Fintech 🧠 Food - 1st August 2021 - Paxos & BofA, Solaris raises $224m & What does Fintech look like in the Metaverse?

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Weekly Rant 📣

If every company becomes a Metaverse company, what happens to Fintech?

People throw around the term Metaverse a lot lately. The word risks losing all meaning. Used to be a VR company? Now you’re a Metaverse company. Used to be in gaming? Metaverse. Do you run a family farm? Heck Metaverse (cue Oprah meme).  Just keep saying Metaverse as every word in a sentence.

It's almost like if you say the word enough it will become a reality. It reminds me of a classic Simpsons sketch in which former Republican Senator Bob Dole speaks in 3rd person.

The line goes something like

"Maybe Bob Dole should run, Bob Dole thinks Bobe Dole should run? Bob Dole thinks Bob Dole should. Actually, Bob Dole just likes to hear himself talk about Bob Dole. Bob Dole!"

So what is the Metaverse?

You'll often hear people talk about "The Metaverse," much like they talk about "The Internet."  

The most used metaphor is to imagine the world of the movie Ready Player One. In which all games and forms of content come together into one giant VR universe. It implies interoperability between IP and a persistent digital universe complete with its economy and rules. This definition is imperfect, though, because it implies the Metaverse is purely about entertainment.

Mark Zuckerberg had an interesting definition. He talks about any interaction between people where you feel "present" without being in the same physical location. This presence could involve many activities like working, socializing, watching a movie, or gaming. You could also achieve the sense of presence via many devices or technologies, including virtual reality (VR), augmented reality (AR), or even traditional screens.  

For me, the Metaverse is about more than gaming, and it's about more than presence (but more on that later). First;

The word Metaverse is everywhere.

If you've heard the word Metaverse a lot lately, it's not you going mad; the term seems to be ballooning, especially around two events.

1. The Roblox IPO

2. Facebook earnings

(If anyone knows what happens on May 10th lmk, I couldn't find much on Google other than the epic "Great online game" by PackyM).

1. Much of the press about Roblox is that they are a "Metaverse company." Roblox is famous for its internal currency (Robux) and economy. Roblox also has a set of tools that allows creators to build entire game worlds (and games) from scratch. This open sandbox meets economy is why many point at Roblox and say, "that's a Metaverse company."

2. In the most recent Facebook earnings (and subsequent press tour by Mark Zuckerberg) Mark announced Facebook is apparently going to become "A Metaverse company." It is unlikely Facebook is going to build its own 3D games or sandboxes, so clearly Facebook has a different vision for what the Metaverse actually is. And that’s dividing the Twittersphere.

It seems just like every company is a Fintech company, the next big thing is for every company to become a Metaverse company.

The battle for the Metaverse has begun.

The term Metaverse is also dividing people because:

1. There isn't one shared definition

2. It's overused

3. People have their hopes for what the Metaverse could be

4. And it just sounds annoying

The definition problem: John Palmer coined the phrase "Scissor label" to describe a word that establishes a trend without a shared definition. The lack of definition creates space for anyone to apply their interpretation to the word. In turn, this annoys everyone who has a different hope for what that trend or term could be.

The overuse problem: Trend surfing is not new. In the .com boom, people put the letter e in front of everything (e.g., eCommerce), and then post-iPhone, we got the iProducts where the letter i was placed in front of every half baked product. You can almost tell what was trendy by reading public company earnings reports (e.g., "Blockchain" was hot in 2018). It's the corporate equivalent of standing next to someone cool in the hope that people like you. It doesn't work, and it's usually done by incumbent companies who are a bit lame.

When Facebook says it wants to become a "Metaverse company," it is a logical strategy, but it is also trend surfing. Perhaps a sure sign Facebook is now an incumbent.

The hope problem: When a generation of people builds a new paradigm, it is often trying to improve or fix what came before. The cypherpunks designed the internet to break the stranglehold of centralized newspapers and media on the world's information. Similarly, many early advocates for "The Metaverse" hope for a more decentralized economy and a world where individuals share more of the benefit of economic growth.  

