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Stripe has enabled embedded finance for platforms. What does it all mean?

Aoife Loy
Aoife Loy
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What’s this all about?

Embedded finance is picking up speed. As big tech firms continue to advance into banking, making financial services ever more accessible, Stripe is the latest one to show its hand. With its recently announced Treasury offering, the company is unlocking channels between banks, platforms and SMEs. And it’s a pretty big deal. In the following article, we explore Stripe’s strategy and what it might mean for financial services and banking in the long-term.

Read on if you:

  • Are keen to understand what Stripe Treasury is all about
  • Want to know if this ambitious project will be a success
  • Have an interest in what it means for banks and the future of financial services

If you’ve seen our recently published guide to big tech and banking partnerships, you’ll understand just how much the embedded finance trend is gaining momentum. In the short time since the guide went live, the Libra Association, the Facebook-backed digital payment group, has announced that it will transition to the name ‘Diem’ which looks to be cause for yet another lawsuit against Facebook.

Then Stripe drops a press release announcing the launch of Stripe Treasury in a ‘major expansion of financial services offering for platform partners’.

This is an important development. In a Tweet, John Collison, Stripe co-founder and president, says they’ve described Stripe as a global payments and treasury network for a few years now. However, what is significant about this announcement is what Stripe seems to be signalling about its long-term goals.

This announcement is all about the power of platforms.

Stripe Treasury: the details

This announcement is all about the power of platforms – a look at the news release about Stripe Treasury sees the word ‘platform’ used no less than 14 times.

First of all, though, it’s essential to note that the news about Stripe Treasury came just two days after Stripe said it was taking Stripe Capital to the next level, equipping platforms with an end-to-end lending API so they can offer lending products to their business customers without the need to build their own solution. Businesses, meanwhile, can obtain a quick injection of cash.

Stripe Treasury builds on this, giving “Stripe’s platform users powerful APIs to embed financial services, enabling their customers to easily send, receive and store funds”, according to the release. It also standardises access to banking capabilities via APIs by expanding its bank partner network.

In a nutshell, Capital lets platforms extend lending to their customers, while Treasury sees Stripe essentially launching banking-as-a-service (BaaS) software, hence the press image focusing on the API call to create an account with Goldman Sachs. It’s providing API layers to banks to serve platforms and exposing this layer to allow platforms to embed financial services into their products.

stripe treasury press images

On the back end, the venture will see Stripe collaborate with some familiar names in banking (which we’ll get to later) to offer debit cards, bank accounts and other products to online businesses.

On the front end, its partnership with Shopify has really caught attention. Shopify is a platform in and of itself and is growing at a rapid pace. Reportedly, new stores created on the Shopify platform grew 71 per cent in Q2 2020 compared with Q1. Meanwhile, a record number of merchants were added to the platform in Q3. It also seems to be layering financial partnerships with the likes of Alipay and Affirm and it recently joined Facebook’s Libra Association (Diem).

Shopify will utilise Stripe Treasury to power its Shopify Balance offering, a business account for independent businesses and entrepreneurs which will be available to merchants from early 2021, according to reports.

Will it be a success?

Stripe has identified key pain points and seems to have a surefire way of attracting customers. For instance, if your business is using Stripe’s products already, accessing banking services through its offering is a logical next step.

Ultimately, it looks like Stripe Treasury will make financing more accessible for small businesses and reduce barriers to entry. Here are two key reasons why:

1. It reduces friction

There are currently a lot of hoops to jump through for small businesses. Even opening a bank account can be relatively complex.

Stripe sheds light on this in its news release, citing recent research it conducted which found that setting up an account takes five and a half days on average and over half of those surveyed (55 per cent) were required to visit in person.

Furthermore, banks’ patchwork technology was not built for the realities of today’s world where 76 per cent of businesses use industry-specific software platforms to manage their businesses. Indeed, 46 per cent of businesses say that their banking experience has hindered their growth.

Stripe’s offering is a win-win. As stated in the release, businesses want a solution for financial services available within the platform that powers their operations, while the platforms themselves want to overcome the typical barriers they face in embedding financial services within their own products.

