I’ve gotten versions of this question recently from bankers and investment-analyst clients.
It’s certainly messy. There are multiple countervailing trends in the macro economy that make this a complex picture. Rapid shift in rate environment has changed the mix in usecases for embedded finance, credit and BNPL models are more challenged, while high deposit yields create new opportunities in treasury products. When I talk to platform providers in embedded finance I hear that yes, deals are still happening but there’s definitely been a mix shift in customers and usecases over the last year.
Prominent bank failures in the US and Europe are not helping anyone either. These are further having a further adverse chilling effect on both bank liquidity and regulatory scrutiny. On the risk appetite side, there is a real danger of ‘baby with the bathwater’ as regulators and bank directors may be prone to look at anything creative as a risk rather than as potential innovation. Regulators are going to be leaning into their ‘protect the banking system’ mandate rather than the more open minded, lets stimulate competition and innovation.
US Banks are facing potential capital calls to replenish the FDIC reserve. Traditional deposit liquidity is chasing yields to money markets further pressuring liquidity. The yield curve and the lending market are upside down.
Embedded finance is also dependent on partnerships/customers with fast growing fintech startups, banking-as-a-service platform integrators and the like. But a significant share of fast growing fintechs over the last few years may have grown too fast, over raised, and could be now short of continuing capital. Expect to see a lot of consolidation and thinning out in the BaaS and neo-fintech space through the rest of the year.
And yet… Where there is turmoil there is opportunity. An 50-80% haircut in valuations create opportunities for acquisition, and an enormous about of smart, capable talent on the beach. It’s a buyers market for banks or well-enough capitalized bigger brands in fintech.
And yet… all these headwinds are intrinsically temporary. AI, new payment rails, working open banking, digital-issuance continue to fuel huge new opportunities and usecases across verticals. The overall trend towards embedded finance is a powerful long term cyclical trend. As software continues to transform every industry, payments, capital and finance _needs_ to be more closely embedded in all the SaaS platforms, marketplaces and apps that business (and consumers) now use every day. Banks that take advantage of temporary market downturns to invest in embedded finance stand to benefit enormously through the next economic cycles.