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  • Fintech 🧠 Food - 13th Dec 2020 - BaaS mental models, Open Banking M&A, Tink & Whatsapp does shopping carts

Fintech 🧠 Food - 13th Dec 2020 - BaaS mental models, Open Banking M&A, Tink & Whatsapp does shopping carts

Hey everyone 👋, thanks so much for coming back for more brain food, covering four fintech's that caught my eye this week, an in-depth look behind some of the biggest stories and best content of the week. It's the "I know kung-fu" version of what happened in fintech. Apparently. :)

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Who's Baas For?

This new B2B infrastructure landscape is vast, and there's no perfect mental model for understanding it all because it too is at different levels of bundled or unbundled.  

I'm thinking about two lenses

  1. Who's the customer?

  2. How atomic is the infrastructure? 

There are many shapes and sizes of the customer and B2B infrastructure provider.

🕵️‍♂️ Lense 1: Who's the customer?

In August, 11:FS put together this quadrant in the 11:FS Banking as a Service Report; you may have seen me reference this a few times because it's essential.

But what's missing from this picture is the size of the customer.  Imagine a 3rd dimension with the largest in the category near the front and start-ups at the bottom. This is already playing out across each of the four categories in the quadrant.

Digital non-finance companies

Last week when Stripe launched their Treasury and Capital products, they were quite clear they're serving the non-financial, digital brands (top left quadrant). The partnership with Shopify is natural as a platform for small merchants. Stripe Treasury enables Shopify to offer a bank-like experience embedded inside of Shopify (in this case, Shopify Balance).  

Verticalized SaaS is a great place to be. Stripe has done tremendously well from consistently betting on growth businesses. While Stripe's initial partner was Shopify, their ideal client is the mid-sized platform (e.g., Lightspeed). Stripe Treasury can be used by fintech's, but there are others already well serving that segment.

This more bundled set of capabilities suits the smaller, less financial customer.

Digital finance businesses

When I think about Marqeta or Galileo's customers, they also include some non-finance, digital companies (e.g., Instacart, Doordash), but there's a nuance. Typically the platform (Instacart, Doordash or even Uber) is large and at scale.  

If you look at many of the new fintech neobanks, they're powered by one of the many new bank-as-a-service providers (e.g., Marqeta, Galileo, Synapse, etc.). Many of these started relatively small and grew using the APIs at their infrastructure provider.

These players are interesting, serving large big tech, and smaller but growth fintechs—size matters.

Traditional finance businesses

For the banks, it's interesting, in theory, they're at the bottom of all of the bank-as-a-service value chain, but not all banks are equal. There are giant global banks, large regional banks, smaller regionals, and community / local banks.

A small section of these community banks have figured out they can enable the bank-as-a-service providers (see: Durbin amendment). These small banks are arbitraging the US card fee regs and benefiting. Being small, they can make decisions quickly, and the bank-as-a-service providers can abstract all of that tech complexity. They're more an enabler of the provider than they are the customer.

However, companies like Amount are playing in a different space. Amount's customer is likely to be a regional bank, which has historically complex IT infrastructure and needs a neat abstraction. It may be simpler for some mid-sized banks to circumvent their tech infrastructure and manage payments in and out of an omnibus account in their general ledger (amazing what you can get done with that approach).

The megabanks also have to decide whether they become partners to the new providers or compete directly? They have the scale to afford their massive tech infrastructure but little growth.

So non-digital finance brands can be both partners and customers of bank-as-a-service providers and size matters.

Traditional non-finance businesses

What about the traditional brands?

For pure “BaaS”. the larger global brands have offered some financial services via affinity cards. Think about airline credit cards or branded cards from your favorite store or even a car company. Like the banks, large corporations may have enough financial firepower to do something interesting the hard way, but the regionals or mid-sized corporations are interesting.

For regionals embedded finance is something that’s starting to appear inside products like Quickbooks, and they’re the ultimate customer, but it still feels like an under-explored segment. Who's going to serve these folks with an Amount like product offering for them to embed finance? Who's the UI Path of BaaS?

🕵️‍♂️ Lense 2: How atomic should the infrastructure be?

Depends on the audience.

Different audiences need different levels of complexity.  

  • Smaller digital businesses: Prefer more bundled products closer to the platforms they're already using. Stripe serves this well.  

