Fintech 🧠 Food - 26 Sep 2021 - Truelayer $130m raise, Airwallex $200m, and why Chase is going all-in on cloud-based core banking

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Weekly Rant 📣

Chase Woke up

For me, Chase is the first giant global bank that is going big on Fintech and digital. Not digital transformation, but digital. They're investing or acquiring a new start-up almost every other week; they have some significant long-term bets like Onyx, and their CEO Jamie Dimon is "scared shitless" of Fintech companies. That's a good thing.

But two announcements this week really went to the core of what Chase is and will become in the next decade.  

1. Chase launched its UK retail challenger bank.

2. Chase announced it will replace its US core banking platform with the cloud-native challenger Thought Machine.

Instead of a spin-out app, or something aimed at a specific segment, this is the Chase brand, mass market, retail offering.

Chase is all in. So what changed?

Meanwhile, most big banks still aren't paying attention. Their head is in the sand. Chase has dabbled in the past with limited success, so what are the chances for these initiatives and projects? And what can we learn from these moves?

Fintech is massive, but most banks hadn't noticed.

Fintech continues to be on an absolute tear. In the past week alone, Airwallex raised at a $4bn valuation, Atome, a BNPL provider, raised at $2bn, Open Banking provider Truelayer at $1bn plus. If you read This Week in Fintech, the sheer list of things happening is staggering. But the bank reaction has outwardly been 🤷‍♂️.  

For the most part, Banks appear to have their heads buried in the sand about the threat from Fintech. There are some exceptions, but they were either regional banks or Goldman, who had no retail presence historically.

Most big banks are still waiting for interest rates to rise, the tech bubble to pop, or focussing on being slightly better than last quarter. That will be a losing strategy that continues more of the same. Erosion of earnings, erosion of net interest margin. Even if interest rates do rise, every time they've been increased in the past 3 decades, the peak rate has been lower than the previous peak. The good times for the traditional banking business model have passed by.

Doing slightly more digital isn't an option. It's time to go all in. 

Chase itself is a lesson in this.

Chase historically

This isn't Chase's first attempt to do a digital bank. The last endeavor, "Finn by Chase," is a case study on how not to launch a digital challenger proposition as a bank.  

Finn was aimed at "millennials" (probably because someone noticed that young people liked digital and weren't depositing as much as their parents). Finn had some good features, like digital account opening, but its core feature was emojis. Yes really. The idea was that you'd respond to a transaction with a smile, a sad face, or something in the middle. I know what you're thinking; give me that account right now!

To their credit, Chase closed Finn reasonably quickly when they saw horrible attrition and engagement. They also took lessons on what they got right and wrong. The main lesson appeared to be digital account opening good, trying to win millenials with emojis; bad. (I actually think there's a whole different problem set faced by the under 40s that requires great product work, but Chase recognizing emojis don't help is a positive step).

Chase has its "Pay Later" product, My Chase Plan, where credit card users can pick a transaction over $100 and pay it off in installments. It also has "Quickaccept," an attempt to compete with Square, offering merchants a phone-based POS terminal/card reader and 0% fees for instant payment.

Outside of the core brand JP Morgan also has some more subtle (but massive) plays like Onyx to create a new payments rail and wrap up the (giant and underappreciated) Global Cash Management market.

So JPMC hasn't been idle by any stretch and seems to be improving with each iteration. While none of these new products can claim to be a category leader (or even top 10), they show intent.

And even without all of this silly digital business. JPMC has done well post Global Financial Crisis (GFC) at the scale game.  

I often describe the main game banks are playing as being like the movie Waterworld. The polar ice caps have melted in this movie, and there is little to no solid ground to live on. Humanity has taken to the seas and fights over what precious resources remain. Only the largest gangs and communities can hoard enough to survive. Banking is a scale game, and JP Morgan has doubled down on its global reach, corporate and investment banking, and "fortress balance sheet" to deliver growth over the last decade.

You're left with a bank with solid foundations but isn't winning in new market opportunities. Cue, launching a digital bank in the UK and changing its core in the US.

