NEW YORK, N.Y. — Embedded finance is one of the most popular trends in fintech, and two experts shared why it will drive modernization today at Fintech Nexus USA 2023.
Marqeta CEO Simon Khalaf and Allen & Overy partner Alex Touma shared the stage on Thursday morning. Touma’s practice focuses on intellectual property and technology, including fintech, payments, and cryptocurrency services.
Already a $20 billion market in the United States as of 2021, it is estimated to double as soon as 2026. The key to that growth is eliminating friction. Do that, and you’re tapping into a $213 billion opportunity.
Khalaf’s joining at an interesting time
Khalaf was named Marqeta’s CEO in January, as founder Jason Gardner became executive chair. He wasted little time in targeting embedded finance. He said that with more than 30 years of business experience and multiple CEO roles, Khalaf is well-suited to guide Marqeta beyond its startup years. Mature companies require more structured approaches, with Khalaf prioritizing operational efficiencies.
He admitted it’s an interesting time to take over a company, but stressed that this is the best time to build fintechs and financial services firms. Since Khalaf took over, he’s seen multiple bank failures, rising inflation and interest rates, and the near collapse of cryptocurrency.
Those factors caused many players to revisit their business relationships and question who they wanted to do business with. When Silicon Valley Bank collapsed, Marqeta focused on helping customers find new working capital paths. They questioned their banking relationships while answering queries about their health.
Khalaf defines embedded finance as companies whose primary business isn’t financial services offering it to their clientele. They send the bank to their customers instead of directing customers to the bank. More than 50% of Marqeta’s sales are from embedded finance.
The next embedded finance frontier? Accelerated wage access
Look for new use cases, beginning with accelerated wage access, but only if designed correctly. The worker wins because they get their wages sooner. The company can keep the funds on its balance sheet until they are spent. That allows them to put them to work.
“There is a perception that money has moved, but money will not move until you spend it, so it’s a win-win,” Khalaf said.
Khalaf also sees opportunities in marketplaces. They know the seller’s potential and how to extend credit to them. He cited the example of Uber drivers receiving fares immediately after the trip. It’s on a card, but funds don’t transfer until they get spent.
Credit and debit cards are powerful tools with broader distribution than Facebook, TikTok, and even water. Utilized properly, they can help retailers understand buyers.
Khalaf said higher rates have companies revisiting their working capital approaches. For many, debt servicing is a survival issue. Look for increased focus on underwriting single transactions.
Crypto ain’t done yet; far from it, actually
There is plenty of interest in disrupting networks. Cryptocurrency tried to do that but hasn’t succeeded. Too bad, as Khalaf said, the American payment system is “embarrassing.”
“It’s not about moving the money,” Khalaf said. “It’s about the leader and confidence you build.
“There’s a lot of very smart people working on crypto, and the issue is that they haven’t found a good application. In every industry that doesn’t find the killer application, it takes some time to regroup. And then they come back with a killer application.”
Khalaf said to look to the history of the Internet for a parallel. The first decade was about information access and doing things faster. Then came instant access to services.
“The next phase of the Internet is instant access to money,” Khalaf said. “That’s why I’m very excited about it. I think crypto will have a role in that because smart people will realize that you don’t have anything without an app.”
There’s innovation through crypto and innovation with embedded finance. Does that spell the end of banking? Just the opposite.
“Believe it or not, it’s making the banking system disappear but disappear in the right way,” Khalaf said. “It’s not going anywhere; it’s going everywhere.”
The challenges of regenerative AI
Khalaf said generative AI must generate revenue. The simplest way is through large learning models for service and support. ChatGPT is the beginning of models that understand what you want. They become the brain.
That approach will help with underwriting transactions with sub-second responses.
“That’s when you need assistance,” Khalaf said.
