Fintech 🧠 Food - 28th Feb 2021 - Coinbase IPO, Broken payments infrastructure & why Michael Bolton shows the future of trust in fintech

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Weekly Rant 📣

This week Robinhood competitor Public.com managed to go a bit viral with the late 80s (and my mum's favorite) Michael Bolton. It was, frankly, fantastic.

"Break up with your brokerage" is a twist on "How am I supposed to live without you" focussed on "payment order flow," which has been the subject of Reddit and political outrage after the Gamestop saga.  This is a laser-guided bit of marketing content aimed squarely at Robinhood.

VCs and Robinhood's effort to repair RHs reputation since the Gamestop saga has been herculean and mostly diversionary.  As I mentioned in the Brainfood special on Gamestop and Robinhood, Payment Order Flow isn't strictly a bad thing, but that's also not the point.  

Robinhood's issue is not Payment Order Flow; their issue is their product can create bad financial outcomes for users, they're terrible at PR, and they didn't manage their collateral properly.  

No amount of Vlad appearing on clubhouse with Elon Musk can deal with the fact he comes across as incredibly poor at communicating in recent weeks. No amount of VC blogging about Payment Order Flow can distract from Robinhood's inability to manage their capital adequately when they had a margin call.

But to understand why the product creating bad outcomes could be long-term damaging to RH, we have to understand the changing nature of trust.

The changing nature of trust

Supply and demand psychology has changed dramatically in the attention economy. The supply of low-cost goods (and access to financial services) is continuing to increase.  Demand (or attention) is now a scarce resource.

Attention comes to those who can grab it and build a community around it. Grabbing attention is easy once; keeping it is hard.

This creates two core needs in the product.

1. The need for simple, high utility products

2. The need for that product to drive social utility

Functional utility matters, especially for the excluded.  CashApp and Chime succeeded by providing features people living paycheck to paycheck really needed, like getting paid early or real-time payments. With clean, simple, mobile-first experiences, this utility built trust as users valued the improvement brought to their lives.

Social utility increasingly matters.  What unites the second wave of Neobanks like Daylight, GigWage, and Greenwood bank is their direct focus on social utility. Great design to solve large user bases real-world social problems is a good business model.

Most banks fail on simple, high utility products and fail especially on driving social utility.  Their UX is often a copy+paste of what Chime did 3 years ago, and their attempts at social utility tend to be announcing large amounts of cash to underprivileged areas of society.

But as my friend John Hope Bryant says, poor communities need a hand up, not a handout. A great product is a hand-up.  A great product can drive profit, user utility, and social utility.  In fact, an increasing number in society expects it.

How Robinhood stacks up on "trust."

Robinhood does well at being a simple and high utility, possibly even for the excluded.  Their simple, mobile-first app has been wildly popular with a generation of people who either didn't think to or couldn't access financial markets. Robinhood has benefitted massively from the tech stock bull run and arguably spearheaded a retail investor-led bubble in financial markets.

Robinhood does not do well when it comes to social utility.  While its core mission of democratizing access to finance is a good one, the social costs of doing so can be massive. Notably, Robinhood suffered negative PR when one of its users sadly committed suicide after it appeared they had gotten into massive debt, margin trading.

By introducing complex financial products like Options to the consumer, Robinhood weaponized the consumer for good and bad.  The financially savvy could now play the markets nearly on par with the pros. But the unlucky user could also do untold damage to their finances.  

With great financial product access comes great responsibility.

To be fair to Robinhood

1. I believe they genuinely set out to open up access to markets and growth 

2. Their user base is massive and continues to grow

3. They're a genuine trailblazer, and that comes with learning hard lessons as you do hard things

4. They're taking real steps to improve their investor education and UX as they go

But for me, the reputational damage is done and continues to be done.  Not because their CEO is bad at communicating, but because of the culture that led them to open up access to leverage products without first considering the damage that could cause to their user base.  It is more likely to be naivety than malice. But also, how hard would it be to go, "what happens if this goes wrong for our users?"

If recent rumors are true that Robinhood is rushing to IPO in March, I wouldn't be surprised to see "reputational risk" and future regulatory action in the risk section of the S1.

On a personal note, I hope they turn it around. RH has brought millions of low-income people into financial markets.  They may have created a speculative bubble, but they also let a genie out of a bottle for the consumer. That has to be a good thing in the long term.

