Going down the rabbit hole of Fintech structure

Who’s behind the boom in fintech startups? How are digital-wallet entrepreneurs, for instance, launching their ideas? How much of their products are they building in house? 

The front end of fintech garners a lot of attention, but the back end has often gotten ignored. But there’s an infrastructure powering everything. What is it? Who is it? How will it change?

On today’s episode of the Payments Innovation podcast, we invited Chris McCann, managing partner at Proof of Capital, to take us down the fintech rabbit hole by exploring these ideas from his popular article, The FinTech Infrastructure 101.

Who supports the fintech infrastructure?

“There’s a large category of these underlying banks that provide all the actual accounts and regulatory licensing,” Chris said. “And they’re not the typical Wells Fargo, Chase, or Bank of America.”

Who are they, then?

Community banks. Evolve Bank and Trust. Bancorp. Lincoln Savings Bank and Trust. These are real banks that provide the infrastructure for fintech startups.

Right now, the biggest fintechs are integrating directly with local community banks. As more players enter the space, however, that could start to change. 

“There’s a handful of companies, what they call these core banking infrastructure providers,” Chris said, “that really provide all the underlying technical infrastructure, both for traditional banks, community banks and even some of some of that. But the fintech apps themselves, these companies, they’re not household names unless you’re really deep in the banking sector.”

Besides traditional financial institutions, we’re also seeing support from banking-as-a-service platforms, lending-as-a-service platforms, banking connector APIs, and brokerage APIs.

The future of fintech infrastructure

Tech companies tend to want to be fintech companies or even banks themselves. It’s a bit of a reversal from the days when every fintech company wanted to be tech.

“But more specifically,” Chris said, “you’re actually seeing tech companies start to embed fintech features into their existing applications. This is like the trend of embedded fintech.” 

You don’t just have the traditional banks themselves needed to power the infrastructure, but you also have a very different class of customer. If the underlying financial value chain moves to tech companies, everything becomes totally totally different. 

Of course, predicting the future is always a dangerous game, but…

“I do think there is a place for an independent company to think about core banking from the ground up from more of an application-centric approach first,” Chris said. “And this is, in my opinion, fundamentally different.”

The role of geography in fintech infrastructure

On top of all of this, both application and infrastructural side, there’s also the added complexity of geography. For “normal” companies, geography can be a little bit less important, but in the financial space, it ties into the regulatory regime and the licensing requirements.

“I think you’ll see a different set of services across the US, across Europe,” Chris said. “Asia’s very different. In Asia, people are much more comfortable holding their assets in a digital balance than a digital wallet. So that ecosystem might develop very differently. I’ve been talking to a few folks on the India side who said that is a very different direction that they’re moving into.”

In the U.S., our sweet spot is anything building on the fintech financial infrastructure area, anything that’s developer centric. But that’s not true everywhere.

For more of Chris’ thoughts and research, you can read his article, “Fintech Infrastructure 101  - Overview & Market Landscape” and listen to the full episode of our conversation on Payments Innovation.

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Until next time!