To some, we're only in the Metaverse when everything is open, including the economy, the interface, the rules of the game, and the game source code itself. Today's reality is that open vs. closed is a spectrum, and we see models emerging.

The annoying problem:  The word "meta" itself has countless meanings; it gets used to mean almost anything. Meta should mean "self-referential," so Metadata is data about data; the "Meta" in a video game refers to the game's tactics. But now apply that to the word Universe, and you have a word that sounds like a self-referential digital universe.  

We need some more terms and definitions.

I saw this chart (h/t Will Burns), which helps separate the different flavors of "Metaverse" we're starting to see.

I agree with this. If you think about Roblox it is a Metaworld. but it's not a Metaverse. Roblox has its own economy (a “Meta-economy”), but that Meta-economy is closed.

Contrast this with Axie Infinity.

Axie Infinity is like a cross between Pokemon and Cryptokitties. Players can breed and battle cute little "Axies" and are rewarded with the in-game currency. Axie Infinity is also staggering and fascinating in equal measure. It has generated $114m in revenue in the past month. That puts it ahead of or on par with some of the biggest blockbusters in the world like GTA 5.

Unlike Roblox, Axie has an open Meta-economy.  Anyone can buy, sell or trade individual Axie's or the game's currencies (AXS and SLP) without being in the game world. The coins are compatible with the Ethereum blockchain and can be held in a standard Crypto wallet.  

If Roblox disappears or changed its rules, all of the Roblox creators would be out of business, and all of the digital goods would disappear.  If Axie disappears or changes its rules, the users still have their goods and currency. What's more, in Axie, 95% of the revenues are paid directly to players.

Axie isn't interconnected with other worlds (yet), but its economy could be. In effect, it is a Meta-world with an open Meta-economy, and that's interesting.

So "The Metaverse" would have

1. New experiences: A sense of being physically present ✅

2. No Central Server: Interoperability between worlds / IPs ✅

3. A Meta-economy: That is open✅

So what has the Metaverse got to do with Fintech?

The internet did two things to the analog economy.

1. It transformed existing business models (e.g., Payments moved from being a commodity to a differentiator)

2. We saw the birth of internet native business models.

We will see both of these things play out in The Metaverse.

1. Transforming business models: 

Business models are already being impacted. Payments are already a key battleground for closed Metaworlds and Meta-economies, with Epic Games famously fighting in court with Apple over the iTunes 30% cut of each transaction.  

The audiences have unmet needs and jobs to be done. In these Metaworlds, we have two key audiences, the creators and the developers. Both audiences have seen a surge in Fintech products in the past year, so it's likely both will be well served by Fintech companies in the short term. But we could do more.

How long before we see a "Stripe Checkout" for Metaverse developers (complete with inbuilt virtual currency and economy tools)? Or Shopify integrations to Metaworlds for the creators (like we've seen with Instagram)? Would this be built by game engine providers like Epic / Unity or someone else?

In the early Metaworlds and economies, Fintech activity tends to be owned and operated by the platform (e.g. Robux). But if we take Mark Zuckerberg's definition of any activity where we are present (work, collaboration, education, fashion), what does Fintech look like there?

Metaverse native Fintech is unexplored territory. While "going to a virtual bank branch" is every bit as lame as it sounds, if the Metaverse continues to rise, we may get Metaverse native Fintech companies, just like we have Mobile-only Fintech companies.  

What would it look like to visualize your finances in 3D? If vertical SaaS companies can grow revenue with Fintech, why can't Metaverse companies?

If Stripe is growing the GDP of the internet, who is growing the GDP of the Metaverse?

2. Metaverse native business models: 

New business models are hard to predict with the advent of new paradigms. When the iPhone was invented, most people assumed that we would pay for music or films following the analog model (i.e., buying an album, movie, or box set). What happened was because we now had much faster internet, we could stream content. Streaming opened up a new business model; subscriptions.  Cue everything from Spotify to Netflix.