Chase bank UK

This week Chase launched its digital-only retail bank offering in the UK. It offers 1% cash back for everything you spend on the debit card over the first 12 months and a 5% AER return on any round-ups from transactions. There's also no account fee, no fee for spending abroad or using ATMs.

On the face of it, that's one heck of a deal. The card is waitlist only and in testing, so it remains to be seen if / when this product will scale out, but this is absolutely in mainstream banking territory. It competes on price and is clearly a loss-leading product, which suggests Chase will have to launch other products in the UK to drive profitability (and is therefore thinking long term).

The card design is clean, royal blue, and the app screenshots look simple and, again, clean. There's nothing wrong with this product as advertised, and that in itself is an achievement. 

The UK consumer flocked to Marcus by Goldman when it opened in the UK with the highest savings rate, and I wouldn't be surprised if this debit card drives a few signups. 

 What's unclear is if people will switch their direct deposit (wage) to this new bank or if Chase ends up like Monzo and Revolut as a secondary, everyday spend card with a lower average balance. 

If they're not collecting the entire monthly salary, this is a high-cost CAC with a low potential for cross-selling. It could be a well-executed, expensive folly.  

The UK consumer is already spoilt for choice with great everyday spend cards and has shown little desire to switch direct deposit (despite some banks paying as much as £200 to get people to change).

Chase isn't the first bank to launch on a new cloud-based core in the UK. The other case study is Natwest spent £100m ($137m) to launch Bo in November 2019. By May 2020, Natwest announced it would be closing, and its 11,413 customers were given 60 days to withdraw their money from accounts. Bo ran on a modern, cloud-based core (Mambu), offered consumers great savings rates, and was 100% digital. But it failed because it was expensive to operate and was losing significant money.

Diagnosis: Bo was a bank project run by different consultancies (Oliver Wymann and Accenture), who had no experience executing like a Fintech Company.

Meanwhile, Natwest had another challenger offering, Mettle (which is still live). Mettle focussed on SMBs and can be thought of as a lite version of Bank Mercury aimed at freelancers or small businesses. Mettle was aimed at a much more profitable customer segment that was underserved in the UK and executed much more like a Fintech company would than a big bank project.

Lesson: Mettle had a more sustainable customer segment from day 1 and focussed on smaller, iterative releases rather than a "big bang" launch. (They also had some challenger consultancy heavily involved in the early days that you may have heard of).

Will Chase UK succeed?

Chase UK has a long way to go before it can be declared a success or failure. It has no doubt learned the lessons of Finn, but has it learned the lessons of Bo? Or is it about to?

The traditional media seems obsessed with this move, seeing it as a clear threat to the big banks, unlike those silly little Fintech companies. That likely reflects the mood in many of the big bank board rooms in the UK.

This launch isn't it for Chase, who recently acquired UK Robo Advisor Nutmeg and its 70k customers. I suspect we'll see a lot more to come from them in the UK.

Chase US Cloud-Native Core with Thought Machine

Chase has selected Thought Machine to replace its consumer checking and lending platforms in the US. This comes after a selection process and extensive testing of the Thought Machine platform under high volumes and load. JPMC had five criteria to evaluate new platforms against:

1. Shipping product faster

2. Run many products on a single platform

3. Availability, resilience, and scale to support 57m customers

4. Run all products and transactions in real-time

5. APIs that enable embedded experiences

Thought Machine as a modern, cloud-native core ticked all of the boxes. This is a huge validation for cloud-native core banking in a market where many banks have been wary of ditching their mainframes. This isn't Thought Machine's first big win, they're live with Mox by Standard Chartered and SEB in Sweden, but this is the first time one of the world's largest banks has committed to replacing all of its core systems with a modern core.

What happens next will be crucial.

Thought Machine consistently proves itself as great tech, great engineers, and the benchmark for core banking. But when it comes to getting a product to market, we often forget about everything else.  A bank deciding to shift to Thought Machine is like me deciding to wear Nike to win the Olympics 100m dash. I may have the right equipment, but there's still a ton of work to do.

