Fintech 🧠 Food - 28th Nov 2021 - Moonpay raises $555m, Afterpay is doing subscription installments & The war of the payments buttons

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 9,518 others by clicking below, and to the regular readers, thank you. 🙏

☀ gm. Happy Thanksgiving, US readers, and to everyone else, happy Sunday :). For a quiet week in Fintech land, we still got a $555m raise for Fintech x Crypto on-ramp Moonpay and an intriguing announcement from Afterpay about all things subscriptions (👀).  

🔌 If you're starved for Fintech goodness during the US Holiday season, here's a Black Friday gift. Last week's Fintech Insider news episode was super fun, and you should check it out. Analysis on Visa vs. Amazon and why Zilch is one of the fastest-growing BNPL providers in Europe.

Weekly Rant 📣

The war of the pay buttons

Klarna offering a "pay now" button sounds backward when you first hear it. Why would a consumer want to pay for something entirely when they could spread the cost over 4 months just as easily? Because for me, this is not about BNPL, it’s about the war of the pay buttons.

Klarna could be building an alternative payment and loyalty network, and the BNPL feature is just one component of that. Conversion at checkout is the key battleground for payments. BNPL is just one way to increase that checkout conversion.

BNPL in effect is a great wedge into creating a payment network.

Merchants love BNPL ♥

BNPL was always a good business case for merchants. When a merchant adds BNPL, they see average order value (AOV) increase, conversion increase, and those all-important repeat customers. The business case is a no-brainer (as I wrote previously in everything is BNPL).  The reason they’re able to do this is that they created a shopping ecosystem.

So much of what the BNPL providers do is create a complete shopping experience, not just spreading the cost for the consumer.

Klarna was the pioneer of the shopping app. Even early in its life (i.e., before it made it to the USA), it was doing clever engagement and reactivation tricks like:

• Showing you the item you bought instead of the invoice when you complete a payment

• Proactively sending you offers from other merchants for things you might like

• Partnering with merchants to help identify the right items to cross-sell with different SKUs

But perhaps the most underrated engagement trick is one-click checkout and now they get to play there too. This is where the payment buttons always played.

From one-click to no clicks.

When Amazon invented the "one-click" checkout, it felt very Amazon. The business case is clear, get people to convert faster and think less at checkout. Less friction = more sales. Since then, there has been an explosion of options at the checkout.

Look at them all! 

In principle, offering so many options makes sense for the merchant. The buttons work. The more choice they offer, the more likely they are to see the user complete a purchase. Less friction = more purchases.   

But in aggregate, it's also creating an ugly UX at checkout. So much of this comes from brands that give directions to merchants on how to use their payment button but ignore the end-user. Although the newer payment buttons are working hard to overcome this UX complexity and ugliness.

For example, the experience of using Shop Pay actually startled me with how fast it can be. The first time you use it, it feels like using any other payment page, but the second time is radically different. If you get to checkout and Shop Pay is an option, it just assumes you want to use it, fills in all of your details, and sends you an SMS to verify with.  You don't even need to click pay. Enter the SMS code, and you're done. I felt bamboozled like someone had performed a magic trick I couldn’t quite figure out. It's so fast. BNPL providers and the payment buttons are both competing on experience and data.

Data will become the competitive advantage in payment buttons 🥊

BNPL solved the data problem payments always had.  It used to be the case that if a consumer landed on a merchant website and checked out as a guest, there was almost no way to reactivate them.  

Merchants spend large sums of money to try and acquire customers, but they have no idea who that customer is, what else they bought historically, and what they might like to buy in the future. That data generally isn't available from the card networks or banks in any helpful way, and what shows up in someone's open banking data says what merchant they shop at, but not what items they bought. 

The data BNPL providers can gain about shoppers as they click that button at checkout is a superpower.  The BNPL provider can see what you bought (SKU level data) in addition to where else you may have been spending.  

Most of the BNPL providers have become consumer shopping destinations for their users. They offer discovery, loyalty, and a dashboard of various purchases. This reactivation of the consumer is what helps them drive repeat to spend to the merchants.

When you combine the data and the shopping, they have the beginnings of a two-sided market.

Can they compete with card networks?

Make no mistake, card networks are hard to compete with. Visa has 46m merchants in more than 200 countries, with 3.3bn cards issued and $11trn annual payments volume. By contrast, Klarna has a paltry 250k merchants (albeit large and important ones).

If this tweet from Bloom Credit founder Matt Harris is anything to go by, the competition is already happening:

BNPL providers merge discovery, selection, purchase, and reactivation as few others can because they have the SKU data, as Alex Rampell points out. 

(Alex is a16z Fintech Managing Partner and former founder of Trialpay, which itself was an attempt to use SKU data to reactivate consumers in e-commerce)

BNPL providers also have the potential to reduce the number of card fees merchants have to pay.  They often turn many payments into a single payment for merchants. Where a consumer is "paying in 4," the merchant is getting paid immediately. Where the card scheme might have seen four payments, they might only see one today.

This can have other use cases. For example, imagine turning a monthly subscription into a single upfront payment for the merchant. Now instead of paying 12x card fees per year, the merchant just pays one.

