Fintech 🧠 Food 24th Oct 2021 - Bitcoin ETF, Facebook launches Novi (at last), and are we in a Fintech bubble?

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 8,770 others by clicking below, and to the regular readers, thank you. 🙏

☀ gm. Happy Sunday from Las Vegas.

I'll be at Money 2020 for the rest of this week and am excited to meet all of you (especially if you want to build something new in Fintech on 11:FS Foundry, you can reply to this email or catch me at [email protected] ).

This week Empire Fintech invited me to moderate a panel debating this topic with some incredible speakers. The best thing about being a moderator is you get to hear some fantastic perspectives and then try and repackage all of those ideas into a narrative for your weekly rant. Huge props to everyone on that panel.

🔌: ICYMI, 11:FS announced a partnership with Google this week, and we released a podcast ep "every company is a crypto company." Be sure to check them out.

Weekly Rant 📣

Are we in a Fintech Bubble?

N26 just raised $900m (at $9bn) and became Germany's second-largest bank. Brex (founded in 2017) just raised at a $12.3bn valuation. FTX (founded in 2019) raised at a $25bn valuation. PayPal is buying Pinterest; 8 of the top 13 private companies are Fintech or Crypto. 1 in 5 VC dollars is invested in Fintech.

So are we in a bubble? ... 👀

But first, the duck test.

The duck test. 🦆

A duck test is a form of reasoning. Usually, a person can identify an unknown subject by observing some characteristics. 

The classic example goes: 

Then in 1728 Jacques de Vaucanson invented a mechanical duck that could quack, walk and eat food a bit like a duck. The point being abductive reasoning is not always accurate. The temptation when we see crazy valuations is to cry "bubble!" But the reality is rarely that simple.

(PS. Does anyone else love that the duck test reasoning is called abDUCtive, or just me?)

Secular trends 📈📉

There's a lot of stuff happening outside of the Fintech industry that is helping to drive its growth.

The macro shift to digital: Zoom out of your body and observe what you're doing now. You're either on a phone or laptop. Everything that was analog is still becoming digital. The analog forms of product manufacturing require parts, labor and are expensive to distribute. If I want to create a rubber widget, I have to source it, manufacture it, and deliver it to you, in finance that takes paper money, branches, and paper contracts.  Expensive.

The first step was to digitize the paper processes. When digital technology arrived, analog businesses used the new technology to reduce their cost of distribution. Same products, same business model, fewer branches.

The real breakthrough of Fintech is to bring new products and new business models that are cloud and mobile native. Robinhood has lower costs (because it's digital-only) and pioneered "zero commission" trades as a business model. Square charged customers for a real-time P2P payment via Cash App and built a way better customer experience.  

New cost model + new business model + new distribution = truly digital. 

Digital allows everything to be real-time (not 2 days later). Digital means we can apply intelligence to your context (you're standing next to a friend, do you want to split a bill with them). In the truly digital manifesto, Jason (my co-founder) calls this "Digital RICHES."

The pandemic shunt: When the pandemic hit, we were suddenly all locked in. Bank branches were shut, paper money was unclean, and we all got a little bored and went head first into our devices.

This increased the average consumers' savings, allowing them to buy risky stocks as entertainment (the consumer went "risk on"). It drove people to try digital account onboarding, and in many cases, stimulus checks were delivered by Fintech apps.

Money printer go brrrr: Central banks printed massive amounts of money (best summarized by the meme "money printer go brrrr") in response to the economic downturn. 

Central banks gave the consumer stimulus checks (which allowed the consumer to plow more into stocks), but they pumped the vast majority into capital markets. Central banks do this by buying government (and sometimes corporate) bonds. Investors sell their bonds to this massive buyer (the central bank) and receive cash (or cash equivalents).

BUT, because they received cash, they need to put that capital somewhere to deliver a return (yield). So the institutional investor goes "risk-on," too. They abandon bonds and allocate to higher growth stocks (like tech) or possibly even more volatile assets like Crypto. 

The financialization of everything: This canonical work by John St Capital describes a world in which alternative assets (like art, wine, and now even NFTs) are available to consumers. Collectibles, real estate, and Crypto are now much more available and often via a simple mobile-first interface. If there is some movement or exchange of value, it is increasingly accessible.

Outside of that, Gen Z is growing up in a world with high student loan fees, historically low yield savings accounts, and in the shadow of the global financial crisis. To this generation, speculation and day trading meme stocks isn't gambling; it's necessary.  Brands like Square in the US or Kuda in Nigeria have connected culture to money and redefined what a "trusted brand" means in finance to a whole generation.

Public markets earnings growth: The big Fintech public markets beasts keep crushing earnings. PayPal and Square benefit from growth in their merchant business, but they've added BNPL, Crypto, and now lending. And this is all driving increased engagement, transactions, and profitable revenue.  Profitable revenue.

