When Wise went public in 2021 at an £8.75 billion valuation, it already had more than 10 million customers, was processing more than £5 billion in cross-border transactions per month, and scaling quickly. But organic growth comes from unexpected places, so when Wise noticed an uptick in sign-ups from a bank in Hungary, they knew they had identified their next area of growth. The Hungarian bank was referring its customers to Wise because it couldn’t offer clients the same international payments services in-house. Wise decided to create a solution that the bank could embed in its own product. This model blossomed into the Wise Platform.
Wise Platform extends Wise’s core payments infrastructure to support the international money movement needs of banks and global businesses. In other words, Wise is expanding beyond its niche of cross-border payments to create a platform that bundles other financial services to support business clients. I sat down with Steve Naudé, Head of Wise Platform for his insights on the Wise Platform and the growing trend towards re-bundling of financial services within fintech.
D2C fintechs pivoting to offer embedded infrastructure to other businesses has been one of the biggest drivers behind the wave of re-bundling in the industry, which seemingly is only set to continue accelerating this year. 2022 signaled a rapid increase in re-bundling, evidenced by grand statements such as Elon Musk’s intention to create a super app similar to China’s WePay or AliPay after he bought Twitter for $44 billion.
The beginning of the year marks a great time to reflect on a question we’ve discussed multiple times within TWIF: Where are we in the story arc of the “Great Rebundling” and what will we expect it to look like in 2023?
A quick review: How did we get here?
Since the 2008 financial crash, customers have lost their trust in traditional financial services. The wave of fintechs that subsequently emerged offered unbundled alternatives, which were often more transparent, efficient, and cost-effective. This sparked an acceleration in the digital economy, as fintechs rapidly appeared and started to tackle different parts of the financial landscape. As examples, Bitcoin was created in 2009 and Venmo launched in 2011, allowing consumers to send money to one another without going directly through banks. Square launched in 2009 to support merchant payments and Wise launched in 2010 to facilitate cross-border payments. Subsequently a wave of alternative lenders and neo-banks have emerged to provide the financial services once exclusively provided by banks.
But infrastructure and licensing was (and still is) hard to develop in-house, limiting the ability of fintechs to expand both to new geographies and launch new services. While some fintechs have been able to reach global scale in recent years, others have been limited to their original scope.
As one of the earliest fintech disruptors, Wise has had the ramp way to obtain global licenses and build cross-border payments infrastructure since its start way back in 2011. It makes a lot of sense, then, for businesses to bundle this infrastructure into their own offerings.
“A company could theoretically build Wise’s capabilities in-house, but it would require significant time resources that take away from the company’s ability to invest in its core offering,” Naudé reflected.
The cost of investing in infrastructure is compounded by the industry preparing for a slower economy in 2023, as startups downsize to brace for a decrease in VC funding. In these macro conditions, younger fintechs will seek out cheaper and more streamlined ways to bundle financial services, while more established fintechs have an opportunity to capitalize on the market to build new capabilities or acquire at lower prices.
Re-bundling in 2023
The move towards re-bundling is motivated by multiple supply drivers, including the increasing availability of integrations via APIs, as well as demand drivers such as the proliferation of embedded finance, and the incoming threat from Big Tech. Several financial services companies have started to band together as API integrations between different products have become more cost-effective and technically feasible. Last year, Payload announced it would build an integration-first payments solution powered by JP Morgan to facilitate back-end payments processing. Banking-as-as-service providers such as Railsbank are continuously adding integrations to their platforms to offer more bank-like services, and payment orchestration platforms like Payoneer make it easier for businesses to combine multiple payment services together. The availability of integrations will only become more widespread, making it easier for start-ups to leverage one another’s services for customers. These integrations will continue as fintechs enter non-financial industries as well, creating financial solutions for industries such as healthcare, agriculture, and education. Bain & Company predicts that embedded finance will reach a transaction volume of $7 trillion in the U.S. alone by the end of 2026, with the largest opportunities in B2B and B2C payments, followed by embedded banking and BNPL.
While the accessibility of APIs is an opportunity for fintechs, the entrance of Big Tech into the industry creates more competition that incentivizes re-bundling as well. Amazon is rapidly expanding its financial services, offering new products within payments, BNPL, business credit cards, and business lending. Apple’s latest iOS 16 release included enhancements to Apple Pay, including the ability to track receipts and make bundled purchases to multiple merchants. Google hired a former PayPal executive to run Google Pay to reset its fintech strategy after a failed Plex launch (a rolled-back plan to launch a checking and savings account for Google customers). Fintechs also heavily rely on Big Tech for infrastructure (e.g. AWS for cloud computing) and distribution.
