NYMBUS Fintech Glossary - Cleaned

The Definitive Guide to Potentially Misunderstood
Fintech Trends & Terms

(And What They Mean to the Banking Industry)
COMMISSIONED BY
RON SHEVLIN ALEX JOHNSON
Research Director Director, Fintech Research
Cornerstone Advisors Cornerstone Advisors
TABLE OF CONTENTS
Introduction.................................................................................................................................... 1
Banking-as-a-Service......................................................................................................... 2
Buy Now, Pay Later.............................................................................................................. 7
Challenger Banks/Neobanks.................................................................................. 12
Credit Invisibility................................................................................................................... 15
Cryptocurrency...................................................................................................................... 21
Decentralized Finance................................................................................................... 25
Digital Transformation................................................................................................... 29
Embedded Finance.......................................................................................................... 32
Embedded Fintech........................................................................................................... 35
Financial Health.................................................................................................................... 37
Modular Banking................................................................................................................... 41
Open Banking......................................................................................................................... 43
Platforms......................................................................................................................................49
Self-Driving Finance........................................................................................................ 52
Super Apps................................................................................................................................ 55
Web3 ................................................................................................................................................ 58
Endnotes...................................................................................................................................... 60
About the Authors............................................................................................................. 61
About Cornerstone Advisors................................................................................. 62
©2021 Cornerstone Advisors. All rights reserved.

INTRODUCTION
Consider these three truths:
1) Business executives don’t want to appear ignorant of the top trends in their industry.
2) Industry buzzwords appear and spread faster than a wildfire.
3) The definition of words matters.
These truths have convinced us at Cornerstone Advisors that the industry needs a definitive guide to the
burgeoning number of fintech-related terms that have emerged over the past few years. We’ve observed a wide
variation in the use—and at times, misuse—of many fintech terms and concepts.
We want to set the record straight.
We’ve learned over our many years of consulting, however, that it’s hard (if not impossible) to dictate how people
define a new business term or concept. In fact, three Harvard Business School professors, in a book called Beyond
The Hype, argued that new business terms gain traction when organizations shape the definition of a term for their
own purposes. 1
This guide—or glossary—won’t just define the terms, however. It will incorporate Cornerstone’s research on the
terms to provide a data-driven view of what’s going on in fintech, and will include our perspectives and opinions
on what these terms mean to the industry.
CORNERSTONE ADVISORS | The Definitive Guide to Potentially Misunderstood Fintech Trends and Terms 1
BANKING-AS-A-SERVICE
tl;dr Banking-as-a-service (BaaS) is a strategy where financial institutions

partner with fintechs or non-financial firms to provide financial services to
the partner’s customer base, leveraging the financial institution’s charter.
According to consultancy Oliver Wyman:
“For a financial institution, [BaaS] is an opportunity to reach a greater number of customers at a lower
cost. The cost of acquiring a customer is typically in the range of $100 to $200. With a BaaS technology
stack, the cost can range between $5 and $35. For the distributor, offering financial products opens up
new revenue lines at attractive margins and can deepen its relationships with customers, and can then
capitalize on cross-selling opportunities.” 2
A growing number of banks are recognizing this opportunity. Venture capital firm Andreessen Horowitz identified
13 partner banks with less than $1 billion in assets and 16 partner banks in the $1 billion to $10 billion asset range
(Figure 1 and Figure 2).
FIGURE 1: Partner Banks in the Sub $1 Billion Asset Range
Bank State Assets Partners
Source: Andreessen Horowitz
FIGURE 2: Partner Banks in the $1 Billion to $10 Billion Asset Range
Bank State Assets Partners
Source: Andreessen Horowitz
Roughly one in 10 respondents in a Cornerstone Advisors survey is currently pursuing a BaaS strategy and
8% are in the process of developing a strategy. Just 3% have ruled out a BaaS strategy (Figure 3).
FIGURE 3: Current Approach to Banking-as-a-Service
Which statement best describes your organization’s approach to BaaS?
46%
20%
11% 12%
8%
3%
Currently In the process Considering Might consider Ruled out Never discussed
pursuing a of developing pursuing a BaaS in the future pursuing a or considered a
BaaS strategy a BaaS strategy BaaS strategy BaaS strategy BaaS strategy
Source: Cornerstone Advisors survey of 290 U.S.-based bank and credit union executives, Q3 2021
Many banks, however, are slow to capitalize on a BaaS strategy. We have a few guesses why:
• Fear of losing the customer “relationship.” Many banks feel that BaaS disintermediates them from their
customers, relegating them to be little more than “dumb pipes.” We have two responses to that. First, banks
have already been disintermediated. It’s not unusual for a Gen Z or Millennial couple to have three or four
checking accounts, invest with four different investment firms, use six or seven mobile payment tools, and
use three or four sites to help them manage their money. All told, these couples might have relationships
with 30 or 40 different financial providers. Second, so what if a bank is a “dumb pipe?” If a bank can
generate more revenue and profits by being a “dumb pipe” than as a “smart provider,” then why is the
former an inferior strategy?
• Lack of confidence in their technology capability. Many banks think they lack the application programming
interface (API) development and technology integration capabilities required to be partner banks. They’re
probably right, but there are a growing number of companies in the market that can help banks bridge this
gap and become partner banks.
• Confusion around the term. According to a recent blog post on Finextra, “the difference between Open
Banking and BaaS APIs is how deeply the respective type of API can be embedded, how much of the
lifecycle of the exposed banking product is captured by the API, and which lifecycle activities of the
banking product happen within the embedded context versus outside of it.” 3 We’re not sure what that
means, and we would guess that many non-IT bank executives would struggle to make sense of that
explanation, as well.
The Economics of Fintech Banking

Banks should think of BaaS as “fintech banking.” The difference between fintech banking and retail banking or
commercial banking is that banks are providing banking services to retail or commercial (usually small business)
customers indirectly through an intermediary (the fintech).
Similar to retail or commercial banking, however, fintech banking requires a dedicated technology platform to
provide services. Instead of providing those services directly—under the bank’s brand—the services are provided
as a white-label service, under the fintech’s (or partner’s) brand.
This should be very appealing to many banks as the cost of customer acquisition is significantly reduced since
the bank’s partner is, effectively, paying the acquisition costs.
There are attractive economics on the revenue side of the coin as well.
The free checking trend of the last 30 years has forced banks to rely on interchange and punitive fees as the
sources of revenue from deposit accounts. The opportunity to charge consumers for value-added services like
bill pay, electronic statements, and personal financial management (PFM) tools came and went with bundled
free checking packages.
Providing fintech banking services enables banks to disaggregate the sources of revenue, and although they
typically share interchange revenue with the sponsoring brand, many of the banks pursuing or planning to
launch a BaaS strategy view fees generation from ACH, fraud management, know your customer (KYC), account
verification, and card issuing and processing services as very important to their efforts.
Growth Through Fintech Banking

In the current economic cycle, banks are struggling to grow their lending volume and must explore alternative
growth strategies. What are those strategies? Traditional strategies include mergers and new product
development. Both are viable growth strategies for banks but can take many years to pay off.
Banking-as-a-service, or fintech banking, is a strategy that offers mid-size banks a faster path to growth than
traditional strategies offer. But the space is getting hot, and early-movers are gaining valuable experience into
the workings of this new space.
BUY NOW, PAY LATER
tl;dr Buy now, pay later (BNPL) is a payment mechanism that enables
someone to spread their payments for a product or service over a specified
period of time for either a fixed fee or a set interest rate. Merchants’ interest
in this payment scheme is driven by its potential to influence consumers’
choice of products and providers.
The BNPL space is rapidly developing, with recent activities including:
• Amazon and Affirm partnered. Amazon shoppers will be able to split purchases of $50 or more into
smaller, monthly installments. Affirm said some loans will come with 0% APR, while others will bear interest.
• PayPal will stop charging late fees on BNPL payments. Since its launch, more than 7 million consumers
have used PayPal’s BNPL service, purchasing more than $3.5 billion of products.
• Square acquired Afterpay. The deal will bring Afterpay’s merchant relationships into Square’s seller
ecosystem and help to convert Afterpay’s existing customer base into Cash App users.
• Apple announced a BNPL offering. Apple Pay users will be able to make interest-free BNPL purchases,
choose any credit card to make the payments, and avoid late and processing fees with certain plans.
Between 2019 and 2021, the percentage of Gen Zers in the United States using BNPL services grew six-fold from
6% to 36%, and more than doubled among Millennials, from 17% to 41%. Gen Xers’ adoption more than tripled,
and even Baby Boomers got into the act (Figure 4).
FIGURE 4: Buy Now, Pay Later Adoption by Generation, 2019-2021
Buy Now, Pay Later Adoption by Generation, 2019-2021
41% 2019 2021

36%
30%
17% 18%
9%
6%
1%
Gen Z (21-25) Millennial (26-40) Gen X (41-55) Baby Boomer (56-75)
Source: Cornerstone Advisors survey of 3,898 U.S. consumers, Q2 2021
Overall, consumers will make nearly $100 billion in retail purchases using BNPL programs in 2021—up from
$24 billion in 2020, and $20 billion in 2019 (Figure 5).
FIGURE 5: Buy Now, Pay Later Retail Purchases in the U.S., 2019-2021
Buy Now, Pay Later Retail Purchases in the U.S.

($ in billions)
$99.4
$23.9
$20.3
2019 2020 2021e
Buy Now, Pay Later Changes the Customer Experience

Observers on social media and the blogosphere claim that “BNPL is here to stay.”
That’s an odd perspective because BNPL—previously known as installment payments and point-of-sale
financing (POSF)—has been around longer than some of the observers.
What’s different—and important—about today’s buy now, pay later service is its place in the customer journey.
Traditionally, installment payments, POSF, BNPL—whatever you call it—was an option at checkout (i.e., the end
of the customer journey). Today, BNPL influences consumers’ choices of products and providers (i.e., earlier in
the journey).
Students of marketing learn about the Four Ps of Marketing: product, place, price, and promotion. According to
the Four Ps creator, Northwestern University professor Philip Kotler:
“The marketing mix is the set of controllable variables that the firm can use to influence the buyer’s
response. The four variables help a company develop a unique selling point as well as a brand image.”
Payments have become an important element of the selling proposition and should be considered the Fifth P
of Marketing. By varying payment terms—for example, spreading payments for a purchase over
a period of time—marketers can influence consumers’ likelihood to buy.
As merchants experiment with surcharges on card-related payments, do they run the risk of decreasing sales
or average transaction sizes? Do they risk losing sales to merchants that don’t surcharge on card transactions?
If the answer to these questions is yes (and BNPL providers claim it is), then BNPL (and payments overall) is
an element of the marketing mix for marketers to leverage.
Is There a Downside to Buy Now Pay Later?

BNPL has its detractors. Consumer advocates criticize BNPL programs for encouraging consumers to take
on debt they might not be able to afford:
“There is a risk that BNPL schemes may attract people who are already in financial difficulties and
may be struggling to make their existing bills and payments.” 4
There is evidence of that. Cornerstone research found that among BNPL users, 31% consider their financial
health to be “dire” or “struggling” (versus “managing” and “thriving”). In contrast, of consumers who don’t
use BNPL services, just 20% rate their financial health as dire or struggling.
Other warning signs support the critics’ claims:
• Over the past two years, 43% of BNPL users made late payments. Two-thirds of them, however, said it
was because they lost track of when the bill was due—just a third blamed it on not having the money to
pay the bill.
• More than half of BNPL users had their credit card limits decreased in 2020. This likely led to some
consumers using BNPL programs.
Detractors’ warnings won’t slow the growth of BNPL any more than their warnings against the dangers of
using credit cards have affected the growth of that product.
The Future of Buy Now, Pay Later

To succeed and differentiate, BNPL providers will:
• Become shopping destinations. Afterpay, for example, announced that it will enable its merchant partners
to advertise on the BNPL firm’s app to boost their promotions, products, and offers. Brands will be able
to choose the products they want to promote via sponsored listing formats, and pay only when a shopper
engages with the ad.
• Sharpen their sales attribution claims. BNPL providers claim they help merchants make sales that wouldn’t
have been made otherwise. Sound familiar? Visa and Mastercard made the same claims about credit cards.
Today’s merchants will demand accurate attribution metrics.
• Specialize. BNPL providers will need to be masters of the customer journey. Few (if any) will be able
to do that in more than just a couple of product categories resulting in specialization by product category.
This is already happening with BNPL specialists like LoanStar Technologies in home improvement and
Prima Health Credit in elective medical procedures.
Standalone BNPL Providers Won’t Last Long

Why does Square need Afterpay’s app to enable merchants to advertise when it has broader reach than
Afterpay does? Answer: It doesn’t. Expect Afterpay’s app to be embedded into and absorbed by the Square
app after the acquisition is complete.
As Afterpay gets absorbed into Square, its payments will increasingly come from within the Square network,
not the traditional payment rails. Other BNPL providers will have to find similar paths to keep up with the margin
improvements Afterpay will realize.
Same with Amazon and Affirm. The giant retailer is partnering with Affirm—instead of acquiring the company—to
test the impact BNPL can have on sales. If it’s positive, Amazon will acquire Affirm or build its own BNPL capability.
This is not to say that with their lofty valuations, some BNPL providers—Klarna is a good example—won’t be
acquirers themselves. Why? Because a BNPL offering—by itself—is only part of the value chain (or customer
journey). To maximize the value of buy now, pay later, it must be integrated with the other elements of the
marketing mix—that is, become the Fifth P of Marketing.
Can Banks Battle Back?

