earlier, organizations have a robust suite of options available to them today to help them bring all these cool things that they’re imagining to life and that’s the path that they’re taking to get into the embedded finance world, but we’re also seeing scenarios where companies find that embedded finance services are just a purely new revenue opportunity that could help increase client engagement and stickiness. So maybe it’s not being driven by evolution of existing products and services at all. Maybe companies just see this as an opportunity towards a new path of revenue.

Yvette Bohanan:

Really important, and just to take this concept now and tether it a little bit, Drew, can you jump in here with maybe one or two examples of companies that have evolved in this way and walk us through how to think about that?

Drew Edmond:

Yeah, absolutely. I think we’re seeing this across domains. We’re seeing this in business-to-consumer companies. We’re seeing this in business-to-business companies. There are a lot of companies that are going through this type of evolution right now. I think it’s helpful probably to use a company that’s already gone through this that we’re all very familiar with and that many of us use pretty regularly, and that’s Uber. Uber started as a company that really earned its income from ride-sharing fees, but now we see them having additional healthy streams of revenue coming from the embedded financial services and the payments component of their business. They used to only be able to pay their drivers through weekly bank transfers. A driver would sign up. It’s a more common payroll system. ACH sent to their bank account once a week, but they really weren’t solving the needs of the users of their platform.

They really evolved into new payment types that helped to satisfy the increasing demand that the drivers have to get paid quickly and more frequently. For example, if you’re a driver now, you can get paid multiple times a day, I think up to five times a day using their real-time push payment system, which Uber will charge you for, so that’s a revenue stream for them, because this is providing a lot of value to the drivers. You can think about them needing to fill up on gas or needing access to those funds multiple times throughout the day. Uber will push funds to a co-branded Uber Visa card, which is another great revenue stream for them because then they’re also earning interchange revenue every time that card is being used. If the driver is going to use that card to pay for gas or pay for repairs on their car, they have some reward systems baked in, but they’ve got the interchange revenue that’s going to Uber when that card is being used. It’s really a classic example of turning payments from a pure cost component into that revenue stream.

Yvette Bohanan:

That’s a great example. It gives me pause though because I think of Uber. Uber’s got a huge staff. They’ve got engineers, they have product managers, they have people thinking up all these great ideas. They have a ton of risk management staff probably too. A lot of these tech companies are set up for this, but this is happening across the board in a lot of organizations. When you start talking about embedded finance and other sorts of things you need to be able to do to do this well, who are the businesses? Who are the provider businesses that the merchants should be thinking about and how should they be looking at this provider landscape? If they’re going to rely on someone to create this new revenue stream? What’s going on in the provider landscape in this space? Let’s double click into that whole embedded finance category for a minute. Chris, how should they be looking at that?

Chris Uriarte:

Well, the landscape that you’re talking about, Yvette, is complex to say the least. There’s many providers that are offering specific solutions around things like money movement or traditional banking products. Card issuing is a really big one these days. You get into areas like lending and working capital, wallets, prepaid, store value, and much, much, much more, so there’s tons of providers in this space, and while there are many small and medium-sized businesses and Fintechs that are providing point solutions to help solve a lot of these problems, some of the larger global players that we traditionally have associated with online commerce and payment processing have often gotten into the mix as well, so those are the likes of Stripe and Adyen and Shopify and Square. These are names that are very, very familiar to us that have been in the payments industry for years, but they have really, really expanded their product and service set to go beyond just classic payments.

If you look at somebody like Stripe, there is a whole roadmap for embedded finance and associated payment products there that goes far beyond just classic payment processing. First and foremost, companies really need to be clear on what you want to offer because if you’re just window shopping down the Fintech aisle, it’s going to be very, very confusing. You need to know what your goal is here and that’s going to help lead you to at least the right class of providers that you should be looking at.

Yvette Bohanan:

It’s like the cereal aisle in the supermarket.

Chris Uriarte:

Yes, exactly.

Yvette Bohanan:

No idea there’s four different kinds of Rice Chex and you’re comparing labels all day long, you can’t get out of that aisle. It’s straightforward, but it’s not straightforward, because you have all of these considerations and payments is not straightforward as a topic, as an industry. What are the challenges that you typically see when a business starts to contemplate this? You have some executives coming in or maybe the product management team’s saying, “Hey, we got this great new idea.” What should people be thinking about?

Drew Edmond:

Yeah, absolutely. I think you’ve hit on a really key point because looks can be pretty deceiving here, and I think, yeah, people might have dollar signs in their eyeballs when they think about adding financial services to their product suite. When you look at the websites, when you’re walking down the cereal aisle and see that Cinnamon Toast Crunch has gotten into embedded finance-

Yvette Bohanan:

Exactly.