The list of things needed to get to market includes more than the core.  Having a great modern core and horrible legacy everywhere else is like giving a heart transplant to a pensioner. It might work, but it doesn't fix everything. Fortunately, there are great modern providers of other key pieces of the puzzle, like KYC, compliance, fraud, risk management, reporting, and even treasury management. But, stitching them together is hard, especially if this is not the skill set of the bank.

Old school vendors are tough to dislodge.  Gracefully moving 57m customers from one core to another won't be easy. There are countless case studies of CEOs who lost their jobs after migrating their core banking provider. Done wrong, migrating the core can be an expensive way to lose your job. The incumbent vendors will pull every trick in the book to make it hard too.  

The core is often plumbed into literally thousands of other external systems. Many of these can be thrown away, but branches break suddenly, or customers can't cash checks. Trying to migrate all of this in one big bang is immeasurably complex.

Execution is everything.  So often, the line between success and failure is how quickly you can change course and pivot. This is very hard to do if you have 10 different consultancies and 20 vendors fighting it out for 10+ year contracts. It's not what you do; it's the way you do it. Chase needs to find the launch on this platform that's big enough to be meaningful but small enough to be able to declare victory and iterate.  11:FS wrote a report about how to get there called rebuilding financial services if you want to go deeper.

Banks need to develop their architecture that manages orchestration outside of the core, to address this new world. I think that architecture would look something like this.

What does this mean for the provider landscape?

• Banks will sign big checks with modern, cloud-based vendors

• But that is no guarantee of success

• The integration problem is hard

• And traditional consultancies/systems integrators make that problem worse, not better

Cloud-based cores will come and eat the lunch of the incumbents' core banking vendors, and frankly, this is long overdue.  

Meanwhile, Fintech marches on. Square, PayPal, Robinhood, and others are shipping faster, have modern core's, modern architecture's and have the experience to build and operate in a truly digital way.

Game on.

ST.

PS. If only an organization was staffed with Fintech builders and operators with hands-on experience building digital Fintech propositions and working with modern fintech tools eh?

4 Fintech Companies 💸

This week feels like a strong vintage.

1. Sequin - The credit building debit card for women

• Sequin has a Visa debit card that can be used for everyday spending.  The twist is Sequin issues users a small loan (or spots the user) and pays itself back over a month. It will also try to identify when cash flow is running low and automatically spot the user.  

• Women are disproportionately rejected for credit cards, receive lower limits and higher APR rates. This is despite women achieving similar credit scores to men (often with a lower average income and temporary loss of earnings due to pregnancy).   Women consistently feel less financially secure than their male counterparts, and there is a massive gap in the market for a product that ambiently evens the odds.

2. Concreit - Robinhood for Real-estate

• Concreit is making real estate investing accessible by letting users invest as little as $1.  Capital is automatically invested in real estate projects (with no input by the user). The service functions a bit like a savings account (albeit with no FDIC insurance and the risk of loss, but a much higher potential return, up to 5%).

• Concreit's focus on getting the time to invest down to minutes is interesting.  There are other "get into real estate" Fintech companies, but the focus on "just give us the cash and we do the rest" is a low effort for the user, with a decent potential return. Given how popular DeFi yield products have been in the same returns range, Concreit is arguably more mainstream-friendly, and part of the growing patchwork of opportunities savers now have for yield.

3. Lightyear - Global Robinhood + No FX Fees

• Lightyear is a stock trading app that is available globally, commission-free, and offers a multi-currency wallet.  Investors outside the US often get stung with hidden fees for tax forms or FX. The team at Lightyear is ex-Wise and brings the experience/infrastructure that enables global, affordable FX and extends it to investment.

• The next wave of cut-through Fintech companies is remixing the best parts from the past 5 years' winners.  Fintech has been local and typically focussed on unbundling. Going global and re-bundling the "best of" Wise and Robinhood Lightyear is a perfect case study for an emerging trend.