For now, the majority of BNPL purchases are paid with either a debit or credit card. So, if banks don’t get their
money up front (i.e., at the time of transaction), they get their interchange fee when the BNPL players get paid.
That won’t last, however.
Merchants have two things in common: 1) they’ll do anything to make a sale, and 2) they hate interchange. If
merchants can reduce interchange fees by driving purchases from debit and credit cards to other forms of
payments, they’ll do what they can to make that happen.
As BNPL providers collect more data about consumers’ shopping and buying behaviors, they will become better
partners to merchants than the banks and payment networks are.
The long-term impact on banks: less interchange revenue and customer engagement.
The clue to what banks can do to fight back comes from the number of BNPL users who were late on a payment
because they lost track of when the bill was due. Banks can fight back by helping consumers better manage
their money.
This will be a tough challenge for banks that see themselves as product (e.g., checking account, savings
account, loan) providers and not service (i.e., advice, guidance, monitoring) providers.
Our bet: banks will fight back from a regulatory perspective focusing on the alleged downsides of BNPL and the
“risks” it presents to consumers. But it will be an uphill battle.
CHALLENGER BANKS/
NEOBANKS
tl;dr The challenger bank movement has evolved from fintechs touting
their (so-called) superior mobile banking capabilities to fintechs focused
on serving niche segments of the market, winning business on the strength
of their targeted product offerings.
Pop quiz time: What’s the difference between a challenger bank, a neobank, and a digital bank?
Answer: There’s no difference between the first two terms. Neobanks and challenger banks are generally
considered to be digital banks, but so are “banks” like Finn and Greenhouse from JPMorgan Chase and Wells
Fargo, which don’t qualify as challenger banks because they were born out of established banks.
The irony is that the vast majority of challenger bank and neobank labels aren’t really banks because they don’t
own a banking license.
Whatever they’re called, however, there’s no question that the challenger banks/neobanks are attracting
consumers.
2020: The Year of the Challenger Bank Insurgency

In the annals of history, 2020 will go down as the year of the pandemic. In the annals of banking history, however,
2020 should go down as the year of the challenger bank insurgency. At the end of 2020, 28 million Americans had
an account with a challenger bank, including one in five consumers between the ages of 21 and 40.
More importantly, at the start of 2020, just 4% of Gen Zers and Millennials (ages 21 to 40) considered a
challenger bank the provider of their primary checking account. By the end of the year, however, that
percentage nearly quadrupled to 15%, and nearly tripled among Gen Xers (Figure 6).
FIGURE 6: Digital Bank Share of Primary Institution Status
Percentage of Consumers Who Consider a Digital Bank to be Their Primary Bank
15% 15%
11%
4% 4% 4% 3%
1%
Gen Z (21-25) Millennial (26-40) Gen X (41-55) Baby Boomer (56-75)
Jan-20 Dec-20
Source: Cornerstone Advisors surveys of U.S. consumers, Q1 2020 and Q4 2020
Challenger Banks Are Winning on Product Differentiation

Conventional wisdom—and even some of the challenger banks’ own advertising—holds that fintechs win
customers because they provide a superior customer experience and have better mobile banking tools.
It’s more than that. Digital banks predominantly compete on product differentiation. Chime is a good example of
a challenger bank competing with a “featurization” strategy. The fintech certainly offers a good user experience
and touts no fees to attract consumers in the low- to middle-income brackets. But there are three features of
the company’s product offering that are key to its success:
1) E
arly access to money. Cornerstone research reveals that nearly a quarter of Chime customers chose the
fintech as their primary bank because it offers two-day early access to their direct-deposited paychecks,
as well as to government stimulus and tax refund checks.
2) Spot Me. This product feature lets Chime customers make debit card purchases that overdraw on their
accounts with no overdraft fees. Chime customers with monthly direct deposits of $500 or more are
eligible to enroll. According to Chime’s website, “limits start at $20 and can be increased up to $100 or
more by Chime, based on factors such as account activity and history.”
3) Credit-builder credit card. Chime’s predominantly low- to middle-income consumers aren’t in the
crosshairs of the big credit card issuers’ marketing efforts. According to Cornerstone’s research, 15% of
Chime’s primary banking customer base either has the card or is on the wait list for the card—all within six
months of the card launch. To get the card, a consumer must have a Chime Spending Account and have
set up their direct deposit with the company.
The Rise of Community Fintechs
The key to product differentiation is segment specialization. A growing number of challenger banks serve specific—
often narrow—consumer segments. These fintechs compete by identifying the specific (and often underserved)
product needs of their target markets. Today, there are segment- or affinity-based challenger banks for:
• Environmentally conscious consumers. Fintechs like Aspiration, Ando, and Greenpenny are committed to
fighting climate change. They personalize their product offerings with features like cash back on purchases
from firms with environmentally friendly policies and debit cards made from renewable materials or
upcycled plastics.
• African Americans. Dedicated to closing the racial wealth gap, OurBanc, Greenwood, and First Boulevard
cater to the unique financial needs of African American consumers. First Boulevard, for example, offers Cash
Back for Buying Black™ with up to 5% cash back on debit card purchases at participating Black businesses.
• LGBTQ consumers. Daylight provides LGBTQ consumers with debit cards in their preferred names, even if
they don’t match their legal identification. In addition, Daylight connects members with a financial coach to
learn more about how their identity impacts their money, and to get advice and guidance from an expert in
LGBTQ money matters.
• Gig workers. Fintechs like Qwil, Oxygen, Moves, and Lili serve gig economy workers who have unique
banking needs like 1) inconsistent and/or unpredictable income patterns, 2) credit needs, 3) health (and
other) insurance needs, and 4) tax requirements.
• Young physicians. With high debt-to-income ratios (thanks to high student loan balances) and only
moderate income as a resident or newly practicing doctor, young physicians are often turned down for
loans from traditional institutions. Panacea Financial was co-founded by two physicians to address the
needs of medical students, residents, and attending physicians.
• Disabled consumers. People with disabilities can’t accumulate more than $2,000 in assets without risking
the loss of some of their benefits. To address this issue, Purple’s ABLE account lets customers optimize
which account is used for qualified disability expenses (transportation, medical, etc.) and automatically
moves funds from their checking to the Purple ABLE account.
What makes these segments or affinity groups attractive is their unique banking needs. Geography-based
financial institutions—of which most are, even the megabanks—serve a population that cuts across these
segments and affinity groups. This makes it difficult for them to: 1) identify the unique needs of specific
consumer segments, and then 2) develop and deploy products for each segment.
But, by law, they’re not “banks,” so we propose calling them “community fintechs” because of the non-geography-
based communities they serve.
CREDIT INVISIBILITY
tl;dr Credit invisibility is the paradoxical state in which consumers are

unable to access mainstream credit products because they lack sufficient
established records of having used such credit products in the past. When
it comes to solving this paradox for consumers, banks’ apathy has left the
door open to fintech companies and neobanks, which are introducing new
credit builder products at a rapid clip.
Depending on who you ask, the number of U.S. consumers who are unable to access mainstream credit
products is somewhere between 45 and 60 million. According to research from the Consumer Financial
Protection Bureau (CFPB), these consumers fall into two main groups: 1) “credit invisible” consumers who do
not have a credit record with the nationwide consumer reporting agencies (NCRAs), and 2) the “unscorable,”
or consumers who have limited credit records with the NCRAs, but the records are deemed unscorable because
they consist of stale accounts (i.e., no recently reported activity) or contain too few accounts or accounts that
are too new to be reliably scored.
The burden of credit invisibility isn’t distributed equally. Here’s the CFPB again:
“Credit invisibility and unscorable credit records affect some segments of the population more than
others. About 15% of Blacks and Hispanics are credit invisible compared to roughly 10% of Whites and
Asians. Thirteen percent of Blacks and 12% of Hispanics have unscorable credit records compared to
about 7% of Whites and close to 8% of Asians. In addition, young consumers are more likely to be
credit invisible.”
How Consumers Gain Access to the Credit System

To understand why credit invisibility isn’t distributed equally, it’s important to look at how Americans gain access
to the credit system.
In 2017, the CFPB conducted a study looking at the de-identified credit records for over 1 million U.S. adults who
made the transition from credit invisible to credit visible. The study documented the types of information that
led to the creation of these consumers’ credit records and if and how these consumers were aided by family or
friends in establishing those credit records (Figure 7).
FIGURE 7: Entry Points into the U.S. Credit System
5%
Personal
16% Loans
Student 1%
Loans Mortgages
9%
Auto Loans
38% 14%
Credit Cards Retail Loans
12%
Collections
U.S. 3%
CREDIT Other
SYSTEM
Source: CFPB
The top three “on-ramps” aren’t a surprise. Giving credit to someone who has never had credit is easiest when
the risk is: 1) owned by someone else (student lending, 92% of which is underwritten by the U.S. Government);
2) subsidized by a third-party with a vested interest (retail loans, which seem likely to increase as merchant
adoption of BNPL increases); or 3) balanced out by the potential for enormous profits (credit cards).
According to the CFPB, less than 1% of consumers below the age of 25 used a secured credit card as their entry
point into the credit system. This isn’t a surprise given that secured cards are far less profitable for banks than
unsecured cards.
Collections as an entry point into the system—in which a consumer’s first credit record captured by the credit
bureaus is an unpaid financial obligation (most frequently, unpaid medical, cable, or cell phone bills)—is a bad
thing. It disadvantages these consumers immediately as collections notices are among the most damaging
credit characteristics in most lenders’ underwriting models.
This is especially concerning since low-income consumers are more likely to start their credit journey
with collections. In low-income neighborhoods, 27% of consumers have credit records created from non-
loan experiences. In contrast, non-loans are the entry products for only 8% of consumers in upper-income
neighborhoods.
Another disadvantage for consumers from low-income neighborhoods is that they have fewer opportunities to
acquire joint accounts or become an authorized user on an established credit account, both of which represent
safer ways to establish credit histories.
Given that credit is an essential tool for building financial health and resiliency, and given that the current
on-ramps to the U.S. credit system are deeply flawed, it’s understandable why fintech companies would be
interested in making the problem of credit invisibility a priority in their product roadmaps.
The challenge is that, unlike overdraft fees, it’s surprisingly difficult to build a good wedge product around the
problem of credit invisibility.
The Problem With Credit Builder Products

The most common fintech solution in this space is credit builder products. As the name suggests, these are
financial products that are designed to help consumers establish and develop positive credit histories. They
come in many different flavors, but they are all essentially designed to do the same thing—generate positive
repayment data that can be reported back to the three credit bureaus. The logic behind credit builder products
involves four arguments:
1) Banks have failed to create safe, low-cost on-ramps to the U.S. credit system.
2) Most consumer credit in the U.S. is provided by banks.
3) Banks rely primarily on the credit bureaus and the FICO score to make credit decisions.
4) Therefore, we should build a new product that makes it simple for consumers to generate and
report positive data to the credit bureaus and improve their FICO scores.
The theory makes sense. In practice, however, it’s difficult to build a product that is both novel and appealing
to consumers and effective at responsibly improving their credit scores. It’s a bit like shooting a basketball; the
farther away from the hoop you get, the more your shooting percentage decreases.
Credit builder products come in a variety of flavors: 1) credit builder cards, 2) credit builder loans, 3) spend-to-
credit transformers, and 4) rent and utility data aggregators.
Credit Builder Cards