Drew Edmond:

when you’re looking at their websites and you’re trying to understand the features and capabilities that some of these providers have out there, you’ll see that the value proposition that is forefront a lot of the time is ease of implementation and speed to market, but the reality is that there are a lot of different challenges and pitfalls that you might face if you move too quickly into this arena and you don’t really think through all the aspects and the implications for your business for starting up these types of new programs. There are risk and fraud considerations, there might be regulatory and licensing issues that you need to deal with, there might be changes to your operations, the processes themselves and customer support enhancements that you might need as well as go to market and reputational considerations.

That last one’s really important, those reputational considerations, because if you think about changing your relationship with the customer, now if you’re offering financial services, these are really critical pieces of the business or the customer that’s using these products and how they think about the use of financial services might be different than how they think about the relationship they have with you for the core products and services that you have. You need a mental shift on how you approach these things.

Yvette Bohanan:

So as you go through that mental shift, if you’re the business here contemplating this, what questions should you make sure you ask and get answered? Just to get started. What’s the starting point in your questions? It’s always about asking the right questions, isn’t it?

Drew Edmond:

Yeah, absolutely.

Yvette Bohanan:

What are the right ones?

Drew Edmond:

There are definitely some basic questions to start with, absolutely. So the first one is really around the classic build versus buy discussion. Am I going to build any of this in-house or am I going to go out and buy things from service providers? If I am going to use service providers, what types of providers do I need and how do they differentiate amongst themselves? How are they going to treat me differently and service my needs differently? What regulatory hurdles might exist? Do I need money transmitter licenses for instance? What are the potential legal, fraud and risk liabilities? Do I have the right people and systems in place to address that?

A lot of times we have risk teams at merchants or at businesses, but they may not be perfectly suited or trained to address some of the issues that come up with new financial services that you might be providing. More questions are how will this impact my overall customer experience and what’s the reputational risk if things go wrong? We touched on reputational risk earlier, and then, am I able to support this in the geographies that I’m doing business in? If not, what are the other providers that I might need to pull in to make sure that my international coverage and expansion ambitions are covered there? These are some of the questions that need to be answered before you go too far down the road and start writing code.

Yvette Bohanan:

Okay. All right. You have this buy versus build canonical question. Let’s unpack it. Let’s start there. What are the pros and cons around buy versus build in this particular space?

Chris Uriarte:

Yeah, I’ll jump in on that one, Yvette. I think it’s the classic business conundrum here that we’ve seen in technology and business over the years. It really comes down to things like control, complexity and economics of the overall solution. These days, all the piece parts are there for any company to build any of these types of financial solutions from scratch, but you would really need to have a significant amount of experience and expertise to really do it well. For example, you can forge your own relationship with a sponsor bank and build your own compliance and risk program from the ground up. You could also design all the technical interfaces to the different rails that are going to be necessary, but that’s going to take a lot of time, expertise, and money at the end of the day. If you’re not ready for that, then you can go down the route of finding a service provider who could do some or even most of these functions for you.

So for example, if you want to move money via ACH or maybe RTP or some newer type of real-time payment scheme from bank accounts to wallets, you could find the service provider that will provide the technical, the banking and the compliance framework to do that for you. The downside in that scenario though is that your costs are typically going to be higher on a per unit basis, on a per transaction basis. However, this is usually a good starting point for companies that don’t have the expertise bringing these types of financial services to market. You really have to ask yourself, do you want to become an expert in building financial service products? If you’re a company who’s really just in the business of building and selling widgets, at the end of the day, you’re probably really good at building and selling widgets, and maybe you want to stick to that and you should leave the building of the financial products probably to the experts.

Yvette Bohanan:

Yeah, it’s tough though, because there’s this yin and yang from what Drew was saying too, right?

Chris Uriarte:

Yeah.

Yvette Bohanan:

The less you build in-house or the less you retain from an operational perspective in-house, the more you’re giving up to this provider, and it goes back to who’s the provider and how are they… Part of the question’s around your customer experience, your reputation. How does all of that play together? Just a few dimensions here that they’re like levers and knobs that you really have to think through.

Chris Uriarte:

For sure.

Yvette Bohanan:

Speaking of levers and knobs and thinking through things, risk. Risk management, one of our favorite topics, Chris. [inaudible 00:15:17] risk management, compliance, broad mitigation are all big considerations here. Definitely tying into your reputation and your customer experience and just the ability to do this successfully. So whether you do buy or build, those things are always an overhang of what you have to think about and they can be tricky. Particularly with embedded finance. When you add this embedded finance component, how do you tee up that thought process?

