Platform Banking: Near-Term and Long-Term Architecture; The Impact of Technology on New Business Models in Banking; PayPal Reports Second Quarter 2024 Results;

In this issue, we delve into the evolution of platform banking, explore Apple’s expanding financial ecosystem, and highlight the latest trends in open banking across Europe

Insights & Reports:

1️⃣ Platform Banking: Near-Term and Long-Term Architecture

2️⃣ Apple's Financial Offerings: Tech Company or Bank in Disguise?

3️⃣ The Impact of Technology on New Business Models in Banking

4️⃣ Q2 2024 Third Party Provider Open Banking Tracker

5️⃣ PayPal Reports Second Quarter 2024 Results

6️⃣ Embedded finance: How banks and customer platforms are converging

Curated News:

1️⃣ Revolut tells staff it is launching share sale at $45bn valuation

2️⃣ Pix arrives at Google Wallet

3️⃣ Apple Tells WeChat Parent Tencent to Eliminate Loopholes 

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TL;DR:

Welcome to the latest edition of Fintech Wrap Up! Here's what's been happening in the world of fintech, payments, and banking:

First up, platform banking is evolving. In the near-term, banks should focus on deploying and integrating service meshes to interact with legacy core banking systems. This setup acts as a gateway for external connections and accelerates integration by exposing well-defined APIs. Over time, banks are expected to transition to microservices-based core platforms, which will enable a more scalable and flexible ecosystem. This transition supports a true platform banking environment where services like deposits and loans can be individually managed and scaled.

Apple continues to blur the lines between tech company and bank with its expanding suite of financial services. Since its debut with Apple Pay in 2014, Apple has launched several financial products, including Apple Cash for peer-to-peer payments in 2017 and the Apple Card in 2019, which offers cashback rewards and enhanced security features. More recently, in 2023, Apple introduced Apple Pay Later, allowing users to split purchases into interest-free payments, and Apple Savings, a high-yield savings account offering a 4.15% APY.

New business models in banking are also emerging, driven by technology. Banks are adopting three distinct approaches: enriched in-house models using third-party data and services, partnering models sharing technology with third parties, and open models distributing services through broader marketplaces. Each model presents opportunities and challenges, requiring banks to assess their technological capabilities, risk management strategies, and partnership potential.

In the realm of open banking, Germany retains its top position with 37 home-regulated Third Party Providers (TPPs), while Italy leads in non-domestic TPPs with 153. Passporting remains strong, with the average number of non-domestic TPPs per market increasing by 12% over the past nine months, highlighting the growing cross-border presence of fintechs in Europe.

PayPal's Q2 2024 results are impressive, showcasing a net revenue increase of 8% to $7.9 billion and a 17% rise in GAAP operating income to $1.3 billion. The company's transaction margin dollars also grew by 8% to $3.6 billion. PayPal's total payment volume surged by 11% to $416.8 billion, and despite a slight decrease in active accounts, the payment transactions per active account rose by 11% to 60.9, reflecting strong user engagement.

The startup pricing journey is also under the spotlight. Early-stage companies are realizing the immense value of focusing on pricing as a lever for revenue growth. By investing in dedicated pricing teams and leveraging cross-functional insights, companies can achieve an average revenue uplift of 32% without the hefty costs associated with other growth initiatives.

Embedded finance is on the rise, with revenues expected to exceed €100 billion in Europe by the decade's end. The integration of financial services into nonfinancial platforms is becoming more prevalent, offering seamless customer experiences and tapping into the growing demand for convenient, on-the-spot financial solutions.

In curated news, Revolut is gearing up for a share sale at a staggering $45 billion valuation, reinforcing its position as Europe’s top fintech startup. Google Wallet is set to incorporate Pix payments, expanding its functionality in Brazil, and Apple is urging WeChat and Douyin to close loopholes that circumvent its payment system.

Stay tuned for more insights and updates in our next edition!

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Insights

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Platform Banking: Near-Term and Long-Term Architecture

🔹 Near-term: Deploy and integrate service mesh

In the near-term, banks with legacy core banking application architecture should prioritize building a service mesh to abstract underlying legacy platforms.A legacy core is not a limitation to support platform banking because a service mesh that can interact with legacy core through adaptors allows banks to move towards microservicesbased architecture. Service mesh, as the name implies, is a set of services, along with product configuration and orchestration logic, will interface with core platforms and expose a set of APIs to both internal and external parties for accelerated integration.

A service mesh can minimize the number of endpoint integrations within the bank while providing a standard, well-defined, and documented interface to external platforms. In a way, service mesh acts as a gateway for external parties to connect and enables the “platform” feature of platform banking. As shown below, a combination of APIs and service mesh will help wrap a unified integration layer on traditional banking cores. The time to market for new products and services is still constrained by the underlying monolithic cores with longer development and deployment cycles. Banks may still face challenges scaling this architecture, as the entire core platform resides on infrastructure that doesn’t scale in real time. In the near term, banks can start offering their leading products and services on their own, and third-party marketplaces can stitch up partnerships with niche players in new markets to offer their products and services.

🔹 Long-term: Microservices-based core

In the long-term, banks should move to a next-generation microservices-based core platform in coordination with service mesh. Banks with an ambition to build industry-leading marketplace should build a microservices-based platform that can offer and scale banking services as individual stacks categorized by product domains. Image below depicts a representative microservices-based core architecture that can support a true platform banking–based ecosystem.

In this architecture, the core is a combination of services organized by product domains, such as deposits, retail loans, and commercial loans. In such an architecture, services can be broadly categorized into two types: product-specific services and common services. Product-specific services are those that are unique and tailored to support a specific product; as an example, underwriting services might vary and require unique services to support retail loans against commercial loans, as the underlying risk, terms, and offers might vary across loan portfolios. Common services are cross product and can be product-agnostic. These services are fundamental to typical core banking platforms;

Source Deloitte