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- Fintech 🧠 Food - 25th Oct 2020 - PayPal does Bitcoin, JP Morgan's Square killer & why engagement matters in finance
Fintech 🧠 Food - 25th Oct 2020 - PayPal does Bitcoin, JP Morgan's Square killer & why engagement matters in finance
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Banks understand risk, they think in portfolios, and diversifying makes sense. Except when it comes to their own business. In their own business, banks only bet big on things they can see an in-year return. This short-termism is a form of risk. Strategy risk.
Bank's strategy risk is fintech's opportunity.
Fintech's, big techs, and consumer-focussed businesses generally have investors who think over a much longer time horizon. Square Cash and Venmo were both able to create engagement. Square Cash is simple and viral. Square Cash is not a checking account; it's an engaging and useful product. Bankers immediately wonder, "how will that ever make money?"
What most folks missed is the cross-sell potential of owning the P2P wallet. Square Cash added freemium features, or seemingly "gimmick" features like buying Bitcoin; it drove massive user value and engagement first. Engagement first wins user trust, drives down CAC, and creates insights into data that help drive what comes next on the Square Cash roadmap.
This engagement first model is something banks can do in their labs, but not in their core business. Banks struggle to diversify their bets and then buy back into the market when there's a leader. It's no surprise then that we see JP Morgan launching it's "Square killer" for merchants this past week. This launch comes long after Square has become a market leader in the sub $1m revenue merchant segment. JP Morgan has had to bet big for an in-year return because they're too late to the party.
Fintech's that focus on enablement first are also winning. Stripe is the canonical enablement first company. Everything they do is about giving the merchant tools to do something for themselves. Can you imagine a bank building something like Stripe Atlas? Most banks cannot imagine it, "we're a bank; we're regulated." That may be true, but the banks are also leaving value on the table by not solving their customers' adjacent problems.
Now what's happening is that bank infrastructure, which banks see as cost centers, is being turned into profit centers for the new entrants because they're focusing on enablement first.
Banks struggle to do either engagement first or enablement first.
So it caught my eye this week when I saw Deutsche bank is spinning off their IT team. If a bank can sell it's IT division, could it change it's IT supplier?
4 Fintechs 🤑
1. Silverflow - The cloud-native card processor (EU)
Ex-Adyen execs do for acquiring what Marqeta, GPS, and Galileo did for issuing. People forget that in most parts of the world, Stripe is an abstraction layer. Silverflow has gone a layer down and will publish simple APIs that connect directly to card networks.
Silverflow is likely to appeal to larger merchants (think Adyen type of customers like big techs) who had to bring their payments work in-house or push their suppliers super hard. I like companies that are close to the infra, solving deep infra problems that scale well. They just raised 3m Euro.
2. Circles - Universal Basic Income as a Crypto 👛
Circles airdrops 240 CRC tokens every month into each user's wallet, but there's a catch. To access Circles, each user must be invited by three other users already in the network. Built on Ethereum's xDai sidechain, Circles uses "trust lines" for payments to create a social network for value.
UBI has been a consistently hot topic in recent years as automation could replace jobs, and post-pandemic, we see the inefficiencies in stimulus checks. Circles is an early, experimental product and, like most crypto, aimed at the in-crowd and not the people who need UBI. But give it time. Social networks with their monetary system are doable; how long until this is solving real problems? Bitcoin is mainstream now.
3. Laka - Bike insurance-as-community (UK) 🚲
Laka is a registered insurance broker in the UK aimed at the cyclist community and is raising capital via crowdfunding.
Insurance has an engagement problem. By creating a community engagement is natural, and Laka's customers are obsessed with the brand. Brands that drive engagement first are interesting to me. It made me wonder, what's the Peleton / wellness version of this at scale?
4. Primer - Retool for E-commerce 🛠
Primer allows merchants to connect multiple payment processors with a click, then add fraud providers, accounting tools, insights, etc. Primer solves both vendor lock-in and geographic expansion without the merchant having to build a sophisticated internal handler code.
Companies like Finix have shown a trend to build more of a "Stripe on expert mode" Primer has brought a no-code / retool feel to building transaction flows routing rules and a back-office dashboard. This "back office as a service" of undifferentiated handler code is something we spend a lot of time with at 11:FS; we think it has enormous potential.
Things to know 👀🧠
PayPal has announced it will allow customers to hold bitcoin and "other virtual coins" in its wallets. It will also enable crypto payments at its 26 million merchant network. The CEO Dan Schulman suggested this is the first step before working with central banks and "thinking of all forms of digital currencies."
🤔 My Analysis:If nothing else, adding Bitcoin to Venmo will drive engagement. It worked for both Robinhood and Square. Come for the bitcoin, stay for the rest of the product is effective marketing. PayPal intends to launch a "closed-loop" crypto wallet (i.e., you can only buy and sell inside the PayPal wallet), so this is a baby step. If we ever see something like USDC available inside PayPal (with anything near it's current Defi APY's ~8% to ~10% on USDC), that could be quite interesting.