If BNPL providers become more convenient for consumers and merchants, they can continue to displace card payment volume. In this context, Klarna offering a "pay now" button makes complete sense.

By offering a pay now button, Klarna is extending its potential to be a parallel payment network. Not everyone wants to split a payment, but they may have a brand affinity for Klarna (or other BNPL providers). I think this is true of the payment buttons too.

In fact, all shopping buttons that have SKU-level data can become e-commerce marketplaces. They link the consumer ecosystem to the merchant ecosystem in a way the card networks can't. BNPL is just an excellent way to bootstrap being a payments button. 

It's not surprising to see folks like Fast.co and the mighty Shopify enter the fray (with SHOP pay). 

The new battleground.

The shopping buttons compete on how effective they can be for merchants and how efficient they can be for consumers. The shopping buttons already know a consumer's preferred address and payment method, so there is no data for the consumer to enter.  

To win the shopping buttons need the largest possible two-sided marketplace. Amazon has a pretty massive consumer and merchant ecosystem, but it's all on the platform. Shopify now with Shop Pay has a shot at being the alternative. PayPal is the OG internet pay button and has a significant merchant and consumer ecosystem, and recent moves into BNPL position it well.

But where the BNPL providers have the edge is the experience of using SKU data to create increased sales for merchants.  

What happens now?

As a territory, checkout is looking crowded. For consumers, one way through it might just be to have your favorite button not even give you a choice and assume you mean them. For merchants, short term, the right answer is to support as many payment types as possible. 

The problem compounds as merchants become international. There are many payment types, with many individual rules for how those payment types work regionally. Managing all of that is so complex it has led to the rise of payment orchestration as a category (e.g., companies like Primer that provide no-code workflows and automation for e-commerce businesses) 

It's unlikely the card networks will meaningfully innovate in BNPL, and given the anti-trust issues around Visa/Plaid, I'd be surprised if they could acquire a BNPL provider. But there is scope for the larger BNPL providers to acquire the smaller ones and the none card network-shopping buttons to do the same. More M&A may yet be on the horizon after all.

Or maybe in Web 3, we won't need BNPL because we’re all owners and we'll be able to stream cash in real-time 🤷‍♂️

ST.

4 Fintech Companies 💸

1. Column Tax - The Fintech API for tax

• Column tax is an API-first infrastructure Fintech company that has two products.  "Tax refund unlock" allows consumer Fintech companies to make a tax refund arrive early (e.g., monthly payroll) instead of annually. Tax filling ingests data, computes tax liabilities, and manages the return to filing process end to end.

• 🤔 There's so much to like here.  Refund unlock is the perfect wedge product for a consumer Fintech, but doing it as an API allows all of the existing Fintech companies to offer it.  Having a little extra every month as a consumer is a massive benefit to consumers struggling to live paycheck to paycheck. You could imagine every cash advance service using this, but also, why wouldn't every consumer Fintech App? Interestingly, refund unlock built on Payroll APIs from Atomic. So a Fintech API on a Fintech API is selling to Fintech companies. I also think Column tax, but for SMBs, would be super powerful too (essentially Stripe Tax but for everyone else). 

2. Slope - BNPL for B2B and global markets

• Slope is a BNPL for e-commerce stores that sell to business customers. Businesses can integrate slope at checkout, and Slope will underwrite the loan to the business buyer before offering the buyer an installment plan. The seller then gets paid immediately.  

• 🤔 Slope is effectively competing with sales finance/invoice discounting from banks. Creating BNPL for business is something others (like Balance) are working on, but doing this for international companies is exceptionally hard.   The Slope founders want to create another B2B payment network, and using BNPL as a wedge is smart. Just like we're seeing BNPL providers threaten card rails in consumers, imagine that but for B2B 👀

3. Fractional - Multiplayer real estate investing.

• Fractional allows groups of friends or colleagues to buy real estate together. Under the hood, Fractional forms an LLC on behalf of the investors, creates a bank account for the LLC, sources financing for the property, and represents the LLC to close the property.  Fractional has built collaborative voting, earnings collection, and a community of investors that can share and learn from each other.

• 🤔 This is exceptionally well put together. The hard work here is in legal structuring, bank account management, property closing, etc. Hiding all of that behind a slick digital interface is 😍.  You can tell a lot of effort went into making this look effortless. 

4. Vergo - Digital Banking for Tradespeople

• Vergo provides a debit card, cashback, and invoice management for people who work around property and trades. They've focussed virtual cards around "projects," working capital loans, and cash flow analytics.  The cashback is designed to work with specific trade suppliers, and the invoices are automatically linked to the project.

• 🤔 Managing projects and finance is painful admin nobody wants to do. Using "projects" as an organizing principle and embedding finance to that project is spot on.  In Jan 2019 at 11:FS, we incubated a similar concept for a bank client who ultimately didn't move forward with it. But the insight from our research was all finance admin ties back to the project, and the ability to grow is subject to cash flow.  Neobank for x industry can go so much deeper into the Job-to-be-Done of a specific sector than one size fits nobody banks and will always have a role to play.  Becoming profitable and sizeable in their niche will depend on how successful they are at lending (and how long the Durbin debit gravy train lasts). 

