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  • Fintech 🧠 Food - 20th Dec - Crypto is mainstream, GoDaddy buys Poynt, $65m for Public.com & can we fix student lending?

Fintech 🧠 Food - 20th Dec - Crypto is mainstream, GoDaddy buys Poynt, $65m for Public.com & can we fix student lending?

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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Crypto is mainstream. Bitcoin just passed its all-time high, Coinbase is rumored to be filing for IPO, an insurance company is buying Bitcoin. Oh, and a significant asset manager (Ruffer) will allocate $400m to Bitcoin, and Square just added "Bitcoin rewards" to its CashApp card. That's not even all of it, from just this week.

Each part of that sentence is worth unpacking in its own right, but I wanted to zoom out. We've seen countless attempts by big companies to bring crypto into the mainstream across 2014 through 2019. Crypto Twitter has cried, "the institutions are coming!" more often out of hope than evidence. So what changed? Why is it now different? Is this just another bubble?

Crypto is following the laws of supply and demand. PayPal entering the market this year has increased demand, while the "halvening" roughly halved the supply of new bitcoin in May of 2020. PayPal is estimated to be buying more than 100% of Bitcoin's new supply to keep up with its demand.

In the past month, something new also happened. Mass Mutual, a 170-year-old life insurance provider, joined Square and Micro Strategy in a list of companies that now hold Bitcoin. Ruffer, a UK-based asset manager with more than $27bn under management, has purchased more than 2.5% of its portfolio into Bitcoin. 

Bitcoin isn't a speculative consumer asset. It just hit the big leagues.

Institutional demand 🏦

Large, regulated asset managers who manage 100s of billions of assets have to ensure their client demand for returns are met continually in a market where nearly 20% of all dollars in existence have been printed this year. That's becoming increasingly hard to do.  When you massively increase the supply of an asset, demand goes down, and so does the price. Holding US dollars is a bad investment for institutions.

Holding bonds isn't much better either. Central banks when they "print money" are buying bonds directly, impacting those bonds' yield, pushing investors further towards higher risk equities (like tech stocks).

Bitcoin, over its life, has been volatile and yet remarkably resilient. Investors have come to realize Bitcoin is more like Gold than the US Dollar. When you hear "cryptocurrency," people often assume - "well, Bitcoin is terrible, it's too volatile!"

A good friend once said glibly, "Bitcoin is either going to $0 or it isn't. If it isn't, then its scarcity will gradually drive the price up." So we have an asset that, despite the predictions of many doubters, won't die.

That alone wouldn't be enough for regulated asset managers. They need individual segregation of client funds, the assets must be held safely by a custodian, and they have to regularly report their activities to regulators. The crypto exchanges of 2017 for retail were not designed to do that.

In 2020 the picture is very different; not only are there well-developed crypto offerings from market entrants like Onchain, Gemini, and Anchorage. Traditional custodians like Northern Trust and Standard Chartered now offer institutional crypto custody.

Institutional demand has increased, but institutional-grade supply has too.

Consumer demand 🤓

Meanwhile, consumers, especially younger consumers, use fintech apps (e.g., Square) instead of their everyday bank and investment apps like Robinhood instead of savings accounts. Square, in particular, has responded to consumer demand to be able to buy Bitcoin and makes a sizeable percentage of all Bitcoin sold.

For a generation who have grown up during the financial crisis, fintech and crypto appear far more stable and secure than old institutions. Contrary to many traditionalists' belief, the main activity is not consumer day trading, but people buying and holding.  

When Square Cash card adds Bitcoin as a "cash back" style reward, consumers see that as so valuable because, unlike air miles, they can see how it impacts their long term finances for the better.

Even the staunchest critics of Bitcoin now have to accept it; crypto here to stay. It may crash, it may fall, but it will probably never die.

What happened to "Bitcoin is unregulated!" 🤔

Crypto is regulated. It can be fully compliant with all KYC / AML regulations, and most major jurisdictions have comprehensive guidance for crypto businesses. Most crypto businesses have registered with a regulator, and the industry has robust standards for managing risk that is more effective than just the existing regulations.