These cards—offered by fintechs like Chime, Varo, cred.ai, and Step—automatically set aside money from a
linked deposit account as they are used, ensuring that customers always have the money to pay their bill at the
end of the month and, for all practical purposes, eliminating the risk of default. When the bill is paid, the card
provider reports the repayment to the bureaus.
These cards typically come with no interest and few fees (primarily generating revenue for the providers
through interchange).
What’s the problem?
Bureau-based credit scores help lenders assess a borrower’s character, which is credit underwriter speak for
willingness to repay debt. This type of credit worthiness assessment is especially useful for long-term credit
obligations (auto loans, HELOCs, mortgages) and for lending across different macroeconomic conditions (a
person’s willingness to repay debt tends to be fairly stable).
Credit builder cards are great for consumers, but the concern is that the repayment data they are generating
and reporting to the bureaus (which is almost guaranteed to be positive) isn’t the most reliable signal for those
customers’ willingness to repay future debts.
Credit Builder Loans

Credit builder loans are installment loans that don’t fully pay out until after the customer has already paid them off.
Offered by fintechs like Self, SeedFi, and MoneyLion, these products are essentially reverse loans. A consumer
makes monthly payments (including principal and interest) until the full amount of the loan (typically between
$500 and $1,000) is paid off and then the money (minus interest and fees) is released to the customer (some
products pay a portion of the loan out upfront). This reverse structure protects the lender in case the customer
doesn’t make all their payments. Over the course of the loan term, the customer’s payments (or missed
payments) are reported to the credit bureaus.
To put it mildly, credit builder loans are not great for consumers. They are marketed as products that enable
consumers to “save money while building your credit,” but the costs of the loan (fees and interest) far outstrip
the yield that customers get on their “savings,” which makes it an expensive option for establishing and building
a credit history.
Spend-to-Credit Transformers
Spend-to-credit transformers are lines of credit or installment loans that allow consumers to pay for stuff they
are already buying, thus establishing and/or building their credit histories. They essentially transform existing
spend into credit transactions that can be used to build consumers’ credit histories and come in two varieties:
1) R
evolving line of credit. A revolving line of credit is linked to a debit card and provided by fintech
companies like Extra and Grain. When a customer uses their debit card, the revolving line of credit is used
to cover the purchase and is automatically repaid by the debit card. These lines of credit come with fees
and, in the case of Grain, an interest rate.
2) Fixed installment loan. The fixed installment loan is tied to specific recurring transactions. An example of
a provider in this space is Grow Credit, which offers 12-month installment loans, accessed through a virtual
Mastercard, which can only be used to pay for recurring subscription payments like Spotify and Disney+.
Grow Credit uses a freemium model, offering small loans ($17 per month) for free and bigger loans
(with the ability to pay for more types of subscriptions) for a monthly fee.
It’s a little bit of the worst of both worlds.
Like credit builder loans, they’re expensive. They offer little to no value unless consumers are willing to pay fees
and possibly interest. And, like credit builder cards, they’re not providing the greatest “willingness to pay” signal
back to the credit bureaus. Automatically linking credit lines to debit cards takes the control to make repayment
decisions out of the customer’s hands. Giving small dollar loans to pay for services that customers are already
paying for and are highly unlikely to default on doesn’t tell lenders anything about their willingness to prioritize
debt repayment.
Rent and Utility Data Aggregators

This type of credit builder service—provided by companies like Experian, LevelCredit, and Perch—confirms,
collects, and furnishes data to the credit bureaus on how consumers are paying their utilities (everything from
electricity and internet service to Netflix) and rent.
These services are monetized in a variety of ways, with some providers opting to directly charge customers a
fee (e.g., LevelCredit costs customers $6.95/month) and some generating revenue through B2B relationships
(e.g., Boost is free for consumers but generates revenue for Experian through lead referrals).
Reporting new data to the credit bureaus sounds like a good idea, but it only makes a difference if that
data is used by lenders’ credit score and underwriting models.
In the case of rent data, only FICO 9 and FICO 10 take rent data into account. Unfortunately, most lenders
haven’t adopted FICO 9 yet and they are likely years (perhaps decades) away from doing so.
Utility data is more widely used in commercial scores (FICO 8 takes it into consideration and is used
widely in most consumer lending decisions), but even a long history of positive utility payments can
only offer a modest bump in a consumer’s credit score (which lenders may still discount in their own
proprietary underwriting models).
Make the Hoop Bigger
Successful fintechs like Chime and Square Cash App are product development machines. You feed in customer
problems/frustrations/annoyances and the machine spits out new products and product features to address
them. Credit invisibility is the rare banking problem that breaks this machine.
The constraints of the problem—building a differentiated solution that doesn’t require customers to do anything
different from what they’re already doing but will produce reliable willingness-to-pay signals that the credit
bureaus will accept and that the credit scores already in commercial use will take advantage of—are simply too
onerous to allow for the elegant solutions that fintech product designers prefer to create.
To solve the credit invisibility challenge, fintechs need to enable banks and other fintechs to change the
constraints of the problem. To return to the basketball analogy used above, the industry needs to shift its focus
from making difficult shots to making the hoop bigger. Here are two examples that show how:
• An international credit reporting infrastructure. Immigrants represent roughly one-fifth of the credit
invisible population in the United States. Seven in 10 of those immigrants come to the U.S. from a small
number of countries that have mature credit reporting infrastructures in place. So why isn’t there a
mechanism for U.S. lenders to utilize credit bureau data from other countries to approve recent immigrants
for credit? Nova Credit, a credit reporting agency founded in 2015, was created to do just that. With the
consent of the consumer, Nova Credit can acquire credit files from the countries that U.S. immigrants
are emigrating from and normalize that data so U.S. lenders can easily leverage it for automated credit
underwriting.
• Cash flow-based underwriting. Cash flow-based underwriting uses bank transaction data to assess a
borrower’s capacity to repay debt. This approach to credit evaluation works well for shorter-term and
smaller-dollar loans and, unlike traditional credit scores, doesn’t require lengthy credit histories. Cash flow-
based underwriting is about recency—e.g., does the borrower currently have the capacity to repay this
loan—which means that it only needs as little as three months of bank transaction data. Petal, for example,
has used cash flow data to underwrite 70% of its 100,000 credit card customers with thin or no traditional
credit histories.
The growing awareness and acceptance of cash flow-based underwriting and the public pressure that fintech
companies have put on banks to help solve the credit invisibility problem have pushed some big banks to
approve credit invisible consumers for credit cards. According to The Wall Street Journal: 5
“JPMorgan Chase, Wells Fargo, U.S. Bancorp and others will factor in information from applicants’
checking or savings accounts at other financial institutions to increase their chances of being
approved for credit cards. It is aimed at individuals who don’t have credit scores but who are
financially responsible.”
CRYPTOCURRENCY
tl;dr Americans’ adoption of cryptocurrency as an investment asset is

growing—as is their interest in using cryptocurrency (primarily Bitcoin)
as a payment mechanism. Banks have a long list of risk-related reasons
for not providing cryptocurrency services—but the biggest risk is not
providing them.
At the start of the pandemic in 2020, trading of Bitcoin, Ethereum, and other cryptocurrencies increased
sharply and maintained a high level of trading throughout the spring. In June 2020, Coin Metrics wrote:
“If historical growth rates can be maintained, Bitcoin’s current daily volume would need fewer than
four years of growth to exceed daily volume of all U.S. equities and fewer than five years to exceed
daily volume of all U.S. bonds.” 6
A survey of 3,898 U.S. consumers conducted by Cornerstone Advisors in Q2 2021 found that 15% of American
adults owned some form of cryptocurrency—a little more than half of whom invested in cryptocurrency for the
first time during the first six months of 2020 (Figure 8).
FIGURE 8: Cryptocurrency Ownership in the U.S.
Do you currently hold any cryptocurrency assets

(e.g., Bitcoin, Ethereum)?
73% 11% 8% 7%
No, and I don't have any plans to No, but I plan to in the next 12 months
Yes (purchased for first time in 2020)
Yes (purchased for first time in pre-2020)
The rise in the price of Bitcoin in the first quarter of 2021, coupled with Coinbase’s IPO debut (which valued the
company at ~$85 billion), helped legitimize Bitcoin and cryptocurrency in the eyes of many doubters and skeptics.
Not among banks, however.
A Cornerstone Advisors survey of senior bank and credit union executives found that eight in 10 financial
institutions have no interest in offering cryptocurrency investing services to their customers—and just 2% said
they were “very” interested (Figure 9).
FIGURE 9: Bank Interest in Providing Cryptocurrency Investing Services
How interested is your financial institution in providing

cryptocurrency investing services?
79%
19%
2% 0%
Not interested Somewhat interested Very interested Already doing it
Source: Cornerstone Advisors survey of 260 financial services senior executives, December 2020
Consumers Want Bitcoin From Their Banks

Banks and credit unions appear to be unaware of consumer trends and attitudes regarding cryptocurrency.
According to that same Cornerstone survey:
• 60% of crypto owners would use their bank to invest in cryptocurrencies. Among consumers who already
hold cryptocurrencies, 60% said they’d definitely use their bank if it offered them the opportunity to
invest in cryptocurrencies—and another 32% said they might do so. Just 4% of current crypto owners said
they wouldn’t use their bank to invest in crypto because they wouldn’t switch from the exchange they’re
currently using.
• 68% of crypto owners are very interested in Bitcoin-based debit or credit card rewards. Among
consumers that intend to purchase crypto in 2021, about four in 10 are very interested in Bitcoin-based
rewards and almost half are somewhat interested.
Why Are Banks Resisting the Crypto Trend?
What’s holding banks back from offering cryptocurrency investing services? Risk aversion and compliance.
According to the Boston Consulting Group:
“Financial services leaders remain skeptical of the value that cryptocurrency has as an asset class,
and individual cryptocurrencies have lost market capitalization at times. During the COVID-19 crisis,
cryptocurrencies experienced volatility, and their reputation was tarnished by the association of
Bitcoin with criminal acts such as the Twitter hack of July 2020.” 7
It’s not a good excuse. It’s like a bank saying, “We won’t take cash anymore because some people
counterfeit money.”
In addition, banks enabled their customers to invest in stocks like Tricida and Invesco Mortgage Capital,
both of which lost roughly 80% of their market caps in 2020.
Does that kind of volatility not count?
The Coming Bank-Bitcoin Boom

Banks have a long list of reasons for avoiding cryptocurrency—“Our customers shouldn’t be investing in it,” “It’s
too risky, not worth it,” and so on. The bigger risk for banks is not providing cryptocurrency services.
Patrick Sells, head of Bank Solutions at NYDIG, the Bitcoin subsidiary of Stone Ridge, a $10 billion alternative
asset manager, makes the case that providing crypto services reduces banks’ risk:
“By not offering cryptocurrency trading services, banks potentially have greater AML exposure
because they don’t know where the funds that are coming in are coming from.”
Banks and credit unions can’t keep ignoring consumer demand for cryptocurrency. And they won’t. Four forces
will mobilize the banking industry, setting the stage for a bank-Bitcoin boom in 2022:
1) Large institutions launching crypto offerings

2) The success of PayPal and Square in the crypto space
3) Strong consumer interest and demand
4) Continued regulatory easing and guidance
This gives banks some time in 2021 to educate themselves on the compliance factors and product options
involved. Options in the plural because, as NYDIG’s Sells explains, crypto isn’t just about trading:
“Banks have a range of product options including trading, rewards, and interest enhancement (i.e.,
providing interest to account holders in Bitcoin).”
Falling back on moral excuses for avoiding the crypto market—e.g., “It’s a Ponzi scheme”—doesn’t hold water.
It’s akin to saying you won’t lend to someone who goes to Las Vegas to gamble or won’t bank someone you
think spends too much of their money on lottery tickets.
Banks have to own up to the realization that investing in cryptocurrencies is becoming mainstream. Refusing to
play the game is a bad business decision.
DECENTRALIZED FINANCE
tl;dr Decentralized finance (DeFi) is a term used to describe financial

services that run on public blockchains, primarily Ethereum. DeFi firms are
referred to as DAOs—decentralized autonomous organizations—because
ownership of the organization is distributed across the firm’s participants.
It sounds appealing in theory, but there are a number of challenges
regarding DeFi that its proponents often overlook.
Ethereum.org defines decentralized finance (DeFi) as:
“A collective term for financial products and services that are accessible to anyone who can use
Ethereum – anyone with an internet connection. DeFi uses cryptocurrencies and smart contracts to
provide services that don’t need intermediaries. A smart contract is a type of Ethereum account that
can hold funds and can send/refund them based on certain conditions.” 8
DEFI USE CASES

