Fintech 🧠 Food - 29th Aug 2021 - Ramp's $3.9bn valuation, Visa's Cryptopunk and finding purpose in Fintech strategy

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 7,496 others by clicking below, and to the regular readers, thank you. 🙏

🔌 Plug:

ICYMI, Visa went and bought a Cryptopunk. Want to know why? Well, you're going to want to check out this episode of Blockchain Insider 👇

Exclusive interview and conversation with Cuy Sheffield from Visa about why Visa bought Cryptopunk 7610 and what it means for the future of digital commerce.

We also cover the Poly network hack in the show, and Messari's Ryan Selkis tells us why he thinks government-driven stablecoins might struggle.

Weekly Rant 📣

What's your purpose in Fintech?

There are two strategies playing out in Fintech.

1. Engagement. Get closer to the customer's problem and solve it better than anyone else, or in a more complete way.

2. Enablement. Make it easier for everyone else to solve their customer's problems, by making something non-core to their business much better, and less error-prone.

If we accept that every company will become a Fintech company, you have to ask what role you will play in that future?  

First up Banks:

As a regulated and licensed bank, is it your job to compete with Neobanks? Lobby against them? Or enable them? (Next week, I’ll cover providers and the week after, non-banks)

Below is the map I like to use to frame strategy conversations (regular readers will be familiar with it by now); you can think of financial services in 5 layers at the most abstract level. (We break these down more in the 11:FS Banking as a Service reports)

The way I read this picture is as you move up the diagram, you're closer to the customer. That's why you see Shopify nearest to the business customer context and problems. As you move down the picture, you're closer to the metal and the infrastructure of finance.

What we've seen over the past 10 years is changing each layer.

• The transactional rails providers have grown (e.g., Visa and Mastercard), benefitting as the base layer. Everything ultimately has to go through them, and they take a fee.

• The capabilities layer is essentially B2B fintech.  The capabilities layer has seen colossal innovation as new providers emerge to solve the problems of the infrastructure and banking industry with modern software and APIs. 

• The financial products haven't really changed.  Financial products have a regulatory definition; a deposit account is a thing a regulator has rules about. There isn't much you can change about a regulated financial product other than the cost/price of the product.

• The services layer has seen massive innovation in the past decade. Companies like Chime innovated "get paid early," Monzo made beautiful banking normal. The UX of banking got better because it focused on solving customer jobs to be done rather than selling commodity products.

• The journey's layer has now become much more important.  Gig economy platforms, e-commerce platforms, and vertical SaaS businesses embed finance where the problem occurs.  

As you stand back and look and how the market has played out over the past decade, you see three things have played out. 

1. Those closest to the customer have done a great job at engaging customers and solving their problems (higher up the diagram)

2. Those closest to the infrastructure have done a great job enabling those above them and compete on being the easiest to use. 

3. The providers of financial products in the middle are stuck in a commodity game.  So the question for everyone as you look at this diagram is. Should you move up? Down? Partner? All of those?

The Strategy for a Bank on this diagram

Most bank strategies are limited because leaders can make 90% of their bonus by saying no to everything. Change at scale is complex, and the incentive to change often feels lower priority than whatever compliance thing matters today.

But this only counts if you see your competitors as other banks playing the commodity financial product game. The reality is, there is competition from above and below. The capability providers enable more direct access to the infrastructure and commoditize bank services in payments (and even lending to some degree). The 

For banks, competition is coming from above and below. So what do you do?

Moving up closer to the problem is a no-brainer.  The more interesting question is, HOW do you move up?  

Banks have rightly been improving their UX, but often by copying the innovators feature for feature, rather than understanding the customer job to be done. Can they really innovate and execute at the pace of the Neobanks? Probably not, and what's more, the cost of running their legacy infrastructure, branches, and processes is much more expensive. To win in this space, they have to find a way to deliver like a Neobank, and that will take some creative funding and operating models (and is something I'm spending much of my time talking to clients about).

Moving down and becoming an enabler may be a winning strategy.  Since the advent of the embedded finance movement, the banks that have enabled embedded finance (i.e., community banks) have done incredibly well. But this is more luck than judgment. Banking-as-a-Service and embedded finance are currently very regional, and each bank excels at one particular product. There aren't really partner banks with something global and more complete in the product (yet).  The opportunity to be the most "embedded" bank is there for the taking.

