Fintech 🧠 Food 22nd Nov - Google Pay's Plex flex. PNC acquires BBVA, DOJ greenlights Finicity & Mastercard and why community is the future of banking

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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This week team 11:FS released Episode #2 of Decoding BaaS. The team did an incredible job, and you should watch it. It features insights from folks at Bond, BBVA, Chime, Galileo, Jack Henry, Marqeta, Synapse, and many more!

The week that was 📅

All the things happened this week.  Google, Affirm files for IPO, PNC acquires BBVA's USA business, the DOJ greenlit Mastercard's acquisition of Finicity. And that's before you get to the exciting fintech's popping up or Marqeta partnering with Uber. Oh, and a16z just raised another $4.5bn and is pointing a good chunk of that at fintech. You thought fintech was big before? You've seen nothing yet.

Possibly the most significant development this week is Google Pay's upgrade (fully unpacked later).  Google now has a better consumer banking experience than your bank (probably), and with Plaid integration, it already works with your bank as a PFM at least. These experiences virtually render the role of having a branded bank app a sort of affinity product. The low hanging fruit for mobile app experience development has now gone. Most big banks have pretty decent apps, to be fair to them, but the game just changed.

On the internet, niches are massive. 📝

There are a few ways for banks to compete with the big-tech experience.  One is brand, which banks can do with older customers, but maybe not the younger generations. Another is product, again banks have an edge here, but this will erode over time as fintech's continue to eat away at the product set. The most defensible is managing regulated activity and risk, which as banks lean into becoming platforms makes sense.  But perhaps the overlooked opportunity is community.

When Greenwood, a bank by and for the Black community, announced, my first thought was you'd never see this as a spin-out from a big bank.  

This week, Daylight (formerly Be-Money), the bank by and for the LGTB+ community, broke cover and announced partnerships with Visa and Marqeta. Daylight is an example of building with a community, not for the community. Daylight is baking the community into the process of creating the business with empathy all the way through. The 30m Americans in the LGTB+ community have on average higher banking fees, are less likely to gain mortgage approval, and face hidden costs (like living in expensive urban areas for safety).  These challenges are something big bank processes are just not designed to or able to cope with.

Something as simple and inclusive as allowing a customer to use their true name is, in theory, something big banks support. Putting your true name on your card seems great until you bump into all of the small problems that cause.  How does the bank credit score a person's true name if that's different from the name they used when KYC was performed?  How does the bank update all of its CRMs, fraud systems, and risk systems across its whole value chain? 

It can't. 

So when you end up with is a card with a true name but a bank that is incapable of working with it.  Meanwhile, the 30m LGTB+ and their $1trn of buying power are looking for an alternative.

Banks may want to be more inclusive; they have talented staff who want to do the right thing, but getting it done is culturally and technically near impossible. There are typically two types of internal objection.

1. That's too hard/expensive

2. The rules won't let us

1. "It's too hard/expensive."

Some of the cost figures I've seen for seemingly simple changes inside banks would astonish you.  My all-time favorite was someone I know was working to create a "kids account" inside a big bank's existing web experience.  They wanted to see if they could re-use the bank's existing joint account capability. There'd be some terms and conditions changes, maybe some new rules (the kid's card would have limits, etc.). Want to guess what the work estimate was?

Go on, guess.

£18m ($~25m) and FIVE YEARS to implement.  

FIVE YEARS. Five, actual years.  What's scary is that this sort of thing isn't uncommon (I can feel those of you reading this who work in banks with me right here). A bank may want to do the right thing by its community, but it's such a slog. So instead, you see them throw cash at communities, more of a hand out than a hand up.

2. "The rules won't let us."

My all-time favorite bit of banker twaddle. Usually said by someone who either hasn't read the regulation or is lazy. Here is another story from behind the scenes in banking. A team was working on a mobile payment app that required both a customer's mobile number and bank account information to make payments work.  A zealous data protection lawyer decided this was the hill they were going to die on. They believed it was excessive personal data to require both the phone number and banking information to facilitate payments to people based on their mobile number.