Here are some of the ways DeFi apps (often called “dapps”) and protocols are already being used: 9
• Decentralized exchanges (DEXs). Right now, most cryptocurrency investors use centralized exchanges
like Coinbase or Gemini. DEXs facilitate peer-to-peer financial transactions and let users retain control
over their money.
• E-wallets. DeFi developers are creating digital wallets that can operate independently of the largest cryptocurrency
exchanges and give investors access to everything from cryptocurrency to blockchain-based games.
• Yield harvesting. Dubbed the “rocket fuel” of crypto, DeFi makes it possible for speculative investors to
lend crypto and potentially reap big rewards when the proprietary coins DeFi borrowing platforms pay
them for agreeing to the loan appreciate rapidly.
• Non-fungible tokens (NFTs). NFTs create digital assets out of typically non-tradable assets—like art, videos,
and even tweets on Twitter—commodifying the previously uncommodifiable.
• Flash loans. These are loans that borrow and repay funds in the same transaction. Here’s how it works:
Borrowers enter into a contract encoded on the Ethereum blockchain that borrows funds, executes a
transaction, and repays the loan instantly. If the transaction can’t be executed, or it’ll be at a loss, the funds
automatically go back to the loaner. If you do make a profit, you can pocket it, minus any interest charges
or fees. Think of flash loans as decentralized arbitrage.
DeFi Versus CeFi (Centralized Finance)
The Ethereum website distinguishes decentralized finance from traditional finance along seven dimensions
(Table A).
TABLE A: Decentralized Finance Versus Traditional Finance
Decentralized Finance Traditional Finance
You hold your money. Your money is held by companies.
You have to trust companies not to mismanage your

You control where your money goes and how it's spent.
money, like lend to risky borrowers.
Transfers of funds happen in minutes. Payments can take days due to manual processes.
Transaction activity is pseudonymous. Financial activity is tightly coupled with your identity.
DeFi is open to anyone. You must apply to use financial services.
The markets are always open. Markets close because employees need breaks.
Financial institutions are closed books: you can't ask

It's built on transparency – anyone can look at a
to see their loan history, a record of their managed
product's data and inspect how the system works.
assets, and so on.
Source: Ethereum.org
What differentiates DeFi dapps from their traditional bank or Wall Street counterparts? According to Sid
Coelho-Prabhu, product manager at Coinbase:
• Independence. At their core, the operations of these businesses are not managed by an institution and its
employees. Instead, the rules are written in code (i.e., smart contracts). Once the smart contract is deployed
to the blockchain, DeFi dapps can run themselves with little to no human intervention (although, in practice,
developers do maintain dapps with upgrades or bug fixes).
• Transparency. The code is transparent on the blockchain for anyone to audit. This builds a different kind
of trust with users who can understand the contract’s functionality or find bugs. All transaction activity is
also public for anyone to view. While this may raise privacy questions, transactions are pseudonymous by
default, i.e., not tied directly to your real-life identity.
• Global. Whether you’re in Texas or Tanzania, you have access to the same DeFi services and networks. Of
course, local regulations may apply but, technically speaking, most DeFi apps are available to anyone with
an internet connection.
• Permissions. Dapps are permissionless to create and permissionless to use—anyone can create DeFi apps,
and anyone can use them. Unlike finance today, there are no gatekeepers or accounts with lengthy forms.
Users interact directly with the smart contracts from their crypto wallets.
• User experience. Don’t like the interface to a certain dapp? No problem—use a third-party interface or build
your own. Smart contracts are like an open API that anyone can build an app for.
• Interoperability. DeFi applications can be built or composed by combining other DeFi products like Lego
pieces—e.g., stablecoins, decentralized exchanges, and prediction markets can be combined to form entirely
new products. 10
DeFi Downsides
You hold your money, you control where your money goes, and transaction activity is pseudonymous (which the
dictionary defines as “writing or written under a false name”). What could go wrong with that?
Blockchain expert Gwyneth Iredale identified a number of DeFi shortcomings:
• Scalability. DeFi projects encounter scalability difficulties. Transactions require extended periods of time
for confirmation and are highly expensive during the period of congestion. For example, Ethereum could
showcase capabilities for processing almost 13 transactions every second with Ethereum at full capacity.
The lack of scale helps account for outrageous transaction fees, which can run to 10 times the amount of
the underlying transaction.
• Uncertainty. In the event of instability in a blockchain hosting a DeFi project, the project could automatically
inherit instability from the host blockchain. As of now, the Ethereum blockchain is going through various
changes, which can increase the risk for a decentralized app.
• Liquidity. As of October 2020, the total value locked in DeFi projects amounted to roughly $12.5 billion—a
small fraction of the size of traditional financial systems.
• Shared responsibility. Among all the advantages and disadvantages of DeFi, the shared responsibility
factor works negatively for users. Therefore, the DeFi space needs tools and processes that could prevent
possibilities of human mistakes and errors. Where are those tools and processes going to come from?
Centralized sources. The bigger issue here, though, is the question of immutability. DeFi is built on the
premise that all transactions are immutable. Should mistakes be reversable or not? 11
DeFi: Throwing the Baby Out With the Bath Water?
The authors of the book DeFi and the Future of Finance state:
“Traditional finance exhibits layers of fat and inefficiency that ultimately remove value from the
average consumer. The contractual efficiency of DeFi brings all of this value back.”
This statement ignores the reality that when you’re starving in the desert or freezing naked in a snow storm,
a little bit of fat can be a big help.
Achieving “contractual efficiency” at the expense of controls and protections is a tradeoff we bet few
consumers are willing to make. In fact, the trend in the United States—with the rise of the CFPB—suggests
that Americans want a centralized financial system, not a decentralized one—even if it promises a greater
level of efficiency and transparency.
DIGITAL TRANSFORMATION
tl;dr As a buzzword and management fad, digital transformation has

about another 12 to 18 months before some new fad begins to take hold.
Banks, on the other hand, have a long way to go to achieve their digital
transformation.
The banking world appears convinced that the Coronavirus crisis has helped accelerate the digital transformation
of banking:
• The Boston Consulting Group offered up the proof point that, post-crisis, 25% of consumers plan
to make less use of bank branches or stop using them altogether. 12
• According to The Financial Brand, “The new normal of banking is quickly moving from branch-
heavy, product-centric organizations with legacy technologies and cultures to consumer-centric
organizations with more personalized solutions that can be delivered seamlessly.” 13
• RTInsights wrote: “Led by employees working remotely and customers increasingly doing their
banking online, digital transformation is accelerating in the banking sector as a result of COVID.” 14
What is Digital Transformation, Anyway?

These perspectives miss the point of what digital transformation is.
For starters, the relatively small minority of consumers—25%—who plan to make less (or no) use of branches going
forward is a pretty weak argument for transformation. Who says that they won’t start using the phone to make
voice calls to call centers more often?
Second, banks are not “quickly moving” to provide “personalized solutions that can be delivered seamlessly.”
That simply doesn’t happen in a three-month time frame, and especially during one when financial institutions
are scrambling to adapt to a crisis.
The examples cited above fail to meet the definition of digital transformation—at least as defined by bank
executives themselves. In a 2019 study conducted by Cornerstone Advisors, executives were asked which of
three possible definitions of digital transformation resonated the most with them. The definition capturing
nearly 80% of the vote was:
“Integration of digital technologies into all areas, fundamentally changing how to operate and deliver
value, and a culture change that continually challenges the status quo and gets comfortable with failure.”
As a buzzword and management fad, digital transformation has about another 12 to 18 months before some new
fad begins to take hold. Banks, on the other hand, have a long way to go to achieve their digital transformation.
A study from Cornerstone Advisors found that only about a quarter of banks and credit unions had embarked on a
digital transformation strategy before 2019, and that 45% hadn’t launched a strategy prior to this year.
Not surprisingly, then, few banks are very far along towards completing their digital transformation journey—all
told, only 36% think they’re at least halfway done.
It is hard to believe, however, that 20% of the institutions that deployed their digital transformation strategy in
2020, and 27% of those that started in 2019, think they’re at least halfway done.
Emerging Technology Adoption

If you thought financial institutions that were halfway (or more) done with their digital transformation strategy
would have already deployed most emerging technologies, think again. The data tells a different story, especially
regarding:
• Cloud computing and APIs. Roughly four in 10 banks that think they’re halfway or more through their digital
transformation strategies have yet to deploy cloud computing or APIs. And we have a colleague who keeps
urging us to stop calling these technologies “emerging.”
• Chatbots. Most banks don’t agree with our assessment that chatbots are a foundational technology and
that every bank will end up deploying multiple chatbots across a range of business processes and customer
journeys. Only about a quarter of the institutions halfway or more through their transformation have
implemented chatbots so far.
• Machine learning. Just 14% of the banks (self-reportedly) halfway or more through their digital transformation
efforts have deployed machine learning tools to date. For a technology hyped as having a transformational
impact on the industry, 14% doesn’t seem like a very high number.
Digital Transformation Progress

But digital transformation isn’t just about technology, right? At least that’s what some observers say.
Even if it isn’t, then surely, we can use business results as a gauge for digital transformation impact.
Maybe not.
Less than a third of banks that claim to be halfway or more done with their digital transformation strategy
have achieved a 5% improvement in any of nine key performance measures.
And we thought we had set the bar low at a 5% hurdle.
Delusions of Digital Transformation
What should we make of these survey findings? Either: 1) bank execs have a very different definition of what digital
transformation is than we (and we suspect, you) do, or 2) bank execs are deluding themselves (or Cornerstone)
regarding how far along they are in their digital transformation journeys.
In the spirit of Jeff Foxworthy’s “you might be a redneck if...,” you might be digitally transformed if:
• You’re opening checking accounts within five minutes. Even among banks that offer digital account
opening, 40% still require an applicant to take more than 10 minutes to complete a checking account
application according to a study from Cornerstone Advisors.
• You’re instantly approving unsecured loan applications through digital channels. The same Cornerstone
study found that at 54% of banks, it takes loan applicants more than 10 minutes to complete an unsecured
loan application online or on a mobile device, and that just a third are instantly approving those loans.
• You’ve got a more holistic view of your customers’ financial lives. Bankers like to say that they have a lot
of data about their customers. Nonsense. Consumers generally do a very small percentage of their financial
activity with any one institution. If a bank hasn’t “transformed” its data aggregation capabilities, it hasn’t
digitally transformed.
• You’ve built a digital product factory. Banks need a technology platform that enables them to rapidly and
cost-effectively design, create—or plug in—and deploy new digital products and services. The digital product
platform must be 1) component-based, 2) API-driven, and 3) cloud native.
Using these criteria, most banks have a long, long way to go towards becoming digitally transformed.
EMBEDDED FINANCE
tl;dr Embedded finance is the integration of financial services into non-

financial websites, mobile apps, and business processes. The umbrella term
“embedded finance” glosses over the deep distinctions between embedded
payments, lending, banking, and insurance, however.
There are different views of what embedded finance is. This is our definition:
“The integration of financial services into non-financial websites, mobile apps, and business processes.”
A good example of this is the debit card Lyft offers its drivers. Product features like a strong rewards program
and instant payments are coupled with customer experience improvements like seamless account opening and
integration into Lyft’s driver app to provide a compelling offer for Lyft drivers (Figure 10).
FIGURE 10: Embedded Finance Offer from Lyft
Source: Cornerstone Advisors
Behind offers like these is a bank that 1) provides the debit card, 2) accounts for the movement of money in
and out of the accounts, and 3) deals with the compliance requirements for providing the product.
Banks often see non-financial brands like Lyft or a fintech like Chime or Current as competitors or threats.
That’s narrow-minded thinking.
These companies are simply potential distribution channels for banks, enabling the banks to reach a broader
range of customers than they could have on their own (evidenced by the average of nearly 1.3 million
accountholders partner banks have according to a recent Cornerstone Advisors survey).
Embedded Finance Forecast

Lightyear Capital (working with Cornerstone Advisors) estimates that embedded finance revenue will grow
to nearly $230 billion by 2025, up from $22.5 billion in 2020 (Figure 11). At a five times revenue multiple,
embedded finance will create more than $1 trillion of value by 2025. Assuming faster growth in the second half
of the decade than the first, the estimate is in-line with Bain Capital Venture’s estimate of $3.6 trillion by 2030.
FIGURE 11: Embedded Finance Revenue Growth
Embedded Finance Forecast ($ in billions)

54%
‘20-’25
CAGR
$140.8
2020
62%
2025 ‘20-’25
CAGR
$70.7
62%
‘20-’25
CAGR
$15.7 $16.1
$2.6 $1.4 $5.0
$-
Wealth Management Consumer Lending Insurance Payments
Growth Drivers of Embedded Finance