You put these factors together, and you see investors with capital to deploy, with an absolutely massive TAM, public markets showing growth, and massive consumer and market adoption. The growth can't be just speculation.

The local Apex 🗻

With long-term low-interest rates, investors searching for yield, it is no surprise they've allocated heavily to "growth stocks" like Fintech companies (in both public and private markets). VC firms have raised massive funds and deployed a significant percentage of that to Fintech.

The supply shock and inflation could see interest rates rise, and eventually, that VC cash will be deployed (especially at the pace it is being deployed!) As interest rates rise, investors could become more cautious. We may also see businesses propped up by VC cash, with high user growth, scrutinized more for profitability (especially lending companies).

Post financial crisis, the peer-to-peer lending companies that were darlings at their IPO took a significant hit. They couldn't fund their lending, so revenues and profits fell dramatically. Last week, Matt Burton at QED pointed out that lending always looks like a great business in a bull market because you are literally giving people money and then selling that loan to investors. But when investors have less appetite for loans, there's no more money to give out, and the revenue dries up. If markets turn, lending businesses (e.g., BNPL and "embedded lenders" could be in trouble unless they've partnered super well).

People tend to overstate the pace of change and understate the impact. 🏃‍♀️

If we are in a local apex or in a bubble, then capital is being deployed into many industries where revenue is yet to arrive. If interest rates rise briefly, banking will be a nice place to be again, and we could see them sweep up some of the Neobanks that have built large user bases (but little profit) through M&A.

But the secular trends aren't going away. It's now cheaper and faster than ever to build a Fintech business because many B2B providers have emerged. There are still massive consumer and social problems to be solved in financial inclusion. Checks and ACH still dominate SMB payments, and Fintech has barely made a dent in global annual banking revenues.

Perhaps a correction will also bring some consolidation. Do we need 35 BaaS providers? Probably not, but 4 or 5 leading players feel realistic per major market or region (as we've seen in payments for decades, many multi-billion companies can exist)

Fintech is still 1% finished.

My thesis is that Fintech is 1% finished. We're only just heading into real estate, corporate banking, and we've barely touched proper "wealth management" or capital markets.  

ST.

4 Fintech Companies 💸

1. Level - Loan re-selling platform for Fintech lenders

• Level allows Fintech and non-finance businesses who are originating (selling) lending to quickly and simply trade their loans in return for cash from investors.  A lender can ensure they have the spare balance sheet to return to lending by trading the assets. Level provides a modern, clean UI as well as access to capital through major lenders.

• The move to embedded finance has allowed Fintech and non-finance brands to drive new sources of revenue from payments and now lending. Lending is significantly more complex than payments. The money to lend has to come from somewhere, and unlike banks, most businesses can't just make it up out of thin air. So typically, they take out a credit facility (with a bank like Cross River or Silicon Valley Bank). Once that credit line is used up, they can't lend until the loans are repaid or sold to someone else.  If you're not deep in banking, selling loans can be time-consuming and costly. What level does is really simplify that process and bring a lot of prospective loan buyers to the table.

2. Frankie One - Alloy for Australia

• Frankie One provides a platform to manage every step of customer onboarding, from checking identity documents, performing full KYC / KYB all the way to ongoing monitoring and "persistent" KYB.  Frankie One customers include major banks like Westpac and Fintech companies like Afterpay and Volt. 

• The "horizontal platform" for all forms of customer onboarding and ongoing monitoring is a thing now. My gut says Alloy is unlikely to expand outside of the US any time soon (I could be wrong!), but its home market is so very large.  Frankie One has some impressive customers, and Australian Fintech is gaining a presence on the global stage. Especially as Aus starts to roll out its super open banking meets GDPR rule set (the consumer data right), which is much broader than just banking data, but the multi-industry (which Alan Tsen covered here for 11:FS Unfiltered). These services (for now) go wide in not many Geo's, or do a lot less but in more Geo's. M&A may follow.

3. Brass - Mercury for Nigeria

• Brass provides payments, invoicing, cash flow forecasting, and team collaboration as a Neobank for SMBs. Brass comes ready to integrate with tools like Slack, Quickbooks, and Zapier. Brass has no monthly fees or sign-up costs. Where Brass looks different to most North American and European Neobanks is they also offer advances on invoices.

• Nigeria has a vibrant and growing consumer Neobank ecosystem, but its entrepreneurs are still underserved by SMB offerings. Other services focus on a specific area (e.g., payments or cash flow), but Brass believes the account experience is the core.  In the US and APAC, we've seen that both of these worlds can exist, and different companies will pick various Fintech tools. SMB Fintech is a big TAM no matter where you look.

