Anyone who has flown a major airline in the past decade has had the experience of sitting down, cracking open a book, or turning on the in-flight entertainment, only to be interrupted by a flight attendant pitching the latest promotion for the airline’s co-branded credit card. There’s a reason airlines are so aggressive in pitching their credit cards: It’s an invaluable revenue source for low-margin and hyper-competitive industries like airlines. In addition to providing billions of dollars of revenue for each of the major carriers, these card programs are estimated to provide substantially higher operating margins than the core business of flying passengers between cities. Offering a financial product like this as a non-bank takes years of negotiation and integration to accomplish—something only available to the largest and most well-resourced companies.
Delivering financial products at scale is similar to buying IT in the 1990s. It involves large teams of professionals at two firms getting together for lengthy contract and price negotiations. Once terms are agreed upon, there are complex integrations and accompanying maintenance that need to be accounted for. Due to the way that technical infrastructure was deployed and delivered, there was no choice but to spend time with only the largest enterprises. But cloud computing changed all of this by making it dramatically easier and cheaper to procure computing resources, and the technology buying decisions gradually moved from teams overseen by the C-suite to rank-and-file builders.
In the same way cloud computing broke down the barriers for IT procurement, the cloud is changing how banks deliver services, specifically anything tied to payments. The computational paradigms of cloud and mobiles that revolutionized software are making it more cost effective and efficient for banks to break down their infrastructure and deliver their platforms as microservices to a wider variety of companies. As a result, the same economics that have allowed airlines to seriously impact their bottom line through rewards cards are now accessible to more companies, with a wider variety of financial products.
J.P. Morgan, the world's largest bank, is betting that financial services will be embedded everywhere in the digital economy—in fact, businesses are demanding it. The macro trend of payments as a new compute platform has analysts projecting embedded financial services to generate $138 billion in revenue for the industry by 2026. As companies have increasingly been able to access financial infrastructure in a more streamlined way, it’s allowed banks and technologists to work together to create products that end-users want, typically starting with payments. Payment primitives inside software applications will be as ubiquitous as HTTP for software developers due to the increased revenue and engagement they enable.
Because software is changing the way banks deliver services, it means that non financial businesses have better access to financial services and the ability to customize them for their customer’s particular needs. In fact, the International Data Corporation (IDC) estimates that by 2030, 74 percent of global digital consumer payments will take place on platforms owned by non financial institutions.
This is how the new era of software and banking works: As financial institutions migrate their operations to the cloud, it allows them to expose their back-end systems through application programming interfaces (APIs) that they can share with third parties. These third parties can then leverage APIs for the things banks do best (moving money, fraud prevention, security, lending) and integrate their expertise into an elegant solution powered by software. Now, many financial experiments are taking place, and businesses, like popular global coffee brands, have embedded payments and deposits into their mobiles apps to minimize their costs, while increasing customer engagement and loyalty.
Today, developers have access to a wider variety of banking APIs, and these same banks are much more willing to expose their infrastructure to smaller, high-growth companies. Well-known fintech investor Matt Harris penned an article in 2019 that argued fintech would be a “fourth platform” of the technology stack, joining mega themes like the internet, cloud and mobiles. Importantly, Harris has pointed out that the global revenues for financial services dwarf software: financial services produce $12.5 trillion in global revenue verses about $600 billion for software. The prediction is that embedded financial services will greatly augment or even eclipse core business revenues. This is already happening: One popular ecommerce platform reported that revenues from financial products like payments, foreign exchange, and lending now account for more than 65 percent of revenue.
Take video games, for example. It’s one of the ripest opportunities for embedded payments, and game developers are working to build digital marketplaces and economies that mimic the ones that exist in the physical world. Video game revenues exceed $200 billion annually, with more than $60 billion being spent on in-game items that don’t easily transfer from one player to the next for real monetary value. Some estimates say that digital universes have the potential to generate up to $5 trillion in value by 2030—which is equivalent to the GDP of Japan. Research figures for these digital economies vary widely, but they are all huge and there is no unified financial infrastructure to power them. Today monetary transactions in these ecosystems end up taking place on gray markets, and the industry is asking for solutions to provide safe and refined experiences to facilitate this activity. Additionally, formal marketplaces can enable new sources of revenue by taking a fee from sellers and increase engagement from users.
“We’re starting to see financial services embedded into industries and products that were not historically financial in nature, and we believe video game ecosystems are ripe for this, starting with payments,” said Brody Mulderig, head of Web3 and video gaming business development at J.P. Morgan Payments. “Because video games have global audiences with a high degree of engagement they develop social constructs analogous to the physical world: reputation, status, and digital value. Embedded payments are a logical progression in scaling this analogy.”
While video games are ripe opportunities to leverage embedded financial products, the dramatically reduced barriers to scalable infrastructure will enable more technologists to build their vision, which may result in new products and industries that haven’t even been conceived of yet.
This story was produced by WIRED Brand Lab for J.P. Morgan Payments.
