🧠Fintech Brain Food - August 9th 2020

Howdy #fintech nerds 👋. Huge week in fintech. Google is a bank (kind of), and Banking as a Service's buzzy new start-up. So much to get into this week...

Howdy fintech nerds 👋. Remember how everyone kept asking will big tech come to banking? Guess what. That's a thing now. Google launched Cache an account with 8 different banks. Fintech got big (e.g. Square). Finance is no longer something banks do. It's something everyone does. Hold on to your pants, this is a another red hot week in fintech 🔥

As always, 4 fintech's, good reads, things you should know and tweets of the week.

4 Fintech's 🤑

1.Unit Finance - Helps tech companies build financial services into their products 💳

  • The market they're playing in is a $3.6tn monster. 📈 Matt Harris from Bain Capital reckons embedded finance is the fourth platform (after internet, cloud and mobile). Forbes Ron Shevlin suggests there's $230bn of revenue to play for by 2025 in the USA alone.

  • API Quality is everything 👩‍💻 Unit are aiming to be a bank as a service provider with "stripe quality APIs and dashboards". Which is a shot across the bow of the current players like Marqeta, Galileo and especially Synapse. All have seen exceptional growth in the past 5 years, but among developers there are grumbles about API quality, dashboard quality. It's not a surprise then to see

  • BaaS but for tech companies is a bullseye 🎯 for what the market needs. The full sentence on their (remarkably vague) homepage reads: "We help tech companies launch vertical banks and build financial services into their products (deposits, cards, payments, lending & more)." Honestly I've never seen such a sharp articulation of who they're going after. It's also clearly a bet that the BaaS space is just really getting started.

2. Orum - Helps companies move money in real time, in the USA, really 👀.

  • Orum Foresight is building real time payments for US financial institutions. 🕵️‍♀️The idea being that a consumer wouldn't have to know where the money is going, they get some neat (ML driven) matching and fraud prevention and voila. Moving money real time feels a lot more like magic.

  • It's a clever way to solve an expensive infrastructure problem. 🤔 We're in a real time economy except financial services isn't. My guess is by targeting financial services and offering fraud prevention (and likely other tools), Orum gets banks all of the benefits of real time payments without the costs of infrastructure upgrades.

  • Isn't it interesting how VCs are going after "unsexy" problems. 🤖 Moving money real time 10 years ago was the preserve of the most nerdy of nerd payment folks. Now it's a buzzy fintech startup. Fintech isn't about shiny UI anymore, it's about the clever ways to solve deep infrastructure problems.

3. Integrated Finance - Manage all the fintech APIs in one dashboard. 💻

  • Fintechs build to ship quickly but this creates it's own problems. 💥 When you're building a digital bank, the first priority is to ship code and get in front of customers. It's no surprise then that things aren't built in the most efficient way. A few years in and it's not uncommon for 60% of tech effort is quickly spent maintaining rather than building. They just have way less of it than the incumbents and it's much easier to change...

  • There's a fintech for everything now. 💡 Whether it's account onboarding, fraud prevention, risk management, treasury management. You name it, there's always a super exciting fintech that's way better than you at that one specialist thing.

  • But integrating them all is a pain. 🤦‍♂️ Most fintech's have really clean APIs, but they all have to come together. So your job as a digital bank becomes putting together all of these lego pieces. If you've built your architecture right, that's quite doable, but it's also a distraction from the core mission.

  • So these folks built the "pre-integrated dashboard for everything" 👀, they're super early but they're the team behind OpenPayd with a strong track. The need for this is massive.

4. We are Banked - Real time payments with ultra clean APIs for the UK

  • A2A (Account to Account) payments in Europe are already a thing. ✔ (For the un-initiated: Europe has a regulation called Payment Service Directive 2 or PSD2, that requires banks to produce APIs to allow 3rd parties to pull data from banks. It also allows a qualified 3rd party to instruct payments across bank infrastructure). Companies like Truelayer already do this on behalf of the UK tax authority HMRC. Companies like Vyne are making this A2A style of payment an option at checkout that competes with cards.

  • But the field is wide open for the taking. 🔱 There's no clear winners yet. This race is just getting started. What will A2A payments be used for? How much card volume will they take? Or will they create their own, new volume?

  • The benefits of cheaper, contextual, composable payments could be massive. 📈Cheaper: Even though card payments are "cheap" in Europe compared to the USA (0.3% in Europe vs ~1.5% in the USA) A2A payments are cheaper (starting at around 0.15%). Contextual: They also come with the added benefit of the data that comes along with bank account access. The loyalty / data possibilities could be much more significant than they are in the cards world which the banks have much more control over. Composable: Real time A2A payments that are API first can be built directly into workflows for consumer and businesses to automate things. That could get really cool.

  • This Avios partnership is neato-burrito. 🌯 But what really struck me was this Avios partnership (Avios are the airmiles for British Airways). If you integrate banked at your e-commerce checkout, you get this out of the box, meaning customers can automatically gain avios just for choosing this payment option.

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Good Reads 📚

1. Fintech scales vertical SaaS - ( 📜Blog from a16z )

  • Vertical specific SaaS businesses lend themselves to fintech. a16z give the example of a CRM for the pharma industry Veeva 💊. "Let’s assume the average vertical SMB customer spends about $1,000/month on software and services. Of that, $200 per month will typically be on traditional software (e.g., ERP, CRM, accounting, marketing), and the rest on other financial services (e.g., payments, payroll, background checks, benefits). In a traditional vertical SaaS business, the only way to capture more revenue from the customer was to upsell software. This left the $800 per month potential revenue from financial services to other vendors."