The reality of Bitcoin is most law enforcement prefer it to cash.  

Bitcoin has a global, searchable database of every transaction ever. Most exchanges and wallets store the identities of their verified customers.  

It is far easier to detect and report a financial crime in cryptoassets than in the legacy financial system. (I helped a tier 1 bank build their AML policy on crypto and remember the surprise in the AML leadership when it became clear how transaction monitoring works in crypto).

If the global financial system started to run on something that resembled crypto, we'd be much more effective at preventing financial crime and terrorist financing.

The big picture: Truly digital, truly global finance 💸🌍

Bitcoin is the first truly global, truly digital financial asset.  

🚦 Finance isn't digital; it is digitized.  Banks, asset managers, and exchanges had taken the trades that existed in paper and represented them with digital technology.  

Banks replaced your paper statement, with a statement on a website, with a statement on your mobile phone.  

The global financial system's inefficiency comes from poor abstractions as one decade's technology overlaid another.

🚦 Finance isn't global; it's globalized.  Banks managed international trade before the 1970s. Those processes were then digitized when SWIFT was founded in 1973. Digital messages could securely manage bank messages that were previously managed via phone calls.  

With each passing decade, the SWIFT network grew, and today, with its new API (GPI), up to 90% of payments can settle in as little as 5 minutes between member banks. But the problem is, these efficiency improvements are getting slower and slower.  Incremental gains in the financial system are not enough. We need a new one.

Finance wasn't designed to be natively digital, natively global.

Bitcoin just happened to be the first example of that. Since then, with the rise of Ethereum (and others), we see the building of an alternative financial system. A finance system that can be made backwardly compatible with the old world of regulation but a system capable of so much more.

Fintech moved us from Finance 1.0 to Finance 1.5 ▶

Today's largest fintechs, like Stripe, Square, or Chime, solved real-world consumer problems by taking cutting edge product design and applying creative problem solving to the existing infrastructure. By abstracting the infrastructure, Stripe made it far easier to accept payments on the internet. Thousands of tiny improvements that incumbents weren't making have transformed the experience of buying online or starting an e-commerce business.

Consumers can now get paid two days early. The cost of starting a business has reduced dramatically, and under-served communities now find they have better, digital, and real-time finance. But all of these new businesses are innovating around the constraints of the infrastructure.

Imagine what could happen if the infrastructure was designed to be digital?

Stablecoins, the internets new payment infrastructure 👛

Stablecoins as a topic is where Bitcoin was in 2017.  

In 2017 the regulatory mood music around Bitcoin was gloomy. Regulators liked "DLT" or corporate blockchains, but "not the currency." That is now changing.

Regulators are fans of CBDC (Central Bank Digital Currency) but not "Stablecoins" (especially those from Facebook).  

Sound familiar? I suspect that the same will happen; CBDC projects slowly advance and quietly achieve efficiency gains. Meanwhile, Stablecoins will become a better, global Fedwire / ACH.

Defi, the internets new finance infrastructure 🤘

Decentralized finance (or Defi) is finance with no single company or government in control. That's the sort of sentence that sounds terrifying to a 60 something politician. Defi started by replacing companies (like Coinbase) with software (like Uniswap) built and ran by a community. That software never holds (custodies) your asset; you always remain in control of that asset as the legal owner.

The code that drives this software is transparent and can be reviewed by anyone, and anyone with a wallet can access it. Without going too far down the rabbit hole here, this means anyone, anywhere in the world, can exchange assets or make a trade with just a smartphone and an internet connection.

Imagine banking without banks or exchanges.  Defi is even earlier, even scarier, and yet way more exciting. Engineers are creating investment products that passively "lend" your cryptoassets to other exchange users. Because these exchanges are in software and completely open, they can even string lending and borrowing together into a single transaction. These transactions can all execute near instantly.

Defi investments products can yield anywhere between 5% and 10% APY in the most passive strategies. These aren't savings products, but they are much more tempting to anyone with a Coinbase account than most savings products.

