🧠 Bilt Rewards and the Future of Loyalty.

Plus; What Capital One and Discover means for the payments industry, and where are the $100bn Fintech's?

Hey everyone 👋, welcome to Brainfood, the weekly read to go deeper into Fintech news, events, and analysis. Join the 38,478 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

Capital One offering to buy Discover is seismic.

Words like “reshaping the industry” don’t quite cut it. Things to Know this week distills what this means for payments and Fintech.

A few weeks ago, Bilt Rewards also brought back the growth round, raising over $200m at a $3.1bn valuation.

They’ve created a category that sits alongside airlines and Starbucks loyalty programs as possibly an all-time great. That’s your Rant this week.

PS. I’ll be at Fintech Meetup in Vegas in a couple of weeks. Reply if you’re there and you want to chat about embedded finance, compliance, or fraud :).

Here's this week's Brainfood in summary

📣 Rant: Bilt Rewards and the Future of Loyalty.

💸 4 Fintech Companies:

  1. Lucite A.I. - Investment Bank Analyst .slides as a Service (A.I.)

  2. Authentic - PayFac for Insurance (Insurfac?)

  3. Pluto.markets - Public.com for the Nordics

  4. Finvest - The Treasury investments app

👀 Things to Know:

📚 Good Read:

Weekly Rant 📣

Bilt Rewards and the Future of Loyalty.

We have barely scratched the surface of loyalty and consumer engagement. The prize for getting it right is massive.

The two biggest memes of Fintech content demonstrate this point perfectly.

  • Airlines are banks that offer flights as a reward. During the pandemic, United Airlines' market cap dropped to $6bn, while its loyalty scheme was valued between $19bn and $31bn. Airlines create loyalty points out of nothing and sell them in advance to banks. Consumers can use those points for flights; the banks make money from the swipe fees. Consumers charged 1 percent of U.S. GDP to Delta's American Express credit cards.

  • Starbucks is a bank that offers coffee as a reward. 29m people use the Starbucks loyalty app, and if they pre-fund their Starbucks wallet, they get double points for every purchase. The gift cards are used by 53% of all Starbucks customers. With $1.6 billion in deposits, consumers are "lending" to Starbucks at 0% for those sweet sweet points.

Of course, they're not actually banks.

But they are making up a magical currency (points) that might never be redeemed and monetizing the perceived value to consumers. 

Bilt is positioned to be a bank.

More accurately. Bilt is positioned to be the next monster loyalty case study by becoming the account that rewards rent payments.

How? 

PS. The company just raised over $200m at a $3.1bn valuation. Just when you thought Fintech growth rounds were dead.

  1. Rental demand is soaring in urban city locations

    1. Buying is not an option in desirable metro areas

    2. Driving more households into renting

    3. There was no upside to being a good renter

    4. There’s an opportunity for the “AMEX or Chase Sapphire” brand for rentals

  2. Bilt uses rewards as a hook for a two sided market

    1. On time rent becomes travel, fitness or dining rewards

    2. Aimed at high earners in metro areas

    3. Large property owners (REITs) get cost savings and new revenue streams

    4. Bilt’s relationships with REITs give it a distribution advantage

  3. Bilt’s opportunity has great timing

    1. Renting is the better financial choice for high earners in metro areas

    2. Bilt has headroom with existing clients. REITs are expanding and growing fast.

    3. They have a unique data opportunity that could be valuable for future underwriters (of REITs and residential mortgages)

    4. Perhaps they could move down market into the smaller landlord space too

  4. Bilt is a bank in all but name

    1. Bilt sits in the flow of funds

    2. Monetizes payments (with their card)

    3. Invents value out of thin air (reward points)

    4. And has data that could be used to price risk (like lending)

  5. Closing thoughts

    1. Is anyone building Bilt for everyone else?

    2. Why doesn’t everything we do reward us?

    3. The missing link is the gap between data and payments

1. Rental demand is soaring, especially in cities.

a) House prices and affordability are out of control. Today, the U.S.'s median sale price for a single-family home is 7.6 times higher than the median household income, pricing many out of owning a home. This is higher than during the global financial crisis

b) This is driving more households, including high-income urbanites, into renting. In major cities, more than 45% of the population are renters (this is a crucial data point to understand Bilt's ideal client profile). 