4. Tap Water - Embedded Working Capital for SaaS businesses

• Tap water allows SaaS platforms to embed lending solutions into their platform or experience.  Much like how embedded payments have grown Vertical SaaS revenues, embedded lending is a coming trend as companies like Sivo gain momentum and hype. Tap Water handles the risk, compliance, and capital sourcing, leaving the SaaS platform to make a share of revenues.

• Tap Water has taken away the pain of embedded lending but isn't itself a balance sheet lender (building a marketplace between banks and SaaS platforms).  In theory, Tap Water has done what a SaaS business would do if they were to build their own lending engine. Sourcing capital from investors and originating the loans is lighter than being a balance sheet lender. Still, it comes with overheads (like KYC, underwriting, and of course, finding investors to fund the lending). Embedded lending could create $2trn of market cap in the next decade; this trend is just getting started. If I were a bank, I'd look to acquire something like this ASAP.  SaaS is hot, SMB is hot, embedded finance is hot. What's not to like?

Things to know 👀

1. Truelayer raises $130m at $1bn

• European Open Banking provider Truelayer has raised $130m led by Tiger Global with participation from Stripe.  Truelayer provides tools for developers to access account information from bank accounts and allows developers to instruct payments. Truelayer counts European Fintech companies like Revolut and Freetrade among its customers.

• 🤔 Truelayer was one of the first to get Open Banking payments to market.  As early as Jan 2020, Truelayer inked a deal with the UK Government to allow any department to use Open Banking to accept payments. This means we could pay for passports, driver's licenses, etc., via Open Banking. Perhaps more notably, if you want to fund a Freetrade account (think, UK's Robinhood), you can do so directly from my bank account.

• 🤔 The European Open Banking landscape is fragmented.  Visa has acquired Tink, which has a strong presence in the DACH region. Mastercard owns the UK real-time payments rail (Vocalink) and acquired Aiia, a Nordic Open Banking Provider. Truelayer has dominated in the UK but followed some of its clients (like Revolut) into other markets.  

• 🤔 This Stripe investment puts the Plaid / Visa story into context.  Having a rail other than cards that work at scale could be a significant strategic advantage. Plaid looks like they're building their own and trying to win customers, but you have to wonder if they're going to get their checkbook out. Stripe had no Open Banking play but is hedging via M&A.  If you want to see the future of Open Banking, watch what happens next in Europe closely. The big moves are still to be made.

• 🤔 The use cases for open banking as a rail are much more exciting than cards because it combines data and payment.  People often say, "Open Banking is a cheaper rail than cards," but that's not what really excites most developers or merchants. At minimum Open Banking can improve checkout conversion experiences.  At its best, we could see exotic use cases. There are two examples I use often. Firstly, imagine a loyalty program where a brand could reward you for buying them, regardless of which retailer you used? Secondly, imagine a BNPL button that could underwrite you based on your bank account history?

2 Airwallex, the hidden giant, raised $200m at $4bn

• Airwallex has raised $200m at a $4bn valuation to expand from APAC across Europe and the US. Airwallex has two main offerings; first, it offers a multi-currency account for SMBs; second, it's also a platform for multi-currency embedded finance offerings. It helps businesses manage FX, collections, payments, or even create virtual cards to manage expenses.

• 🤔 I think of Airwallex as if Brex, Wise Borderless account, and Stripe had a baby in Australia.  This combination is potent for import-export businesses, which see much of their profit margins eaten by cross-border fees. Think about a small coffee chain in APAC; you might be importing your coffee globally and have to swap in and out of several currencies to do so. On top of that, your local bank gouges you on fees and offers a terrible UX.

• 🤔 If Airwallex can break the US, it can become a global powerhouse.  The US is a challenging market to break into, but another Australian Fintech did that recently; remember AfterPay? What Airwallex does for SMBs who have FX challenges is a whole category. Leading with better FX is an excellent wedge product for drop-shippers, t-shirt printers, or any kind of widget-maker. But from there, the product expansion and "SMB super app" potential is limitless (think; everything PayPal or Square does for merchants but with better FX).

