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Future of Finance and Commerce

Making Frictionless Finance a Reality

October 17, 2022

A key component of every bank’s digital strategy is application programming interfaces, commonly referred to as APIs. APIs power the digital strategies for banks of all sizes and enable new business models that bring together disparate functionalities to create completely new customer experiences. APIs enable mobile sites, connect back-office systems for data sharing and have redefined how banks partner with fintechs by decreasing cost and speed to market for new consumer capabilities.

APIs are key to a bank’s digital transformation success. However, many still view APIs as a technology tool that simply makes connecting different systems easier versus a tool driving innovation to make them digital channels, major growth engines and revenue drivers.

As consumer demand grows for easier access to financial information and transactions, as well the ever-present threat of disintermediation from big tech and others, banks will need to redefine their role in the digital value chain. They’ll need to adopt new digital business models, deliver digital first services and customer touchpoints for a more personalized, compelling customer experience. One way for banks to meet this challenge is to open their ecosystems to partners, exposing and monetizing their business services via APIs to help drive innovation via embedded financial services.

The seamless integration of financial services into a traditionally non-financial platform makes frictionless finance a reality for customers. Good examples are Uber or Lyft where customers can make cashless payments within the ride-sharing app.

By exposing and commercializing their services as APIs, available for anyone to consume and integrate with, banks can create new revenue streams and value, even if the customer touchpoints are not owned by the bank. As third parties leverage APIs that embed services such as banking, payments, lending and data into the consumer-facing apps, banks can create new revenue streams based on the everyday activities of consumers.

With APIs helping banks open their ecosystems over the last few years and becoming a mainstay technology for interconnectivity, most are no longer concerned that distributing their products through partners threatens their client relationships. By embedding into another business’ application and customer touchpoints, banks benefit from having a newly created revenue stream that is marketed by someone else (traditionally a huge cost to banks). This also creates a new stream of customer data back to the bank to build more personalized products in the future.

The opportunity for embedding financial services lies initially in three particular use cases:

Invisible Payments

Payments can be initiated via APIs in third-party applications, enabling customers to transact in a frictionless, convenient way. Innovators such as Starbucks, Uber and Stripe integrate payments and embed them in their user experiences. These payments are invisible from an end-users’ perspective. The payment is seamless and simply a part of the overall experience.

Additionally, virtual cards allow companies to simplify the process of paying contractors or employees. Instead of cutting checks or issuing direct deposits, companies can pay via a virtual card and receive all or some of the interchange fee.

Companies such as Venmo focus on simplifying the payments process and enable features that allow users to link their bank accounts to make money movement easy and, in some cases, real-time. Venmo also allows customers to apply for the company’s debit card, allowing users to access funds immediately rather than waiting two or three days for funds to settle in their accounts. These cards also work at any retailer and at most ATMs.

Seamless Lending

With just a few clicks, customers can access the funds they need right from the fintech’s app. Using the bank’s API-based lending services, fintechs can fully integrate lending services at the point of purchase in tailored ways that meet their specific customers’ needs. The entire lending process therefore becomes simpler and more convenient.

A great example of this is LightStream, a lending fintech that delivers a loan experience that allows customers to focus on their purchase, rather than on their financing. Loans may be approved and funds received on the same day as a customer applies.

Integrated Investments

Integrated investing provides fintechs with the APIs to seamlessly provide investing into their vertical offerings and simplifies the investing process for consumers. Examples in market include Robinhood and Alpaca whose API enabled platforms offer commission-free stock, ETF and options trades, a streamlined trading platform, fractional share capabilities and cryptocurrency trading to buy and sell cryptocurrencies like Bitcoin and Ethereum.

Adopting an embedded finance strategy presents a new opportunity for banks, although it’s too early to tell if this strategy will become a permanent delivery channel that every bank incorporates. However, banks should assess this opportunity to stay ahead of the curve and further extend their digital reach and establish relevance in the future of finance.