2. It helps overcome restrictions for certain businesses

As well as that, banking can be particularly difficult for some of the newer business models, such as for example, subscription-based businesses, which are increasingly common.

From the personal experiences shared by one writer in The Financial Brand: “After going through a massive paper-based process, my mortgage lender told me that they could not approve the refinance without at least three years of verified income from the small business. They also said that they ‘didn’t understand’ a subscription-based business, and would require a co-signer. This is despite having more than 35 years of mortgage payments without interruption.”

Stripe is already one of the most popular payment gateway solutions for subscriptions so many of these businesses are likely already using its services. It could perhaps become a de facto bank for them.

Additionally, through Stripe Capital, businesses will be able to obtain funds that will be repaid out of future sales made through Stripe’s payment platform with loan amounts and repayments based on the customer’s transaction activity – no credit scores or old-school application forms. This is great for businesses like jewellery start-ups which may find it difficult to get access to funding due to jewellery’s association with money laundering.

Does Stripe, like Square, want to become a bank?

Since 2018, Stripe has been quietly making moves into the business of finance and is gradually eating up areas of opportunity in financial services.

Some of its activities are uncannily similar to that of Square which has partnered with banks globally and offers loans to SMEs through its own initiative, Square Capital. Square, however, has been explicit about its intentions to become a bank, recently receiving approval for its second application for a licence in early 2020.

There are aspects of Stripe’s proposition that suggest its plans lie in another area. For instance, its financial products are intended, not for its customers, but for the customers of its customers.

Additionally, it doesn’t presently offer all the services of a bank (such as wealth management) and more specialised services. Indeed, in an interview with CNBC, John Collison ruled out any intention of becoming a bank: “We’re not a bank and we’re not planning on becoming a bank.”

Rather, in keeping with its breathtakingly ambitious mission to ‘increase the GDP of the internet’, Stripe seems to want to be the foundation (the platform) on which the future of financial services is built. It appears its plans are focused on infrastructure, not banking.

Notably, the company’s valuation appears to be skyrocketing, with recent headlines reporting talks to raise a new funding round valuing it at more than $70 billion or significantly higher, which would make it the most highly valuable venture-backed start-up in the US, according to CB Insights.

Some of its activities are uncannily similar to that of Square which has partnered with banks globally and offers loans to SMEs through its own initiative, Square Capital. Square, however, has been explicit about its intentions to become a bank.

And what about the banks?

Interestingly, those banks with the technology, bank balance and culture to compete are partners in this initiative, including Goldman Sachs, Citibank and Barclays. Less attention has been paid to these banks since the announcement of Stripe Treasury.

Two things stand out.

1. It’s a big win for another small bank

Firstly, a select contingent of smaller banks seems to have spotted the opportunity presented by BaaS. This time, lesser-known Evolve Bank and Trust are the names behind Shopify Balance. As we explored in our guide, this seems to be a current trend as Square partners with US-based Celtic Bank, while Stanford Credit Union is a partner in Google’s Plex accounts.

2. That name again

Secondly, it’s another major play from Goldman Sachs. Indeed, the bank seems to be on a mission to reinvent itself. Recent strategies of note include:

  • Launching its consumer-facing Marcus brand and platform.
  • Partnering with Apple to launch Apple Card.
  • Partnering with Amazon to become the first financial institution to make underwriting decisions for the sellers on its platform.
  • Launching the developer portal for its APIs allowing clients to embed banking services into their own products.

 

Its involvement in Stripe Treasury is yet another play from the megabank to diversify its revenue streams and cement its position at the centre of embedded finance.

This is serious fuel for future inevitabilities, hastened by the pandemic which has seen banks scale back on lending to SMEs: goodbye linear distribution models, hello contextual financial services. Tech firms like Stripe and Square are changing the fabric of financial services and the allocation of business loans. At the same time, these businesses are increasingly leveraging data to help them understand SMEs so that they can fuel the platform ecosystem. The banks that recognise that embedded finance is increasingly ubiquitous are working with these companies, not against them.

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Aoife Loy
Aoife Loy
Aoife is Lead Content Marketer at LEVERIS. She writes about our mission and approach to technological innovation.
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