New business models will likely exist on new infrastructure. The infrastructure in closed Meta-economies (e.g., Roblox) uses existing banking rails, but most open Meta-economies use new rails.  

The Metaverse technology that enables new business models may be the emergence of Crypto as an at-scale alternative financial system.  DeFi creates new financial rails, NFTs create new forms of ownership and DAOs turn a customer community into shareholders.

Play to earn is the first new model. In Axie Infinity, players can win in-game currency, and because the economy is open, they can exchange their in-game currency for real-world money. So we've already seen a new model emerge where individuals are "playing to earn." Over time holders of the Axie currency will also be able to steer the direction of the game itself. Now think about this with other IPs. Imagine if Star Wars fans could help guide the governance of the Star Wars franchise?

Perhaps in the Meta-economy, incentives, ownership, and community become the core primitives? 

Whatever happens, it's going to be just about impossible to predict, and that's what makes it so exciting.

Maybe my next Gig is building a Banking-as-a-Metaverse-as-a-Service company 🤭

ST.

4 Fintech Companies 💸

1. Domain Money - Ex Marcus team does Investing & Crypto

• Domain Money isn't giving much away on their website other than being a platform to "invest in both stocks and cryptoassets."   The team is essentially the former clarity money team. Clarity Money was a benchmark in PFM and execution that was later acquired by Goldman and wrapped into the core product.  Goldman shut down clarity Money on March 5th, and not surprisingly, the team is ready for its next act.

• When Goldman acquired clarity Money in 2018, it already had 1m users, and remember this was before Fintech was quite so hot.  Now take a team with a previous exit, successful track, and drop them in the white-hot fintech market just after Robinhood IPO'd.  No wonder Bessemer, RRE, and others have already piled in. Domain Money will be one to watch, but I wonder how they will stand out. Will their USP be execution, or do they have an edge? I still think there's space for the "premium" alternative to Robinhood.

2. Lolli  - Cashback (and Bitcoin reward) browser extension

• Lolli will automatically send you cashback or Bitcoin when you checkout at one of their partner merchant websites.  Lolli is like the browser extension Honey (PayPal acquired for $4bn), but with a pure focus on cashback.  Partner merchants include Postmates, Staples, Nike, and Sephora.

• As a part of PayPal, Honey drives traffic to its partner merchants. It makes less sense in isolation, but you have to think Lolli would be attractive to other prominent payments players.  Bitcoin is like bottled Gen Z engagement, so adding it as a reward makes a lot of sense. Can you imagine if Lolli used open banking to drop rewards into your existing bank account automatically? Or what if you could do browser extension-driven BNPL from your existing bank account via open-banking and then use Crypto as a reward?

3. Recap - Turbotax for Crypto (US & UK)

• Recap users can connect multiple exchange accounts (e.g., Coinbase, Binance, Kraken) and creates an instant calculation of your tax liability.  Recap also provides a real-time dashboard of your accounts across multiple exchanges.  Recap is entirely client-side encrypted (meaning no data is sent to Recap).

• The regulators have started a significant crackdown on Crypto (there's a headline) in recent months. We haven't yet seen the focus shift to tax, but it inevitably will, and solutions like this could be well placed.  Many larger competitors exist (like Tokentax and Koinly), although it doesn't appear any of them take encryption and privacy quite as seriously. Given how privacy mad the Crypto community is, this could be quite a USP. I wonder if this product should be an API play, used and integrated into many other tax or crypto platforms 🤔?

4. SuperHog - Short rental guest Insurance (UK)

• SuperHog provides Airbnb (and other) hosts with a simple KYC / verification service that helps give them increased confidence in their guests.  SuperHog offers a "host guarantee" where hosts are repaid for theft or damage by any guest they successfully verified for a flat monthly fee.

• This vertical-specific KYC is interesting. The fine print is mighty fine; this looks an awful lot like insurance; their FAQs and terms don't speak to being underwritten or having any formal financial products. It's more of a private contract, where SuperHog is risk managing their subscription revenue from hosts vs. the risk of damage by a verified guest. By knowing the vertical, they'll start to identify the types of guest who's a risk.