Three consumer trends are driving the growth of embedded finance:
• Changing buying behaviors. According to Martin Kenney and John Zysman, “A digital platform economy
is emerging. Companies such as Amazon, Etsy, Facebook, Google, and Uber are creating online structures
that enable a wide range of human activities. This opens the way for radical changes in how we work, create
value in the economy, and compete for profits.” 15 It’s opened ways for radical changes in how we buy:
Between 2014 and 2018, Amazon’s share of consumer retail and total consumer spend tripled.
• Openness to non-traditional financial providers. Many consumers younger than 55 (in particular,
Millennials) are willing to get a checking account from non-banking providers like Amazon, Google,
and even Starbucks and Uber (Figure 12).
FIGURE 12: Interest in Checking Accounts From Non-Traditional Providers
If the following companies offered a checking account, what would you be most likely to do?
(% that would open an account)
Gen Z (21-25) Millennial (26-40) Gen X (41-5) Boomer (56-75) Senior (76+)
Amazon 30% 46% 38% 11% 9%
Google 25% 39% 34% 6% 8%
Microsoft 15% 33% 26% 4% 8%
Venmo 24% 33% 22% 3% 2%
Facebook 15% 32% 25% 4% 3%
Instagram 20% 32% 24% 2% 3%
Starbucks 20% 30% 23% 3% 5%
Uber 13% 30% 22% 3% 2%
Snapchat 19% 27% 19% 2% 2%
Source: Q3 2020 Cornerstone Advisors survey of 3,016 U.S. consumers
• Willingness to share personal data. The generational divide is also seen in consumers’ comfort level sharing
personally identifiable information with mobile apps—a necessary ingredient for embedded finance.
The Embedded Finance Landscape

Fueling this growth is an interconnected landscape of companies that include:
• Providers. Embedded service providers plug offerings into platforms to increase distribution and improve
customer retention. Examples of embedded finance service providers include Lemonade, WealthSimple,
Raisin, Affirm, and Habito.
• Enablers. Enablers are the pipes through which providers and containers exchange information and
data. Companies like Green Dot, Railsbank, Marqeta, Plaid, and Finicity provide the data/technology
infrastructure and connectivity capabilities via APIs and banking-as-a-service.
• Sponsors. Firms like Amazon, Gusto, Shopify, SmartRent, and Uber aggregate services across providers
to offer a platform or network of interconnected solutions, allowing customers to access best-of-breed
solutions through a frictionless experience.
EMBEDDED FINTECH
tl;dr If embedded finance is the integration of financial services into non-

financial websites, mobile apps, and business processes, then embedded fintech
is the integration of fintech products and services into financial institutions’
product sets, websites, mobile applications, and business processes.
Financial institutions have two strategies to deal with the emergence of embedded finance: 1) capitalize on
the opportunities it potentially brings as new distribution channels for their products and services, and/or
2) replicate the approach by embedding fintech products into their digital banking platforms.
Banks can protect and grow their core products—e.g., payments and loans—by finding new distribution
opportunities through embedded finance. That might prove a difficult road, however, for mid-size financial
institutions that find themselves shut out of those deals by retail platforms—the containers—that partner
exclusively with large banks.
But mid-size banks and credit unions can pursue a different strategy: create new revenue streams from new
products and services already created by fintech startups—in other words, embedded fintech:
The integration of fintech products and services into financial institutions’ product sets, websites,
mobile applications, and business processes.
Here are three potential opportunities:
• Bill negotiation services. Financial institutions have a bill pay-related problem: few consumers use an
FI’s digital platform to pay their bills. Partnerships with fintechs like Truebill and Billshark—which analyze
consumers’ bills, make recommendations to lower their bills, and negotiate their bills to help them save—can
help drive consumers back to FIs’ bill pay platforms, creating a new revenue stream for financial institutions.
• Subscription services. On average, Americans subscribe to roughly 13 services, spanning video, shopping,
food, music, dating, and other services. Although there are mobile apps available to track subscriptions,
two European fintechs—Subaio and Minna Technologies—and U.S.-based WalletFi do it exclusively with
bank partners. These fintechs help banks’ customers manage the entire subscription lifecycle including:
1) purchasing new subscriptions, 2) tracking how much is spent, 3) comparing and switching providers,
and 4) canceling unwanted subscriptions.
• Data breach and identity protection services. A new service from Breach Clarity (now part of TransUnion)
makes the process of dealing with data breaches easier and better—for both consumers and banks. The
company analyzes every publicly reported data breach in the United States. Based on more than 1,000
factors, it then computes a score for each breach and provides consumers with recommendations on what
they should do about the breach. And it integrates its services into banks’ digital banking platforms.
Building an Embedded Fintech Factory
An embedded fintech factory for financial institutions will be built on a digital product platform, a technology
platform that enables financial institutions to rapidly and cost-effectively design, create—or plug in—and deploy
new digital products and services. A digital product platform is:
• Component-based. All components must be self-contained to accommodate continual change. With modern
Agile methods, including DevOps and continuous delivery, anything can be changed at any time without
affecting other code components.
• API-first. Banking components need to be available for consumption throughout the bank and also by third
parties. With the right API architecture, financial institutions can achieve the agility needed to rapidly deploy
new products and services regardless of whether they’re developed in-house or by third-party providers.
• Cloud-native. Only cloud computing can offer the computing power and flexibility required to leverage the
latest technologies—such as artificial intelligence (AI), machine learning, and advanced analytics—and keep
pace with the latest developments in security and regulation.
There are two paths to creating this digital product platform: 1) replace the existing core system with a more
modern system, or 2) deploy a core integration layer that sits on top of the existing legacy core.
FINANCIAL HEALTH
tl;dr It’s time for financial institutions to stop equating financial health
with financial literacy. The new financial health is behavioral, integrated,
and measurable, and will become the basis of competition in banking.
According to research from Cornerstone Advisors, roughly one in five American’s financial health situation is “dire.”
Nearly half of the consumers in this segment can’t pay their bills on-time and in-full all of the time, and about
three-quarters can’t make their loan payments every month (Figure 13).
FIGURE 13: Financial Behavior by Financial Health Category
There are three challenges the industry must deal with to fix the financial health crisis: 1) financial institutions
pay lip service to financial health, 2) financial literacy efforts are ineffective, and 3) financial health is not just
a problem for low- and middle-income consumers.
Financial Institutions Pay Lip Service to Financial Health

In a recent survey, the Financial Health Network asked financial services executives about their organizations’
most important strategic priorities. The second most-frequently mentioned priority—cited by seven in 10 banks
and credit unions—was “improving customer financial health.”
The data doesn’t add up, however. If seven in 10 financial institutions are focused on improving customer
financial health, then why do just:
• 48% incorporate customer financial health into their strategic plans?
• 42% provide personal financial advice or coaching to help with day-to-day challenges?
• 38% offer digital financial health management or budgeting tools that provide advice?
• 21% regularly track and report on customer financial health?
The answer: banks and credit unions are paying lip service to financial health. As a result, a lot of financial
institutions’ “financial health” efforts are either public relations-oriented community grants or financial
literacy efforts.
The Financial Literacy Problem

There’s another problem here: improving financial literacy may not have much impact on consumers’ financial
health. According to a study titled So Many Courses, So Little Progress: Why Financial Education Doesn’t Work:
“One-size-fits-all financial education has been demonstrated to have little to no effect on changing
real-world financial behaviors. A meta-analysis of more than 200 studies found that educational
interventions explained only 0.1% of the financial behaviors studied.” 16
Financial Health is Not Just a Low- to Middle-Income Problem

A survey of U.S. consumers from Cornerstone Advisors revealed that many consumers across the income spectrum
wrestle with various aspects of their financial lives. Although the vast majority of Americans across all income levels
pay their bills on-time and in-full most or all of the time:
• A little less than half of the consumers in the $50,000 to $75,000 range earn competitive rates
on their savings and investments, are on-track with their long-term savings, or are able to cover
emergencies.
• About a third of consumers in the $100,000 to $250,000 level don’t always earn competitive rates
or are on-track with their savings.
• Among the $250,000+ crowd, nearly three in 10 said they don’t always spend less than they earn
(we know, you’re not shedding any tears).
The point is that many consumers at all income levels have financial health issues of some type—the difference
often being time frame, with concerns shifting from the present to the future as income rises. Omidyar
Network’s report Breaking New Ground in Fintech supports this:
“Low-income consumers discussed financial health in terms of problems to avoid like ‘not worrying
about covering costs,’ and ‘not being in debt.’ By contrast, moderate-income consumers spoke
about financial health more in terms of future opportunity. These participants wanted solutions that
provided financial advice or investing tools.” 17
The New Financial Health

The implied connection between financial health and low income is outdated. A new financial health concept is
emerging, one that is:
• Behavioral. The old financial health concept was rooted in “literacy” and dominated by educational
approaches designed to teach people how to better manage their financial lives. The new financial health
concept is behavior-driven, designed to use technology to help people change their financial behaviors and
influence the financial decisions they make when they make them.
• Integrated. A growing body of research links financial health to both physical and mental health. This
means that the new concept of financial health doesn’t look at financial behavior (or literacy) in a vacuum
and moves the management of financial health out of the strict realm of financial institutions and providers.
• Measurable. Under the old concept of financial health, someone was either financially healthy or not. The
new concept recognizes that there is a continuum of financial health—ranging from poor health to high
performance—and that the components of financial health can be quantified (much like the scores we get
on a wide range of physical health tests).
And this new financial health concept applies to all consumers—not just the under-served ones.
Financial Health Predictions

Some predictions about financial health:
• Financial health will become the basis of competition in banking. The basis of competition has shifted
from location (who has the best/most branch locations) to price (who has the best rates and fees)
to convenience (who makes banking easiest). The new basis will be financial health—who best helps
consumers improve their financial health (or performance). Price and convenience will still play a role—but
the point of differentiation will be improving measurable financial health.
• Financial health platforms will emerge. The financial health fintech space is growing and getting too
complicated for consumers to navigate and for players in the ecosystem to integrate with one another. An
Amazon of financial health—or better yet, a Fitbit of banking—will emerge to help consumers find the best
financial health providers and help providers better integrate.
• Mid-size institutions’ positioning will be threatened. Many mid-size financial institutions think they’re
well-positioned for the new financial health because they “care” more about consumers than big banks do.
Nonsense. The new financial health is AI- and API-driven. Big banks already invest more in terms of people
and money on this than any smaller bank could. Mid-size institutions will need to commit to competing on
financial health—which they don’t do today.
• The government will stick its nose into financial health. The Community Reinvestment Act (CRA) was
enacted with the intent of providing credit to low- and moderate-income neighborhoods. The legislation has
done some good, but there are two emerging issues: 1) what “neighborhood” does a digital bank serve? and
2) higher-income consumers need help, too, and need more than just credit. Look for a future administration
or Congress to require banks to monitor and improve their customers’ level of financial health.
MODULAR BANKING
tl;dr Modular banking is a technology approach that enables financial

institutions to quickly launch new products, innovate on existing products,
and build a digital-first product stack.
In the pursuit of innovation, mid-size banks and credit unions have been left to choose between two equally
unappealing options:
• Waiting on the core. Innovation isn’t typically the top priority for legacy core banking system providers. To
the extent that core providers innovate, it’s usually through a combination of internal product development
and strategic acquisitions. Mid-size banks and credit unions can access new products and features through
their core system providers, assuming they’re willing to wait.
• Replacing the core. Of course, financial institutions replace their core banking systems with more modern
alternatives. Apart from the considerable expense and lengthy time to implement (18-24 months minimum,
in most cases), the real danger of a core replacement is the risk of disruption.
There is a third choice: modular banking. Specifically, there are three primary development paths that are
unlocked by modular banking (Figure 14).
FIGURE 14: Modular Banking Development Paths
#1 Quickly launch new products.

Small
Teen Elderly
Business Existing Product Stack
Banking Banking
Banking Don’t touch the legacy core banking system.
Launch new products based on pre-built,
white-labeled use case modules on the
Modular Banking Platform Legacy Core Banking System modular banking platform.
Digital SMB
Issuance Accounting
Crypto #2 Innovate on existing products.
Existing Product Stack
BNPL FX Rewards Integrate modular banking platform with
the legacy core banking system in order to
augment existing products with innovative
Modular Banking Platform Legacy Core Banking System new features and capabilities.
#3 Build a digital-first product stack.