🤔 My Analysis: Will want to use crypto? A few added Bitcoin in 2017 only to pull back. What's changed now is we have stablecoins. For merchants who struggle with global acceptance, or payment fee's, stablecoins could be quite interesting.
Quickaccept from JP Morgan lets small merchants take card payments within minutes via a card reader or mobile app. They're offering same-day payments for free (unlike Square that charges a 1.5% fee. The team from WePay, a 2017 acquisition, designed the card reader, and JPMC intends to migrate "a large portion" of its 3m SMB customers to this service.
🤔 My Analysis: They're undercutting Square, which may be easier for them to do because they're much closer to the payment rails and have lower costs than Square in payment processing.
🤔 My Analysis: JP Morgan has had to buy back into the market because they didn't react to Square sooner. In 2019 Jamie Dimon said when Square came to market, "They did stuff we could have done that we didn't do."When JP Morgan trialed QuickAccept earlier in the year, 95% of the merchants who used it were new to the bank.
🤔 My Analysis: It will be interesting to see if they can solve the adjacent problems merchants have. Bankers tend to view products in terms of finance fees and finance features. Square has gone much deeper into inventory management, launched SDKs, and helps with BI and data. JP Morgan has the firepower to buy back in, but does it have the foresight to see past the banking business model?
Monzo announced the launch of its "Premium" card for £15 per month. It comes with a 1.5AER savings rate, £2000 phone insurance, and global travel insurance. Oh, and a metal card. Yawn. Don't forget discounted airport lounge access, account aggregation, and virtual cards.
🤔My Analysis: I love Monzo, but this is a banking product with features that could have come from any other bank. So is the differentiator brand? It's hard to understate just how LOVED this brand is by it's UK customers. Their NPS is the best of any brand in the UK. Not only banks, anything. What brought Monzo to the dance was building beautiful things that just work that we didn't know we needed. Monzo products are still beautiful, and they still just work. But that last bit, "building things we didn't know we needed." That's my worry here.
🤔 My Analysis:Monzo does some cool stuff that almost nobody notices (and I worry they don't advertise or feature nearly enough). Monzo integrated with IFTTT has some cool recipes for saving or spend management there. Monzo also added auto-export transactions to Google Sheets function.
🤔 My Analysis: Revolut, Starling, Coconut, and Tide are making a real charge at the much more profitable small business segment, solving for deeper engagement first challenges. I love their joint account, for example. Imagine if that was more like Gather (BF Sep 27). Solve for engagement first, adjacent problems, and charge for that. Don't be a poor tribute act to the old world banks.
Good reads 📚
SMBs biggest challenges that are not solved by their banks, SMBs suffer "Lack of technology support for accounting functions, poor integration between accounting and payroll functions, and insufficient reporting capabilities." But Ron points out this is an opportunity for new revenue, a $370bn opportunity. Banks today generate about $11bn from accounting, but those services aren't significant in terms of market share.
🤔 My Analysis: In our 11:FS US SMBs report earlier this year, we found the top 3 brands SMBs felt solved their problems: 1) Quickbooks, 2) Stripe, 3) Shopify. The megabanks Citibank and Chase placed 14th and 15th, respectively.
🤔 My Analysis: Banks' engagement problem leads them to a data access problem. Banks don't try to solve the whole SMB jobs or the most painful jobs, just the jobs they already have products to solve. Banks miss the opportunity to get all of that juicy data in the accounting programs and add value to their customers. Add value like inventory management or supply just in time working capital.
🤔 My Analysis: This is why companies like Brex, Square, and other small business tools are so hot; there are so many problems for small businesses that their banks and accounting programs don't solve. There's so much money to be made in solving adjacent SMB problems still.
Companies like plaid have wrapped legacy in modern APIs, creating many new products and services for consumers. An entire generation of neobanks, lenders, and tools have been made possible due to these APIs. The shift is from "read-only" to read/write. In this article, a16z neatly articulate the difference between the wedge and the vision; understanding both is critical (and so often bankers can't see past the wedge)
Payroll is "the revenue side of a consumer balance sheet" (oooh, that's neat 👏). In theory, payroll data allows a lender to parse willingness to pay versus the ability to pay. It also gives identity verification, direct deposit switching, and potentially has value to employers too. The various wedges in the article 1) Income verification 2) Direct deposit switching 3) Payroll attached lending 4) B2B HR and payroll access and reckon that 2 and 4 are the likely areas of wedge opportunity.
🤔 My Analysis: It may be more interesting to see what niche new businesses appear that don't fit into those four categories. What companies like copilot money or Sofi gain a complete market position because that API now exists? That said, you should read this piece. It's fantastic.