Fintech 🧠 Food - 2nd May 2021 - Brex raises $425m, Paxos $300m, Petal Cashscore and why creator brand fit matters

Intro

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 5,674 others by clicking below, and to the regular readers, thank you 🙏

This week 11:FS launched a new report, rebuilding financial services from the inside. We discuss why banking tech is broken, why the pace of change is a power law and the ideal financial services architecture.

Wanna see? 👉 Download it now. 👈

This report was a labor of love; the team worked super hard on it. Regular readers will recognize many of the core concepts. Please do reach out with your thoughts and share widely.

Weekly Rant 📣

Creators, and financial services, marketing gimmick or the new normal?

Fintech is on a tear. Q1 21 was the highest ever quarter for fintech investment, according to FT Partners.  Fintech companies managed a staggering $29 billion in volume across more than 750 transactions. 

Brex announced $425m funding (discussed in detail in this week's good reads), teen card Greenlight raised $260m, teen card Step has raised $100m, and Amount.com is partnering Barclays for BNPL. A year ago, each of these stories would have been the biggest story that month.  Fintech is now the most significant thing in tech and culturally relevant.

It's no surprise too when you consider that each generation is doing worse than its parents. We own homes later; we're starting families later, and asset prices grow faster than incomes.

This week Neobank Current announced it had raised $220m, and it was partnering with Jimmy "Mr. Beast" Donaldson; it caught my attention because it's a perfect example of the reaction. Other fintech companies (notably Step) have partnered with creators, but Current has architected their whole brand around a new concept of trust.

Trust is changing

If watching 100 people compete to build a car in Minecraft isn't your thing, it is probably worth saying why Mr. Beast is so popular. Mr. Beast will run competitions for gamers, who compete to win 10s if not 100s of thousands of dollars.

But it's not just a gimmick; Mr. Beast (and all of his friends) are relatable and come across as super genuine. They don't pretend to be life experts, but they do change lives.  The philanthropy and giveaways are much more than entertainment; they're a way to give back to a community and an audience. This is a hard point to do justice because brands have run competitions and giveaways, so to understand why this builds trust, we have to consider who the average gamer is.

Why creators have trust

Influencer marketing became a bit of a dirty word in the mid-2010s, as every wannabe influencer started shilling harmful makeup or mid-level marketing schemes.

But a creator is not the same thing. I don't know who coined the term "creator" (it is potentially just perfect branding, and now every instaglam type will be calling themselves a creator). But the word is much more accurate.

Creators build trust with their audience through a promise. We are like you, we share an interest, and we will always entertain/inform/be there for you.  

The creators who keep this promise build a massive amount of trust in an increasingly chaotic world, noisy and where a generation feels left behind by centralized authority and institutions.  

What Mr. Beast is saying when he gives away $10,000 for creating something in Minecraft is "I see you, I value you," and to a generation of people who don't feel that from the rest of the world. That. Is. Massive.

Are brands playing with fire by aligning with creators?

No, you're just old.  

I get it. Financial services are important. When you're dealing with someone's money, you're dealing with their safety, shelter, and health. The consequences of getting finance products wrong are significant (that's why some rules or regulation makes sense).  

There's an argument that creators bring their trust and audience to "promote a financial product" (in this case, a Neobank). Does the audience understand what they're buying or why they're buying it?

Yes, they do. When you sign up for a Neobank like Current, you must pass through an onboarding process. But there's something more significant going on than just being successfully onboarded.  The creator must fit the brand, and the brand must fit the creator.

Creator brand fit

Most smart creators are very picky about which brands to collaborate with. Even though they're getting paid, they're also keenly aware their community is their lifeblood. They have to recommend things that align with the values or needs of their audience.

But it works two ways.

Brand creator fit

Current, like many Neobanks, has innovated in the kinds of smart features that make a difference in people's lives. For example, when you buy gas, the merchant will often put a $100 hold on your card, making a massive difference to a month. Current will refund whatever you didn't spend on gas.

Current's average customer age is 27, and the features they build matter most to younger, low-income consumers.

In effect, Current makes a promise to its users.  "We see your pain; here's a way around it so you can get on with what you need to."  