You may be wondering, how do you make mobile number based payments work without the mobile number or account information. You'd be right to wonder, but that didn't matter. The issue was getting escalated to the top. It took six months to resolve this issue, and a senior exec had to find $10m of risk budget in the unlikely event the bank got sued for a data protection issue.  Instead of understanding how to protect the customer, the internal atmosphere is adversarial in these situations.

Daylight, Greenwood bank, and the Neobanks have faced similar challenges and are subject to the same rules. They won't always get it right, but they have a good reason to try. This culture of orienting around your community is something smaller regional banks historically understood.  These new digital community-driven banks have an opportunity to serve the market that Google Pay might miss and the megabanks can't.

Neobanks build their tech on 3rd party specialists in newer technology and have a culture of working together to solve customer problems. This culture creates a velocity in product development. This velocity becomes a power law.

Mega corporates have spent nearly $1.1trn on digital transformation and wasted $900bn of that. Imagine if 90% of your spending was wasted? You'd give up. The big banks are still just about big enough to get away with it. But as the fintech velocity power-law starts to kick in, banks are caught between big techs and specialists for communities.

The neobanks that win will build a moat by serving that community with products the major brands can't or won't. From there, they get permission to cross-sell.  

The trick, it seems, is finding a massive niche.

4 Fintechs 🤑

1. Juni - Banking for e-commerce businesses

• Juni has built an account with features targeted at e-commerce businesses like cashback on ad spend, cash flow management, and liquidity management.  There are many solutions for small companies, but there's an elegance to how Juni has thought about integrations, dashboards, and a spend card. Brex has proven this type of solution can be popular. Juni built on Railsbank and a patchwork of fintech vendors.

• Juni made me think of if Shopify balance was available to non-Shopify merchants.  It's playing in the right space. It can potentially use the data (from ads, invoices, and revenue) to do a Clearbanc / Pipe lending play to these businesses.  Juni raised a 2m Euro seed and could be one to watch. 

2. Lemon.Markets - Drivewealth for Europe

• Lemon.markets offer a brokerage as a service to enable its customers to provide stock trading to their customers without setting up an infrastructure.  Neobanks or non-banks can now build trading experiences in their product. Interestingly this spans simple retirement products, ETFs, or active trading products.

• Drivewealth has customers like Revolut, Hatch, and Moneylion. Neobanks (and large global banks) are searching for profitability. Trading and investment products have been a bright spot during the pandemic, so solutions like Drivewealth and Lemon.markets could serve both incumbents and challengers.

Also, excellent name choice. 

3. Trust & Will - Online end of life planning 

• 68% of Americans don't have a will, and around 60% in the U.K. If the worst happens and you die without a will, there are many disadvantaged groups (e.g., unmarried couples, carers, and civil partnerships). If you've ever known someone who has had to deal with a relative's estate, it can be extremely stressful—vast piles of paperwork, costs, and an unclear process.  Trust & Will simplifies this whole process with simple online processes for setting up Will's and Trusts.

• The market for over 50s financial services is massive and underserved. The target customer for this kind of product is in their 50s and historically would have seen a financial advisor and possibly lawyer. In COVID-19, this just hasn't been realistic. With over 160,000 customers to date, and Will & Trust is an example of the type of digital-first business playing in the "retirement/estate planning" space that banks used to only happen in branches.

4. Doller - Autopilot budgeting for "Financial Independence, Retire Early" (FIRE)

• Doller's mission is to close the wealth gap for Gen Z by automating finances with standard features (e.g., roundups) and some nifty ones (e.g., save $1 every time you exercise with Fitbit). Doller is targeting the FIRE community. The FIRE movement on Reddit has been around for some time.  If personal finances had a Crossfit movement, FIRE would be it.  The FIRE community has the concept of "a number," the amount a person needs to save to retire (or become independent of salary income).  

• Doller is leaning into a cultural awareness in Gen Z that to get anywhere in life, they're going to have to optimize their finances.  Unlike their parents, Gen Z is unlikely to benefit from an ever-rising economy and standard of living. They've also launched "Doller sheets," which is a google sheet for personal finance. That caught my eye; Doller can build a community by going beyond the PFM app into the Crossfit companion for finance. It's hard to tell, though, if these community things are billion-dollar businesses or just good businesses.