4. Bree - Chime for Canada

• Bree is aimed at the 11m Canadians who live paycheck to paycheck. Bree offers up to $100 as an advance to prevent falling into overdrafts that are repaid when the customer's paycheck lands.  Bree doesn't have mandatory fees but allows its users to "tip" Bree (and gives them a complete choice over the tip amount). Bree also comes with many of the standard Neobank features like budgeting and spend management.

• Bree uses open banking to check when employers are depositing paychecks in their customer's accounts.  I find it striking that when open banking players (like Railz or Flinks) emerge in a market, consumer innovation is never far behind.  Bree doesn't perform a credit check for the cash advances and makes its revenues almost entirely from "tips." This has worked well for folks like Square and Money Lion, but something about tips and no credit checks feels like it could head where BNPL has in the UK; there's a significant risk of unintended consequences.

Things to know 👀

1. Paypal rumored to be acquiring Pinterest

• Paypal is rumored to be in late-stage talks to acquire picture storage and social sharing platform Pinterest for around $70 per share. CNBC noted that competitive pressure from businesses like Shopify has pushed PayPal to move higher in the e-commerce funnel. Shopify has launched its Shop Pay button product and partnered with BNPL provider Affirm to increase its attractiveness to merchants.

• 🤔 Is discovery the key to becoming the Super App?  BNPL providers have increasingly proven consumer discovery can be powerful in e-commerce to drive new and repeat purchases. Affirm, and Klarna reactivates consumers with their App, and I suspect it's a big part of why Square wanted AfterPay. PayPal currently has no "discovery" capability.  Owning discovery means becoming much more valuable to the merchant as a provider to drive new revenue. Owning discovery also means significantly deepening the touchpoints with the consumer and collecting more data about their purchase intent.  (This from Dan at CoreVC is a good way to layout the competitive landscape)

• 🤔 Where does Pinterest fit?  This piece by Jareau Wade points out Pinterest users show significant purchase intent.  77% of weekly active pinners have discovered a new brand or product on Pinterest and are 7x more likely to purchase a product they've saved. If e-commerce players are moving down, it's not surprising to see Paypal moving up the funnel. As Jareau points out, Pinterest is far from perfect, but it's sitting out there, likely able to drive a lot more top of the funnel than it is today to a platform like Paypal. 

• 🤔 E-commerce discovery is part of becoming the Financial "Super App."  The past week several people have joked, "e-commerce is Fintech now," but also it kind of is. They're becoming inseparable.  There was historically a big break in the process at the payment. Where advertising giants like Google and Facebook could drive attention and intent, all that data got lost at the payment.  Consumers went into a black hole, and reactivating them was down to how much data the merchant themselves collected for loyalty and reactivation.  Data drives a flywheel when pushing the entire funnel (discovery, consideration, conversion, loyalty) into a "super app."

2. The first-ever Bitcoin ETF launches

• The first-ever Bitcoin ETF (BITO) saw a launch this week, briefly spiking Bitcoin to a new all-time high of $66k.  This followed sentiment from famous traders like Paul Tudor Jones (and JP Morgan analysts), suggesting Bitcoin is a better inflation hedge than gold. 

• 🤔 ETFs (exchange-traded funds) expose Bitcoin to a much larger market than the Crypto industry had historically.  Everyone from pension funds to consumers can buy the Bitcoin "ETF" through their existing brokers or 401k. This is another crucial milestone in "mainstreaming" Bitcoin.  Consider how different having a regulated ETF is in the US from China announcing it is "banning" Bitcoin every 3 weeks.

• 🤔 The launch of an ETF got delayed for what felt like forever but was always going to happen.  Having a large provider (like Proshares) gives the regulators confidence that the due diligence will be done.  It's also important to note, this ETF is based on Bitcoin futures, traded on the CME (Chicago Mercantile Exchange). After nearly a decade of due diligence into Bitcoin ETFs, this is as "safe" as it gets from a regulator's perspective, a regulated exchange with a regulated market actor. Within days we saw the second ETF launch, and now, no doubt more will follow. I'm curious to know when we get Ethereum based ETFs. Like Bitcoin had a long journey, an Eth ETF feels inevitable but not imminent. 

• 🤔 It's an accident of history that regulated investors can't access spot markets.  The CME did the hard yards early in Bitcoin's lifecycle to build out infrastructure for a regulated futures market, and the CFTC (Commodities and Futures Trading Commission) came out quickly to declare Bitcoin a "commodity." Bitcoin got regulatory certainty by being both a commodity and a futures product offered on a regulated exchange.

