Hello TWIF UK & Europe friends, I hope you had a good week.

Don't forget about our upcoming breakfast!

...Well that week was an entertaining one. We saw Elon tweet about X and Xmoney - a power house fintech in waiting I suppose? We saw Mr Beast acquire fintech Step.
We got to watch Stripe show robots buying things and yet again spurning the advances of the public market in favour of the private.

Europe continues to sound the klaxon on security. President of the European Central Bank Christine Lagarde echoed sentiments from French MEP Aurore Lalucq that Europe is overly dependent on US and Chinese payments systems. A theme that seems to be gathering PR momentum.

We also saw crypto continues its march into the mainstream with adoption in payroll, HR and travel. More about that in the bulletin.

But today I wanted to talk about something that was all the rage a few years ago. Something before AI fever took hold of us all. Something that was part of the fintech hype cycle ever before Crypto stole the limelight, spectacularly exploded, and then stole the it again. Something that began even before mobile apps helped to revolutionize the engagement landscape for financial services. Before modern APIs and the cloud. Before the great unbundling of the stack altogether. Something that without the fanfare of other fintech movements quietly marches on, bit by bit shaving market share year by year. Something entirely boring these days, but important nonetheless. Embedded Finance. If that’s not your thing - scroll to the bottom for the industry news and updates. If it is, don't and read on about Why brands like Uber, or Mr Beast of anyone of trust or note may soon be your bank.

Embedded Finance isn’t new. It’s probably as old as commerce itself. From the first farmers protecting themselves from a poor yield after the agricultural revolution to ride hailing apps banking their driver base, the motivation has and always will be the same. Context.

The Germans have a better term for embedded finance called (and yes I am mentally doing this in an accent) "Kontextbezogenes Banking"  - it basically translates to 'Contextual Banking'. In other words delivering a financial service relevant to the context in which the need occurs.

For the farmer post the agricultural revolution, it was likely a merchant in the town square on market day with some papyrus and ink, scribbling down an agreed price for next years yield. And for the Brands of the world today, it’s about understanding their users.

Take a ride hailing app like Uber or Bolt of Lyft. Each knows their drivers’ circumstances better than any bank. They have the context layer that allows them to offer something truly beneficial. And now with an evolving BaaS landscape, tailoring a bank account or debit card product to suit it is achievable.

But in this regards two things are for sure:

1. Embedded Finance is not a modern phenomenon.

2. The easier it becomes the more use cases it opens up.

In the beginning, embedded (or contextual) financial services were a form of Insurance, risk mitigation, a gamble. For the farmer in post agricultural revolution it was physiological need. A need to ensure their survival. It was a bet to protect against bad weather or pestilence, (or perhaps even competing farms having bumper yields). And for the merchant, perhaps it was more psychological. A bet against supply chain disruption and for expenditure certainty.
As doing business became more certain in general (less war/increased economic stability) embedded finance climbed its own Maslow’s Hierarchy. It moved from solving for deficiency to solving for growth. And so it moved from creating certainty in an uncertain world, to into the world of credit. The difference is subtle. CFD’s, futures and forward contracts are all instruments where the buyer and seller accept the future is an uncertain world and these instruments (at some cost) provide a degree of certainty. As the world became more certain, so the embedding of finance moved from insurance, to credit. Embedded Credit also has a long history. But for mainstream adoption as we know it, it seems to have begun as a consequence of the industrial revolution, where the new found ability to mass produce needed a symmetric capacity to mass consume.

Enter, the world of mass credit and a result, embedded credit! Since the early 1920’s people have been turning up to furniture stores, and being offered installment payments to buy their beds and mattresses. (I suppose you could call that specific example embedded finance or financed bedding). 

By the 1960’s that function had spread to automobiles. And then, as transportation continued to innovate, credit became widespread for international travel and the like. Embedded Banking is simply the most recent iteration. First we solved for security, then for growth, and now embedded banking has taken the next step. It’s no longer just solving a contextual problem. Its inverting the use case. Rather than solving the contextual problem, it’s about leveraging it.

The Uber's of the world don't want to be the bank for its driver base. But by conveniently placing banking facilities, it can shore up its chief revenue metric, Miles Driven. If a ride hailing app can pay you instantly, why would you drive via any other means. If they can deliver the trimmings of a traditional bank layered with the unique context they have of their target demographic, they can add hyper-specialized benefits that no other Bank can. And in doing so, they become top of wallet. Not only do Miles Driven become locked in amongst the heavy user base, but they increase market share and reduce the gig economy problem of “multi apping.” And more boringly but no less importantly, they can generate new revenue streams through the traditional means such as interchange, bank fees, FX and the usual revenue flavours of the month.

But here’s the thing, embedded banking is going through its latest evolution. What I like to call the 'Post Payroll Revolution'. Crucially it allows businesses with large payroll runs to generate balance sheet protection after you have paid. By banking those you pay, you open an entirely new layer or revenue generation. Instead of a dependency on kinetic activity (some event must occur to generate a revenue) you enter a situation where you make both kinetic and passive revenue.

Think of it this way, A ride hailing app typically has a circa 3-5 day cashflow cycle from ride booking/completion to transaction acquired/driver paid.

Day 1. App receives booking. Passenger completes journey.

Day 2-3. App receives passenger funds from acquirer.

Day 4-5+. Driver receives payment to own bank account.