Things to know 👀

1. Solaris Bank raises $224m and acquires Contis.

• Solaris, a Germany-based Banking-as-a-Service provider, has raised $224m to expand its presence in Europe and Asia. With 35m Euros of revenue in 2020, the expectation is the combined Solaris / Contis entity will push north of 100m Euros in the coming 12 months.

• 🤔 My Analysis: Solaris was one of the first to be a fully-fledged bank that offers Banking-as-a-Service.  Solaris is unlike Synapse who partners with banks and payment processors, or Marqeta, which is a payments processor and partners with banks. Customers include Germany's Tomorrow Bank (Aspiration for Germany), Penta (Ramp for Germany), and the Ribbit-backed Vivid Money.

• 🤔 My Analysis: Fintech M&A is now huge.  FT Partners Q2 report showed Fintech deals topped $39bn, but Fintech M&A is even larger at $44bn. Contis is a more traditional BaaS provider, UK-based, and had some success with Crypto-based clients.  

• 🤔 My Analysis: The race for the "pan European BaaS platform" has started.  Solaris has been the "default choice" for German BaaS for some time, but BaaS has come a long way since they were initially founded. Now ~15 or so platforms are gaining presence in different markets (e.g., HUBUC, Swan.io, Weavr), not to mention the big names looking to expand (e.g., Stripe). Europe remains a fragmented market, with a massive prize for the winner.

2. Paxos raises $300m from BofA, FTX & Coinbase Ventures

• Paxos says the new investors have joined their $300m Series D round. Paxos offers products like custody (cryptoasset safekeeping), brokerage (add Crypto to your app), a Stablecoin (PAX), and much more. Paxos currently provides services to companies like Paypal, Revolut, and Binance.  

• 🤔 My Analysis: Paxos has always differentiated itself by being one of the most licensed, regulatory-compliant infrastructure providers. Paxos has a New York Bitlicence and is registered as a Trust company. We're in the middle of a Crypto crackdown, and the industry is making a flight to credibility. Paxos has done a lot of the hard yards on this already.  

• 🤔 My Analysis: The Bank of America investment is interesting is a signal that incumbents are starting to get that Crypto is becoming legitimate, and partnering/investing is the best way in.

• 🤔 My Analysis: Paxos is positioning itself to be the ultimate on/off-ramp between Crypto and traditional rails. In April, Paxos announced it had applied for a clearing agency license. This license would allow Paxos to settle trades of registered US securities with institutions like Credit Suisse. A same-day settlement service would be a massive upgrade for market participants like Robinhood, who suffered massively when the $GME Gamestop ballooned trading volumes and created a huge credit risk.  Paxos would be a provider that could then do both Crypto and securities for institutions, wallets, and everything in between

Good Reads 📚

1. Open Banking will be Good for America.

• The Biden Executive Order from July 9th calls for "the transfer of consumer financial transaction data so consumers can more easily switch between financial institutions." The opportunity for banks is to see themselves more as manufacturers of APIs.  Instead, they focussed on non-mandated APIs that allow banks to be the arbiters of digital identity?

• 🤔 My Analysis: Open banking is viewed as all stick and no carrot by many big banks.  For a short while now, "Low-key-KYC" has been my favorite use case for open banking. A sort of "oh, you already have a bank account, so you can use this service" is nice. But what if it was a genuine, strong digital identity recognized by governments and institutions? This would undoubtedly beat a top-down government-driven ID card scheme (like we see in much of Europe or Asia) and probably be more compatible with the liberty-loving population of the US.

• 🤔 My Analysis: But the opportunity for banks is broader than open banking. If the market wants embedding, then give them embedded. Very few have put being the default choice for embedded finance at the core of their strategy. Some have it in the top 3 or 4 things they're working on, but it has to be the long-term play for me.  If you're a bank operating in multiple Geographies, serving large corporates, with a broad product suite, how do you become the mega-Solaris bank? 

Tweets of the week 🕊

That's all, folks. 👋

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