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Regional and community banks looking to launch buy/sell/hold crypto products and services may be growing anxious under current market conditions. But this anxiety is misplaced. History has demonstrated time and again that, in aggregate, economic downturns are temporary setbacks. For savvy investors, they present a tremendous opportunity to increase holdings for significant long-term growth. They key is knowing which investments provide desirable upside and acceptable risk. Cryptocurrency is no exception. Regional and community banks must be equipped to help their customers capitalize.

The Human Element

If only the stock market were as predictable as people, investors would never miss. For centuries people have demonstrated enormous collective power to drive markets to scary heights and devastating drops. Just because a lot of people are investing in something with wild enthusiasm, that does not make it a good investment.

In fact, skepticism is wise under these circumstances. At least a few people who watched Super Bowl LVI took Matt Damon’s advice and invested in crypto. At least a few of these may have invested in LUNA, which at its height had a combined market value of more than $60 billion. Within a 48-hour window, the LUNA crypto token crashed from $120 to $0.02 – a 99.9% correction. From there, the price continued to plummet, the decimal moving farther and farther left. Fractions of a penny. Billions of dollars wiped out within days.

It would be easy to assume this could happen to any cryptocurrency on the market, and many investors made this assumption, wiping out more than $300 billion in combined value across all cryptocurrencies including giants Bitcoin and Ethereum.

As mania-driven buys do not always indicate a good investment, panic-driven selling does not always indicate a bad one.

Not All Crypto is Created Equal

What is the difference between LUNA and Bitcoin? There are many, but perhaps the most important difference is this: Bitcoin is a regulated cryptocurrency, and LUNA is an algorithmic stablecoin. While typical stablecoins use a centralized asset-backed model, LUNA and other algorithmic stablecoins are a completely synthetic asset, attempting to peg their value to the value of something else. This construct is unreliable and, in the case of LUNA, unsustainable.

The key differentiator of Bitcoin, on the other hand, is scarcity. Bitcoin (BTC) is capped
at 21 million.

This scarcity drives demand, which, if all things remain equal, preserves purchasing power regardless of the dollar.

However, investor behavior this year indicates that cryptocurrency is perceived as a risk asset above all else. Thus, all things are not equal in terms of demand stability or even growth. Buyers have put cryptocurrency in the same bucket as the stock market, and, as such, it is susceptible to the same triggers, specifically inflation, interest rates and recession. As interest rates increase to stave inflation, investors are driven toward liquidity. This creates supply, which drives down the price.

Here are three snapshots to demonstrate this:

  • When inflation reached 40-year highs in late 2021, BTC fell from an all-time high of $61k to $47k by end of 2021.
  • When the Fed indicated that it would raise the interest rate by half a percentage point on May 31, Bitcoin fell in concert with the stock selloff.
  • When talks and confirmation of a federal rate hike of 75 basis points caused the stock market to drop significantly (the Dow lost 3,160 points from June 8 to June 16), BTC fell from $31k to $22k.
  • Other currencies suffered more drastic declines in value.

While it is true that BTC has lost enormous value in recent months, it is nonetheless behaving as reasonably expected in the current economy. These cryptocurrencies have mastered the key ingredients for sustained success: decentralized decision-making, utility and regulatory maturity.

Here are just a few current circumstances that are likely good indicators of the future:

  • Bitcoin is borderless and digital, making it perfectly suited to globalization.
  • Bitcoin holdings among long-term investors are increasing during this downturn, indicating that many are taking the opportunity to acquire at a lower price while simultaneously promising a faster positive price correction than the stock market due to supply and demand.
  • Only about 12% of crypto is held on exchanges, further proof that most investors  are not looking for fast cash or liquidity but instead riding the dip for long-term gain.

Cryptocurrency is Currency

Though some mistakenly believed cryptocurrency would replace traditional fiat currencies 
as something different, immune from market forces and a good hedge against inflation, the opposite has proven true. Cryptocurrency is, ultimately, just currency. Bitcoin runs alongside the financial markets, subject to the same forces.

As stated before, history has shown time and again that even the most severe economic downturns are temporary.

The long-term trajectory of the markets is always climbing.

This is not the first major recession that the crypto markets have endured. Regional and community banks would be wise to consider the current moment another “stress test” 
on the path to future growth and bullish investing.

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