In the above scenario, the passenger payment is a fleeting mark on the balance sheet. A temporary liability before deducting fees and forwarding to the driver. But what if the ride hailing app was the defacto bank? Let’s say, it issued its own branded bank accounts to its driver base. That means that yes, obviously when the funds are acquired from the passenger, the ride hailing app can now delete some transaction fees it incurs to send to the driver. And yes they’ll make some of the interchange clip if there is a card. And yes yes, I know they can probably offer some contextual fringe benefits too like discounted cars/insurance. That’s all old hat at this stage. It’s not that it’s not valuable. But this evolution of embedded banking allows for something new. 

By banking their Payroll, those funds are still technically on the ride hailing app’s balance sheet. Previously those funds would be a cash debit at the bank and you can kiss goodbye the principal and the interest that would have accrued.  Assuming the Brand has the ability to encourage deposits to stay on account (as opposed to being immediately moved to the user’s incumbent bank) this allows the brand to tremendously grow its deposit base. Instead of handling $500M+ of monthly payouts, they are growing 500M of monthly Deposits. Yes there is of course leakage as these users fund their daily lives, but even if you assume a 90% instant withdrawal rate, that’s still 50M a month of AUM growth that can be used in a multitude of ways to amplify your growth.

Across a year thats over half a billion sat on account to generate interest and use in other ways. And I think this use case marks a new era of embedded banking, where Banks finally concede that governance and compliance is their only moat. But distribution, customer service and user adoption gets entirely abstracted to the brands.

A brand basically needs two things to succeed here.

1. A payroll/accounts payable base large enough to justify banking it.
2. Brand equity via identity (being cool) or trust (being reliable).

Is it so hard to believe? Just this week Mr Beast acquired Fintech App Step in a deal to combine his brand and the established governance frame Step provides.

Large Brands could easily command a vast commercial audience if the became a engagement layer of a bank, or partnered with the burgeoning class of BaaS banks. It’s only a matter of time before a BaaS provider grows big enough to command the trust of a brand like Google. Imagine paying invoices through Gmail. (how is that not a thing already!?)

Brands like Reddit, Roblox and Steam, have huge brand loyalty and could command a compelling marketshare. All it would take is to layer on existing high demand benefits like Free Reddit Gold, 5% off games if bought through your Roblox account or advanced access to release through your Steam Account. If Google offered me a Google Bank account and I got free youtube Premium, I'd sign up there and then.

Brand’s like Amazon, Etsy and Temu similarly have huge B2B audiences that they could offer contextual benefits like. Free Amazon Prime if you receive your Amazon sales to your amazon account. Higher cash back on your corporate spend if you spend it back at Amazon... Going slightly more rogue for dramatic purposes, Booking.com could give you 1 nights free holiday if you pay receive your salary into a booking.com account. HMRC could offer discounted tax if you dared to let them bank you! Amicable (the divorce app) could automate child share expenses. Your grocer could offer you BNPL.

As you can see I’m stress testing my own argument for semi comic relief. But the fact remains, if you bank the entity you pay, you turn cash debits into ledger debits. And at scale, that can open up a new economic model for a huge number of brands.

I think we are finally entering the Post Payroll revolution, where brands fight for your deposits, and share in the upside that once was the exclusive domain of Banks.

Oh and by the way, a long time ago, when I worked for a small UK Bank, in my employment contract I HAD to open an account with them. So there's always that too...

 Daniel Cronin

👍 👎 Have feedback or news to share? Let me know on Twitter and LinkedIn.

Funding/Financing 💸

Highlights below of deals since the last post in the fintech space across the UK & Europe. Deal data powered by Dealroom.

🌎 Tether backs Anchorage Digital with $100M as $4.2B crypto bank gears up for IPO

🇬🇧 Bound (secures $24.5M to scale FX risk management for finance ops globally)

🇬🇧 Incard raised closes £10M Series A to expand its financial platform

🇪🇺 Finst raised €8 million to support European expansion

🌎 Saudi fintech startup Madfu has raised over SAR 95 million ($25.5 million) in a pre-Series A  

🇬🇧 Levl announced $7 million seed round to provide stablecoin infrastructure for fintechs

🇬🇧 Tangible raises $4.3M Seed Funding for “Hardtech Debt” Platform

Challenger Banking 🚀

🇬🇧 Monzo wrongly denied refunds to thousands of fraud and scam victims

🇬🇧 Revolut enters EoR market powered by Deel

Digital Assets ₿

🇪🇺 EU considers blanket crypto ban targeting Russia🇬🇧Gemini exits UK market citing high compliance costs as it shifts focus to US markets

Traditional Banking 🏦

🇬🇧 HSBC chosen to tokenise government bonds

Infrastructure 🚧

🌎Stripe unveils  AI agents promising to herald a new age of commerce

Payments 💰

🌎 Elon Musk owned X to launch ‘X Money’ powered by Visa Direct. The partnership will allow X users to leverage Visa Directs global payout rails to transfer money instantly.

Regulatory Corner 🔎

🇬🇧 UK FCA exchanges letters of cooperation with Indian regulator IFSCA. As the global macro environment highlights increased uncertainty and the breakdown ot the existing world order, this could signal a strategic shift of the UK government to hedge its bets on who to main train relationships with in the future.

Longer Reads 📜

My partner in crime and TWIF’s very own Matt Jones wrote this fantastic piece - Ukraine’s Fintech Ecosystem

Stablecoin Paper - Flow by Deutsche Bank