From Finance 1.5 to 2.0 ⏩

These truly digital, truly global assets and crypto networks are still early and confusing to use directly. However, when companies like Square and Robinhood use their design expertise, that problem is solved. In effect, consumer and B2C fintech can act as a bridging technology between the old and the new infrastructures, much like a browser capable of rendering the latest web standards.

My sense is we're about to witness a convergence between "Fintech" and "Crypto" in B2C.  

At the infrastructure level, companies like Stripe have been wary of crypto because of the regulatory pressures, but those pressures are starting to change.

This year, the OCC granted charters to crypto businesses to become banks and allowed banks to hold cryptoassets on behalf of their clients. This is a keystone moment of legitimization for an asset long associated with drugs and the darknet.

And the opportunity for the new infrastructure is not just more investment class assets.

The internet demands truly digital, truly global finance. 🦄

Change is slow until it's sudden. The internet has made us more connected, and yet society is in its difficult teenage phase in dealing with it. We're searching for the right monetization and governance models for a world without borders.

We're unlikely to see a significant change in the world order any time soon. Still, as western governments keep printing money and consumer trust in those institutions diminishes, the crypto alternative looks ever more appealing.

Crypto is a macro-hedge against government incompetence, and in the pandemic, there is no shortage of that.

Fintech itself is an easy on-ramp to the new global financial infrastructure, and change will be slow until its sudden.

🍣 Takeaways

  1. Crypto has arrived and is legitimate

  2. Fintech is a 1.5 bridging technology and on-ramp

  3. Stablecoins and Defi will create an alternative global financial infrastructure (slowly and then suddenly)

  4. Some smart legacy financial institutions are already figuring out how they play in and legitimize this world

4 Fintechs 🤑

1. Cledara - SaaS-based spend management

  • Managing and tracking SaaS usage is hard, so Cledara built a platform that does it for you.  It includes unlimited virtual cards and spends approvals. Cledara claims its customers reduce software spend by up to 30%. The team is founded by serial fintech operators and is live in 20 European markets. The spend control space is super crowded, but Cledera has an excellent wedge product and momentum.

2. Joro - Track the carbon footprint of your spend

  • Plenty of people would like to be better for the planet but often don't know how to. Joro works by linking your everyday spend to the estimated carbon impact. They're not the first to do this, but Sequoia-backed them (so it must be a matter of time to massive IPO 😉).  

  • Seriously though, I love these apps, but I don't get why they aren't baking in an "auto offset your spending" feature. If a business like Ecologi had an API, these apps would be much better. 

3. Onepipe - Plaid for Data and Payment APIs in Africa

  • Africa is in the midst of a fintech boom, with Paystack, Flutterwave, and many more fintechs solving real customer problems. Having lots of new APIs is awesome, but Onepipe aggregates the payments APIs, fintechs, and the banks directly.  

4. Avenue8 - The data-driven real estate broker 

  • The home buying process is beyond broken and protected by lazy incumbents who profit from the inefficiency. Often brokers, agents, lawyers, and surveyors have little incentive to make life more digital and slicker. Avenue8 is the latest in a line of Proptech players attacking the problem with a mix of humans and data. Avenue8 is a platform that helps manage the agent/client relationship digitally. Proptech will be hot in 2021.

Things to know 👀

  • Poynt provides Square-like POS terminals, e-commerce, and mobile payment acceptance. Poynt has 100,000 merchants processing $16bn of GMV. For GoDaddy, this bakes in commerce as an offering to add value to its merchant customer base.

  • 🤔 My Analysis: Anyone who isn't Shopify, PayPal, or Square is now making a play to become more like them. Shopify has shown how payments can drive revenue and growth for their merchants and the platform.

  • 🤔 My Analysis: Being an "also-ran" in the e-commerce space is a massive opportunity, but I wonder how much value there is for businesses with more of a nexus, say in Latam or Europe.

  • Fifteen months after launching, Accel, Greycroft, and Lakestar are leading a significant growth round (that also includes Tony Hawk). Public sees "community as the moat," Public didn't see a spike in growth in March when the stock market volatility hit but has instead seen a steady 30$ MoM growth rate. 75% of their community are long term investors, and only 3% speculate.