Digital Product Stack
Replace the legacy core banking system with
the modular banking platform in order to build
a modern, digital-first bank or launch into a
Modular Banking Platform
new market or customer segment.
Modular banking platforms typically offer all the same functionality as a modern core banking system. The key
difference lies in the assumption underlying the design of modular banking platforms—most clients won’t use all
(or even most) of the platform’s functionality but will rather use it to augment the functionality of their existing
core system or build new digital products on top of it.
In essence, modular banking is the breaking apart of a core banking system’s functionality—know-your-
customer, ledgering, card issuance, real time transactions, lending, FX, rewards, etc.—into a series of loosely
coupled microservices and APIs that can be rapidly combined and deployed in a cloud environment to facilitate
specific use cases.
This flexibility also enables financial institutions to jump from one development path to another, as market
conditions change and accelerate. So, for example, a mid-size credit union could solve an immediate product
innovation pain point through white-labeling a pre-built use case module before pivoting to bring innovative
new features and capabilities to its existing products by integrating the modular banking platform to its legacy
core system.
OPEN BANKING
tl;dr Open banking is really just about data sharing but has become a
term usurped by consumer advocates (and some fintech providers) to
represent the path to financial inclusion, financial health, and consumer
control over their data. Kumbaya, my lord.
On his Fintech Takes blog, Cornerstone’s Alex Johnson wrote:
“The trouble with open banking is that it has a great name. After all, who doesn’t want banking to
be more open? Banking shouldn’t be closed! It shouldn’t be cumbersome or challenging to navigate.
Customers should own their data and they should be able to take it with them wherever they want!” 18
But what is open banking? Good luck finding any agreement in the United States regarding a definition of
the term. According to Investopedia:
“What Is open banking? Open banking is also known as ‘open bank data.’” 19
No, it isn’t. In fact, when one of the authors of this report recently tweeted “Isn’t ‘open banking’ the same thing
as ‘open data’?” the tweet was met with many resounding “No!” responses.
Wikipedia’s definition isn’t any help, either. The online encyclopedia says open banking is:
“A financial services term as part of financial technology that refers to: 1) the use of open APIs that
enable third-party developers to build applications and services around the financial institution;
2) greater financial transparency options for account holders ranging from open data to private data;
3) the use of open-source technology to achieve the above.”
Really? We’ve never heard open banking equated to open-source technology before.
Consulting firm EY defined open banking as:
“Online banking and financial services enabled through consumers’ ability to offer third-party providers
access to their personal bank account data and payment initiation.” 20
But that capability has been in place for a long time as consumers have given access to their bank accounts
to make ACH payments for monthly bills and other purposes.
Whatever the definition, apparently, the United States is really behind on open banking. According to an
American Banker article titled “U.S. way behind the curve on open banking”:
“Policymakers, fintech companies, and financial services firms are finally beginning an earnest dialogue
about open banking. It’s good because the U.S. has a lot of catching up to do. In the U.S., there’s no
legal requirement stipulating a financial institution must make a consumer’s financial data available
to a third party if a consumer provides affirmative consent.” 21
The rationale for that view is often supported with meaningless consumer survey statistics like this one from
the American Banker article:
“Consumers have demonstrated their desire for open banking. 87% of individuals preferred to adopt a
fintech application rather than use a product or service offered by a traditional financial services provider.”
How does that data point demonstrate a desire for “open banking?” If consumers prefer a fintech app to a
traditional provider’s products and services, then why would traditional firms need to share data? In addition,
fewer than 87% of consumers do their banking on a mobile device today, so it’s hard to believe that many
consumers would prefer a fintech app to their traditional bank account.
Furthermore, a study by Morning Consult found that just 45% of Americans said they’ve heard of open banking
and 63% are worried that increased sharing of data between financial institutions will lead to more fraud. 22
The Morning Consult study was conducted before the Biden Administration’s July 2021 executive order, which
Bloomberg Law said:
“Gave a boost to Consumer Financial Protection Bureau’s decade-long effort to kickstart open banking
in the U.S. when he signed an executive order last week aimed at boosting competition in the economy.
The president’s executive order includes a provision that strongly encourages the CFPB to issue Dodd-
Frank Act regulations that would make it easier for consumers to access their bank data and transfer it
to other banks and outside apps, such as Venmo or Robinhood.” 23
The real impact of the executive order is likely to be more contractual than technological. It will enable data
sharing constituents to rely on data standards instead of the one-off developed contracts and agreements that
dominate the industry today.
How is Data Shared?

The discussion about open banking in the U.S. typically revolves around statements like “we need to enable
consumers to move their data wherever they want.” Much of the talk about open banking, however, ignores how
data is shared and for what purposes. The most common use case is account verification, and data is typically
shared one of three ways:
1) T
okenized APIs. Industry associations like FDX are working to standardize APIs, while data platforms from
companies like MX and Plaid are developing libraries of open-source API documentation that matches FDX
guidelines to help financial institutions connect without having to develop their own APIs.
2) Screen scraping. This is fast becoming an unacceptable approach because regulations in some countries
prohibit it, there is a lack of traceability, data quality isn’t very strong, and there are security concerns,
particularly around sharing login credentials.
3) Manual data entry and verification through microdeposits. Speed of the process is the biggest drawback
here as it can typically take one to three days to verify an account.
What’s a bank to do? Scarlett Sieber, Chief Strategy and Growth Officer for Money 2020, wrote in Forbes:
“For many U.S. financial institutions, the starting point to open banking and API enablement will be their
core provider. Currently, the three leading providers in the US—FIS, Fiserv, and Jack Henry—are creating
API gateways that expose the data and functionality inside of their core systems, allowing banks to
easily work with third parties.” 24
Jim Marous, CEO of the Digital Banking Report, isn’t so sure about that. According to Marous:
“Research of financial institutions indicates that core providers are not regarded as ready to support the
technical or innovation needs for the development of open banking solutions.” 25
The bigger issue here might just be financial institutions’ misguided notions of what open banking is and isn’t. The
Digital Banking Report also found that most financial institutions think open banking is an important contributor to
a wide range of business objectives including customer experience improvement, new customer generation, new
revenue generation, and new product development (Figure 15). Is there anything open banking can’t help with?
FIGURE 15: Open Banking Objectives
Percentage of Financial Institutions That Say the Following are

“Very Important” Objectives to Their Open Banking Initiatives
Improve customer experience and financial well-being 85%
Ability to remain competitive in changing ecosystem 83%
Ability to generate new customers 80%
Ability to expand relationships with current customers 77%
Ability to generate revenue beyond current products/services 71%
Ability to offer an expanded array of products/services 65%
Source: Digital Banking Report
Challenging the Conventional Wisdom About Open Banking
With the open banking hype machine working overtime, a number of assumptions or conventions have taken hold
in the industry.
Assumption #1: Market incumbents are committed to giving customers control over their data and service
provider relationships.
According to Greg Carter, CEO of Growth Street, “Banks talk a good game on open banking, but the raw data
shows a very different picture.” 26
The reality is that giving customers control over their data is not in banks’ best interest, and, therefore, banks will
only do the bare minimum to facilitate easier access to competitive services for their customers. If fintechs were in
their place, they would act the same.
There’s another assumption to challenge here: consumers actually want control over their data.
In the United Kingdom, where open banking has been legislated, one fintech CEO argues that consumers don’t
want it. According to Anne Boden, CEO of Starling Bank:
“People want better service; they don’t want their data. We have to be careful that we don’t keep
pushing on at this because we think it’s going to get us somewhere. There were a raft of fintech
companies set up to use this data, but nobody had a business model because nobody’s prepared to pay
for that data.” 27
Assumption #2: Open banking will unlock tangible new value for consumers, especially those who are
financially vulnerable.
According to the U.K.’s Open Banking Implementation Entity (OBIE):
“People could stand to gain £12bn from Open Banking-enabled services over the course of a year.
To realize all the value, consumers need products more closely tailored to their needs, which are
designed to engage them more meaningfully and really enhance their lives. Access to transaction data
allows firms to offer services at the exact point in time when a consumer needs them, reducing the
background noise and offering something genuinely valuable.”
11:FS adds:
“The overstretched segment (defined as individuals that are resilient and borrowing) stands to gain
the most at £287 per person, equivalent to 2.5% of income, according to the findings. This segment
represented only 18% of U.K. adults that need help in improving financial security and managing debt.”
In this instance, some of the existing open banking solutions that can be used to address these problems include
PFM tools such as Yolt, which is being discontinued in December 2021, and Emma, which assists with budgeting
and offers tips on money management based on insights from the transaction analytics. This segment was also
shown to struggle with debt and therefore could benefit from accessing debt management advice from open
banking platforms such as Tully and Toucan.
In the U.S., Americans have had access to similar PFM tools. Yet, consumer debt (excluding mortgages) has
climbed to its highest point, even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade
ago but is rebounding. Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer
debt except mortgages. Auto debt is up nearly 40% to $1.3 trillion, adjusting for inflation, in the last decade. And
unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big
banks for borrowers and loan volume.
Nifty fintech apps can be built using data insights aggregated by open banking functionality. But if the consumers
who download those apps don’t change their financial behaviors, then the value provided by open banking will
remain theoretical.
Assumption #3: Open banking will create a wide-open competitive landscape and consumers will have more
choices than ever.
The vision for open banking—as expressed by its advocates—is one of unbundling. When data can flow freely, a
whole ecosystem of fintech providers will spring into existence. Each one will attempt to disrupt a slice of banks’
product portfolios (personal lending, deposits, mortgage, etc.) and thus, the standard bank product portfolio will
be unbundled.
In this environment, banks will have no choice but to embrace this new ecosystem and become curators of open
marketplaces or platforms, as Chris Skinner passionately argued:
• Customers should not have to go and find the thousands of APIs in the open banking marketplace
that might be relevant to them or that might work for them. The bank should do this for the customer.
• Customers should not have to go and perform due diligence on thousands of start-up firms that are
light regulation, little history, restricted capital, and no trust. Banks should do this for them.
• Customers should not have to work out how to take thousands of APIs and integrate them into their
ecosystems. Banks should do this for them.
This assumption may end up being true. The first part certainly happened. Today, we have a massive number
of niche fintechs fighting for consumers’ attention. However, looking forward it is also reasonable to predict a
banking ecosystem that looks a lot like what we have now. There are two reasons for this:
• Rebundling. Unbundling is great when your goal is to drive a wedge into an existing market and disrupt it.
Once you’ve accomplished that, the question becomes how will you retain, grow, and monetize your customer
base? The answer, for many of the most successful fintech companies, is rebundling—expanding into new
product lines with a focus on generating revenue and locking in customers.
• Fintech infrastructure. For fintechs that don’t want to rebundle themselves into full bank competitors (or
have been unable to do so), there is a very attractive alternative path forward: providing their technology to
banks and other fintechs. Avant now offers Amount. Kabbage launched Kabbage Platform. OnDeck spun
off ODX. And myriad new companies aren’t even attempting to build a consumer-facing brand, they’re just
jumping right into the fintech infrastructure business.
Our banking future may end up looking less open (a huge ecosystem of niche providers organized through
marketplaces and platforms) and more like the landscape we’re already familiar with (a concentrated number of
large, multi-line providers, powered by an array of invisible infrastructure companies).
PLATFORMS
tl;dr Bankers think they know “platforms.” After all, they have an
online banking platform, a mobile banking platform, a lending platform,
and other platforms. But “platform” isn’t just a technology construct—it’s
a business model.
Despite the recent spate of books on the topic, the platform business model is hardly new. Platform Strategy
defines a platform as a:
“Plug-and-play business model that allows multiple providers and consumers to connect, interact, and
create and exchange value.”
Mark Bonchek and Sangeet Paul Choudary describe three things a company must do to be a platform:
• Be a magnet. A platform must attract the right providers—those with the most desirable products and
services) and the right consumers (those who the providers want to do business with).
• Act as a matchmaker. A platform requires a mechanism for matching consumers to the right providers,
and for enabling providers to reach the right consumers who come to the platform.
• Provide a toolkit. The toolkit is what enables providers to easily plug into (and out of) the platform,
and to integrate with consumers.
Banks as Platforms? Doubtful