c) There was no upside to being a good renter. Renters faced stagnant wages and rising rents. One of the core drivers of inflation over the past 2 years has been increased rental prices. Renters have little pricing control. Paying rent on time means you have a happy landlord and no negative consequences.

d) The market is changing. Unlike competitors aimed at low-income segments, Bilt is more like Amex or Chase Sapphire for urban renters. It's aspirational and could one day serve lower-income segments. (For example, it doesn't charge renters for reporting on-time payments to the credit agencies).

2. Bilt uses rewards as a hook to create a two-sided market

a) Bilt turns rent payments into fitness, shopping, travel, hotel, or dining rewards. Users pay via ACH, debit, or credit card in the "Bilt payment center" app. They also offer the Bilt Mastercard to earn even more points on rent and a zero transaction fee. The first of each month is "Rent Day" and has exclusive rewards like winning a month's rental payment, Lyft ride credits, or a flight to Europe for half points.

b) Ideal clients are high earners in metropolitan areas. Bilt feels premium. It offers extra rewards on dining out, fitness, and rideshare. Think 30-something with an apartment and Equinox membership. Rewards can be spent on travel, fitness, rent, shopping, and, intriguingly, towards a down payment on a house.

c) Property owners get cost savings and new revenue streams. On-time payments create higher rewards for tenants and less cost for landlords. Landlords pay $0 for ACH, and Bilt will match the current card acquiring fees. The rewards incentivize early renewals and referrals to avoid vacancies. Plus, whenever a tenant spends time at a local partner merchant (like a local restaurant), the landlord receives a small % of the Bilt revenue generated for driving that customer to the merchant. 

d) Bilt has a distribution advantage. Bilt has partnerships with the largest Real Estate trusts and property managers like Camden, Equity Residential, Greystar, and Willow Bridge. They have more than 4m rental units on the platform through these partnerships. A large condo might have a Bilt Rewards logo at the front desk, like a Hilton would have an Honors logo.

👉 Takeaway: Bilt helps property owners get paid on time, renew faster, and potentially generate new revenue.

👉 Takeaway: High-earning urban renters get rewards for paying rent. Something they already had to do.

3. Bilt's opportunity

a) Rent has never been cheaper, so demand is outstripping supply. Given the rise in interest rates, consumers are priced out of home ownership. Home building cannot meet property demand, especially in metro areas. Smaller landlords are unable to meet this demand, creating opportunities for REITs. REITs have started to build entire condos and communities 100% to rent. This secular trend drives demand for what they offer.

b) Bilt's immediate opportunity is deeper penetration into residential REITs. Today, its core audience is the premium rental segment serving large Real Estate Trusts (REITs). It has plenty of headroom to grow into that market; if that's all it does, that's massive. Residential has been one of the best-performing REIT sectors recently, delivering a 16% return from 2016 to 2020. 

c) Bilt is building a data moat. As Bilt's rental payment and tenant spending data set grow, they will have unparalleled visibility into the financial health and trends of REITs and renters. Imagine if they launched premium data services for real estate investors and financiers. A sort of mini S&P or Moody's. 

d) They could also push into the smaller landlord market and lower-income segments. Most residential rental properties are owned by individuals with 1 to 4 units (14.4m units owned). The reward mechanism is so effective and creates on-time rental payments that it could be valuable for the long-tail of landlords. Renters, too, would benefit from having their credit data reported without paying for the privilege. They may end up in this market segment over time as REITs look to expand.