Things to know 👀

1. Google Pay gets a significant upgrade with Plex (💪)

•  Google Pay is now the all in one money app. It has tap-to-pay, P2P payments, personal finance aggregation (with Plaid), customized offers, and even "full banking services."  Google Pay has elegant features like allowing google to crawl through photos and email to find receipts for finance tracking. By 2021 Google will have a handful of bank partners to offer full online checking and savings inside Google Pay (A service called Plex).  

• Square Cash, PayPal, and even digital banks like Ally just got a new competitor.  Google says it will "not share your transaction history for ad targetting," but it gives users the option to have three months of transactions analyzed to get much more relevant offers.  The new insights tab takes cues from google's data and search superpower. For example, you can search for transactions in natural language (e.g., "Mexican restaurants" or "shirts"). This isn't as deep as some of the new PFMs but runs circles around what most regional or community banks can do.

• 🤔 My Analysis: Google Pay is slowly becoming a super app.  You could imagine how Google Maps + Google Pay + Assistant could help you find a local Chinese place in a new city and order food from a verbal or natural language search.  

• 🤔 My Analysis:  The battle between this and Apple Pay will be interesting.  Google appears to be coming bottom-up by partnering with smaller banks. Apple went big with Apple Card and Goldman.  Apple Pay and Card may have more active users and a head start, but the race isn't over.

• 🤔 My Analysis: Smaller banks who've struggled to offer cutting edge digital now have a compelling alternative.  If they focus on relationship products, they can essentially leave the day to day app development to Google. When you combine Google Pay with GCP, Google has a compelling narrative for smaller banks' cost reduction ambitions.

• 🤔 My Analysis:  Larger banks have more to lose here, especially given Plaid integration.  If Google Pay can become a meaningful PFM and get good regional bank coverage, why would you need your big bank app anymore?

• 🤔 My Analysis: Unlike Google Maps or Gmail, Google Pay has almost no shot of making it into the Apple ecosystem, and Apple customers are crucial early adopters.  Arbitraging this ecosystem war may give banks a window to find their niche in the consumer landscape.  

2. PNC acquires BBVA

• PNC becomes the USA's 5th largest bank and becomes a national bank with this acquisition.  PNC is gaining 637 branches across the South West, which, combined with its existing North Eastern presence, gives it access to 29 of the 30 largest markets in the U.S.

• This account from Shamir Karkhal of how PNC and BBVA shaped his path as an entrepreneur is well worth reading. Simple (one of the first Neobanks) was inspired by the PNC virtual wallet before later acquired by BBVA.  Shamir wonders what this will mean for Simple, Azlo, and the BBVA Open Platform (arguably, other than Goldman, the most well-known bank as a Service offering from a large bank USA).

• 🤔 My Analysis: PNC has a bit of JP Morgan about it. Traditional, well run, and acquires well.  If the banking business model is like the movie Waterworld with Kevin Costner, JP Morgan and PNC would probably find the high ground.  What I mean by that is, the best banks can continue to grow by being better than everyone else in a dying market.

• 🤔 My Analysis: Stories like this PNC one remind us in fintech land that banks aren't going to disappear any time soon, but those banks leave massive opportunity on the table. The banks that are profitable and growing are also the best placed to become platforms. If they don't, others will. Like global warming, that might not threaten current management's lives but is a massive risk for the species. So it may be worthwhile if those banks have a "get off the planet" strategy. 

3. Affirm files for IPO

• With more than 6,500 merchants, 6.2m users, Affirm hit profit for the first time in Q2 and Q3. Affirm's Q3 revenues were $173m and in Q2 turned a $35m profit. The S-1 also showed that Peleton had been ~30% of all GMV during the lockdown. Holy wow.