Could a bank move up and down the stack? It really depends on who you are.

Smaller banks who have carved out a niche might find it challenging to complete with Neobanks and the Fintech Super App's ability to drive user engagement. But these banks can (and are) winning at moving down the stack and being more of an enabler.

The megabanks with licenses in multiple Geo's are already spending billions trying to get better at engagement, but few have yet intentionally and successfully become enablers. But the opportunity here is massive. Like moving up the stack, the issue will be how they do it. Do they use their existing project processes, budget cycle, and sales teams, or will it take something more radical? And if so, what?

Where does this all head?

What makes banks profitable is their scale. What makes scale work is things not failing and being repeatable. But organizations of this size resist change because all change introduces risk.

To change, they've got to find a new way to do something meaningful and more than innovation labs or expensive copycat products.  

Banks need to increasingly separate manufacturing from distribution. Many banks have different "group operating" or "group technology" divisions, but that's not what I mean.

In the early 2000s, I worked for British Telecom (BT). BT was the monopoly provider of telco and internet services in the UK and was under constant pressure from regulators and the government to be split in two. To get ahead of this, BT created a wholly separate entity, "BT Openreach," whose job was to serve BT's retail business and the rest of the market with the same level of service. 

BT Retail invested in being an internet provider and even getting into sports (BT Sports has the second-highest number of Premier League soccer games etc.)

In effect, the infrastructure and manufacturing business slowly figured out how to be a pure enabler. (Now you can argue it's not been as effective as it could have been, and it's no Stripe or Plaid when it comes to API quality, but that's not my point).

Meanwhile, the retail business figured out how to get better at engagement.

If I were the CEO of a bank, I'd want 

• An engagement strategy.  Separate from the core but feeding the core business. This would need an almighty mandate, multi-year funding, and, most importantly, protection from the company to do things like use 3rd parties and the new Fintech providers.

• An enablement strategy.  The bank is already designed to not create risk and manage compliance. But to get better at enablement, it needs to think multi-year about its APIs, partnerships, and go-to-market. Having an API isn't the goal; having an API developer's love is the goal. This requires a whole different go-to-market and skill set. Fewer relationship managers and more developer and community managers.

The temptation for an incumbent will always be to be slightly better than yesterday.

But the opportunity is to be actually good.  

Imagine if a bank could take its profits and seed 10s of exciting consumer propositions that run on its infrastructure per year; some might even make it big. That would be cool. But it would need an engagement strategy.

Imagine a partner bank serving Fintech companies globally, with outstanding APIs and a broad product set. That would be something. But it would need an excellent enablement strategy.

Quality matters. Developers matter. And it starts with strategy and a mandate.

How do you get those strategies in place? And execute?

📞👉 :)

ST.

4 Fintech Companies 💸

1.LANA.xyz - The Financial Super App for the gig economy

• Lana is a financial Super App for the under-banked in Mexico, Peru, and Chile. Lana provides a wallet, earned wage access, and instant lending to millions of workers. By partnering with the platforms, Lana can get worker earnings information to perform underwriting itself or make that available to a marketplace of lenders.

• Lana is a spin-out from Cabify, a Spanish ride-hailing company that now has independent founders and investors. Pablo, the CEO, was also a founder of Denizen the Neobank for global citizens that was acquired by and ultimately closed by BBVA.    Lana believes they can become the primary financial service provider for underbanked workers because, in effect, they're placed to collect the "direct deposit" equivalent from the platforms. They're starting with the gig economy because workers often use many apps, and there's more underwriting data in those apps. In time their goal is to expand to any cash-based worker.

1. Basis theory - The tokenization API

• Basis theory allows developers to build secure applications in minutes with a single API.  Their API will enable developers to secure highly regulated data like PII (Personally Identifiable Information), card data (with PCI compliance), or even bank and healthcare data. The data can also be acted on by developers as if it were sitting in their own database.

• If you have to build a Fintech App or B2B software, you're going to have to comply with countless regulations. Everyone is writing a similar data security code, whether it's to appease partner banks or pass due diligence with customers.  Basis theory provides all of that via a single API with way less overhead. One of the founders, Ben Milne, is also Co-founder and chairman of Dwolla, one of the first real-time payment network Fintech companies in the US.

