Understanding API Infrastructure And Why Banking-as-a-Service Helps Businesses Win.
More speed, faster scale and increased revenues.
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Hi friends 👋🏻,
Welcome to another essay on Open Africa.
Today we’ll be talking about API companies, particularly Infrastructure companies.
Disclaimer: APIs give companies superpowers. I’ve heard this a lot. I'm sharing early thoughts about how API infrastructure companies differentiate. Please share your own experiences with me to help refine my thinking.
Writing this is my way of understanding certain differences between African API companies. As far as fundraising goes, every API company is into infrastructure.
But how do these startups differ amongst themselves?
Diving deeper helped me see that they went beyond payments to also cover “rails” that connect user bank accounts to apps, support businesses with embedded finance, offer KYC/AML solutions etc.
If every company will be a fintech company, API infrastructure companies will expand the pie, help businesses reduce costs, scale faster and even increase revenues by outsourcing functions to small bits of code.
Today, we’ll be learning about:
APIs. What are they?
API 1.0 vs API 2.0.
Embedded finance: More speed, scale and revenues.
Why choosing an Embedded finance partner is both art and science.
Let’s get to it.
APIs. What are They?
Have you had work to do but just felt lazy to do it?
You were capable of doing it but just felt it wouldn’t be worth your time. You preferred to do something else.
So, what do you do?
In secondary school, I would give this work to a junior. I would promise to reward them with less work next time or grant access to exclusive senior boys gathering.
Side note: If you did this as a senior, you’re just as bad as I am.
Now, you might be thinking, what are you trying to say, Kamso? Well, this is a very basic explanation of what APIs are.
API is an abbreviation for Application Programming Interface.
Think about starting a food delivery business. There are different functions like delivering the food to your customers, receiving payments, tracking sales, sending order confirmation and others. All of a sudden, your food business becomes a complex operation. But your customers only care that when they request a meal, you deliver it. That’s your value proposition – Food delivery.
The others are just hard things that you do to grow and manage the business but not core to that value prop.
Here’s where APIs come in.
Packy McCormick of Not Boring describes them like this:
API first companies provide mission-critical but non-core functionality to their customers, like accepting payments, providing cloud security, or sending communications to customers.
APIs take away complexity from businesses using a few lines of code. APIs like Paystack and Flutterwave can help you with payments, WhereIsMyTransport for transportation, Appruve for verification and a host of others.
Whenever you use an API what it’s saying is:
I’m here to do this heavy lifting because it’s my speciality. I’ve done millions of such processes to prove that you can rely on me and turn your attention to doing what’s core to your business.
That’s an API.
However, what is not an API is the school example I gave at the beginning. That is just bullying (or discipline🤷🏽♂️).
There are three types of APIs:
Internal APIs. Companies use these for only internal uses.
Public APIs. These APIs are released for public use. For example, Twitter API allows you to view embedded tweets in blogs like this one here without visiting Twitter or even having a profile.
Vendor APIs. These are also called third-party APIs. Companies use them to manage whole functions they would rather not be involved with. Examples of some companies include Flutterwave, Stripe, Mono, Stitch etc. In concrete terms, the Stitch API can pull in relevant data points (e.g., account balances and recurring transactions) from a users’ multiple bank accounts to “Stitch” together and give a clear view of their financial profile
For a more technical explanation of APIs and their types, please read this and this.
We are going to be focusing on Vendor APIs because companies use them to manage an entire function like payments, fraud, insurance, data management etc.
First, it was Payment.
API 1.0 (a term I just coined) was led by the likes of Flutterwave and Paystack.
Before them, companies used Interswitch. This came with some problems: Scale and Costs. With Interswitch, developers would have to spend lots of money while waiting for close to a year before they get the payment terminal.
It wasn’t reliable to use Interswitch at scale for large volumes of transactions. Check my essay on Flutterwave to better understand this.
Then it turned to fintech
The success of API 1.0 companies brought greater interest in the Fintech space across Africa. Financial technology as a term went from “What’s that?” to “It’s about payments” to “Every company will be a fintech company”.