  • Smaller fintechs: like to start with something bundled, but they increasingly move down the stack as they mature.  

  • Smaller banks are an attractive segment that we'll see more activity to enable.  

  • Mid-sized corporates that are non-digital seems like an open opportunity for someone.

Until recently, the choice was between bank-as-a-service providers who could do a limited set of products in a more atomic way OR providers who could do a broader set of products and capabilities in a more bundled way.  

Companies like Privacy.com, Synapse, and Unit (who announced their $18m Series A this week) focus on this platform approach by bundling customer service, compliance, tech, and much more for smaller growth businesses.  

The Marqeta's and Galileo's are more atomic and allow you to "roll your own" compliance; this requires more upfront work from the company but gives more flexibility.

Lastly, have folks like Moov who build the connective tissue to the financial infrastructure itself down to the metal.

This is complicated by the fact that there are many individual capabilities in the “Bank-as-a-Service stack”, and each can be bundled, more atomic or closer to the metal.

Why can't I start with a bundle and gradually move closer to the metal?

Many fintech companies have. In the UK Monzo and Revolut, both started by partnering with Wirecard, before moving gradually down the stack and closer to the metal.

I suspect we'll eventually see all of the different levels of abstraction co-exist as those building the abstractions start to partner with those closest to the metal. But, if you want to understand BaaS, you have to understand who it's for and how bundled or unbundled the offering is.

Final thought: There's a ton of non-differentiated code companies have to build as they begin to embed finance, and one bundled offering is unlikely ever to rule them all. Something is missing between BaaS and core banking.

I'm still wrestling with the right mental models for all this. But I think there are a few takeaways.

  1. Bundling BaaS and fintech infra works for the smaller to mid-sized user

  2. Audience matters and growth businesses are always good business

  3. Audience matters and the growth businesses segments are hyper-competitive

  4. Meaning the more traditional customers are a giant opportunity, and what Amount is doing has a UI Path feel to it

  5. What Moov has done for the bottom layer of the finance infrastructure likely will be abstracted over time as these platforms become an ecosystem of platforms.


4 Fintechs 🤑

1. Finch - Payroll APIs

  • We've had a wave of payroll APIs in the past six months, with Argle and Pinwheel both making waves in recent months. Finch feels well thought through; as a read and write API, their homepage lists countless use cases, all requiring user consent.  

  • When I covered the YC summer 2020 LINK batch, I described finch as "the bit of plaid that was missing." Which makes you wonder how long until we see M&A in the payroll APIs. Finch broke cover with their $12m Series A this week.

2. Modular Bank - Estonian Core banking provider 

  • Modular is a banking platform that's partnered already with a financial services group in Finland and another in the DACH region. Only two years old, they have 35 staff and live customers with what their investors describe as an "elegantly designed platform." 

  • The space for "next-gen" core banking platforms is wide open, and reference clients are gold dust. The challenge with core banking is that many are selling to a tiny group who are willing buyers; the much more challenging thing in core banking is bringing the experience of getting live and taking your client there with you.  

  • The value opportunity for me is to "do a UI Path" and figure out how your product & client handholding come together (but I would say that, wouldn't I).

3. Synctera - Fintech partnerships as a service

  • Synctera helps risk-averse banks with their lengthy procurement processes and compliance to partner with fintechs. They've created a dashboard and platform for both the fintech and bank to manage their partnership. In a sense, it's replacing the partnering function of banks, but at scale. 

  • There's been plenty of fintech databases before; there are even some compelling API sandboxes, but what I like about this is it's doing what the bank and fintech had to do anyway, far better than either could. It's the perfect middleman play.  They just raised a $12.4m seed, and I'm curious to know how they make money (share of billing?) One to watch. 

4. Superrare - Digital Art Marketplace

  • More crypto than fintech, SuperRare is super compelling because it shows a new type of commerce. It's a digital art marketplace that has earned artists $4.5m and importantly made nearly $1m of secondary market sales in 203 countries. While the raw numbers aren't huge, the fact that it's global and only for digital works is what stood out.  

  • The digital world doesn't do anything unique or rare. Humans value rare; look at baseball cards. With our subscriptions to movies and music, the link between creator and fan has diminished.  The rise of the creator economy is slowly changing in things like writing, but what about music? Film? What about an album that there are only 11 copies of in the world, and you can prove you have one?  I love niches on a global scale.