• 🤔 The reason we don't have spot market access comes down to two core issues that the Crypto industry has yet to fully tackle.  Firstly, wash trading (AKA colluding to raise the price of something). What is to prevent someone from creating multiple accounts on an NFT site and buying and selling an asset between themselves to bid up the price if it has no KYC service to prevent that? Wash trading is absolutely happening in Crypto, especially outside of the US. Until that changes, the spot market looks "unsavory," and US-based exchanges arguably have little control over that issue.  

• Secondly, "consumer protection."  If wash trading occurs and there's a big price swing, what's the framework that prevents consumers from losing everything they have? Some would argue historic "consumer protection" = "no access to high return products" and lack of financial inclusion. But the point for regulators is that a framework exists, and that's often more important than it is effective.  The Crypto industry needs to speak with one voice and have one framework for consumer protection to get mass market spot products on regulated exchanges.

Quick hits 🥊

• Facebook's Crypto wallet Novi finally launched. Facebook has delayed its Diem stablecoin (formerly Libra) and instead adopted USDP as its core stablecoin asset. for Novi's launch.  🤔 Facebook has gradually walked the ambition back from its play in Crypto. Originally it was a non-custodial wallet, using a currency backed by a basket of assets. Then it was a US Dollar stablecoin; now they've adopted someone else stablecoin. Lesson.  Central banks really didn't want Facebook issuing its own currency but have no issue with its wallet. Facebook is likely trying to baby steps its way towards Diem, but why launch it if the USD stablecoin works?  This is a massive validation for Paxos' USDP stablecoin approach (which is fully backed 1:1 with USD), and this could be seen as the market saying, "USDP is the most regulatory US Dollar friendly stablecoin." Whatever is the lowest regulatory risk can win a lot of scale as Crypto is becoming regulated.

• Klarna is overhauling how it manages credit reporting and checks ahead of proposed UK regulation.  Klarna will be much clearer that the consumer will have penalties for missed payments, the ability to actually pay for a product in full (!), and will use open banking to help prove consumers can afford to make repayments. 🤔 Who could have predicted that? 😇  (I have absolutely no inside info there for the record, it just felt inevitable).  BNPL's reckoning is just beginning, but this is a smart pre-emptive step by Klarna.

• N26 becomes Germany's second-largest bank, raising $900m at $9bn.  Where Revolut has much of the UK and Eastern Europe, N26 has done well in markets like France and Germany. After trouble with regulators, they now have the capital to get towards an IPO in a few years. 🤔 N26 has a full banking license, and its feature velocity has slowed since it got that license.  Suppose it can use this capital to regain shipping velocity. In that case, it could play for being the "European consumer Fintech Super App/bank," or it could focus on becoming an efficient lender (like Starling in the UK). But it's unclear they're executing on either.  They have incredibly supportive investors and time. They've put their regulatory challenges behind them. So it's doable. Intrigued to see how this plays out.

Good Reads 📚

1. The rise of Fintech "Super Apps"

• Jason evaluates this "Fintech Super App" phrase that is getting thrown around and points out the trend comes from Asia. We saw "operating systems within the operating system" like WeChat mini-programs (apps within the App) that had nearly 800m users in 2019.    Jason points out that the reality in the west is that companies that started with a single wedge product are rebundling Fintech and using "Super App" as a marketing term (as much for investors as consumers).

• The unbundling of Fintech and the rise of API providers made consumers' financial lives very disaggregated. Jason's point is that the rise of embedded finance will actually displace the consumer aggregated Fintech as the transaction moves closer to the problem or context it's there to solve for.  Jason then argues that where I manage my money (e.g., Revolut, PayPal's wallet, CashApp) aisless likely to be the super App than big tech companies or massive merchants like Walmart and Amazon.  

• 🤔 While I agree embedded finance is a macro trend, I disagree that there will be no "Fintech Super Apps."  The marketing term may be a distraction, but there is absolutely a place for the single dashboard and management for the consumer. If everything is embedded, where do I see my whole picture? The design pattern of oversight, insight, foresight needs a home. There are Jobs to be Done around receiving my paycheck, distributing it to different places, managing utility bills, and just admin. Maybe that thing shouldn't be called a Super App, but I also don't think it's a bank account.  

• 🤔 There's a gap in the consumer-centric ecosystem that re-aggregates Fintech and helps build up a savings pot, identify investment opportunities, switch utilities.  If everything is embedded, then everything is disaggregated, creating a cognitive load for the consumer. I see it not unlike how Modern Treasury and Ramp both have a place for SMBs and growth businesses. Different people come at the problem from different perspectives.

• 🤔 Also, generally, I believe Big Tech can't get out of its own way when it comes to Fintech.  They're too big and political. Their best bet is to partner with someone who can execute (e.g., Amazon and Affirm).

Tweets of the week 🕊

That's all, folks. 👋

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