4. Why is Bilt a bank?

Whenever we call something a "bank," a regulator somewhere has a panic. Airlines, Starbucks, and Bilt are not banks by legal definition, but they're doing a few things that make them an exciting Fintech company. 

a) Sitting in the flow of funds. Bilt's rewards offering is predicated on seeing the payment for rent via ACH, debit, or credit card transaction. If they act as an acquirer there, they get to make a fee on the single largest transaction renters make monthly as revenue.

b) Monetizing payments. The Bilt debit card means they get extra swipe fees whenever that card is used. I see no reason they couldn't launch a credit card with even better rewards and offers to increase that revenue line. (Interesting aside, the card is issued by that well-known Fintech partner bank, checks notes, Wells Fargo?!)

c) Inventing points out of thin air. Banks invent deposits out of thin air when they create credit; loyalty-driven programs do the same thing with points. As soon as they're created, these points have economic value. If they did do a credit card, they could pre-sell these for billions like the airlines do.

d) They have data that could be used to price risk. Bilt would have some unique underwriting data if they wanted to be a lender. Perhaps the more interesting model is as a data provider to lenders and investors in the REIT and private credit markets. A sort of S&P for residential rentals.

5. Some closing thoughts.

Bilt is a classic example of how all Fintech is Ad-tech. It uses a seemingly simple data point (paying rent) to incentivize a bunch of other behaviors it can monetize (like card swipes and local merchant partnerships). 

BNPL providers are ad-tech LARPing as Fintech. They bring shoppers back to merchants by understanding what those users buy and what they might like to buy. 

Travel, Shopping, and Coffee now have data and loyalty flywheel case studies.

But it made me wonder.

  1. Who's building Bilt for everyone else?

  2. Why doesn't everything reward us?

Who's building Bilt for everyone else? This is the grand prize for financial inclusion. Whoever figures out the loyalty scheme to get the lower FICO scores paying more rent on time and building credit unlocks a massive underwriting opportunity. Maybe that's Bilt, maybe that's someone else?

Why doesn't everything reward us? The short answer is usually that the economics don't work. What Starbucks, Airlines, and Bilt have in common is they found ways to bring together a flow of funds and data to drive a flywheel effect.

Bilt is a badass company that's just getting started. 

Everything should work this way; we're missing the link between data and payments. 

Your homework assignment is as follows.

Look for more data, own the payment, and you can win.

ST.

4 Fintech Companies 💸

1. Lucite A.I. - Investment Bank Analyst slides as a Service (A.I.)

Lucite pulls together business overviews, competitive analysis, public financial metrics, buyers lists, and recent M&A from a given category. They aim to save time and effort pulling together data for putting up-to-date slides together. The service combines GPT-4 with publicly available APIs.

🧠 All of the standard A.I. disclaimers apply. What's the moat here when it's public APIs and GPT-4? Why wouldn't someone else build this? Isn't this just Microsoft co-pilot? The trick is knowing what templates must be created and standard outputs. When the cost to produce fairly good output goes down, the value of the grunt work goes down, but the value of insight and agency goes up. Believable isn't the point. Insightful is. I wonder what this means for the investment banking culture of working the analysts hard as a rite of passage. How many analysts will pay for this on the side to look good in front of bosses? Quiet A.I. users are a thing.

Here's an example I created using Affirm, the BNPL company.

2. Authentic - PayFac for Insurance (Insurfac?)

Authentic creates and manages captive insurance companies for online businesses (e.g., Vertical SaaS) to offer their users insurance (B2B2B). Clients monetize recurring commission and underwriting profit with an almost zero cost integration. Authentic creates a captive insurance company and then provides clients with a widget to buy insurance in minutes (e.g., a Vertical SaaS for Salons can offer those Salons a bespoke insurance product via the widget). 