1. Zeal - Payroll as a service as a service

• Zeal allows any company to become a payroll provider (or add payroll to their service).  For example, Gig economy platforms can add in payroll, or HR platforms can add payroll into their HR suite offering.

• Most payroll platforms are old or locked down, and most APIs simply aggregate those platforms.  By making payroll a thing anyone can embed, the solution space becomes broader. Payroll is a jump-off point for so many consumer and business-facing applications that I'm excited to see what people will build with this kind of platform.  I also think there's a giant gap for someone to just nail Crypto and stablecoin payroll. 

1. Treasure - Cashflow analytics for SMBs

• Treasure analyses bank and accounting data to provide insights like "you can pay key suppliers an average of 7 days later" or "you have high overhead costs that could be trimmed." These insights are often built by finance teams with complex spreadsheets but unavailable to SMBs. By maximizing the use of cash (and the return on it), Treasure can "generate more revenue" from "idle" cash.

• One of the biggest challenges SMBs face is knowing how much cash they have on hand and what they can do with it. Turning data into insights like "you could be paying suppliers later" is gold dust for CFOs and business owners. Anything SMB and payments has been white-hot in the past year, and Treasure is right on trend (similar to Digits).

Things to know 👀

1. Visa bought a Cryptopunk.

• Payments giant Visa bought Punk 7610 for around $150,000 worth of Ethereum this past week.  In his blog post, Cuy Sheffield from Visa said, "We think NFTs will play an important role in the future of retail, social media, entertainment, and commerce." He goes on to say: "To help our clients and partners participate, we need a firsthand understanding of the infrastructure requirements for a global brand to purchase, store, and leverage an NFT."

• 🤔 NFTs have a good shot at being the future of media. NFTs change distribution and close the gap between artist and fan.  This week, 3LAU, the DJ, announced Royal, a new "record label" that aims to turn music into an investible asset class.  While the mechanics haven't been revealed, in theory, NFTs allow artists to raise money to create and record new music while allowing fans to own some of that IP (and even its future cash flows). In the same way, Spotify changed the business model from buying albums to streaming, NFTs could make fans part owners and IP an asset class. Record labels should be terrified. 

• 🤔 My Analysis: By leaning into these trends, Visa gets to learn about the new emerging types of commerce.  Arguably Visa's most valuable asset is its brand, and if it's going to be a part of the crypto world, placing its brand front and center there makes a ton of sense.  I love the humility of the whole thing. It really is an experiment to learn, with brand benefit.  

• 🤔 My Analysis: This is perfect marketing, with perfect timing.  NFTs are at an all-time high and a cultural phenomenon. Visa's earned media coverage has already paid back the $150k the Cryptopunk cost.

• 🤔 My Analysis: Do not underestimate how hard it is to get something like this done in a big global brand.  What Cuy and the whole team at Visa pulled off here will have taken massive amounts of work.

Disclosure: Visa is a sponsor of 11:FS Blockchain Insider, but these are my personal reflections.

2. Ramp raises $300m

• 5 months after raising $115m, Ramp's new raise values the company at more than $3.9bn in a round led by Founders Fund.  Ramp launched its first "corporate card" in August 2019 and has more than 2,000 businesses using Ramp as their "primary spend management solution."

• Ramp has also acquired "Buyer," a "negotiation-as-a-service" platform that claims to save 27% on big-ticket purchases like software contracts. Over time Ramp wants to combine its spend data with Buyer to help its customers get the best rates on anything they buy. 

• 🤔 My Analysis: Momentum matters. While they have increased cardholders 5 since last year, investors are excited that Ramp's growth continues to accelerate month on month. As it's scaling, the growth rate isn't slowing; it's increasing. Ramp customers are growth businesses themselves. So not only are they winning new customers, the ones they already have are doing more volume as time passes. 

• 🤔 My Analysis: Ramp aims to build a complete finance automation platform, from spending to accounting and reporting.  In effect, the spend management card was the wedge product for a much bigger vision. 