The expansion of Big Tech into the industry is not guaranteed. There are several obstacles, including regulatory hurdles and competing business priorities. The EU’s Digital Market Act, set to go into effect in 2024, is meant to limit the market power of Big Tech in Europe. That said, the impending expansion of Big Tech into fintech will force fintechs to offer more holistic services to their customers, which will require them to integrate with other fintechs (re-bundle), rather than build in-house.
More mature companies that have cash on hand are already capitalizing on M&A to bundle services, especially as valuations continue to remain low within the industry. Valuations of formerly VC-backed companies decreased by 69% in 2022 and VC backed exits were down 72% in 2022.
PayPal has actively used M&A to grow its business by expanding into new offerings. The company has spent more than $14.03 billion across more than 25 acquisitions to date. Some of the more prominent ones are listed here:
Acquired Company
Industry
Date
Value
Venmo (and Braintree)
Payments
2013
$800 M
Xoom
Global Remittances
2015
$890 M
iZettle
Payment Infrastructure
2018
$2.2 B
Hyperwallet
Payout
2018
$400 M
Honey
Shopping Rewards
2019
$4 B
Curv
Digital Assets Security (Crypto)
2021
$200 M
Paidy
Digital Lending
2021
$2.7 B
Acquiring allows PayPal to scale into new markets while fighting off competitors. M&A can also take on a different strategy to boost a company’s existing product line, as Global Payments did when it acquired EVO at the end of 2022. 2023 will bring even more M&A as companies take advantage of low valuations to acquire companies in new geographies or to expand to new products and verticals.
The Risk of Re-bundling
On the flipside of these benefits, re-bundling also introduces concentration risk for the greater fintech ecosystem. The domino effect caused by the collapse of FTX is a great example. When FTX filed for bankruptcy in November 2022, Gemini, BlockFi, and Genesis all halted withdrawals. Bitcoin and Ethereum are both still trading down from their pre-November prices. The fall of one crypto company quickly cascaded throughout the rest of the market, revealing the risk of such far-reaching interdependencies.
These best practices will become crucial in 2023, as embedded finance creates more partnerships between unlicensed and licensed financial partners.
Interestingly, financial regulators are reacting to this concentration risk by expanding oversight upstream from financial service providers, to regulate their non-financial services vendors. Recent legislation such as the EU’s DORA, the FCA’s authority over cloud service providers in the UK aims to extend cybersecurity and data private standards in the financial industry to “critical” technology (e.g. cloud computing) vendors. The concentration of fintech infrastructure on specific technology vendors trickles down from a larger trend across the industry. Gartner reported that in 2022, AWS and Microsoft respectively controlled 38.9% and 21.1% of the global infrastructure-as-a-service market. Regulators need to ensure that financial providers do not become “too big to fail,” which would require the same government intervention as the 2008 financial crisis.
Overall, the regulation of the technology vendors and the emphasis on cybersecurity and privacy is a necessary reaction to the exponential growth of the industry. However, if fintechs do not react quickly enough to remain compliant as they bundle new services together, they are at risk of falling behind in a highly competitive landscape. Fintechs and their embedded providers will need to ensure they remain compliant as they expand and seek to bundle new services together.
I asked Wise’s Naudé about how to protect against concentration risks and he emphasized three critical precautions:
1. Transparency
2. Clear communication
3. Contract terms.
Before forming an agreement between partners, each one needs to be “crystal clear” on what they are responsible for, down to the very small details. If a partner chooses to use the Wise Platform to facilitate international payments, who is responsible for KYC? What about ongoing AML on transactions? Establishing mutually agreed upon standards before the partnership begins is the only way to ensure that it is successful.
Ultimately, re-bundling is a good and necessary evolution of fintech: At its very core, fintechs aim to add more transparency, simplicity, and efficiency to the financial journey. To do so, a 360 view of finance is critical and embedding offerings together helps companies to free up time to focus on their own objectives. The more that re-bundling happens, the more opportunities for synergy will become apparent. The era has already begun and will continue growing in 2023.
