Industries develop over time. When they mature, they tend to become more specialized. That’s what is currently happening with the fintech industry. It’s entering a new phase of division and specialization where the many players in the game are beginning to focus on what they’re good at and leaving the rest to others. We’re exploring the multiple aspects of this ongoing trend, which has been coined as various terms—fintech enablers, embedded finance, fintech-as-a-service, and modular finance.
The general idea is there are more and more companies providing the technology, operation, licenses, and other services to their clients—which can be large corporates, SMEs, and startups—so that their clients can provide their own fintech services. With this evolution, it’s very likely that the finance sector as we know it will no longer exist. Here are a few examples of the specialized services offered by fintech trailblazers.
This might be the most well-known sub-sector among all fintech enablers. The concept of banking-as-a-service first emerged in the UK, Germany, and other parts of Europe, and then blossomed with the rise of challenger banks and open banking APIs. The same concept has also found its way to the US, Latin America, Africa, and Asia. (If you’re curious about the landscape of challenger banks in Asia, check out this article.)
It’s hard to define exactly what banking-as-a-service is, as it comes in various forms. Some provide access to bank accounts at incumbent banks, while others supply software, such as a core banking system. Others still offer not only software, but also service operations. Some even issue banking licenses.
Although banking services technically include lending in most cases, many banking-as-a-service options only include the functionalities of a savings account and debit card. On the other hand, there are a different group of companies that focus on lending, which requires a different set of technology, operation know-how, and licenses.
Unlike banking-as-a-service, whose early adopters are mostly startups that try to become challenger banks, credit-as-a-service has many big tech adopters and traditional corporations that are providing their own lending services. This makes sense, because compared to banking services, lending services face less rigid regulation, but has higher profitability potential in the short term.
When we talk about enabling companies to issue credit cards, the tech aspects are often mentioned first. People love to unpack the ways to collect and analyze all kinds of data to build credit models, as well as how to predict the default rate or optimize the interest rate.
However, there is another side to this that cannot be avoided. That is working with card networks, issuing banks, and printing companies to issue cards, authorize transactions, and communicate with settlement entities. This applies to not only to credit cards, but also to debit cards. and any other kind of payment card.
#4. Insurance-as-a-service and brokerage-as-a-service
While banking, lending, and card issuing services have been mostly divorced from insurance and brokerage firms, the issuance of insurance and brokerage services remains with those original companies. The reason is because insurance and investment products are much more complicated, and the learning curve for the average consumer is much steeper compared to a simple savings account or a payment card. There is still considerable debate among regulators and potential clients of insurance- and brokerage-as-a-service as to whether these products should be distributed in this way.
However, despite the obstacles, some companies are working to revolutionize the way insurance and investment products are being built and distributed.
#5. Compliance-as-a-service, custody-as-a-service, and wallet-as-a-service
The driest part of the finance industry might just be compliance, security, and custody, yet it may also be the most crucial part. The is the bedrock on which the finance industry builds the trust (and earns the money) of their customers. This is also why many companies have not provided financial services thus far, because of how rigorous financial institutions are in regards to compliance.
Compliance and security measures include KYC (know your customers), AML (anti-money laundering), CTF (counter-terrorist financing), data privacy, and also protecting one’s assets from all kinds of attack, including digital and physical forms.