🧠Fintech Brain Food - 2nd August 2020

Hello fine fintech humans. Every week I write this thing thinking, shit, what is there to talk about next week. But fintech never, ever disappoints. So much to get to. As always 4 Fintech's you should

Hello fine fintech humans. Every week I write this thing thinking, shit, what is there to talk about next week. But fintech never, ever disappoints. So much to get to. As always 4 Fintech's you should pay attention to, good reads, things you should know and this week, some things to think about...

4 Fintechs 🤑

1. Lendflow.io - Start a lending program with a code snippet 👩‍💻

  • I stopped short of calling this "stripe for lending", it's heading that way (a bit like upstart.com or lendingworks.co.uk.)  

  • Embedded lending is in my opinion the biggest monetisation opportunity in fintech.🚀 I think of embedded lending as lending that appears at the point of need (e.g. small business gets a short loan from Shopify, when Shopify can see their sales are low this week but that's normal and more sales are coming next week)

  • Lendflow has a panel of lenders behind the scenes that they match customers with. So at first glance it looks like an API-first aggregator. 

  • But what stuck out to me was they also bake in customer support, compliance, underwriting, collections. 

  • That's the really clever bit. It's all the stuff that is really hard about running a lending program, managed for you, and you can deploy it with a code snippet.

  • Whoever expands this into consumer brands first and gets distribution right has the opportunity to win big.

2. Alloy - Automated Compliance - A single API for KYC/AML, fraud & credit decisioning. 🔨

  • What alloy does isn't new (comply advantage who just raised $50m have been doing something similar for a while). 

  • What struck me though is who their customers are and the implications of that. Yes, Brex, Petal and Radius the challenger (aka neo) banks are in there. But so is Marqeta. 

  • One of the real implications for the bank as a service movement is the reliance on specialists who are the best at what they do. Rather than owning and running every system themselves, brands can now rely on an API-first provider to do that for them.

  • If you were going to build a challenger (Neo) bank today, there's literally an API for everything.

3. Hummingbird - The Ultimate compliance team Dashboard 👨‍🎤

  • Hummingbird is like if a compliance team found itself on the Starship Enterprise. The systems compliance teams use rarely get love. Hummingbird is a love letter to doing compliance well.

  • This is nerdy as hell 🤓, but ask ANYONE who's had to do this stuff. Proper investigations and compliance process is the hardest bit of running a bank or finance product. They'll no doubt sell to challengers first, but the impact this could have on incumbent banks is huge.

  • It's a well kept secret that the global banking system is pretty terrible at preventing money laundering. Money laundering is that vague jargon that just doesn't reasonate but when you think about it, it's really freakin' important. People trafficking, arms dealing, the drug trade or plain old scamming your grandparents out of their life savings (fraud) all have massive human impact.

  • Globally around 2 - 5% of GDP is laundered annually. 

  • Let that sink in for a moment...

4. Nude - The best house deposit saving app ever. 

  • What if saving for a home was just better, and easier? In the UK especially, property prices feel so out of reach for anyone under 35.

  •  I really like how Nude has turned saving for a house deposit into a game. 🎮 They focus on the time to your goal, then they give you insights on your spending to bring that time to having a house deposit down. This is a classic example of the difference between game design and gamification. There are no badges, but there's a clear goal, there are toys (saving boosters) and clear controls.

  • Often people criticize this type of app for being "features not products". A cynic might see this sort of thing as an even more limited form of personal finance management (PFM, e.g. Co-pilot, Snoop).

  • I actually think these things are the finance apps of tomorrow. These are the types of services the challenger banks struggle to build because they're too bogged down in being banks. Bloated all in one bank apps are not getting deep engagement. These self driving money, digital financial service apps remind me of "micro-apps" that you see inside wechat.

  • Which begs the question, is there a logical aggregation point for all of these services? Many challenger banks have tried to be marketplaces, but it's lacklustre at best so far. Perhaps big tech's who can take these services and collect them into an ecosystem are well placed in time?

  • Regardless, people are massively under-estimating these niche, non bank, hyper-focussed finance apps. That goal focus is something to learn from.  

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Good Reads 📚👀

  • Dion points out JP Morgan are the largest commercial card issuer in the USA, and he's got data out of the wazoo (e.g. Commercial payments are a $125 trillion opportunity - shit. the. bed. That's massive 🤯🚀)

  • Virtual cards are growing at 21% CAGR, and this is a massive win for Marqeta. It's not clear if this is a loss for JP Morgan's payments processor (TSYS). The temptation is to see this as a changing of the guard.

  • 🤔 My analysis: Marqeta is killing it. Rumored IPO coming, recent valuation at $8bn, this could be a real moment for them, and the new breed of bank as a service providers / payments processors.

  • 🤔 My analysis: Virtual cards are so hot right now 🔥. They're a must have feature, everyone from Brex, to Soldo, Penta, you name them. If you're in commercial banking and you don't do really slick virtual cards you're dead in the water. Virtual Cards also coming to the consumer challenger bank space. Revolut were early with virtual cards for consumers, and now Monzo has launched consumer virtual cards. I have a nerd-crush on Privacy.com ❤ which is a hyper focused "manage your privacy and subscriptions with virtual cards."

  • 🤔My analysis:Brex are the ones to learn from in commercial banking, they're 10 years ahead of the incumbents IMO. It's no surprise then that JP Morgan needs offerings to compete. They've become a full bank account replacement Have a look at what Brex actually does. Move your cash into money market funds, offers free wire transfers, and onboard employees and manage their payments and subscriptions. Fintech has moved beyond retail....

