🧠Fintech Brain Food - 16th August 2020

Oh, nice to see you again fintech nerds 👋. This week Square does lending, Facebook creates a separate payments business and as always 4 fintech’s you should pay attention to. It's so exciting to me

Oh, nice to see you again fintech nerds 👋.  This week Square does lending, Facebook creates a separate payments business and as always 4 fintech’s you should pay attention to.  It's so exciting to me that we’re in the third big wave of fintech 🌊. Third what now?  Fintech 1.0 was pioneered through 2010 (Square, Stripe), Fintech 2.0 across 2014 / 15 with neo banks (Monzo, Revolut) and now 3.0 everything is fintech?

4 Fintech’s 🤑

1. Cred AI - If Tesla did an Apple Card for Gen Z 👶💳

  • Gen Z hates credit cards, but credit builder products are super popular.🤝   For example Chime’s credit builder card has increased credit scores by 30 points on average, Apple’s Path to Apple card is also popular as a credit builder.

  • They’re building their own underwriting engine. 🚒  This to me is the stand out piece, the CFPB says this could open credit up to 23 Million people who don’t have access to credit today.  So combine their brand aimed at people who don’t trust credit, the no fees / credit builder angle and an underwriting engine, and you have something that plays to where the market is going vs where the market is.

  • This CNBC article quotes an analyst who says “they’ll need to add rewards to be successful”. 💬 Which to me says everything about the market right now.  The old guard believe credit cards need rewards to really make money because that’s what has always worked.  This card isn’t aimed at those markets.  They’re trying to help users maintain an optimal FICO score at all times.  This is nudging you to become the best financial version of yourself, and achieve your life goals not Hilton points.

  • They intend to licence the underwriting engine to other banks. 🏦  In effect the Cred.ai product is a living proof point for a platform others can buy from.  Gen Z prefer debit cards to credit. 

  • Neo Banks 1.0 Simple and Moven were pioneers.  Neo Banks 2.0 Chime and Varo then come and radically change the user experience.  We’re now seeing Neo Bank 3.0 really look at credit differently, and this cuts across big tech (Apple), broader Fintech (Affirm), specialist lenders (Sofi) and of course Neo banks themselves (Chime and now Cred).

  • Cred launched a couple of weeks ago in beta, and I’m sure we will hear more from them

2 Routable - Making business payments as easy as Square Cash? 🤖

  • Automating a whole bunch of stuff businesses get stuck doing.  Invoices and paying suppliers is a way bigger pain than it should be.  Routable is a platform for making and receiving business payments, Routable integrates with a small businesses account software (e.g. Xero) to do things like automate chasing payment, or automate invoicing.

  • My immediate reaction was, does the world need another accounts payable / receivable software.  But the reality is, yes.  Payments for businesses still suck.  40% of US B2B payments are still check and lots of the existing solutions require wholesale process change.  Basically, making and receiving payments as a business sucks.

  • Stupid things make payments hard in business like routing payments across departments, or approval routes.  There’s a ton of expense cards (e.g. Brex or Soldo) to try to handle that, but cards don’t fix everything.   SMB fintech solutions are not new, but ones with great R&D are 🔥🔥🔥

  • Raised a $12m Series A from investors including Y Combinator = buzzy.  The team finds that no matter what, nearly every company is building their own tools to try and manage paying and getting paid inside a company and just wanted to go solve that.

3.Beanstalk - A child savings account for families

  • Child savings accounts suck. 🙅‍♂️  They’ve always been that taken for granted saver product that, as interest rates have gotten poorer, are chasing an affluent top 5% of the market, and give pretty terrible returns (especially in the UK).  The kids are the future ☮

  • Savings the whole family can get involved with. As you’d expect Beanstalk is 100% mobile and digital, account opening is simple, and there’s two very simple accounts (a money market fund and an index tracker fund).  What really sticks out is the ability to add family to the app.  Uncles, Aunt’s, Grandparents and more can all get involved and send money into the child's account. 👴👵

  • Fintech features like roundups are all here too.  All of those neat Acorn style found money and self driving money things that make saving so addictive and fun make it to one of the most unloved accounts.  Someone just went and made a really really good kids account and it made me wonder, why has this taken so long?