• 🤔 My Analysis: The UK BNPL conversation involves many more risk and regulatory concerns than the U.S. one.  Klarna has received quite a bit of negative press for encouraging consumers to take loans without always being clear they have bought a loan. There are also questions about the effectiveness of Klarna's affordability checks, given its loan write-offs are around 5% compared to around 3% for most banks. Affirm hasn't given detailed stats around its loan losses, but early rumblings suggest BNPL could be the next fintech consumer protection issue.

• 🤔 My Analysis: FWIW, I'm a fan of BNPL. For merchants, BNPL increases conversion and increases GMV, which is the ultimate no brainer. In e-commerce, BNPL allows consumers to "try before they buy" and manage delivery risks like "this doesn't fit, and now I have to battle the merchant to send it back."  These products, when done right, are very consumer-friendly.

4. DOJ greenlights Mastercard's Finicity Acquisition

• Mastercard announced in June its intention to acquire Fincity, which can to help Mastercard strengthen its open banking services.  Finicity has partnered more directly with banks like Wells Fargo, JP Morgan, and Capital One. AKA, the banks that aren't huge fans of Plaid.

• My Analysis: Mastercard has a "Multi-rail" strategy (look at their moves in Europe around A2A), but it's also managed it's positioning with the banking sector well.  By leaning into being multi-rail, Mastercard doesn't appear to be preventing a new payment rail from emerging. It's also smaller than Visa, so it's hard to argue they could abuse their market position. Still, overall I suspect all of this DoJ activity will bring forward card networks being multi-rail.

Good reads 📚

1. How Credit Card as a Service will shape the future of the U.S. Credit Market

• Dov Marmor Railsbank COO unpacks CCaaS. In short, it's "Banking-as-a-Service" but for credit cards.  Create a credit card, embed your app's experience with bank sponsorship, credit line, tech stack, and processing all in one place. CCaaS is fundamentally different from the "Co-Brand" credit card business (e.g., Macy's or Amazon). Co-brand cards are complicated, expensive, and require the brand has to adopt the bank's user experience.  

• 🤔 My Analysis: I covered the Railsbank raise a little last week, so I won't hit too much depth here other than to say I can see big brands getting their teeth into this.  If a bank offers a co-brand solution today, they could dramatically reduce their sales and distribution cost by partnering up with a Railsbank (or Deserve).

2. a16z Verticalising banking

• Anish writes: "In a world of increasingly generic product experiences (everyone builds on the same infrastructure, after all) and rising acquisition costs, fintech companies are pursuing a marketing advantage through vertical banking: services tailored to specific customer communities."  But wonders what the long term moat for this sort of business and points out the vertical neobanks need to offer more value than a generalized neobank could

•  🤔 My Analysis: Another moat is maintaining connectivity to the community.  Come back to Daylight, other Neobanks can copy something like the true name feature, but other Neobanks wouldn't think of the next thing and the thing after.  

Props to the a16z team; I'm a big fan of how clearly they articulate all of this stuff.

3. Chime is dominating digital banking and all of banking

• Banks used to compete on price or affinity, but Chime is building a moat in utility. Chime gives users early access to their money, goes overdrawn without fees, and helps build credit scores with their "credit builder card."  Chime leads with one or all of these features in its marketing because it knows that's creating user adoption.

• Ron's big takeaways for community banks stand out. Learn from Chime, find that killer "hook" that isn't just "we have great service."  Community banks can rely more on partnerships and fintech's and need to stop thinking about digital as a channel and start thinking about it as a behavior.  

• 🤔 My Analysis: Chime built these features because they understood their customer problems and manufactured better solutions. Banks will look at Chime and think, "oh, but they're not in the community," "we have better rates," or even "they can't make that segment profitable." Bankers do this a lot, lie to themselves about why they're safe.

• 🤔 My Analysis: These neobanks don't have to make the assumptions older banks do (It's too hard, and the rules won't let us), and that is the Neobank strategic advantage.  Community banks may not need to own or build a digital experience in the future with services like Google Plex arriving. For community banks to differentiate, the clue is in the name community.  

Tweets of the Week 🕊

(🔥 in the threads this week, be sure to follow a few of them)

That’s all folks 👋