Enter Public

Aside from phenomenal marketing, Public's product doesn't allow users to buy some of the more complex products that Robinhood does. The marketing by Public.com is so effective not because Payment Order flow itself is evil but because it plays into a growing perception about Robinhood. Robinhood is coming across like a casino that doesn't care if you win or the house wins.

Public.com's marketing matches their product and builds authenticity to their comms that builds trust.  Public (and other players like Commonstock and the UK's Freetrade) focus on fostering a sense of community and responsibility in investing.

This mix of product utility and social utility may, in time, be a winning combination.

Bankers, brands, fintechs - are you watching?

If you liked this rant, will love this 11:FS content 👇

1. Why being Lovable is far better than being Viable as a product. My take on why banks can't do product like startups and scaleups. Unpacked in full ranty glory. Say it with me. Feature 👏 Parity 👏 Is not 👏 Product 👏 Parity 👏

2. How Habito changed what trust means.  Mariette unpacks how a UK fintech brand included sex positions in its marketing and built trust in the process.

4 Fintech Companies 💸

1. Invest Composer - B2B No-code investor tool kit

• Invest composer is a no-code tool kit that acts as a layer on top of an existing brokerage. It allows users to create custom, automated investing strategies with simple drag and drop editing from a simple set of building blocks.

• As B2B tool kit, you could imagine investor composer being used inside everything from Vanguard to Public.com.  Whether this complexity really suits a mobile app is a good question, but generally, I'm a fan of services that compete with spreadsheets and manual inputs.

2. Bottlepay - Fintech grade UX Crypto wallet for consumer and SMB

• Bottlepay is a UK focussed crypto wallet with a heavy emphasis on UX. The consumer app focuses on using social media connectivity as a simple way to manage P2P payments with crypto.  The SMB service has many capabilities, including payroll, creating dynamic content paywalls, or crypto payment acceptance.

• Generally, I view crypto UX as still pretty broken and enthusiast-centric (with the possible exception of Metamask and Blockfi). The space between fintech UX and crypto utility feels wide open, and Bottlepay plays right in that gap of "Neobank that does crypto." It will be interesting to watch their adoption, this space feels inevitable, but the timing is hard to call.

3. Boost Platform - Stripe for Insurance (maybe?)

• Boost has created a platform and embeddable APIs for insurance (e.g., generate quotes, policy management, document management, billing, claims). As a digital managing agency, Boost is backed by a carrier and re-insurance (i.e., State national and RenaissanceRe).

• The insurance space is massive, and the insurance nerds have been looking for Stripe for insurance for some time. Stripe elegantly abstracted the customers' compliance concerns when they became a master merchant; Boost has a good equivalent here. But traction will be key; the space for who becomes the default when embedding insurance still feels wide open.

4. Stitch - Plaid for Africa

• Stitch, like Plaid, creates a single sign-on to add financial accounts to an app you're building in seconds.  Like Plaid, this creates a ton of value beyond account aggregation (like implied KYC, income verification, and some level of financial behavior insight). 

• We have seen many "Plaid for Africa" companies in the past 12 months as fintech comes to the continent. Something in the Stitch execution has a great feel, though; I don't know if it's because I'm a sucker for good design, simple APIs, or great docs, but this is really solid.  Which one of these companies eventually receives investment from Plaid will be interesting to watch, especially since Plaid is free of Visa.

Things to know 👀

1. Coinbase IPO

• Coinbase announced its direct listing on Thursday, estimated to be worth $100bn with some impressive figures.  43m users, 2.8m monthly active, 76% of revenue from the USA. $1.3bn in 2020, 35% EBITDA.

• 🤔 My Analysis: Massive, massive Q1 mostly driven by institutional interest, but that could now fade.  

• 🤔 My Analysis: The 10-year Treasury note is catching up to the S&P dividend yield.  Investors believe the massive stimulus will lead to inflation; this would put pressure on stocks with high valuations (or assets generally). If Coinbase is listing at 100x earnings, it makes you wonder if their share price is in for a bumpy ride.

• 🤔 My Analysis: For Coinbase, it could be double trouble; their business relies on crypto bubbles, and their listing price may be benefiting from an almighty tech bubble. Long term, however, if inflation does come, high inflation would inevitably lead to higher interest rates.  Higher interest rates and higher cost debt, as nations are massively indebted, make the financial system look very broken. A broken financial system is a core narrative that drives belief in crypto. Crypto's next act could be something to see.