A new group of companies emerged leading to the development of new apps like Neobanks, trading, lending, mobile money etc.
Some of these companies are Opay, Paga, Yoco, Chipper Cash, Kuda Bank, Wave and many more. They expanded the use cases for what could be built. BriterBridges released their 2021 investment report showing that African startups raised $4.65 billion in disclosed funding last year of which 62% went to Fintech.
Now is the turn of Infrastructure, API 2.0.
2020 was Africa’s year of Fintech Infrastructure APIs, API 2.0.
These companies noticed that most of the fintech companies were doing the same things. They were all building from the ground up – compliance, connecting banks, giving credit and underwriting etc.
So, they set out to build infrastructure.
This infrastructure would be the foundation for how fintech companies built and launched faster. Some of the companies include Mono, Okra, PngMe, OnePipe etc.
According to this TechCrunch article, API infrastructure companies can be divided into three categories:
Data and accounts aggregation.
Open banking.
Embedded finance and Banking-as-a-Service(BaaS).
Data and accounts aggregation.
Some examples include Stitch, Mono, Okra and PngMe.
They connect your bank accounts to apps that need the data. Doing this before was grunt work. Here’s why.
Banks hold a lot of your data. Whether that’s the payment for DStv, deposits for your child’s school fees or even your Jumia purchases. But how do you use your banking data to collect a loan or even a mortgage?
Banks are an option. However, you would need to bring lots of documents to prove you can repay the loans. Also, what if you had enough money from another Bank? Figuring out which information was important, sorting and presenting it in a digestible way was not very simple.
These companies solved this important problem by connecting bank accounts to apps that need them.
They automatically filter out the most important data points (e.g., periodic payments on the 24th of the month which indicates a full-time job) to determine your eligibility for a loan, mortgage, or even general financial management.
Open banking.
Some examples are TrueLayer. Open banking is well...open banking. Customers get control, choice and transparency with how they manage their finances. So rather than being locked into one bank, they can go to a “market” and compare banking services between GTBank, FirstBank, Kuda Bank or even Fairmoney. However, open banking is still an emerging trend in Nigeria and as far as I can say, no startup is doing this yet. You can find more details here
Embedded finance and BaaS.
BaaS means Banking as a service. They provide businesses with a faster way to offer banking products like cards, accounts, credit, payment processing etc without directly working with a bank. Some examples are OnePipe, Marqeta, Unit.
I believe that the space for BaaS providers could be very large, even larger than the companies in the other two categories. Here’s why.
Embedded finance: More speed, scale, revenues.
BaaS provides the infrastructure for companies to embed financial products to their customers faster than they can build this themselves. Here is why embedded finance is attractive to companies:
Decreased costs and increased speed
TAM expansion
Decreased operational costs and increased speed
Offering embedded products to users allows businesses to reduce customer acquisition costs, scale faster and earn more revenue for “free”. There is a massive reduction in operational costs when startups use a BaaS provider. For instance, Wave has been on a massive tear in Uganda. But they wouldn’t have been able to scale without someone doing ID-verification and KYC (BaaS provider: Laboremus).
Here are some other ways Fintechs and brands earn revenue by using BaaS:
Interchange is the revenue earned on card transactions.
Interest income: from end customer’s account balances
Payments: generated by charging payment fees
Financing: generated by offering financing options to end-customers
Platform access: you can earn by charging end customers a subscription for access to the platform.
TAM expansion.
TAM stands for Total Addressable Market. It is the total revenue that could be earned if there is only one provider of a service. For instance, you’re into food delivery in Accra. The TAM would be the total revenue earned by charging everyone requesting food delivery.
When this company embeds services like cards, lending etc, it opens itself to more people and increases the product value to current customers. This also means that an Opay (Fintech) can plug into OnePipe (BaaS) to provide credit to their users.
If the future means that every company will be a fintech company, BaaS companies would win easily, right? Not quite. Their growth in scale and revenue is still heavily reliant on the partners they work with.
Making this choice is both art and science.