Today’s economic realities may be spurring an interest in new business models, but some realities exist:
• Becoming a platform is hard. Amazon’s history provides a lesson for platformification. It spent the first
10 years of existence becoming a consumer magnet. In 2006, it launched Amazon Web Services, which
really became the basis of its platform “toolkit” and helped solidify its ability to become a producer magnet.
All told, Amazon’s platform strategy is 20 years in the making.
• Few banks have the stomach to transform their business model. Here’s reality: unless your bank is on
a burning platform (pun intended), business model change isn’t likely to happen. And even then, it’s no
guarantee.
• Few banks have the strategic vision. There’s nothing like spending 20, 30, even 40 years in an industry
to solidify your view of what drives success in that industry. Platformification is a few steps removed from
that view.
• Few banks have the resources. This, however, is a short-term, not a long-term, challenge. Twenty years ago,
when we pundits told banks they would need websites, and online banking platforms, they said, “We don’t
have the resources to do that.” They were right, but the vendor community filled the gap. As it will with a
“bank-as-a-platform” capability.
• The regulatory environment isn’t supportive. According to the Office of the Comptroller of the Currency,
“Making strategic moves to innovate with new technology-based banking involves assuming unfamiliar risks,
but banks may face heightened risk if they do not innovate. Banks should have effective risk management to
ensure such innovation aligns to their long-term business strategies.”
Banks Can Collaborate With Platforms

Various types of digital platforms are emerging in banking:
• API toolkits. Banks like BBVA, Capital One, Citibank, and Wells Fargo have deployed developer hubs, portals,
or exchanges that enable third-party apps to access, integrate, and/or extract data about the bank’s customer
base. While a “toolkit” is a critical component of a platform strategy, many banks’ efforts are too narrowly
focused on the technology side of the coin to qualify as a true platform. The mindset still seems to be “If
enabling third-parties to interact, integrate, and engage our client base enables us to sell more of what we
already sell, we’re all for it.”
• Marketplace platforms. In their earliest incarnations, marketplace lenders like Prosper and Lending Club
couldn’t really be considered platforms because they lacked the toolkit for integration. That’s changing. As
lending marketplaces hit speed bumps in their evolution, some have turned to a platform strategy. Prior to
its acquisition by American Express, Kabbage re-branded as Kabbage Platform, offering banks processing
capabilities and access to non-traditional data sources including eBay, Etsy, Amazon, and PayPal for
underwriting small business loans.
• Analytics platforms. Use-case specific platforms like NICE Actimize’s X-Sight enable cloud-based financial
institutions to manage and use data from multiple sources. Generic analytics platforms like those from
Trellance provide a collaborative ecosystem that creates communities of users, data scientists, and
application developers like Alpharank, Argus, and Allied Solutions.
• Core integration platforms. There’s an emerging set of players in the fintech vendor space we call “core
integration platforms.” These providers enable financial institutions to better integrate ancillary systems
with their cores.
Implications of the Platformification of Banking
A few thoughts on this platformification of banking:
• Open doesn’t mean platform. A firm can’t pursue a platform strategy and not be “open”—but it can be
“open” and not pursue a platform strategy. Simply providing a facility to share data doesn’t make a company
a platform.
• Platforms will change the way banks acquire and deploy technology. With much attention focused on
platforms like Amazon where consumers are buyers, many of the examples of platformification listed here
are those with banks as buyers. Platforms will change traditional software sales approaches making vendor
performance management a critical information technology skill.
• There’s a downside to platformification. Over-personalization and unintended consequences of data

sharing are two risks of platformification. In a report titled “Five Fears About Mass Predictive Personalization
in an Age of Surveillance Capitalism,” Karen Yeung wrote, “Personalization practices foster and exacerbate
the asymmetry of power between profilers and those to whom personalized services are provided, thereby
increasing the opportunities for the former to exploit the latter.”
SELF-DRIVING FINANCE
tl;dr Self-driving finance is an AI-driven capability that automates the

analysis, advice, and movement of money.
The term “self-driving” is often applied to automobiles. Few of us realize, however, that there are different levels of
self-driving, ranging from driver assistance to conditional automation all the way up to full automation (Figure 16).
FIGURE 16: Levels of Self-Driving Cars
1 2 3 4 5
DRIVER PARTIAL CONDITIONAL HIGH FULL

ASSISTANCE AUTOMATION AUTOMATION AUTOMATION AUTOMATION
A single Advanced driver Environmental Vehicle performs Vehicle performs

automated system assistance system detection all driving tasks, all driving
(e.g. Cruise can provide capabilities. under specific tasks under all
Control) steering and Vehicle can circumstances. conditions. No
acceleration. perform most Human override human attention
Human driver tasks, but human still an option. or interaction is
can still take full override is still required.
control. required.
Source: Alex Johnson, Fintech Takes
The Levels of Self-Driving Finance

An analogous concept can be applied to money management (Figure 17).
FIGURE 17: Levels of Self-Driving Finance
1 2 3 4 5
AUTOMATED RULES. CLOSED. ALGORITHM. RULES. OPEN. ALGORITHM.

TRANSFERS. CLOSED. OPEN.
Simple, automated Sophisticated Algorithmically Sophisticated Algorithmically

account transfers account transfers driven transfers account transfers driven transfers
based on a set based on based on proactive based on based on proactive
schedule. Transfers customer-defined monitoring. customer-defined monitoring.
can go to any rules and proactive Transfers only rules and proactive Transfers can go
account. monitoring. go to provider’s monitoring. to any account.
Transfers only accounts. Transfers can go
go to provider’s to any account.
accounts.
Source: Alex Johnson, Fintech Takes
Level 1 (available today) is the ability to schedule automated transfers from one deposit account to another.
Every checking account comes with this today (much as every car today comes with cruise control).
At Levels 2 and 3, consumers can have a self-driving money service that monitors an account of their choice
(using data aggregation) and move money out of that account and into an account offered by the service
provider. The key difference between Level 2 and Level 3 is who decides when to move the money.
A Level 2 service like the Autopilot feature from Wealthfront utilizes specific rules set by the customer, e.g.,
“when my checking account has more than $15,000 in it, transfer the remainder to my investment account.”
Level 3 services—like Digit or the Surprise Savings feature from Ally—use machine learning algorithms to
understand the deposit and spending patterns of each customer and to act automatically (with no direction
from the customer) to sweep money aside for saving.
Level 3 services provide a more convenient experience for customers than Level 2 services (particularly
when you consider that services like Digit provide liability against any accidental overdrafts caused by their
algorithm). However, the big jump in customer value—like the jump from high automation cars to full automation
cars—comes when we move from closed self-driving money services to open ones.
Providers like Wealthfront, Digit, and Ally allow customers to take money out of any deposit account, but
they only allow customers to move money into an account that they provide. The financial benefit of this
to Wealthfront, Digit, and Ally is obvious, as is the cost to customers in terms of limiting the vision of
self-driving money.
To fully realize the vision (and value) of self-driving money, customers need the freedom for their money to
move from anywhere to anywhere, automatically. As Nik Milanovic notes:
“Self-driving money limited to one app is like a self-driving car that only works on one road.”
Level 4 services like Astra enable customers to link all of their financial accounts (deposit and spending)
together and then create “routines” that facilitate automated transfers under specific conditions—scheduled
transfers, round ups on payment transactions, percentage-based transfers on new deposits, etc.
Level 5 services—the open banking equivalent to Digit—aren’t yet available in the market. Not surprising when
you consider the added complexity of designing an algorithm that customers can trust to automatically balance
transfers across a range of constantly changing external accounts (to say nothing of the data quality challenges
inherent to all aggregators).
The Future of Self-Driving Finance
According to Adam Dell, a Goldman Sachs partner and head of product at Marcus:
“The end state of the bank of the future is a digital assistant that is constantly thinking about your best
financial interests… almost like having your own CFO whose job it is to optimize your money, uncover
ways for you to improve your financial situation, and is relentless in that pursuit.”
Chris Hutchins, head of autonomous financial advice at Wealthfront, adds:
“It allows you to maximize what you’re earning, because everything can happen as quickly as technology
can support it, instead of as quickly as you can get around to thinking about moving money around …
With self-driving money, you’re in control, but money gets put in the right place at the right time to help
you maximize it.”
Both quotes describe a concept that is commonly called “self-driving money” (a term coined by Wealthfront).
Here’s the vision (by way of analogy) from Angela Strange at Andreessen Horowitz:
“When you enter your desired destination into Google Maps, the app plots out the fastest, most efficient
route, even adjusting for traffic and coffee stops along the way. You don’t even need to enter your
current location—Google Maps already knows where you are. What if that same predictive software
existed for our finances? Imagine a future where you could outline your goals as a student—say,
graduate, move to your dream city, save for a house, plan for kids—and an app would execute your
optimal financial plan, rerouting and adjusting for ‘traffic’ along the way.”
So, when are we getting fully autonomous, algorithmically driven, open banking-powered self-driving money?
We’re in for a bit of a wait, for two reasons:
1) While services like Digit and Astra are breaking ground on the technical and UX advances necessary
to deliver Level 5 automated money, they are still small and comparatively unknown to the typical
financial services customer. Building a consumer-facing fintech brand and acquiring profitable
customers without burning through all your capital is hard.
2) Larger, better-known financial services brands—traditional banks, established challenger banks,

robo-advisors—have a compelling reason to stop before Level 4. Take Goldman Sachs’ Marcus as an
example. It may legitimately believe, as quoted above, that the end state of the bank of the future
is a personal, digital CFO for every customer. But given the fact that every $10 billion in Marcus
deposits reduces Goldman Sachs’ cost of capital by $80 million, will it really empower that CFO to
move money out of Goldman Sachs’ walls, even if it’s best for the customer?
You can build a framework for self-driving money. You can translate that framework into a product roadmap.
The hard part is delivering on that roadmap when it means cannibalizing your existing business.
SUPER APPS
tl;dr Super apps are ecosystems. They’re enclosed experiences that make
it easy to accomplish a wide variety of tasks—as long as the tasks occur
within the walled garden. Just selling a lot of different types of products
and services on a mobile app does not make an app a super app, however.
To date, super apps don’t really exist in the United States—but they’re dominant in Asia. A screen shot of one of
the leading super apps, WeChat Pay, demonstrates the breadth of services integrated into a single app (Figure 18).
FIGURE 18: WeChat Pay Super App
Source: Visual Capitalist
Just selling a lot of different types of products and services on a mobile app does not make an app a super
app. The super app term is often misused here in the U.S. because the technical aspects of a super app are
misunderstood.
Super apps rely on mini programs—lightweight apps that run inside another app (Figure 19). They don’t need
to be downloaded or upgraded through app stores. They make it possible for one app to perform the service of
many apps.
FIGURE 19: Super App Mini Programs
Source: WeChat Wiki
There are a number of benefits to mini programs:
• Speed. Mini programs are cached on the phone, making it faster to load than a mobile app.
• User experience. Updates aren’t required with mini programs as the latest version is automatically loaded.
• Integration. Mini programs are tightly integrated: more than 60 entry points, directly shareable in chats,
deep linking to specific subpages.
• Cost. Mini programs typically cost 20% to 50% of the development cost of an app, thanks, in part, to a
shorter time-to-release.
The United States Isn’t a Ripe Market for a Super App
While hardly a household term in the United States—yet—the “super app” concept is often misused and
misunderstood. Just selling a lot of different types of products and services on a mobile app does not make an
app a super app.
Three factors prevent—or at least, provide resistance to—the development of super apps in the U.S.:
• Market power. Many industries in the U.S. are dominated by oligopolies—three to four really large firms that
control 60% to 80% (or more) of an industry’s market share. A company from outside that industry trying
to create a super app will be met with resistance from the oligopolies that may see themselves as potential
super app creators.
• Consumer behavior and attitudes. The heterogeneity of the U.S. population in terms of wants, needs, and
desires means the loss of choice that inevitably comes from using a super app will be rejected by a large
number of Americans.
• Technology development. Super apps took hold in Asia because many consumers there owned under-
powered smartphones that weren’t conducive to managing 40 to 50 separate apps. In the United States,
however, the majority of Americans use smartphones with plenty of horsepower.
WEB3
tl;dr When the business world finds problems and shortcomings with the
existing environment, someone comes up with a vision of a better future
and labels that vision “2.0.” If 2.0 already exists, the vision is named 3.0.
Whatever the number, the proposed future state always describes a nirvana
that is never realized. Sorry, but that’s our definition of Web3.
An earlier section in this guide described the trend towards decentralized finance (DeFi). DeFi is a component
of a broader trend often referred to as Web3. To understand what Web3 is, it might be helpful to review its
predecessors:
• Web1. According to freecodecamp.org, in Web 1.0, the first iteration of the web from 1991 to 2004, “Most
participants were consumers of content, and creators were typically developers who built websites that
contained information served up mainly in text or image format, served from a static file system rather
than a database, and sites didn’t have much interactivity at all.” 28
• Web2. During this era of the internet—from 2004 to the present—businesses built a second layer of
proprietary, closed protocols on top of the internet’s open protocols. This has been a period of centralization,
as for-profit tech companies—most notably Google, Apple, Facebook, and Amazon—built software and
services that rapidly outpaced the capabilities of open protocols. 29
So what is Web3, then? Andreessen Horowitz describes it as “decentralized networks that offer an alternative to
the broken digital status quo.” 30 This definition might not be very helpful, and some smart people understand that.
Ajit Tripathi, head of Institutional Business at Aave, writes:
“Web3 is whatever folks want it to be, so while I wait for this definition to be standardized (by web3c
or some other body of geniuses), I will provide my own list of foundational components in what I think
the web3 stack here needs to be at a minimum: 1) Web-scale shared ledgers (may or may not be a
blockchain when we’re done), 2) Smart Contracts/Deterministic stored scripts, 3) Settlement finality
for transactions, 4) Portable Identity, 5) Data Privacy, 6) Wallets with superior UX and key recovery,
7) Governance protocols for asset recovery, and 8) LegalTech.” 31
Web3 = Nirvana (and We Don’t Mean the Band)