2. Embedded Lending 📜 (Blog by Alex Hartz)

Alex provides some helpful bullet points that I'm going to shamelessly paste below (before going into reasons why you should click through...)

  • Brands can drive revenue by distributing loans with close to zero marginal CAC; 📊👀

  • Borrowers are already accustomed to borrowing from multiple lenders other than their principal banking provider;

  • Loans can be offered when users have significant need and/or high intent;

  • Brands have access to highly predictive proprietary data signals for underwriting and pricing; and

  • Lending can reinforce core engagement and retention loops by driving purchases and brand loyalty 🤝

Alex goes into depth about how embedded lenders are able to distribute their cost of infrastructure across a number of brands. The real play is about data though, if an embedded lender got to a Spotify / Stripe sort of scale. They'd see the same borrower across a number of platforms and what that means for their ability to underwrite is. Stuff. No really go check out this blog. No analysis from me on this one because 👇

3. Shameless Plug idc: I wrote a thing about Bank as a Service 📊👀

I'm absolutely convinced Bank as a Service is an opportunity that we've not even begun to scratch the surface of.

  • Bank as a Service allows any brand to embed financial services into it's customer experience

  • By picking and choosing capabilities from API-first providers

  • Who partner with licence holders in a modular way

Friend of 11:FS Simon Torrance estimates it's a $3.6trn opportunity.

  • 🤔I actually think it's a net opportunity for banks not a net threat

  • 🤔But most incumbent banks won't develop good enough APIs or partnership strategies with the new API-first providers to get the most out of the opportunity

  • 🤔This trend is just the beginning, whether you're a brand, provider or bank figuring out how to embed finance is the strategic opportunity of the next decade

  • Check out the full report here

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Things you should know 👇

1. Crypto is Mooning 🌖

  • Bitcoin hit $12,000 and Ethereum hit $400 (they've since pulled back slightly)

  • General consensus is that this is being led by Ethereum because of our good friend Defi,

  • Regulator noises towards crypto are sounding a lot less negative lately. For example the OCC came out and said they're fine for banks to hold (custody) crypto.

  • If you've not yet been down the Defi rabbit hole, think of it as true peer to peer lending. The middleman (exchange) never actually holds your crypto, they match it with borrowers directly

  • Mainstream apps such as Blockfi, Argent and Blockchain.com are offering deposit rates of 5% to 7% for your crypto. In your face Marcus.

  • My analysis: The big fintech's who do crypto (e.g. Revolut, Robinhood, Square) will all be racing to bring Defi to their users. This will be challenging with regulators who have just about got their head around Bitcoin, but see huge risk in Defi. Yet when fintech DOES get Defi working for mass market, suddenly crypto isn't that weird asset you buy and trade. It's that savings product that's way better rates than everywhere else (although lets see if those rates survive when more liquidity arrives)

2. Apple Enters Point of Sale with Mobeewave (📜 Blog by Tom Noyes & News) 🍏

  • "Mobeewave is an amazing company with a solution that makes any phone a POS (Point of Sale) with just an App"

  • "Apple’s services revenue hit another record in yesterday’s earnings.. merchant acquiring would be new area for growth.. The opportunity: enabling acquirer to add merchants as easily as issuers add consumers. Small merchants would seem to be the best path for attack."

  • Apple just stole Square's toys. Square is valued at $57bn at the time of writing, and Apple just entered that fray. Since Square launched, the whole small business payment acceptance world has changed. But there are compliance reasons why you always needed a separate dongle or device to accept that payment.

  • 🤔My Analysis: Everything Apple does is part of a bigger picture. Apple Pay wasn't about payments, it was about getting to an ecosystem. This Mobeewave acquisition isn't just about merchant acquiring. It's about creating an ecosystem for loyalty, identity and experiences.

  • Various outlets picked up on Monzo's annual report (which was far from bullish) a line that said the bank faces: "'material uncertainties that cast significant doubt upon the group's ability to continue as a going concern'. " You'd think they were dead. ☠

  • This excellent thread from a former auditor brings facts to a sensationalism party. Monzo are basically saying, hey we know the market is tricky right now but we got this. That thread also picks out examples of start-ups in the UK like Bulb and Deliveroo saying very similar things. This is an auditor putting a line in the report.

  • Also this is a phenomenal tip from the FT's Emma Dunkley. "It seems the Bank of England hiked #Monzo’s capital requirement in May - by about £40m vs last year - which sources say prompted fundraise in June, at a lower valuation. Capital increase the result of higher expected credit losses on overdrafts amid Covid and moving into loans"

  • 👆👆👆

  • Allowing you to track your delivery and even offset your carbon for everything you get from them 🌲. It's like if fast.com had logistics and carbon offsetting built in, and point of sale lending.

  • That's it, that's the whole thing you should know.

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Things to think about 🧠

  1. Have you ever tried to offset your carbon? It's hard enough to be a task to do once a year. Why isn't it ambient, or embedded in everything we do? Like that shopify thing. I'd love it if someone combined Flux (digital reciept replacement and data capture) with auto carbon offsetting.

  2. Banks still find it way too hard to partner with fintechs. Yes the pandemic started to change that, but the best buyer for B2B fintech is other fintech's.

  3. The opportunity for the first proper bank as a platform is still there for the taking. Clearbank in the UK is probably the closest attempt, but at the moment it's very focused on payments and clearing. The ability to deploy balance sheet, up into various API-first partners, intentionally, as a strategy. That's interesting.