2. Core Federal payments services went down 

• The federal reserves core system that allows financial institutions to move money was down for several hours this Wednesday.  This meant ACH and Wire transfers were down for more than three hours. This happened in the same week the fed chair spoke to congress on their "digital dollar" progress.

• 🤔 My Analysis: FedNow has been in planning for a long time and is currently slated for ~2024. Powell has hinted legislation may be required to deliver FedNow, which doesn't inspire confidence in that deadline. However, in the era of "build back better," if the US were going to fix one bit of crumbling national infrastructure, it would be its payment system.

• 🤔 My Analysis: The Fed's pace is glacial, while China has joined several central banks in a cross-border currency pilot. The US has to go faster.

• 🤔 My Analysis: Perhaps one way to go faster would be an "X-Prize" for the digital dollar. Shall we do it?

Quick hits

• Square had a huge Q4, with revenues of $3.16bn, up 141% YoY. Cash App delivered gross profits of $377m, up 162% YoY; it also doubled down on adding Bitcoin to its treasury with more than $170m spend at $51k per coin. Like Coinbase, Square may take a hit if tech valuations fall. Unlike Coinbase, its earnings growth is proven and much more connected to a transactional activity like P2P payments, tips, and GMV.

• The UK published its Khalifa review, which has some bold recommendations on the future of Fintech.  The UK has always enjoyed a policy advantage, and I think there's money to be made by watching what the UK fintech community does and taking that to bigger markets.  Key findings; The UK will create a special fintech visa, encourage more local IPOs (e.g., Transferwise), and figuring out how to export the UK's regulatory frameworks.  The UK does this a lot already informally, working with global regulatory counterparts.  

• Little nugget: This report implicitly calls for the creation of a CBDC. You should 100% read that report if you want to see where Fintech policy is headed in the next decade.

It's been a busy week in fintech! If you missed any of it, check out Nik Milanović's This Week in Fintech for the headlines of the past week.

- Astra launches a transaction automation platform- Sezzle partners with Discover- New launches from Affirm (debit card) and Afterpay (banking)- ADP launches a payroll app- Robinhood adds Dogecoin

- Digital wallets surpass cash in-person transactions for the first time ever. 

Good Reads 📚

1. Power to the person - The future of NFTs and Creators

• Genies don't quietly back into bottles; the next big thing will start out looking like a toy, and media businesses are the first to adapt to new paradigms. The creator economy and NFTs are massive human potential unlocks.  Even if we're in a short-term bubble for NFTs, we're on a march towards individuals mattering more than institutions.

• People follow people, not companies, but companies have long had the advantage because of all of the coordination it takes to build scaled products. Like creator fandom today, every 'company' or project will become more like a tribe, driven and defined by the stories and symbols linking its members together, led by those who best weaves its narrative.

• 🤔 My Analysis: I took so much from this, but as I zoom out, it made me think: Entire markets are being unbundled first into APIs and then into primitives. New tools emerge to rebundle the APIs, and then rebundle the primitives. The skillset required to work with these new tools is easier to adopt for the individual's smallest possible firm. But over time, firms become tribes led by creators. Products rebundle primitives. APIs rebundle platforms. Companies either evolve into the skill to use these new tools, or evolution passes them by.

2. Supply and demand has inverted

• Supply of software is no longer an issue, where creating a tool isn't possible; you can borrow them at a reasonable cost in the digital age. Now demand, specifically, customer attention span, is what's in short supply. As a result, mass consumerization is falling out of favor as customers choose personalization and meaning over affordability.

• This also is true of enterprise vendor selection.  Procurement team requirements are rooted in "economics of scale" dynamics, and to succeed, enterprise vendors have to play this game in their sales materials.  Most vendor analysis considers the size and revenue of a vendor to be an important factor for buyers, but in this market where new business models are needed, does it really matter? No. 

• 🤔 My Analysis: This follows neatly from my rant last week about how broken bank procurement is; the core point aperture makes is that so is how analyst reports are written.  This is the founding thesis of 11:FS; the people advising banks are broken (if not more) broken than the banks. You have to fix where you buy the insight from to fix the banking industry.

• 🤔 My Analysis: I like this market map, but it's incomplete in isolation (and I think aperture gets that to be fair to them).  Any bank now has to be ready to work with SaaS vendors, which means changing who they buy from and how they partner and integrate that solution. The culture and biases of their organization need to change, and that's hard.

Tweets of the week 🕊

That's all, folks. 👋