That’s a lot of moving parts that have to come together for Web3 to deliver on its promise. It took 15 years for
Web 1.0 to mature and another 15 for Web 2.0 to peak, so it’s not unreasonable to assume that Web 3.0 will
require 15 years (or more) for all these pieces to come together.
But it still seems to us that there’s some polyannaish thinking going on among Web3 promoters. According to
Andreessen Horowitz:
“Privacy also has the potential to allow greater regulatory compliance. With existing systems, a
user may be reluctant to give their personal information to a service provider or application on the
blockchain, because that information could be used to see every single transaction the user had ever
completed. Privacy layers help allay these concerns.” 32
And from freecodecamp.org:
“Web2 applications repeatedly experience data breaches. There are even websites dedicated to
keeping up with these breaches and telling you when your data has been compromised. In Web2,
you don’t have any control over your data or how it is stored. In fact, companies often track and
save user data without their users’ consent. Web3 aims to solve many of these shortcomings by
fundamentally rethinking how we architect and interact with applications from the ground up.”
Neither of the authors of this report were physics majors in school, but we remember Newton’s third law:
For every action, there is an equal and opposite reaction.
Meaning, for every Web3 advancement that is realized, bad actors—and benevolent actors looking to gain
an advantage within the system—will create tools or capabilities that counter these advancements.
This reminds us of the early days of social media platforms when social media “experts” talked about how social
media “democratized” access to the internet and gave everyone a voice. Roll the clock forward 15 years and social
media platforms like Facebook and Twitter are under scrutiny for limiting access to their platforms based on users’
political views.
Another challenge facing the Web3 movement is the inevitably unequal progress made by its components.
Tripathi’s enumeration of the eight components is spot on: But if advancements in privacy and identity capabilities
don’t progress as fast as smart contracts and wallets, could that completely invalidate the vision of Web3
altogether?
We don’t know. Ask us again in 15 years.
ENDNOTES
1
https://www.amazon.com/Beyond-Hype-Rediscovering-Essence-Management/dp/087584331X/ref=sr_1_1?crid-
=3KQ21TRSZYGVW&keywords=beyond+the+hype&qid=1636294204&qsid=142-0461114-7752667&sprefix=be-
yond+the+hype%2Caps%2C76&sr=8-1&sres=087584331X%2CB004BUIAL6%2C0198841906%2C1591201071%2C9080671339%2
C0595427553%2C0997023619%2C193796521X%2C1937826252%2C9350290782%2C0071844651%2C096300820X%2CB07D-
2C6J4K%2CB08NGS9C9D%2C9811552878%2C1119691222&srpt=ABIS_BOOK
2
https://www.oliverwyman.com/our-expertise/insights/2021/mar/the-rise-of-banking-as-a-service.html
3
https://www.finextra.com/blogposting/21124/from-open-banking-apis-to-banking-as-a-service-how-big-is-the-leap
4
https://www.nerdwallet.com/uk/loans/the-dangers-of-buy-now-pay-later-schemes/
5
https://www.wsj.com/articles/jpmorgan-others-plan-to-issue-credit-cards-to-people-with-no-credit-scores-11620898206
6
https://coinmetrics.substack.com/p/coin-metrics-state-of-the-network-9b9
7
https://www.bcg.com/publications/2020/how-banks-can-succeed-with-cryptocurrency
8
https://ethereum.org/en/defi/
9
https://www.forbes.com/advisor/investing/defi-decentralized-finance/
10
https://blog.coinbase.com/a-beginners-guide-to-decentralized-finance-defi-574c68ff43c4
11
https://101blockchains.com/pros-and-cons-of-decentralized-finance/
12
https://www.prnewswire.com/news-releases/covid-19-set-to-radically-accelerate-digital-transformation-in-the-retail-banking-
industry-301053508.html
13
https://thefinancialbrand.com/97453/covid-19-coronavirus-digital-innovation-transformation-trend-capgemini-amazon/
14
https://www.rtinsights.com/the-future-is-now-how-covid-19-is-accelerating-the-digital-transformation-of-retail-banking/#
15
https://issues.org/the-rise-of-the-platform-economy/
16
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3098279
17
https://www.omidyar.com/insights/breaking-new-ground
18
https://newsletter.fintechtakes.com/p/the-stories-we-tell-ourselves-about
19
https://www.investopedia.com/terms/o/open-banking.asp
20
https://www.ey.com/en_gl/banking-capital-markets/how-a-rapidly-evolving-us-open-banking-ecosystem-will-take-shape
21
https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking
22
https://morningconsult.com/2021/09/07/open-banking-awareness/
23
https://news.bloomberglaw.com/banking-law/did-biden-open-up-banking-the-presidents-cfpb-order-explained
24
https://www.forbes.com/sites/scarlettsieber/2021/03/03/open-banking-what-does-it-mean-for-the-us/?sh=3cd91d9bb52a
25
https://thefinancialbrand.com/122274/core-providers-not-seen-as-viable-open-banking-partners/
26
https://www.finextra.com/newsarticle/33870/is-open-banking-being-hobbled-by-outages
27
https://www.fnlondon.com/articles/starlings-chief-boden-blasts-failed-open-banking-regime-20211027
28
https://www.freecodecamp.org/news/what-is-web3/
29
https://a16z.com/wp-content/uploads/2021/10/The-web3-Readlng-List.pdf
30
Ibid.
31
https://medium.com/@triptananda/decentralised-finance-needs-a-web3-economy-150f2663ab76
32
https://a16z.com/wp-content/uploads/2021/10/The-web3-Readlng-List.pdf
ABOUT THE AUTHORS
RON SHEVLIN
RESEARCH DIRECTOR
Ron Shevlin heads up Cornerstone Advisors’ fintech research efforts CONTINUE THE CONVERSATION
and authors many of the firm’s commissioned studies. He has been a
480.424.5849
management consultant for more than 30 years, working with leading
rshevlin@crnrstone.com
financial services, consumer products, retail, and manufacturing firms
Cornerstone Bio
worldwide. Prior to Cornerstone, Ron was a researcher and consultant for @rshevlin
Aite Group, Forrester Research, and KPMG Nolan Norton. Author of the /ronshevlin
Fintech Snark Tank blog on Forbes, Ron is ranked among the top fintech
influencers globally and is a frequent keynote speaker at banking and
fintech industry events.
ALEX JOHNSON
DIRECTOR, FINTECH RESEARCH
Alex Johnson puts more than 15 years of experience in market research, CONTINUE THE CONVERSATION
product strategy and credit analytics to work in Cornerstone Advisors’
406.599.4687
Research, Fintech Advisory and Lending practices. Backed by an
ajohnson@crnrstone.com
in-depth knowledge of fintech, credit risk, payments, and decision
Cornerstone Bio
management, Alex specializes in writing about the marketplace and its /alexhjohnson
vendors. He previously was director of Portfolio and Solution Marketing
at FICO. He also served as a research director in Credit Advisory Services
at Mercator Advisory Group.
ABOUT
CORNERSTONE ADVISORS
After 20 years in this business, Cornerstone Advisors knows the CONTINUE THE CONVERSATION
financial services industry inside and out. We know that when
www.crnrstone.com
banks and credit unions improve their strategies, technologies,
Cornerstone Advisors
and operations, improved financial performance naturally follows.
@CstoneAdvisors
We live by the philosophy that you can’t improve what you don’t
measure. With laser-focus measurement, financial institutions 480.423.2030
can develop more meaningful business strategies, make smarter info@crnrstone.com

technology decisions, and strategically reengineer critical
processes.
ABOUT
NYMBUS
Nymbus enables banks and credit unions of any size to grow and CONTINUE THE CONVERSATION
attract new market segments by delivering a full suite of banking nymbus.com
technology, including Loan Origination, CRM, and Digital, along
@NymbusCore
with the operational resources to launch and run a new digital bank.
/company/nymbus
Whichever growth path you choose, Nymbus buys back decades
of lost time and accelerates your ability to engage and support the
entire customer journey.
Have questions
about this report?
Contact:
Ron Shevlin, Director of Research rshevlin@crnrstone.com
Cornerstone Advisors 480.424.5849
©2021 Cornerstone Advisors. All rights reserved.

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The Definitive Guide to Potentially Misunderstood

Fintech Trends & Terms

Buy Now, Pay Later.............................................................................................................. 7

About the Authors............................................................................................................. 61

About Cornerstone Advisors................................................................................. 62

©2021 Cornerstone Advisors. All rights reserved.

2) Industry buzzwords appear and spread faster than a wildfire.

3) The definition of words matters.

We want to set the record straight.

tl;dr Banking-as-a-service (BaaS) is a strategy where financial institutions

Bank State Assets Partners

Source: Andreessen Horowitz

Bank State Assets Partners

Source: Andreessen Horowitz

FIGURE 3: Current Approach to Banking-as-a-Service

Which statement best describes your organization’s approach to BaaS?

The Economics of Fintech Banking

Growth Through Fintech Banking

FIGURE 4: Buy Now, Pay Later Adoption by Generation, 2019-2021

Buy Now, Pay Later Adoption by Generation, 2019-2021

41% 2019 2021

Gen Z (21-25) Millennial (26-40) Gen X (41-55) Baby Boomer (56-75)

Source: Cornerstone Advisors survey of 3,898 U.S. consumers, Q2 2021

Buy Now, Pay Later Retail Purchases in the U.S.

2019 2020 2021e

Source: Cornerstone Advisors survey of 3,898 U.S. consumers, Q2 2021

Buy Now, Pay Later Changes the Customer Experience

Is There a Downside to Buy Now Pay Later?

Other warning signs support the critics’ claims:

The Future of Buy Now, Pay Later

Standalone BNPL Providers Won’t Last Long

Can Banks Battle Back?

2020: The Year of the Challenger Bank Insurgency

Percentage of Consumers Who Consider a Digital Bank to be Their Primary Bank

Gen Z (21-25) Millennial (26-40) Gen X (41-55) Baby Boomer (56-75)

Source: Cornerstone Advisors surveys of U.S. consumers, Q1 2020 and Q4 2020

Challenger Banks Are Winning on Product Differentiation

tl;dr Credit invisibility is the paradoxical state in which consumers are

How Consumers Gain Access to the Credit System

The Problem With Credit Builder Products

2) Most consumer credit in the U.S. is provided by banks.

Credit Builder Cards

What’s the problem?

Credit Builder Loans

What’s the problem?

What’s the problem?

It’s a little bit of the worst of both worlds.

Rent and Utility Data Aggregators

tl;dr Americans’ adoption of cryptocurrency as an investment asset is

FIGURE 8: Cryptocurrency Ownership in the U.S.

Do you currently hold any cryptocurrency assets

Yes (purchased for first time in 2020)

Yes (purchased for first time in pre-2020)

Source: Cornerstone Advisors survey of 3,898 U.S. consumers, Q2 2021

FIGURE 9: Bank Interest in Providing Cryptocurrency Investing Services

How interested is your financial institution in providing

Not interested Somewhat interested Very interested Already doing it

Consumers Want Bitcoin From Their Banks

Does that kind of volatility not count?

The Coming Bank-Bitcoin Boom

1) Large institutions launching crypto offerings

tl;dr Decentralized finance (DeFi) is a term used to describe financial

Ethereum.org defines decentralized finance (DeFi) as:

2) Industry buzzwords appear and spread faster than a wildfire.

3) The definition of words matters.

2) Most consumer credit in the U.S. is provided by banks.

• There’s a downside to platformification. Over-personalization and unintended consequences of data