Things to know 👀

  • Tink the Swedish Open Banking platform has had a big 2020, having raised 90m back in January and doubling its valuation in those six months to 680m Euros. Tink reported $30m of ARR as the usage of open banking continues to rise. Key competitors in Europe are Plaid (of course), Truelayer, and Yapily.

  • 🤔 My Analysis: There's no doubt the Plaid acquisition has raised investor appetite in fintech, but that 20x revenue valuation isn't that obscene given some of the B2B fintech valuations and the general heat of the tech sector in 2020.

  • 🤔 My Analysis: Tink has a solid geographical spread (especially vs. the main three competitors). Plaid is investing heavily, but much earlier in its European journey, Truelayer and Yapily are expanding, but the region-wide geographic coverage is a feather in the cap for Tink. They've been at it since 2012 and slowly, steadily, built a business. PSD2 and open banking wasn't a big deal back then.  

  • 🤔 My Analysis: Tink has been busy in M&A (acquiring Instator of Sweden, Eurobits from Spain, and the open banking bit of the UK's OpenWrks).  Their press says the new funding is for hire, but I suspect we will see much more consolidation in the open banking category. There's still plenty of small / mid-sized or regional Open Banking players in Europe, and one wonders if Plaid can get their checkbook out with the DOJ there in the background? 

  • 🤔 My Analysis: Don't forget A2A payments. The new payments rail for Europe will be a crucial battleground in the second half of this decade, and there's a whole swathe of new companies starting to play there too. Open Banking will fulfill it's potential when data and payments begin to be well served by a single platform across a wider geography.

  • 🤔 My Analysis: What is it about Sweden and tech? Spotify, Skype, and now Tink.

  • WhatsApp has 175m users of business accounts, and adding shopping carts is aimed to make it easier for consumers to buy multiple items for a business. It also allows merchants to manage orders or requests. This release follows the launch of payment QR codes, a dedicated "shopping" button, and the ability to share catalog links via chat.

  • Whatsapp, despite its reach, makes little direct revenue, but commerce could be its route forward. India is Whatsapp's biggest market by users.  Still, WhatApp users can't actually PAY.

  • 🤔 My Analysis: It has to be a matter of time following UPI integration in India that Whatsapp adds a simple "PAY" feature. Facebook has tested payments in numerous markets over the past decade but can't seem to get live at scale.

  • 🤔 My Analysis: When I look at some of the naivety that Facebook showed in announcing Diem, I'm also not surprised progress is slow. Despite having all of the money and incredible talent, it was evident to anyone with a finance background that central banks would have significant worries about Diem's economic design (then Libra).  The regulatory concerns are still hurting them, but I also sense a deeper execution issue. Meanwhile, Square Cashapp and Robinhood both have crypto.

  • 🤔 My Analysis: It's clear payments are a strategic imperative for Facebook, but it might be an area they need to much more aggressively partner and acquire rather than build.

Good reads 📚

1. "This is the bad place" - on lazy incumbent margins in financial services

  • [What Alex] "likes about fintech is that it's essentially a subsidized, large-scale attack on value deficits in financial services. And even when individual fintech startups fail (which happens all the time), the collective assault on the industry's conventional wisdom tends to produce positive, long-term effects for consumers."

  • Alex scores things that the credit card industry has done that's a "value deficit" for users e.g. 

  • Making price protection impossible to use, 

  • One-size fits all rewards, 

  • Betting on user laziness, 

  • Encouraging users to revolve rather than pay off debt).

  • 🤔 My Analysis: This is well worth a read because Alex contextualized how many different fintechs change the value equation for customers. The banking business model has been like a bad landlord and getting worse over recent decades: hidden fees, charges, and gotcha reward systems.  Fintech is gaining adoption by not being an asshole to its customers.

  • 🤔 My Analysis: There's a type of banker who would respond to this with sentences like "well, we're not a charity," guess what, neither is Square Cash App. Square's earnings growth is staggering because it's user value equation makes so much more sense. Here's "free P2P2 payments, and pay if want it to be instant, also here's a bunch of other stuff you might enjoy too."Customers don't mind paying for better service; they mind being tricked into thinking they had that for free but didn't.

Tweets of the Week 🕊


That's all, folks 👋

Ps. Get in touch if there’s a rant you’d like to see, and have a great week everyone.