The Case for Choosing an Embedded Finance Provider.
There’s a popular African saying:
Show me your friends and I will tell you who you are.
This couldn’t be truer for API businesses. However, in this case, it’s
Show me your Partners(Fintech/Brand) and I will tell you how fast you’ll grow
Twilio (Communications API company) got most of its initial revenues through WhatsApp and Uber (Brands/Non-fintech). About 26% to be exact. Another BaaS company, Marqeta got 73% of theirs in 2021 from Square (Fintech).
This sort of symbiotic relationship and concentration is needed to make the economics work out, at least at the beginning.
But what are the differences between choosing between a Fintech and a Brand/Non-Fintech?
Fintechs. They use embedded finance to increase transaction volumes which are tied to how they earn. When a company like Barter uses Zazu (card-issuing BaaS provider) to issue cards, they encourage customers to spend more. Choosing to work with fintech could mean faster growth but more concentration and risk. Their dependence on the BaaS provider could push them to develop the BaaS functionality in-house.
Brands/Non-Fintechs: By using BaaS, they increase the overall product for the user. Most times, BaaS features augment the value proposition. Releaf works with smallholder farmers to process and sell oil palm. They use OnePipe to offer accounts and credit to their farmer partners. Farmers win by receiving a new credit line and faster payments. Releaf wins by having happier farmers. Onepipe wins by adding deeper products that Releaf can offer to their farmers. However, choosing a non-Fintech could mean slower growth but less concentration and risk.
Where Do We Go From Here?
As I spoke to more analysts and investors, the common thread going against BaaS companies is the Market Size.
Unlike the west where Fintech and Brand use cases are well established, it is still very nascent in Africa. There are two implicit assumptions made by BaaS and API Infrastructure companies here:
Most end-users of their Fintechs and Brands are online
There is a push for more consumer-friendly banking.
While these may be true, there are still not enough fintech or brands whose customers would increase their usage of the main product of the fintech/brand.
Banks are also trying to own direct relationships with startups and brands. GTBank and Stanbic are introducing new fintech offerings which could compete with BaaS companies.
But here’s my response to these:
Banks have their hands tied with digital transformation and regulations. This means that they are slow to evolve, catch up and meet customer expectations. Also, we’re at an interesting time in African Fintech with more investments than ever before.
Yes, I agree it is still early but I believe in narratives. Everyone is going long on fintech (see: fundraising). This interest could propel the creation of more fintechs and brands, increase transaction volumes and eventually, more revenues will begin to come in.
P.S: Huge thanks to Shawn for guiding me in understanding the benefits of embedded finance for fintechs and brands.
Open questions
What does a partnership like OnePipe and Zazu or Sudo look like?
Should Kuda bank’s business product just work with OnePipe even though they have an MFB licence?
What industries can request large API calls to reach Stripe/Marqeta/Twilio numbers?
Recommendations and Small wins
I wrote down my goals for Open Africa in 2022. I hope that I can bring more content with deep dives and founders operating on the continent. If you’d love to hear more about this or refer, you can contact me here.
I started learning to ride a bicycle at the end of 2021. One day, after trying not to fall into the bush for the 100th time, these five-year-old children cycled up to me and said: “Aren't you too old to be learning to ride a bicycle? You should be like 200 YEARS OLD😂”. I’ve put my haters to one side because now I can ride without needing a helmet.
The calendar on my phone has always been scheduled for another person’s time. I decided to flip this and put myself in control. The results have been good so far. I now batch time for personal stuff, work, meetings, email etc. It sounds robotic but I’m seeing areas to adjust and take back my time.
If you enjoyed this piece, please like and share it with your friends, bosses, journalists, co-workers and anyone else that could benefit from it.
Also, If you’re an early-stage startup in Africa that wants to share your story, I’d love to chat about what you’re working on. You can send me a mail or send a DM.
What did you love about today's essay? Please let me know in the comments. Your feedback helps me make this great. Good, Meh, Great?
Thanks for reading and see you soon.
Kamso.
Amazing read, Chief. Thanks for sharing!