Fintech 🧠 Food - 16th May 2021 - Google Pay & Wise partnership, Vitalik donates $1bn and why Identity is the Higgs Boson of the digital economy

Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in fintech. If you're reading this and haven't signed up, join the 5,888 others by clicking below, and to the regular readers, thank you. 🙏

Weekly Rant 📣

Digital Identity is the Higgs Boson of the Digital Economy.

Identity is a concept that seems simple but is quite complex. When we talk about a person's identity, we could be talking about any number of attributes that relate to that individual.

In a legal sense, your "identity" is how a country recognizes you as a citizen.

When a person is born, they are given a birth certificate that qualifies them for legal protection of the state they were born. In essence, a country takes something unique about you (your name, date, and place of birth), records that, and issues you a certificate. At that point, you become a "legal person." Legally, your identity is issued to you by a country of origin.

As you get older, you're issued various other identifiers by your country of origin like a passport, a driver's license, perhaps a tax identifier (like social security number or national insurance number in the UK). These are "Government-issued" forms of identity, and the passport and driver's license often qualify as "photo-id." (I know this sounds basic, but first principles matter).

Then there's "proof of address," this is a form of identification often issued to you by a trusted institution (like a bank or utility company).

Digitized identity.

Much of the world is predicated on identifying you using these methods. When you open a bank account, you'll need a government-issued identity and proof of address. This used to mean finding the paper document and taking it to a bank branch for a human to verify.  

There are two ways this has been digitized.

1. Mobile KYC / AML providers (e.g., Alloy, Socure, Onfido).

2. Government-issued digital identity (e.g., Aadhaar in India).

Mobile KYC / AML providers capture the paper document remotely, dramatically reducing the cost of evaluating documents. Some providers also help screen the documents for authenticity to prevent fraud and check the applicant's identity against databases (e.g., for underwriting or to see if they're on a naughty list like OFAC).  

Government-issued digital identity creates a single central repository of identity data and a single way to authenticate that you are who you say you are. For example, Aadhaar in India issues a 12 digit identity number and records biometric and demographic data about the citizen.

Both of these solutions create upside for their economies and citizens.  

Mobile KYC / AML is a significant improvement in user experience and can, over time, reduce fraud risk and help include the historically excluded populations.

Government-issued digital identity becomes a single source of truth for all government interaction. It can streamline collecting social welfare to a digital wallet, obtain rice with a fingerprint, and remove the need for paper documents entirely.

Identity is broken because it's not fully digital.

The issue is policy and legacy mindset, not technology. When you onboard to a bank account or other financial product, no matter where you are in the world, you're subject to global standards on anti-money laundering (AML) and counter-terrorist financing (CTF).

Even if the upfront identification and verification (ID&V) of the consumer or business applying for a financial product is 100% digital, "identity" is still predicated on Government-issued identity (and probably a proof of address). 

Some clever Fintech companies have started to incorporate more data into their onboarding and ongoing risk prevention processes, for example, by connecting to Payroll data or by progressively building up a user's trust with very small credit lines (e.g., Tomocredit).

But these are all still hacks around a broken global system.

As I've written before, AML is the world's most in-effective policy experiment.  At 99% useless, and an estimated 2% to 5% of GDP being proceeds of crime, the very assumptions of what "identity" is legally are what causes the problems we see.

This manifests in several ways in the digital world.

1. The cost and friction involved in transacting globally are increased, excluding those who don't have a Government-issued ID.

2. Migrants and refugees are caught between wealthy nations refusing to offer asylum and extreme risks in their home nation.

3. Without ID, people cannot vote, access healthcare, or receive welfare.

4. Human trafficking gangs exploit the lack of documented identity for individuals as they move across borders.

5. Billions of people rely on aid as a lifeline to survive, but charities and NGOs have no way of knowing who received what. Their operations are often "spray and pray."

6. People are reluctant to use real-world identities because, on a global scale, their opinions and voice can receive a backlash, threats of violence, or fears of "being canceled."

This list could be almost infinite, but the problems all have one root cause: States didn't design identity for digital, and policy is designed to make everyone comply with analog assumptions about how the world works.

Digital is a disruption far bigger than iPhones and Dogecoin. It is a fundamental shift in how humans organize themselves and create communities.

The internet is far more disruptive than the printing press.

The printing press is widely credited for inspiring the theory of a nation, as information moved from exclusionary Latin texts led by churches. Early capitalists printed their books in local languages; early politicians used the power of the printing press to win local favor. From 1454 to the early 1600s, power gradually shifted in Europe from the Church to nation-states.

The internet is doing the same thing. By changing how humans communicate, we're moving from newspapers and politicians to memes and tribes. We're moving from nation-states to global communities, and we need a form of "identity" that is compatible with our new reality.

While the internet may yet splinter and be subject to control by the nation-state, the balance of power will always be with those best at creating the software. Creative, younger generations are digital natives. The push for a truly global, truly digital economy is a macro shift that is a question of when not if.

