🧠Fintech Brain Food - 30th Aug 2020

Watching the fintech landscape play out is absolutely fascinating, as different big tech’s jockey on the global stage each with their own strategies, new fintech’s emerge and the narratives all intertwine.

To get through all of this, as always here’s 4 fintech’s, some good reads, things you should know and tweets of the week.

Bit of a long one (it makes sense as a narrative) 😇 👇

4 Fintech's 🤑

1. CommonStock - Community for investing OTT your broker 🏹

• In case you missed it the stock market is seeing an explosion of retail interest. For the most part, that should be a good thing. However, stocks go down as well as up, and the retail investor can and will lose out big. Common Stock aims to overcome that by offering social elements (e.g. follow the trades of this well known investor. They've also vetted a few folks to be community curators and creators who will provide insights and guidance. Congrats to Commonstock for raising $9.7m seed 🤝

• Very similar to Public.com (almost a copy paste, except this seems to link your existing brokerage) and even reminds me of etoro (who eventually got into complex products and crypto). Makes me wonder why this team and are they slightly late? Winning the creators and the community will be key. There's a whole universe that exists off Robinhood's platform, does that belong inside a product?

• The investments space has such an interesting design challenge. Customers don't want to be educated, but will consume content that helps them invest successfully. It's in the platform's interests to see customers add more value and trade more, but it's in the customers to trade less. Balancing this will be key (Shameless plug: had a really good discussion with the CEO's of Public.com and Freetrade here). The use of game mechanics and behavioral design techniques is going to be the art here. The devil is in the details.

• I've seen a few folks this week suggest we need a Lambda for investing 👩‍🎓 after the SEC announced new rules for who gets to be a sophisticated investor (covered later). My £0.02, yes to Lambda for anything, but it would be much easier to have consumer self certification up to sensible limits too (e.g. UK Crowd funding regs).

2. Finix - If Stripe had an expert mode 🥋

• Increasingly companies are taking payments in house and writing their own code to manage that. 📊 It reduces cost, increases flexibility and importantly allows companies to turn payments into a product they offer to their customers.

• Finix just raised another $30m and now includes Amex among its investors. Amex are making some interesting moves, having just acquired Kabbage, now looking at embedded payments. 🤔

• Imagine a global business like Spotify, they have to support 100s of currencies, in 100s of countries with many different providers and banks. At that point, Stripe is no longer the one stop shop. Finix replaces much of the internal "becoming a payments engine" work that a business like Spotify eventually has to do. 💳

• Embedded payments inside a SaaS offering, are according to a16z an opportunity to 2x to 5 revenue for SaaS businesses. Imagine you're starting a business like Shopify who has payments as a major part of their offering to their customers. You could just repackage stripe, but the fee's would be expensive and not much better than going direct. Finix potentially gives those businesses an edge.

3. Chip - Acorns style Micro savings and self driving investments for UK 👜

• Savings and investments are 🔥 during the pandemic as consumers began to really save. The main story has been Robinhood, but these every day savings assistants get overlooked. I really like the self driving savings model. They build in things like streaks and user surprise and delight into the UX, and then use that to drive cross sell into savings and investments products.

•  Business insider is reporting that they're raising at a £130m valuation, which given the state of UK Neo banks right now is a huge shot in the arm for UK fintech.

• These "service first" businesses like chip and plum are showing a model above the banking interface. They use account aggregation and savings as their core hook, and use that to cross sell into savings and investments. This space above the banking app feels ripe for more innovation, especially if the Plaid, Visa deal continues to get regulatory approval.

• These specialist, focused micro apps would exist really nicely inside a Tencent or Ali ecosystem, it's interesting to me that western big tech keeps trying to replace them rather than embrace them with some sort of enabler.

• PS. Big banks, you should have been doing this stuff 10 years ago 👀, and now it's probably better to enable these players than compete with them. They work because they are so focussed, it's not PFM in an app that's got too many features.

4. Socure - AI based digital identity verification 🆔

• When you open an account, the bank is on the hook to make sure you are who you say you are. It does this primarily through checking a number of bits of information about you. It turns out, a ton of fraud happens this way because of the paper and manual process risk. Most big banks still want you to go to a branch, most Neo's can do this 100% digitally.

• Socure's digital onboarding stats are phenomenal 🤯; Reduces account opening fraud by 95%, False positives of better than 1:1 and they Reduced manual review by 90%.

• The dirty secret of "fully digital onboarding" is how much humans are still involved. You might have taken a photo of your drivers licence, and take a live video of yourself without speaking to a person, but there could still be a person, somewhere reviewing that. So I'd love to know how that 90% reduced manual review is gotten to.