🧠 Is insurance ready for a Stripe for Insurance? Stripe created the Payment Facilitator (PayFac) category. This enabled any internet business to start taking payments in minutes. Can the same realistically be done with insurance? Large companies have used captives for decades, but authentic speeds the process by managing the underwriting, claims, and capital markets/re-insurance programs. If they pull this off, there will be a ton of demand, but the real work will be managing the risk and making that feel effortless to Vertical SaaS businesses. Every company will be an Insuretech company.

3. Pluto.markets - Public.com for the Nordics

Pluto is a zero-fee trading app supporting global stocks, bonds, and fractional investing. Users can sign up instantly by linking their bank account and automating recurring bank transfers. The service also features a social feed and chat functionality. 

🧠 Local regulation is hard. Pluto will launch in July and is regulated in Denmark by the Danish Supervisory Authority. The Nordics are not massive (populations range from 4 to 10m), with the whole region having about 29m. But the population skews the wealthy. Let's not forget this region has also produced massive global companies like Spotify, Klarna, and Nokia. A small market can be advantageous if it forces you to figure out how to scale internationally early in life. 

4. Finvest - The Treasury investments app

Finvest is a consumer mobile app that simplifies buying 3, 6, 12-month, or long-dated treasuries. After signing up, users simply select the treasuries they want and can invest, deposit cash, or withdraw in real-time. The marketing contrasts the average 5.3% APY with rates from large bank direct deposit accounts closer to 0.1%.

🧠 This is probably the easiest and most direct way for consumers to buy T-bills. Immediately, I wonder if this is a strong enough wedge to grow users and become a bigger company in time, but in the short term, the simplicity is powerful. It's basically an app at the front and Atomic Invest at the back. Anyone could build it, so there's no obvious moat. What happens when T-Bill pricing is less attractive? Fixed income is a great asset class, and it's absolutely having its moment. If they can expand from their wedge, it might be a solid hook.

Things to know 👀

Huge news: Bloomberg reports that Capital One has agreed to buy Discover in a $35bn all-stock deal (a 26% premium to the prior closing price).

Remember: Discover is a card network like Visa or Mastercard. Discover is *also* a card issuer like Capital One.

Remember:

Discover is a card network like Visa or Mastercard

Discover is *also* a card issuer like Capital One.

Capital One says it will route most of its debit cards over Discover in a bid to work closer with merchants.

🧠 Capital One has a shot at being the brand equivalent of AMEX (but for cost-conscious consumers and merchants). Unlike Visa or Mastercard, AMEX is a 3 party model; they work directly with merchants, issue cards, and co-brand. Capital One could be similar.

🧠 Owning the network could be a huge cost saver. Let’s assume Capital One could route $100bn of card spending over a network it owns end-to-end; that’s at least a $1bn saving. You have to believe they’ll use that as leverage in V/MA negotiations.

🧠 Also potentially makes them a co-brand, Fintech, and Big Tech partner of choice. As Tom Noyes pointed out, their cost savings on debit and credit could make them hyper-competitive as a partner bank.

🧠 If Capital One lives up to the promise of making more debit cards Discover cards, this is PRO competition. It changes the debit issuing and acquiring landscape dramatically. Despite Elizabeth Warren seemingly hating it because Wall St.

🧠 Capital One will become the biggest credit card issuer in the US. They're both strong in subprime and near-prime credit. Capital One is a master of managing credit exposure, and this would make it the dominant player in that market segment.

🧠 I don’t think this gets a ton of antitrust security. If anything, this helps break the duopoly of Visa and Mastercard. They're in good shape if they keep the debit network promise. The deal would close in 2025, which could be under a new President more open to M&A.

Good Reads 📚

Loved this, I’m glad Aika is writing again. Will the winner be the next Bank of America, or will it solve new problems in new ways like Stripe?

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. 

(2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a *. None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.

(3) Any companies mentioned are top of mind and used for illustrative purposes only. 

(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held 

(5) Citations may be missing, and I've done my best to cite, but I will always aim to update and correct the live version where possible. If I cited you and got the referencing wrong, please reach out