Things to know 👀

1. Moonpay raises $555m at $3.4bn

• Moonpay is a Crypto on-ramp allowing consumers to quickly buy Crypto or NFTs directly from their card at marketplaces like Opensea. Before this round, Moonpay was bootstrapped and profitable, generating $150m in revenue in the past year.  Moonpay has more than 7m users and supports 90 cryptoassets. Moonpay will use the funding for M&A and support more local payment types in LATAM and Asia. 

• 🤔 Moonpay is to Opensea as Paypal was for eBay.  Whether Opensea will maintain relevance in the Web 3 boom or fade as eBay has remains to be seen. Competition is coming as FTX and Coinbase are becoming NFT marketplaces, but MoonPay is going another way; it has started to build concierge services for celebrities to buy NFTs. What happens as NFTs scale out?

• 🤔 In the middle of the NFT boom, it's no surprise to see the on-ramps gain much traction.  Moonpay can now charge whatever fees it likes to get access and convert into Crypto, but that will eventually see margin erosion (just as we see the prices Coinbase can take per transaction slowly decline). What happens when Crypto corrects?

• 🤔  Eventually, everyone will build on-ramps, but off-ramping is harder.  The NFT artists who have to pay bills or the DAO contributor trying to buy merchandise have such an awful UX. Services like Multis are the account for Crypto native businesses, but there's a gap in that freelancer space. It reminds me of the new Fintech companies for creators or freelancers like Stir, Juice, or Catch benefits. Wrap a wider problem space into one. I'd love to build this if you're up for it, people. :)

2. Afterpay offering installments for subscriptions

• AfterPay will allow consumers to pay for subscriptions (like gym memberships or online services) in installments.   Initial partners include Fabletics and IPSY. Afterpay will also offer the service for pre-orders (which is interesting given the current supply chain issues).

• 🤔 First reaction was monthly installments for a monthly subscription is a real head-scratcher. But then I remembered that getting paid every two weeks is much more common than monthly in many markets.  If that's what AfterPay is doing, that's quite interesting.

• 🤔 This might make the most sense for merchants, turning monthly payments into annual ones.  Today gyms collect a monthly payment that has a cost associated with the card acquirer.  Using BNPL, the merchant could allow their consumers to split the gym fees they need (weekly, every two weeks, monthly), but the merchant gets one annual payment.  

🥊 Quick Hit: 

• Lydia and Bitpanda partner to bring Crypto to 5.5m Europeans. Lydia the French-based "Fintech Super App" with 5.5m customers, has partnered with Bitpanda to add Crypto investing. Lydia has checking, deposits, joint accounts, bank transfers, investments, and now Crypto. 🤔 People are sleeping on Lydia and Bitpanda, who are both quietly, massive. Bitpanda has set itself up to be the "Whitelabel Drivewealth + Paxos of Europe." It does Crypto, stocks, and offers it all with pre-built UX. 

Good Reads 📚

1. Apple DMV Contracts and Government Identity 

• The poor reliability of social security numbers (SSNs) has forced organizations to rely on driver's licenses to verify identity in the US.  Identity verification companies like Socure and Trulioo have appeared to fill this gap but don't have integrations with providers like state DMVs.  Apple is attempting to bridge this by integrating directly with states, and Jason Mikula has requested to see those documents under freedom of information requests.

• Jason finds Apple is in complete control of the program, defining technical standards, how states must integrate when it goes live, and all communications are subject to Apple's approval.  Apple can potentially abuse its position as a verified credential provider and charge whatever price it sees fit to verify government-issued identities.  Jason questions whether states and local departments are equipped to negotiate effectively with Apple here or are at their mercy.

• 🤔 The Chinese or Indian model is much more secure but unlikely to be accepted by US politics or public opinion.  The Indian Aadhaar program uses biometrics to identify every person and link them to a central database. This makes public administration much more efficient, but it's also doesn't scream liberty or freedom. Some European markets have a good compromise around "Bank ID" where bank credentials are standardized and used by the government and private sector to verify identity electronically (Estonia has an elegant solution that balances privacy and efficiency). 

• 🤔 If Digital identity ever happens in the US, it will come from the private sector.  The US has a history of co-opting private sector initiatives as national infrastructure. From payment schemes like Visa and Mastercard to gradually legitimizing open banking, if identity happens, it won't look like it does in China or India. 

• 🤔 Apple's aggressive agreements are very familiar to anyone who saw the early Apple Pay rollout.  Banks were being asked to ensure they were ready for Apple (not the other way around), promoted things the way apple liked, and Apple was going to take a slice of bank interchange revenue whether they liked it or not. This was particularly unpopular in Europe and Australia, where interchange revenue is ~0.3%. 

• 🤔 Don't forget Decentralization is a thing.  As the world gets excited about Web 3 and the Metaverse, decentralized identity and different residency forms are emerging. While government-issued identity is unlikely to go away, it is likely that just as decentralization offers more individual control/ownership, we will eventually see the same happen for identity. 

Tweets of the week 🕊

That's all, folks. 👋

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