  • 🤔 My Analysis: Public.com is the anti-Robinhood. Launching things like safety labels or separating "long term investments" from your main window in Public.  The app drives engagement through learning and community more than day trading.

  • 🤔 My Analysis: To be fair to Robinhood, their "learning" platform and the youtube community that exists around it is part of what made democratizing the markets so successful, but Public has taken that a step further. This focus on community has also worked for Freetrade in the UK. My sense is Public will be around for a long time and do very well.🍣 BONUS FOOD: This episode of Fintech Insider discusses how a community can play a role in investing with the co-CEO of Public Jannick Malling and Adam Dodds, CEO of Freetrade.  🍣

  • Ramp is the corporate spend control card and service with some elegant features (e.g., slack based spend approvals). Ramp is in a crowded space with folks like Brex who are well funded and going deep into industry verticals.

  • 🤔 My Analysis:Ramp so often gets little details right.  Thousands of tiny 1% improvements in the corporate spend experience.  For example, the Ramp vendor management portal allows companies to track "anticipated spend" across the business and control expenses before they happen.

  • 🤔 My Analysis: Even with the 800lb gorilla out there (Brex), the common enemy is corporate cards that are so incredibly broken.  

  • 🤔 My Analysis: Ramp makes most of its income from interchange fees, and I wonder what would happen to the US Neobank boom if we ever saw an interchange fee cap.  

  • Before this announcement, most partner banks who supported the Neobanks had a higher administrative cost of holding the Neobank customer's deposit than the cost of maintaining deposits for their customers.  

  • 🤔 My Analysis: Typically, partner banks held their client (the Neobank) funds in an omnibus or client money account; funds are protected and can't be used for lending by that partner bank. This change may open the door for partner banks to use those funds for lending. 

  • 🤔 My Analysis: Over time, I wonder if this opens the door for the partner bank to "push" lending up through the Neobank, who could originate the loan and distribute it back to their partner bank.  (Which would solve their "we can't lend in this market" problem too).

  • 🤔 My Analysis: So much of the Neobank market relies on these tiny banks in sub $10bn assets because of the Durbin Amendment. Companies like Stonecastle help arb deposits across several banks, but I wonder when the big banks might be able to step into this fold.

Good reads 📚

  • Student debt has increased in good times and bad. It is leading to borrowers averaging $393/month repayments, delaying homeownership, and impacting credit history from late payments. Tuition price is rising significantly above inflation consistently. While this means a higher % of the population reaching higher education, student loan defaults continue to increase. Crucially, because it's a government set loan, there is no upfront assessment of the borrower’s ability to pay.

  • We see the rise of the "Income Share Agreement" (ISA); for example, with Lambda school, once a student reaches a $50k salary, they share a % of their income with a cap on the total amount repayable. The alternative, canceling the debt would help some people now but wouldn't help with the long term structural forces that created the problem.

  • 🤔 My Analysis: Income sharing is attractive, it reminds me of pipe.com and how they're taking a % of sales, and it is linked to data. There's an interesting startup idea that a mashup of Lambda style "income sharing" and pipe.com style revenue financing. (Holler @ me builders).

  • Pitchbook reported in Q3 2020 that fintech investment totaled $8.9bn, a massive 17% increase QoQ. However, this was over just 414 deals, the lowest since 2017.

  •  The USA has over 5,000 banks, of which the vast majority are community banks, but these community banks. They effectively serve the long tail and niche's, especially when geographies had their niche industry (e.g., oil or agriculture). But these community banks are still defined by their geography in a digital age. While we see digital megabanks (e.g., Chime) and digital "regional banks" (e.g., Daylight), will we ever see a digital niche community?

  • 🤔 My Analysis: It's worth reading this post for Alex's diagrams alone; he brings real mental clarity to a concept I've been trying to nail for a while. 

  • 🤔 My Analysis: On the internet, niche's are massive. We may see tiny neobanks as the costs come down, but they're more likely to live on top of existing fintechs. Imagine a school with its own "fintech app" for campus, courses, classes, and parents. You could imagine apps with less than 10k users, but the creation of those would need to be near-instant and near-zero cost. Like a Shopify business.

Tweets of the week 🕊

That's all, folks 👋