  • Fintech "increases revenue per user by 2 to 5x* versus a standalone software subscription" 👍 and "it unlocks new verticals where previously the total addressable market (TAM) for software was too small and/or the cost of acquiring customers was too high."

  • Embedding finance is not just newer revenue, it's higher margin. 📈 "With an embedded service, the software provider can draw on a proprietary set of data – such as contractor sales to inform lending or product information for better warranties – to underwrite risk, factoring in things like seasonality to better tailor the service to each customer’s needs and risk profile. Ultimately, that produces better margins on fintech products and new go-to-market options."

  • 🤔 My analysis: Possibly the ultimate case study is shopify, who generate more than 50% of their revenue from financial services. This is a company valued at $126bn and you could argue half of that is from financials services. Finance touches everything, but until now companies like Shopify who could embed it into everything they do were the exception.

  • The Good. Newspapers report that Affirm, a US-based point-of-sale lender, is looking to IPO at a valuation of US$10 billion.

  • The Bad. Monzo's annual report. It noted, “material uncertainties that cast significant doubt upon the Group’s ability to continue as a going concern.” (partly driven by weak lending profitability)

  • The Ugly. Two online lenders, one based in the UK focused on personal loans and one based in the US focused on small business loans, sold themselves at a fraction of their peak valuations.

  • According to a recent survey of UK fintech startups, the median IRR in payments is 98%, which compares with 64% in lending.

  • 🤔 My analysis: Lending is hard but profitable if you get it right.

  • 🤔 My analysis: Point of sale lending is massive, and has gone from a niche thing you did for your sofa or kitchen, to something most consumers prefer to credit cards.

  • 🤔 My analysis: The trick with lending appears to be, the closer you are to the context (in this case the item purchase), the more successful you will be.

  • 🤔 My Analysis: Much has been written about the downfall of Monzo, but I can promise you any high street bank would kill for a CAC (Cost of Acquisition) that's as low as Monzo's. It costs Monzo £4 to onboard a customer compares to about £150 for most UK incumbent banks 🔥. Even that fully loaded cost of £20 to service an account is tiny compared to the big banks. This is something everyone is missing.

  • 🤔 My Analysis:Each customer is contributing £4 towards their margin. So at the unit economics level they're net positive. Also if you look at the trend line (graph in the top right under unit economics) that's been trending positive every year.

  • 🤔 My Analysis:Monzo is a bank with 4.5m customers, that's trending towards profit. Bankers see "it's not profitable", but VC's see the word "yet". 🧠 Banker psychology is interesting. They look for whatever negative they can throw at fintech's to feel superior, and I grant you Monzo is in a tough spot right now. But if you really look at the numbers this isn't a lost cause, not by any shot.

  • 🤔 My Analysis:If I were a bank I'd want to figure out how the heck do you get those kind of unit economics. If Monzo can make it through the next year, move into SME and start lending properly they'll put a decent dent in the universe.

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Things you should know 👀🤓

  • It's a partnership with 8 Banks in the USA ", the co-branded, FDIC-insured digital accounts will be offered via Google Pay and built on top of the banks' existing infrastructure." Noteable banks include BBVA and BMO.

  • Google says it will stand out because "they're great at UX" and importantly banks will continue to own the data.

  • 🤔 My Analysis: The upside for the banks here if this works is Google brings customers (and deposits) for near zero marginal cost of acquisition (CAC).

  • 🤔 My Analysis: Where are the Tier 1 banks? No offence to the banks named, but this isn't JP Morgan, Citi and Wells. For smaller banks the user experience is a cost that's hard to maintain on top of everything else they have to do.

  • 🤔 My Analysis: Banks fear Google, so Google both staying away from Data and talking up their UX experience makes sense. However, if I'm the banks I'd actually want Google to bring their data prowess to Cache. Imagine if google turned their data capabilities into spotting lending opportunities. Banks have to tread a fine line between

  • 🤔 My Analysis: There's absolutely a Google Cloud Platform (GCP) play here. Where in delivering Cache, google is able to fund the up front work the bank has to do and host much of it.

2. Defi darling Uniswap raises $12m 🦄 from a16z and others.

  • Defi is so hot right now 🔥. Defi or "Decentralized Finance" is at least doubling in $ volume every month. From less than $1bn "locked" in Q1 to more than $4bn locked in August. These tokens are not only exploding they're built on a new type of infrastructure

  • Decentralized Financial Infrastructure is living up to the promise to "remove the middleman" 🙏. It used to be when we were exchanging goods, services or contracts in a financial marketplace, there was a middleman, they helped manage the risk. This isn't the case with Defi, where you get true peer to peer "swapping" of tokens.

  • Uniswap achieves this by creating pools of tokens and then matching off buyers and sellers, not with an order book but with software (a factory contract and an exchange contract).

  • 🤔 My Analysis: We're witnessing a real time, global experiment in a new type of financial market infrastructure. It's working, and there's billions riding on it. Sure it's still tiny compared to all of global financial markets, but crypto is about to make it's comeback and it's led by Defi.

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Tweets of the Week 🐤

Super interesting thought about PayPal's market position here from Tom 👇👇

And this rocked my whole world, you need it in your life 👇👇

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That's all folks 👋