Drew Edmond:

Yeah, so you’re right in that… I think it’s a really critical… Or it should be a really critical focus area for organizations. The problem is if it’s not a critical area of focus for folks that are thinking about embedding financial services and it affects a lot of things. It affects your underlying costs. If you start seeing a lot of fraud, it affects reputational risk because if all of a sudden, we see an influx of fraudulent activity and it’s affecting your customers and they’re tying that experience to you as a brand, that can be really detrimental to your relationship with your customer. What we often find is that organizations are either ill-equipped to handle the risks that these new financial products bring to the table, either because they haven’t built the right organizational or technological infrastructure, or because they think they’re fine with what they already have in place.

But the reality is that the risks that these companies face with new types of financial products and use cases, they typically can’t be mitigated by the organizations that were originally built to handle traditional payments risk functions such as credit card fraud detection. These are different types of fraud, different types of risks, and the processes and the training involved is just not the same. Companies that are doing this really need to take a fresh look at the risk that comes along with adding these new products.

Yvette Bohanan:

I think this is one area where you just can’t ask too many questions because a lot of what we see and observe when people call us is they don’t know what the risks are that they should be asking about to begin with. I think that’s part of what you’re getting at here. If you’re not dialed in to what the potential risks are, you get into these situations where people may choose a provider, get down the path and find out they actually have some kind of exposure, and they thought the provider was handling it, the provider assumed the business knew what to be doing, and now you get into a situation where everyone thinks somebody else is doing something.

It’s not your traditional risk, it’s not your traditional chain of liability, it’s not your traditional anything. This is new new territory for people. That’s definitely an important area to be thinking about. When you look at the relationships, we need banks here. We need at least one bank in this equation somewhere along the line to make this stuff work, typically called a sponsor bank, and they can have a big impact on operations. Their risk appetite, what they’re willing to do, what they’re capable of doing can all affect the business and the customer ultimately. What options are out there for businesses when it comes to sponsor banks? There’s a lot of scrutiny, a lot of change in this area right now.

Chris Uriarte:

Yeah, so the first thing that I’ll say is that sponsor banks are a necessary evil for many of the activities that businesses are looking to do in this embedded finance world, and I’ll make an important clarification to what I was saying earlier about service providers bringing banking relationships to the table as part of your relationship with the provider. That’s that your service provider sponsor bank at the end of the day is also your sponsor bank, meaning that the bank needs to very much be aware of what you’re doing, what your use cases are, and how you’re going to be transacting for these financial products.

So regardless of whether you’re accessing these products directly through a sponsor bank of your own or through a service provider, it’s important that you understand the bank’s policies, that you’re transparent with the bank about how you’re doing business, and most importantly, that you’re 100% confident that the bank is dedicated to this space that you’re doing business in for the long term, because we’re seeing a lot of evolution in this space right now. We’re seeing a lot of banks come in and out of this market offering different types of services, and we’re also seeing a lot of them really pull back from a risk perspective and being a lot more thoughtful about who they’re engaging with, what type of Fintechs they’re engaging with, what type of use cases they do or they do not want to touch, and just in general how they’re approaching the market in the long term.

Yvette Bohanan:

I want to recap what you said at the beginning there. My provider sponsor is my sponsor. Is that basically the gist of it?

Chris Uriarte:

Yeah, that’s pretty much it. Yep.

Yvette Bohanan:

I think we need T-shirts, Chris. I think we need T-shirts made. This has been a great conversation. I think this session that you’re doing is going to be pretty interesting. I’d love to be there to hear all the questions that come out of it too, but to wrap up this podcast, what are a few takeaways that you want our listeners who are contemplating this becoming a Fintech journey to keep top of mind?

Chris Uriarte:

I’m going to keep it very, very simple. Be cautious, don’t rush and keep it simple to start.

Yvette Bohanan:

Okay. Good advice. Good advice.

Drew Edmond:

All right. I’ll keep it less simple, but I think it’s important to understand your value proposition and the relevant customer journey so that you’re armed with that information prior to conversations that you’re having with any potential providers so that you can really understand how those providers differentiate and how they might serve you, and that can help you really make the right choice to make sure that the partner that you choose is the right one for you.

Yvette Bohanan:

All right. Well, guys, thank you so much. Points well-made. Really appreciate you taking the time to share your observation and insights on this rather hot topic, and for both of you to be here on the podcast. I hope you have a great time at MRC’s Vegas 23. Thank you to all of our listeners. If you would like to learn more about embedded finance, Fintechs and what’s going on in this whole interesting facet of the industry, please check out our podcast library. We actually have a lot of information out there available to you. We have a few PV posts that you might find interesting and thought-provoking, and a couple on-demand learning modules available on our website at glenbrook.com. Until next time, Drew, Chris, safe travels. Maybe we’ll do a redux on what you hear and see at MRC and everyone out there, stay safe, be well, and do good work. Take care.