4. Proportunity - The home deposit booster 🚀

  • Prop Tech is so hot right now.  Digital broker Habito just raised their $35m Series C, Sleeper fintech Unicorn Better.com received over $160m last year and has done more than $1bn in Loans.  Wherever you live, the house buying or mortgage process sucks.  Digital brokers have a massive opportunity to reduce fees, but they can’t help on the deposit side.

  • As property prices continue to rise in most urban areas (especially in the UK), the deposits required are nuts. 🥜  For a semi-detached house within an hour of London average prices are a little over £500,000 ($654,000).  Most lenders won’t do a 10% deposit on a house that large, so when you include taxes and fee’s you’re looking for nearly £100,000 for a house deposit.  The average wage in London is £44,000 ($57k).  People can just about afford the houses but not the deposits.

  • Proportunity work alongside the main lender to guarantee your deposit.  They’ll check your affordability (which if you can afford the mortgage, you can afford their loan on it, usually...).  Proportunity also helps you find a house that’s well priced in an area that’s set for growth

  • What about a digital broker platform that could also support deposit loans?  Feels like a matter of time if house prices aren’t going down any time soon...

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Good Reads 📚

  • 👍Square will allow anyone in the test with Cash app to borrow between $20 and $200, aimed squarely (heh) at the low income segments or as @Jack puts it "We're looking for the most critical financial services that people haven't had access to in the past"

  • Some worry this is predatory payday lending that leaves consumers in financial trouble. “In 2017, there were 14,348 payday loan storefronts in the US, That's more than the 14,027 McDonalds locations in the US in the same year. 12 million Americans take out $27 billion in payday loans each year and pay over $4 billion in fees.  he average payday loan APR of 391% is double the APR of a bounced check fee, nearly 3x the late fee for a credit card bill and over 6x the late fee on a car payment.

  • 🍀But cash app can prevent debt traps, and Max does a phenomenal side by side comparison: “Let's compare Cash App and a typical payday (PD) loan.Pricing:PD: $15 per $100, for initial two weeks as well as extra $15 fee per additional 2 weeks extension. Cash App: 5% flat fee -> $5 per $100, plus non-compounding 1.25% interest per additional 1 week extension.”This is because of the effect rolling over on debt from Pay Day loans creates, that Cash App does not do

  • Cash app has 30m Monthly Active Users (MAUs), a super low cost of acquisition and insight into every day spend activity.  Square also is used to selling on the debt (from it’s merchant business) via Square Capital to mitigate its own balance sheet risk. 

  • 🤔My Analysis: Square is competing with payday lenders, at far better rates, and directly in an app that quite a few people got their stimulus payments in.  This theme of using data and much fairer lending is a trend across Chime, Cred.ai and now Square.  Traditional lending margins and technology stacks are going to come under significant pressure in the next decade as these solutions hit scale.

  • “Monzo customer growth is slowing down, but not the others. Revolut is now at 13m customers.”  “Lending is hurting.  Both Monzo and Starling provisioned more for bad loans last year than they earned in interest income.”

  • “Reliance on interchange is still high.  In spite of its diversification into other areas, cards is still 63% of Revolut's income. But subscription fees do make up >40% of the admin expenses.”

  • 🤔My Analysis: Each one of these has raised capital this year and is trending towards profitability.  It’s going to be key for each of these businesses to diversify not just into lending but perhaps other areas too (like subscriptions).  Revolut is perhaps furthers ahead, as we see Fintechs race to add savings and investments capabilities that have done well in the pandemic (e.g. Transferwise)

  • 🤔My Analysis: Interchange is nowhere near the revenue lifeline for these banks as it is in the USA. In the USA the much higher interchange rate (the amount of income your bank gets when you pay with your debit card), and our good friend the Durbin amendment creates a much more hospitable environment to be a digital bank.