• Citi and Wells Fargo joining the $35m round is interesting. If those stats are accurate the savings for banks would be staggering. Excluding marketing big bank CAC is awful, this could really attack that.

Good Reads 📚

1. Ant Financial's financials 🐜 (🧵Thread by Arjun Kharpal)

• JUST IN: First look at Ant Group’s financials ahead of its massive IPO. For the 6 months ended June 30: REVENUE: 72.53 billion RMB ($10.5 billion), up 38% yoy PROFIT: 21.92 billion RMB ($3.1 billion), up 1,058% yoy

• In the prospectus, there is this big section under “risks”: “Geopolitical tensions have led to a worsening relationship between China and the United States and this adverse trend may continue to deteriorate, which could negatively affect our business and results of operations.”

• 🤔 My analysis: This is what happens when you get fintech right as a big tech. Ant used payments to get at data. Once they had data, they built a credit scoring tool. Once they had a credit scoring tool, they built a lending business across their two sided market.

• 🤔 My analysis: A lot of this worked because of the unique market access they had and the growing market they were in. Watching them and others battle it out for India now is the next big stage for east vs west big tech, with homegrown India stack in the middle making the whole picture very different

2. Tencent and Wechat "The Ultimate Outsider" (✍ Not Boring Blog)

• "In China, Tencent is like Facebook, Nintendo, Shopify, Netflix, Spotify, Slack, and PayPal rolled into one. Its flagship product, WeChat, has 1.2 billion users, and those users spend more time in the app every day than Americans spend on all social media apps combined"

• "In 2017 WeChat launched Mini Programs, allowing businesses to build full-functionality apps within the WeChat platform. Companies like Pinduoduo build on top of WeChat and tap into all of its customers’ existing social and professional networks. Mini Programs turn WeChat into a “super app,. WeChat, for all intents and purposes, is the mobile operating system in China."

• Tencent’s Payments business is nearly as big as PayPal’s entire business, and it generated five times as much revenue as Shopify in Q2.

• 🤔 My analysis: Fintech as a revenue line clearly works in China when you consider the sheer scale of the Wechat and Alipay capabilities in payments. WeChat tends to partner for lending, vs Ali that can do more in house.

• 🤔 My analysis: What's made this work is the ability to continually invite in 3rd parties and enable them, vs Facebook and Apple who have consistently removed APIs or come to blows with developers over fees. It strikes me that whilst for Tencent, payments is a revenue line, it's also an enabler to everything else they do. Which leads us to...

3. Whatsapp and the future of lending in India (✍Blog by Tales of Bharat)

• "Our on-ground research with Kirana stores tells us that shop owners use WhatsApp for everything from placing a purchase order to delivering goods to a customer. WhatsApp has also become the primary source of information for SME owners to update themselves about the latest trends in their business via merchant association groups. " (ST: But as you can see below, this journey is janky to say the least)

• 🤔 My analysis:The D91 blog post shows how account aggregation and UPI payments infrastructure could make this journey seamless. This would require a plaid for India (either in the India stack itself or from the private sector), and a UPI mandate around the management of invoices and credit

• 🤔 My analysis: The simplicity and clarity of this opportunity is striking. For whatever reason, Facebook and Whatsapp cannot put a foot right in payments, and India is absolutely the battleground. Whatsapp has so much potential in Indian fintech. It's where the users are already. What if they just did what WeChat did and launched mini programs?

• 🤔 My analysis: Their key to winning in India is going to be the local partnerships and enabling the entrepreneurs, thereforeIt's not surprising Facebook invested in Jio so heavily. but in a market where PayTM (who Alibaba has 39% of) has 150m users, PhonePe has 173m users and Google Pay has 67m monthly (source)

4. Facebooks Payments Pivot (✍Article by Ron Shevlin on Forbes)

• Centralizing the numerous payments-related initiatives across Facebook may help make them more efficient and timely. But the revenue and profitability outlook for the division appears to be limited. And that may be prove to be a big problem.

• Look for internal squabbles over prioritization of initiatives and arguments regarding the attribution of revenue across lines of business. Those will be clues to how well F2 is really doing within Facebook.

• "Facebook has become a lightning rod for political controversy with its censoring—and not censoring—of certain posts. The result has been calls to boycott Facebook advertising. That will no doubt spread to Facebook Shops over time."

• (Ron also shared this chart on how Tencent's revenue and margin looks vs PayPal)

• 🤔 My analysis: Tencent use payments as a way to enable the rest of their platform, not as a revenue line. As Ron points out, F2's likely future at home is to be a support group to the rest of Facebook, rather than a major revenue earner.