My favorite saying lately is the future is here; it is just not evenly distributed. There are already 100s of millions of people whose primary identity is digital, whose place of work is global, and whose net worth is denominated more in crypto and tech stocks than property.

Digital natives need natively digital identity and for that, we need to look at identity from first principles.

Identity from first principles.

The fascinating thing about identity is how broad it is, but I think you can boil it down to three things:

1. Uniqueness:  Some elements of an individual human (or business) are unique in an identifiable way. (For example, biometric markers, how a person types on type a keyboard, their geolocation patterns (and many more)).

2. Persistence: Those unique elements continue to be unique and display those patterns. (For example, you still have your face, you still have your DNA, you still do things online in a way that only you would do).

3. Attributes: Data about the individual or business. (For example, owns a wallet with the address yourname.eth, has a bank account in the USA, has a birth certificate issued by x government).

In government-issued identity, your uniqueness is your face, date of birth, and place of birth. Your face and date of birth persist, and the government will assign you attributes like a tax identifier or a home address.

It turns out in the digital world, you're putting out so much more data that is unique to you, persists, and demonstrates your attributes.   Every keystroke, sensor, or bit of data is a crumb unique to you. Think about it, how many people bought a coffee from the same place you did, at the exact time you did, and boarded the same train, while viewing the same websites?

Your identity can be self-evident and self-defined (AKA, Self Sovereign)

There are plenty of good projects looking at natively digital identity (based on the self-sovereign identity concept, initially introduced by MIT in 2013 and codified in the Windhover principles).

But each of these projects alone is only a part of the answer.

In the digital world 

• Privacy is near impossible without becoming pseudonymous, and pseudonyms can create toxic environments (like Twitter in some cases).

• There is no one central actor that can manage risk on your behalf (e.g., a bank); you need software that can follow you and your identities.

• Data needs to flow freely between software applications without creating privacy or hacking risks.

• All of this needs to be much more backwardly compatible with the "nation-state" than projects have been to date.

We need solutions that manage many facets of identity across many networks in a privacy-preserving way.

We have all of the tools to do this; they need to be brought together elegantly (Ideas for how we do this, coming next week)

ST.

4 Fintech Companies 💸

Sienna - The privacy-first Defi exchange

• Sienna is an automated market maker (think Uniswap) that helps users swap, lend, and convert tokens in a privacy-centric way.  Existing blockchains and networks often show which wallet is making which transaction (on a service like Etherscan.io, you can see all the transactions in real-time). In effect, every wallet balance and transaction you make on Ethereum can be seen by the whole network (albeit only as your wallet address, not as your legal identity).  

• This can create privacy problems, for example, if an exchange is hacked and your real-world identity is applied to the wallet.  Some sophisticated attackers can "front run" your trades. Seeing your transaction, paying a higher network fee, and then stealing some of the profit you would have made by jacking up the price.  Sienna prevents this problem by making.

Sardine - Fraud Prevention as a Service

• Sardine helps identify fraud at account opening, account funding, login, and any suspicious activities during withdrawals.  The team has a track record across Coinbase, Uber, and Revolut. Sardine's customers include Dharma and Unifimoney.

• Dealing with fraud prevention, especially in crypto wallets, can be highly fragmented.  Several specialized tools help a team build a part of the process (e.g., onboarding providers like Au10tix), but you still need to thread all of the data from those providers together to prevent fraud. Weaving all of this together is neat 👌.

Figure HR  - Employee compensation management

• Figure provides salary banding, analytics, and employee compensation letter/onboarding experiences for start-ups and scale-ups.  Figure allows candidates applying for roles to model what their comp could look like as your start-up scales and shows where any pay inequalities or anomalies may be in the organization.

• Trying to put together salary bands as you scale your businesses is one of those jobs everyone has to do, and nobody enjoys.  There's a point in a company lifecycle where you go from small pirate ship to company that needs some structure. Taking the manual work out of that and adding some excitement is a fascinating niche.

Gajigesa - Earned wage access for Indonesia.

• Gajigesa allows employers to offer their employees or workers payroll with real-time access to earned wages to date. The service is now branching out to provide a broader employee management service for micro-SMBs and SMBs. Gagigesa is aiming to partner with a bank to move into lending.

• Allowing the gig economy employees to cash out earnings instantly has been a significant fintech trend in the past six months.  More than 70% of Gajigesa users have stopped using payday loans since having access to the service.  I like this model, starting by providing real user value, deepening the service on the employer side, and then using that data to lend.  

Things to know 👀

1. Vitalik gifted $15bn in crypto, immediately donates to good causes

• Ethereum founder, creator, and all-around good egg Vitalik Buterin had been gifted more than $15bn worth of a new meme-coin $SHIB (Shiba Inu coin).  Coins like $SHIB and $ELON aimed to copy the success of Dogecoin, the popular cryptoasset that saw a huge run in price this year (leading Goldman traders to quit their day job).

• The meme coin creators sent the coins to Vitalik's public wallet, which crypto observers can see through services like Etherscan.  Vitalik then immediately began to donate much of the asset to good causes. He sent more than $1.2bn to India Covid relief and more than $400m to Gitcoin (a hybrid of Github and Kickstarter for crypto).