• 🤔 My Analysis: One of the things that comes across consistently is Ramp clearly understands the problem they're solving for customers. They talk about managing zombie subscriptions, dealing with admin, and the worry about overpaying. By offering benchmarking and negotiation, Ramp is saving its customers money.  "Use our product, and we'll save you money" is about the best sales pitch there is.  When you add to that the elegance and nuance of the execution, just, 👏.

Good Reads 📚

1. Solana Summer

• PackyM does his thing this time, diving into Solana. Solana is a "Layer 1" blockchain that would compete with Bitcoin, Ethereum, Polkadot, and even Cardano.  What makes Solana different is its speed and security model. Transactions in Eth take 30 mins and cost an average of $12 (although much more lately!) Solana transactions take seconds and cost a fraction of a penny.

• Solana has credible backers (a16z and Race Capital) and has recently seen a surge in NFT projects (like Degen Apes and Sollama's) and a price move from $2 in January to more than $90 at the time of writing. The security model uses "proof of history," instead of getting each mining node to order blocks, each event is timestamped cryptographically.  Solana is arguably "less secure" than Bitcoin or Ethereum. But importantly, Solana assumes a world where ETH and BTC exist if you want slow, reliable, and higher security transactions.

• It goes without saying Packy goes into so much depth; you should set aside an hour to read it properly.

• 🤔 My Analysis: If we want a world where Crypto can be used for more than speculation, performance matters. While Eth and its layer 2 solutions could get there, we need projects like Solana.  

• 🤔 My Analysis: In Web 2, S3 is Amazon's storage service, and EC2 is its compute service. My hypothesis is that in Web 3, we see Arweave become storage and Solana become compute, with Ethereum used as the auditor (to extend the AWS metaphor, Eth is like Amazon Crowdtrail).  Of course, it's so early, and it could all change, and maybe Eth and Solana compete just like Azure and AWS do as ecosystems.

• 🤔 My Analysis: I heard criticism of Solana as "Bro chain" that it has a lot of hype, but here's what stands out for me. If a "thing" has that mainstream feel about it (e.g., the Stablecoin USDC, the project Audius), it tends to support Eth and Solana.  Solana is the hedge a lot of projects make for if Eth never does get fast enough. Does that make it a threat to Eth? No. But a good alternative? Yes.

• 🤔 My Analysis: In December 2013, I remember reading about Ethereum and having an "AHA" moment as Vitalik outlined a general-purpose blockchain. Bitcoin was a blunt instrument that did one thing well, but Ethereum could be used for anything.  I was lucky enough to be part of the early London Eth community, support the project, and remember the energy and excitement I felt at the time. And I have to say, Solana gives me that feeling much more than its alternatives.  That's not investment advice; it's just how my gut works :)

2. A Discounted cash flow Analysis of Axie Infinity

• Projects like the Crypto-based online game Axie Infinity are interesting because they generate cash flow; they're not purely speculative. This means you can value them like you would a company (or similar).  In this piece, a hedge fund analyst uses a cash flow analysis to estimate the value of Axie Infinity. While it is currently valued at $4.5bn, the analyst believes its fair value may be closer to $3.7bn. 

• 🤔 My Analysis: As you look at DAOs, DeFi, and Crypto, much of the value to investors comes from minting new tokens (e.g., rewarding users who hold a token with more tokens).  The demand for tokens is high, so rewarding your users by minting new tokens makes sense, and the price goes up. But this is just like share dilution. It has a short-term benefit, but where is the catch?

• 🤔 My Analysis: The boomer in me says projects have to generate cash eventually, and when they do, today's prices will look high.  Surely the market can't stay in irrational speculation forever. When interest rates finally do go up, we may see a bit of a correction.

• 🤔 My Analysis: The degen in me says this is a new form of ownership cutting out many middlemen.  Imagine owning Epic Games or Colombia Records shares in the first year of founding. Yes, those shares got diluted, but they also went on to do well.

• 🤔 My Analysis: Both of these things can be true.  DAOs and Crypto, in general, will have to start to develop cash flows making them overvalued today. But when they do, the fact they're cutting out the middlemen will make for a far more efficient, global, 24/7 market and economy.  Amazon may have been overvalued before the .com crash over a 2-year time horizon, but not over a 20-year time horizon. The same can be true for some Crypto projects.

Tweets of the week 🕊

That's all, folks. 👋

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