• 🤔 My analysis: The much more interesting market for Facebook payments and lending is India. However, Facebook consistently struggles with enabling 3rd party developers on it's platform.

• 🤔 My analysis: The goal must be clarity and alignment on strategy given the headwinds in the west. Enabling commerce with Shopify is all fine and well, but embedding those payments may be harder without again, some sort of mini program capability.

• 🤔 My analysis: What makes WeChat really magic, is how a user can receive an offer for their favorite coffee, from a small business near them, based on local weather patterns. Facebook is a master of tools for advertisers. Turning that into broader tools for SMBs as a platform or interface? That's going to be the leap.

Things you should know 🧠

1 The SEC modernized their accredited investor rules(📰 Press Release)

• 🤔 My analysis:Retail investors (you and me) are typically only allowed to buy listed securities (stocks and shares on public markets). It's much harder to get access to private company shares. Whilst we've seen some innovations like crowd funding and secondary markets, the primary issue is regulation had been setup to prevent consumers accessing more risky investments in the wake of various financial crisis's (not least the great depression).

• 🤔 My analysis: Historically you needed to be both qualified and have a significant amount of existing wealth before you could get access to those markets. The idea was that if you could afford to lose your investments, then less harm was done. The reality is, it created a barrier to entry for many well qualified professionals or sophisticated investors who just didn't happen to have $5m laying around in cash.

• 🤔 My analysis: This update removes the wealth requirement, but still requires someone to have a recognized qualification to access more complex financial investments. This is important because it means the SEC is willing to change the definitions, but it's far from opening the flood gates. I can see two further potential opportunities.

• 🤔 My analysis: Opportunity #1: Creating self certification for specific investments. Other global regulators have used consumer self certification (and sensible limits on investment amount) to allow a consumer to access a more risky financial product if they can demonstrate they have understood the risk (the devil is in the detail). Others have mentioned a Lambda school for these qualifications could be interesting, but I imagine good self certification could be baked right into the apps and communities themselves.

• 🤔 My analysis: Opportunity #2: Creating a definition of tech sophistication. This is especially relevant in crypto and defi projects, where understanding how a smart contract works is as (if not more) important than the current financial position of an asset.

2. Fidelity files to create it's own Bitcoin Fund (📰 on Forbes)

• Fidelity the worlds 5th largest asset manager " filed paperwork with the U.S. Securities and Exchange Commission (SEC) informing the regulator of a new fund dedicated to bitcoin."

• Fidelity "recently published the results of a survey of 800 institutional investors from the U.S. and Europe, finding that 36% of respondents were already invested in digital assets, while 60% said digital assets had a place in their portfolio."

• 🤔 My analysis: It's striking to me how there's still just about a view out there that crypto isn't going to be a thing. All tech grows through this, they say the next big thing starts out looking like a toy speaking of which.

3. The $ amount locked in Defi doubled from $bn to 8Bn in a month (📰 Decrypt)

• According to data analytics site DeFi Pulse, the amount of cryptocurrency locked in DeFi app smart contracts passed $8 billion this week, currently sitting at $8.41 billion as of this writing.

• Maker had been the leading protocol for some time, with a sizable lead over rivals as of earlier this month. However, it now sits at #2 beneath a new champion: Aave. 🏆

• 🤔 My analysis: It's a widely held view we're in a crypto bull market, but most of the action is happening on new assets like $yfi rather than the old guard like Bitcoin and Eth (which are stubbornly stable).

• 🤔 My analysis: General consensus is that it's such an early petri dish, weird and interesting things are happening, it's where the action is. It's not likely to overtake traditional financial markets any time soon, but it's a working experiment. It's still hard to use, wrapped in dense language and meme's and thinly traded, but all of that is changing.

• 🤔 My analysis: Defi doesn't need to connect back to the old world, it's a paralel. New tools are being built for creators and economies, Defi is predicated on being an alternative to the financial system not an upgrade to it. (Excellent read here from Ian Lee on the subject)

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Tweets of the Week 🕊

Love the simplicity of this from Jack Altman 👀. See it so often, companies building out infrastructure and scale before they've found product market fit. Print this out, and staple it to everyone's forehead 👇

This is a handy thread from Aaron Frank talks about soft vs hard fintech, for those new to the space it roughly translates to "regulated vs unregulated" but with some nuance. It really changes the margin and business model equation though and puts a number of strategies in the cross hairs as a result.

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That's all folks 👋

As always please do remember to like and share this post, and message with your favorite fintech stories.