• 🤔 My Analysis: Memecoins are hard for me to like; the idea is that they represent the value of a meme (e.g., Doge) and speak to a joke. However, coins like $SHIB are particularly cynical in my view and a clear attempt to profit from the mania in crypto markets.

• 🤔 My Analysis: The sheer volume of people buying these Memecoins (AKA shitcoins) had pushed up the price of gas (the cost to make a transaction in ethereum) dramatically in recent days. By dumping trillions of these coins and donating to a good cause, Vitalik did three things at once. First, he drove down the cost of gas. Second, he drove down the price of the Memecoins. Thirdly, he sent a signal that Eth is about more than facilitating speculation.

• 🤔 My Analysis: The $SHIB creators are trying to spin what Vitalik did as being a moment of legitimizing their coin and as "the people's coin." But now, some retail investors have lost out, having bought the hype and noise that came with the "SHIB-army."  The only people that hurt retail are the creators of Memecoins, trying to get rich quickly from retail investors.  Crypto continues to be both the best and worst of humanity, simultaneously.  

• 🤔 My Analysis: If I were law enforcement, I'd be looking closely for organized crime or state-sponsored activity here.  The "$SHIB army" has lots of retail investors involved, but I wouldn't be surprised if there's plenty of bot activity too.

2. Google Pay partners with Wise and Western Union for FX

• US-based Google pay users can now send money to India and Singapore after integrations with Western Union and Wise (AKA, Transferwise).  Wise will make the first transfer free for up to $500, and Western Union offers unlimited free transfers until the 16th of June. The target is to have more than 80 countries available via Wise and 200 via Western Union by the end of the year.

• 🤔 My Analysis: The battle for the payments super app continues. The strategy gap between Apple Pay and Google Pay is becoming quite clear.  While Apple focuses on going deeper into the US with cards and family plans, Google Pay focuses on account aggregation and remittances. Apple Pay wants to be everything to its wealthy client; Google Pay wants to aggregate everything. It is not surprising, given each companies DNA, that this is the path forward.

• 🤔 My Analysis: The gap between US Google Pay and the rest of the world, Google Pay, is now quite significant. Same for Apple's card products. Fintech is highly regionalized today, but wind the clock forward two years, and things could get interesting.  With Ali and Tencent now facing pressure from the Chinese state, there is a window of opportunity for "the financial super app" in APAC's growth markets.  Google is well placed to be that super=app potentially.

• 🤔 My Analysis: You have to imagine India is also top of mind for the Google Pay team.  Historically "Google Tez" had done quite well, but India is such a battleground for wallets. Remittance in via many channels is a good hook and differentiator.

Good reads 📚

1. Stripe and solid-state economics

This article is so good it should be required reading for anyone in financial services. 

• At a $95bn valuation on $7.4bn revenues, trading at 13x sales, Stripe may still have room to run.  

• "You know, a lot of effort went into making this effortless" is a line that sums up how Stripes API handles a variety of nuances, exceptions, and errors without ever-changing. The API is solid state.

• A "solid-state" API is much like a solid-state hard drive. Disk drives used to be noisy, slow, and eventually break down.  Things that are solid-state have fewer moving parts. Therefore less can go wrong for the user.  For example, the Tesla Model S drive train has 10x fewer parts than a traditional car.

• 🤔 My Analysis: Solid-state economics is a beautiful idea and metaphor.  Something that is solid-state is much more likely to work than fail, and "composable, such that one system can take inputs from another and pass them on to a third."  

• 🤔 My Analysis: Every fintech company has to build custom code that competes with the random stuff that breaks in finance. They call these "waterfalls." For example, a bank might randomly reject a payment because (even though you know it's good) their ancient risk system decides it isn't. So to improve your customer experience, you try a second bank, then a third.  Hence, waterfalls.

• 🤔 My Analysis: This is something that a bank itself would struggle to improve. If a bank AML or fraud system rejects something, they can't just try the payment again.  The regulator would have none of that. By creating a layer over the top of this pain, API platforms like Stripe make payments that "just work."

2. The great online game

God damnit Packy did it again, it's hard not to cover what he writes every week, but this is so insightful I had to.

• The internet is essentially a game, and the best players like Elon Musk can use it to gather attention, momentum and change the world. Underneath this, creators and individuals are re-inventing their lives and becoming independently wealthy in a whole new way. They're leaving traditional tech jobs and going down the rabbit hole.

• By playing the game and giving value, the users accumulate points of attention; users can cash out that attention for TV shows, venture funds, companies, or even political victories. If online is a game, then Fornite behavior makes sense; people will want to buy assets (like NFTs) to express their identity, support their creators and be a part of the game.

• 🤔 My Analysis: Chris Burniske tweeted, "Attention = liquidity," and I felt like that idea summarises the entire online game, society, and economy we live in these days. It's one of those ideas that the more you think about it, the more sense it makes.

Tweets of the week 🕊

That's all, folks. 👋