Is TikTok launching a fintech product? | Bank BaaS vs. standalone | Should brands acquire fintech startups?

Hi friends

Welcome to the newsletter, where everything is fintech.

You probably know the statement of a16z partner Angela Strange that every company will be a fintech (link). More than three years later, I am still confused as to why some people fight over this statement. If you were asking me if every company would be a fintech, I wouldn’t answer because “being a fintech” is not defined. If it means every company will hold a financial license, then the answer is a big no, but if the answer is that every company will generate revenue in a way that historically only banks or financial institutions have done, then my answer would be yes.

Don’t ask me why I am ranting about this. Luckily, this newsletter aims at showing you what’s really happening in embedded finance without opening up another useless terminology discussion. So let’s get into business!

This is the last and final reminder that our second Embedded Finance Review is coming up this Thursday in Berlin. The event was ’sold out’ for a short time, as we hit twice as many signups as I was initially hoping for. But I am still afraid of the no-show rate; thus, I made five additional tickets available, so you can still register for a free ticket. I published the final agenda on our event site as well, and we will have presentations from infrastructure providers and non-financial brands, a panel discussion, as well as lots of networking with the local embedded finance community.

In this edition of Embedded Finance Review, I cover:

• 📱 Is TikTok building a fintech product?

• 💳 Card launches in the travel expense and HR software industry

• 📉 Are US banks better positioned to offer BaaS than standalone player?

• 🛑 British FCA requires a popular BaaS provider to seek approval for every new partner agent being onboarded.

• 🤔 Should more brands acquire fintech companies?

Is TikTok entering embedded finance?

TikTok is gradually venturing into the embedded finance arena and is currently in the process of testing a new product designed to provide its users with enhanced capabilities for managing rewards, coins, and transactions. TikTok Coins, while not a new concept, represent the in-app currency that empowers users to either gift content creators or accrue rewards through participation in various campaigns.

What's intriguing about this new product is its user interface, which closely resembles that of a conventional banking application and even indicates a TikTok debit or credit card without actually offering them today. As a result, speculation is rife that this might just be the first step for TikTok, potentially paving the way for a broader range of financial offerings in the future. Interestingly, just a few weeks prior, the company had introduced TikTok Shop in the United States, a move aimed at simplifying the process for content creators to directly sell their products or services within the social media platform.

When you contemplate the synergy between a digital wallet and e-commerce services, it becomes clear that TikTok is strategically positioning itself to offer a comprehensive ecosystem that not only fosters creativity and content creation but also supports financial transactions and commerce. This evolution in TikTok's capabilities could potentially redefine how users engage with the platform and the opportunities it offers for both content creators and consumers.

Are US banks catching up with standalone BaaS?

It’s not easy to be a banking-as-a-service provider in the United States these days. In the past few weeks, we have had stories from Goldman Sachs’ Fintech unit and their issues with the regulator or the BaaS provider Solid that has been faking revenue. And this week? Another BaaS provider is in turmoil, and this time it’s none other than Synapse. One of the oldest providers in the US, founded in 2014.

What is happening? Reports have surfaced that the company is laying off 40% of its staff. But the reason for this is even more interesting: one of their biggest clients, the popular business banking provider Mercury, has decided not to renew their contract and will work directly with their partner bank, Evolve Bank and Trust.

How does BaaS work in the US? In case you are not familiar with banking-as-a-service in the US, let me get you up to speed real quick: Unregulated companies that aim to launch a banking product (i.e., a fintech or a non-financial brand) need to find a technology and a licensed partner. There are roughly three options:

a) You go out searching for a BaaS provider (i.e. Synapse) and a partner bank separately. Common advice back in the day was to start looking for a bank partner first, as this tended to take much longer than finding the BaaS partner.

b) You work with a BaaS provider that has a very close relationship with one or more banks, making the process a little bit easier as you get the full package. Unit is probably a good example for this kind of BaaS provider, having partnered purely with Blue Ridge Bank in the first few years. They have more banking partners now, but the model remains the same. Please note that many BaaS providers, including Synapse, have started to work closer with some of their partner banks. For the sake of this discussion, I would still leave them as separate approaches.

c) You work with a licensed bank that can also cover the tech part. From my (German) point of view, Cross River Bank is one of the first and most popular banks in the US offering this service.

What does this mean? As you can see, when Mercury launched, they decided to partner with Synapse and Evolve Bank & Trust, so choosing approach A. Back in 2017, when Mercury was founded, this was the common approach, as providers like Unit had not been around yet and not many banks offered BaaS either. But a much bigger and more successful Mercury has decided now that they don’t need Synapse anymore and can work with the very same banking partner directly. This brings me to the question of whether (at least in the US) banks are better positioned to offer BaaS than standalone players. Before you contemplate if the standalone players could also get regulated, let me highlight that the US does not have a concept like e-money licenses in Europe, and therefore, becoming a regulated institution means becoming a bank, which is very unlikely, if not impossible, for such players.

At the moment, it feels like US banks with a BaaS product have good momentum, and if more banks launch such products (there are a lot of banks in the US; many might be incapable, but maybe a few are enough), the pressure on standalone providers could increase. Since Mercury is a pure fintech player, I don’t want to say that non-financial brands like retail companies could make a similar move; however, if banks build and design their product in a way that non-financial brands need it, then this could also impact how embedded finance products are being built in the US.

Please note that the Mercury, Synapse, and Evolve Bank & Trust story is a lot more complicated than what I described above. I focused on the elements relevant for this discussion. If you want to know more, check out Jason’s story in Fintech Business Weekly, who was also one of the first people to scoop this story.

Is now a good time for brands to acquire fintech startups?

This is less of a story but more of a question. While going through the news of the past two weeks, I came across two fintech news stories—yes, fintech and not embedded finance. Firstly, UK-based early wage payout provider Wagestream takes over Keebo, a credit builder and card offering. Secondly, Spanish HR provider Factorial acquires Fuell, a corporate expense management provider. Additionally, you have probably heard of various stories of local fintech companies closing down due to lack of funding or general market condition.

So, if a) some early-stage companies are struggling; b) bigger companies are extending their product offering through acquisitions; and c) embedded finance is happening, then I am wondering if we will see non-financial brands acquiring fintech startups. In a past edition, I had already covered Pandadoc’s move to acquire Berlin-based payment startup Denario. Pandadoc empowers sales teams to create proposals and close them via an e-signature solution. Integrating a payment solution into the workflow seems logical, and the US tech company has likely already worked on this before crossing paths with Denario. With such an acquisition, Pandadoc gets not just the technology but likely also a whole team with all the necessary key people to build a fintech product. The exact details of Pandadoc and Denario are secondary, as I am just using them as an example. But I believe Pandadoc will be able to launch their envisioned payment product much faster and perhaps even with less investment required compared to building everything from the ground up (incl. hiring).

Therefore, I am curious if we will see more of such acquisitions. I would assume that fintech companies in the pre-seed and seed stage are most likely the targets, as such acquisitions will always have a flavor of aqui-hiring. Since it will be hard to find such stories around the globe, I wanted to ask you two questions: a) Do you think this will happen? b) Please share acquisition stories with me that you come across that fit this rationale.