  • 🤔My Analysis: It will be interesting to see if any of the UK banks follow the Chime, Apple, Cred.ai “credit builder” path.  As a huge UK fintech nerd it pains me to say this but the product innovation is absolutely coming from the US right now.

Ron 👏 always 👏 brings it 👏

  • “In a July 2020 survey, Cornerstone Advisors asked consumers what they would do if Google offered a checking account. A little more than a quarter (27%) said they would open an account—with 11% saying they would make it their primary account.”

  • “Two-thirds of the consumers that would make a Google checking account their primary account call one of the three megabanks—Bank of America, JPMorgan Chase, and Wells Fargo—their primary bank. Of those that would open a Google account as a secondary account, 57% bank with a megabank.”

  • “Offering a Google checking account makes sense for large regional and mid-size financial institutions who are playing digital catch up to the large banks. They can certainly benefit from the whiff of innovation that sitting close to Google can provide. In addition, a Google partnership will help them reduce their cost of acquisition.  Ironically, Google will be turning a whole bunch of financial institutions into bank-as-a-service providers.”

  • 🤔My Analysis: A lot of banks jumped into partnership with Google and it’s not clear they know why. This speaks to the dire straits mid and regional banks IT stack is in, not able to cope with the digital age.

  • 🤔My Analysis:Salesforce has a partnership with core banking vendor nCino, given their cloud platform Google could do something interesting with the right partner.  Google has some super interesting puzzle pieces with their cloud platform, pay capability and now their PFM cache.

  • 🤔My Analysis: Google could do amazing things with data. Google, the company that brought you BigTable and Big Query, the master of AI could do so much.  Following where Credi.ai, Apple and Chime are going with credit building is a real customer acquisition tool.  Google could do this better than anyone.  Will they though?  Banks are scared of Google even seeing their data.  The fear factor is definitely a thing.

  • 🤔My Analysis: Damn Ron is good and you should read more of his stuff.

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Things you should know 🧠

1. Facebook forms Facebook "Financial" - (📰 News from Bloomberg)

Why can't facebook get fintech right?

  • Facebook has formed “Facebook Financial” (or F2).  The goal is to focus on getting Whatsapp payments working in India and Brazil, massive markets where advertising revenue is insignificant and global competitors (Google, Tencent and Ali) are vying to be the payment option of choice. 

  • 🤔My Analysis: Facebook has a giant opportunity with payments. Mobile and digital payments are a massive opportunity.  In the USA alone Square ($62bn market cap) and Payal ($224.6Bn market cap) would represent an enormous boost to the bottom line.  But it's perhaps much more important as part of it's global ambitions too.

  • 🤔My Analysis: Facebook faces global competitors who are getting Fintech really right (e.g. Tencent and Alibaba especially). Getting payments right is the first step to becoming a fintech company.  Apple and Google now have maturing fintech offerings.  Facebook has to get fintech right.

  • 🤔My Analysis: Facebook has all of the users, all of the money and all of the talent, but somehow can’t seem to get fintech right.  Whether it’s launching and then killing messenger payments, or payments in Whatsapp in Brazil, or even Libra, it just never seems to click.

  • 🤔My Analysis: Facebook is great at user growth and ad targeting, but consistently struggles with regulators and getting payments working.  Being so good with data is directly scary to vested banking interests.  By deeply understanding regulatory nuance before launching and going slow to go fast, they’d likely have much better outcomes.  I’d point at Stripe or Shopify here, who both really get close to the detail in a way that Facebook appears not to from the outside. 

  • 🤔My analysis: Libra really didn’t help things either.  Libra is amazing in it’s ambition and intent, but not having the regulatory and capital risks figured out ahead of time has probably set the project back at least 5 years.  This is solvable, but it’s going to require the right kind of regulatory belly tickling (note, this is not lobbying!)

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Tweet of the week 🕊

Halie showing that maybe every company being a fintech company isn't so fun...

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