• 🤔 nobody has really nailed "embedded FX" in the way Stripe would execute it.  Yes, Currencycloud is the default option if you want to get close to the metal and build your own, but the abstraction is still missing. With Airwallex, more entrepreneurs could build a Ramp.com for import/export heavy businesses (or embed it in vertical SaaS). Banks are already reeling from losing to Wise and Revolut for consumer FX; losing SMB FX flows would be massive. Some banks are reacting, especially those in APAC (honorable mention: HSBC Global Wallet)

• 🤔 Airwallex is a bit of a hidden giant.  Because they're not European or US-based, they get overlooked a little by western outlets, but if they can replicate their APAC success, they're going to be one to watch.

Good Reads 📚

1. Minting money: How DeFi could fund "real-world" debt

• Luca points out that most DeFi value is heading to projects that are 100% digital or decentralized.  Uniswap, MakerDAO, and AAVE dominated the "TVL" or total value locked in liquidity pools. Luca points out this means Crypto is now a very highly correlated asset.  Crypto prices move together rather than as a diversified portfolio.  This is because most DeFi projects lend for trading or speculative activity. This is a dense read (I found myself re-reading a few sentences), but the core point is, if Crypto did more, it would be a healthier ecosystem.

• Luca points to a partnership between Centrifuge and MakerDAO to provide real-world lending backed by the MakerDAO stablecoin (DAI) as the beginning of this shift to "real-world" lending.  Centrifuge bridges assets like invoices, real-estate, or even music royalties into the world of DeFi. Yet to date, it has just $33m TVL locked. The DeFi world doesn't seem interested.

• 🤔 The fact the DeFi is very inward-facing is a feature, not a bug.  Digital goods and digital finance have a zero cost of distribution (for example, sending you an NFT costs me nothing, but running a little art shop or gallery has a high cost associated). It's no surprise that most DeFi projects solve for Crypto-native use cases like speculation and investment.  

• 🤔 DeFi will also play a crucial role in NFTs in the future, as digital goods become part of "The Metaverse" - a natively digital economy could be baked right into the backbone of that future. I often use the example that pre-dotcom era companies use the internet but didn't benefit from it in the way that internet native companies did. Banks use the internet; neobanks exist because of it.

• 🤔 But DeFi could solve more for the analog world too.  Goldfinch is an exciting business that pools capital from DeFi lenders and then distributes that to micro-finance companies in Africa. Goldfinch converts Crypto from its lenders into fiat that can be sent to the micro-finance company. The micro-finance companies are on the hook for KYC / AML of their local lending activity. Goldfinch then offers the investors a return in its crypto liquidity pool when the Microfinance businesses repay their debt. If this model scales, it could be transformational. 

• 🤔 DeFi is true Peer to Peer and could threaten the bank's core business model.  At the most abstract level, banks store value, move value, and lend value. DeFi enables all of that without an intermediary.  But banks do something else too; they're the police of money and enforce the rules. Nobody is doing that in DeFi today. When you see cross-border lending, with nobody on the hook to KYC the source of funds being lent, it looks like a great way to launder money.

• 🤔 To get to a DeFi future, we need centralized finance that solves the trade-offs.  Security of the user, the usability of the service, openness vs. managing the risk of fraud/crime are all levers to pull. DeFi has started permissionless and hard to use. Users struggle to pay gas fees or secure their hardware wallets. These trade-offs won't last forever (DeFi will get easier to use and move from hobbyist to everyone). But I believe CeFi (Fintech and TradFi) can play a significant role if we want to keep regulators from ruining the bit that makes DeFi great; permissionless innovation.

• 🤔 There's no "police" in the DeFi system, and regulators are (rightfully, in my view) concerned that there can be nobody held to account. I differ with regulators because we shouldn't make the digital protocols comply with analog rules. Fintech is great at UX, user security and can be put on the hook for catching bad actors. Let DeFi defy, and let CeFi do its thing.  

• 🤔 Where CeFi meets DeFi is my obsession.  The nexus of Fintech and Crypto feels like a Venn diagram that is heating up. If you're working in this space, hit me up, I want to hear from you.

Tweets of the week 🕊

That's all, folks. 👋

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