It was once stated that in the not-too-distant future, every company will be a fintech company¹. However, several years on from this statement, the question we are now asking ourselves is; will every company build a fintech?

Between 2017 and 2024, over 2,000 companies obtained a Payments Institution (PI) or Electronic Money Institution (EMI) authorization in either the UK or EU². Importantly, it has not just been pure fintech players obtaining regulatory approval, businesses whose core product or service is non-financial have increasingly looked to obtain PI or EMI licenses (‘Payments License’). With this in mind, it’s therefore worth considering whether every company in the not-too-distant future will have built their own fintech?

What’s changed?

The driver of this change is attributed to the seismic shifts across the payments landscape in the last 10 or so years. In Europe, this shift has been driven primarily by regulation, digital transformation, and advancements in underlying technology – with all these factors amplifying each other.

These factors combined to accelerate changes within payments. Critically, customer expectations significantly altered thanks to the mass digitization of payments and improved payments experiences delivered by fintechs, with regulation (e.g., PSD2) further enhancing the transformation. The level of digital transformation is most acutely represented by the number of cash transactions occurring globally forecast to decrease from 27% to 10% between 2018 and 2026³. These factors have contributed to turning payments from a cost center and pure commercial exchange to a key way for businesses to acquire, convert and retain customers. 

Why businesses are building their own fintechs

Payments are now a key part of a business’s strategy, on both the business-to-consumer (B2C) side and increasingly on the business-to-business (B2B) side. But fintechs and banks have been successfully supporting the needs of unregulated companies utilising embedded, agency or other models, so why look to build? 

To the majority of companies, the most important component of their business is the customer experience; anything that impinges on their ability to have full control and autonomy over this is generally non-negotiable. Customer experiences in relation to payments evolved from simple checkouts to requiring alternative methods of payment, virtual wallets and broader embedded financial services. As a result, the landscape for differentiation and optimization of customer experience expanded hugely. To establish differentiated experiences, businesses looked to achieve full end-to-end (& top-to-bottom) ownership, for which a payments license (or equivalent) is generally required.

Outside of these core trends, cyclical factors can play a role. For example, consider rising interest rates. Businesses now want to be able to benefit from interest earned on balances held on behalf of their customers, which generally cannot be achieved when the payment services are provided to their underlying customers by a 3^rd party. This represents a strategic shift as it offers businesses a new revenue stream through earned interest, unlocking sources of income.

The concept of building a fintech and the broader goals this strategic change seeks to achieve can be seen as part of broader new phase in the payments revolution, something that McKinsey refer to as the ‘de-coupling’ phase, where key components of economic differentiation for payments firms will be convenience and customer experience.⁴

Considerations for building an in-house fintech

While the benefits of building a fintech are clear, there are trade-offs to evaluate. The model may not work for all businesses, depending on their scale, customer base, product, service, maturity and other factors. The key considerations and dependencies businesses in this position should review can generally be characterized across the 3 Cs - cost, complexity and core competency.

• Cost
  It is estimated that the license application process in the UK or EU can take up to 12 months⁵ and include substantial setup and legal fees. This cost increases when considering capital requirements, staff (e.g., tech, compliance and risk) and broader associated governance.
• Complexity
  Moving from an unregulated institution to a regulated institution can bring a significant increase in complexity. The business will likely need to deploy new systems, processes, reporting and controls, depending on the product and/or service being offered. 
• Core Competency
  Cost and complexity introduced by applying, obtaining and maintaining a payments license can draw resources and focus away from the core competencies of the business. This trade-off needs to be examined closely, ensuring that the investment made supports the existing business and does not become a detrimental distraction.

While the allure of building a fintech can be strong, ensuring that such an endeavour aligns with the long-term business strategy, financial health and operational capabilities is crucial. As the financial landscape continues to evolve, so too must the strategies businesses employ to thrive within it, always with an eye towards innovation balanced by prudent planning and foresight.

What could the future of business look like?

Given these trade-offs, we expect to continue to see businesses adopt differentiated strategies to supporting their payments needs, but with an aligned focus on improving customer experience, diversifying offering and ultimately monetization. These strategies include utilizing embedded payments and other models that allow them to provide payment and broader financial services to their customers via third parties. 

For companies seeking greater control of their payment offering, building a fintech will continue to be an important path, looking to solve for the 3 Cs outlined above as effectively as possible. Approaches to solving will vary based on business circumstances, with alternative approaches taken to optimize where possible, such as acquiring a licensed entity to aid speed to market.

Lastly there are also 'hybrid’ models, as business look to add additional products and assess whether it is right to build, buy or partner. An example of this could be businesses who wants to own their core payments proposition (acceptance & payouts) but will partner with a 3^rd party to provide lending services to their customers. Building a fintech does not mean all financial services will be built in-house.  

Innovative payment strategies are particularly relevant for the platform-based, ecosystem-driven economy we now live in, where businesses seek to expand their serviced verticals and create more commerce experiences within their ecosystem. This strategy creates greater surface area for payments and thus a greater incentive to optimize those payment experiences. 

How can businesses prepare?

In an era where payments underpin the global economy’s pulse, it’s critical any business looking at their payment strategy has a partner that can support their goals. As a global payments organization with a dedication to investment in innovation, J.P. Morgan Payments is uniquely positioned to assist in building the future of payments with our clients.

The exact steps businesses need to take when executing on the right payments strategy can vary, but four focus areas are:

• Know the rules
  Understand the regulatory environment, models available to your business and how they can be leveraged to most effectively distribute your product and/or service. Furthermore, go beyond focusing on current standards, identifying future considerations like the proposed PSD3 changes, which seek to simplify payments licensing and improve access to payment systems for non-bank payment processors⁶. This proactive stance helps ensure that businesses are not merely reactive entities but are ahead of the curve.
• Elevate Trust and Security
  The bedrock of any financial service is security, thus staying ahead of fraud and other cybersecurity threats is critical to the success of any strategy. Ensure any partners within your payments ecosystem provide robust security for your business now and as you grow.
• Be Agile and Adaptable
  The payments landscape is perpetually in flux, with new technologies and consumer demands emerging at breakneck pace. Work with innovative payments partners to evaluate what use cases are most applicable to your business, and what solutions can help you deliver against those use cases.
• Focus on Customer Experience
  Delivering contextual, innovative and seamless payments experiences will allow your business to transform routine transactions into engaging interactions that allow you to acquire, convert and retain customers.

The evolving regulatory, competitive and user expectations landscape represents a pivotal shift in how businesses approach a payments strategy. As we navigate through the complexities and opportunities presented by this shift, it's clear that the future of businesses lies not just in the products or services offered, but in how seamlessly payments are integrated into the customer journey.

J.P. Morgan Payments stands at the forefront of this revolution, offering a blend of insight, security, adaptability and user-centric payments solutions that empower businesses to not only meet the current demands of the market, but to anticipate and shape the future. As companies continue to embed financial services into their operations, those that leverage the right partnerships, technology and strategic foresight will not only thrive, but redefine the boundaries of what's possible.

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