That promise is very similar to Mr. Beast's. What unites Current and Mr. Beast is they make a promise and deliver on it. Chances are, there is a significant overlap between people who watch Mr. Beast and Current's target audience.

Getting it right

If Wells Fargo announced a significant partnership with a creator tomorrow, it would ring hollow unless the creator and brand's brand promise aligned. 

There is a ton of marketing value in working with creators, but it's not what you do; it's the way you do it that counts.

(For more, Alex Johnson interviewed with Current's VP of marketing here, and you should check it out)

ST.

4 Fintech Companies 💸

1. Weav - Plaid for e-Commerce Platforms

• Weav provides a single API to commerce platforms like Stripe, Shopify, and Square.  Weav will aggregate and standardize all sales, inventory, and accounts data.  Despite each platform having some level of API, cross-platform access can be inefficient and beyond the reach of many builders.  

• With this data now standardized, clients such as Brex can provide real-time dashboards, lending, or financial planning. Small businesses and sellers still find it too hard to get access to cash flow. Revenue-based finance companies are one answer (e.g., Clearbanc). Weav has essentially made that lending use case and many others available via a single API.

2. Inscribe - Fintech Data Fraud Prevention as a Service

• Inscribe is an API that can review and detect fraudulent paper documents. Used by Ramp, BlueVine, and Petal, Inscribe uses OCR to read, classify, and data match the document against a user. If this sounds like UiPath, it is similar, but what makes Inscribe different is their specialism.

• To do AI-driven anything in fintech, you need a lot of data. Inscribe has been quietly working with large payments processors, fintech companies, and lenders for some time and has a larger data set than any individual company.  Fraud is a moving target, and Inscribe is effectively an industry-wide specialist in fraud prevention, better than any particular fraud team.  Over time Inscribe can move beyond paper documents into other sources of data. One to watch.

3. CableTech - Automate Fin Crime controls testing

• Think of CableTech as Fitbit for bank risk teams. With the real-time data and feedback, risk teams have a much clearer picture of what is happening.  Preventing financial crime is hard but is getting much more automated thanks to services like Hummingbird and Comply advantage. However, many of these tools are as good as the people that use them.  What Cabletech does is provide a dashboard and data overlay to the compliance team to see in real-time how financial crime controls are working (or not working).

• When the regulator or risk committee asks for a report, CableTech can generate that quickly in a standard format. CableTech will also detect trends or events that could be new risks and require a policy change. CableTech is niche but super high value to anyone who's worked in compliance.

4. SenchaCredit - The debit card that builds credit

• Sencha is a debit card that will build credit and includes stock & Bitcoin rewards. Initially aimed at students, Sencha has quietly amassed over 1,000 waitlist users and completed the API partnerships it needs to deliver on all of the feature capabilities.

• Every Neobank has started to add these features, but I like the clarity of the Sencha approach; they put all the pieces together. The important thing now will be execution, but the lesson here is credit builder, crypto, and stocks are now table-stakes. 

Things to know 👀

1. Paxos raises $300m and $2.4bn valuation

• Paxos offers infrastructure and white label services for companies like Paypal to access cryptoassets. Paxos offers its customers trading, custody, and the ability to issue tokens.  Clients also include Revolut, Société Générale and Credit Suisse.

• 🤔 My Analysis: Paxos is leading the charge bringing mainstream institutions and credibility to crypto.  Watch for many more big names like those above being announced in the coming months.  My sense is this period we're in isn't the end of the mainstreaming of crypto; it's just getting started. (Not investment advice btw, DYOR).

• 🤔 My Analysis: Paxos powers several Stablecoins, including BUSD (Binance's US Dollar stablecoin), and quietly BUSD is the 3rd largest stablecoin. Stablecoins are a crucial part of the crypto financial infrastructure, settling USD near real-time, anywhere in the world to any venue (now ask a banker what that process would look like for them over SWIFT or Wire).  Stablecoins can be another payment rail, and now both Visa and Mastercard are paying very close attention to crypto, stablecoins as another rail feels like when not if.

2. Vivid Money raises $73m at $436m valuation

• Vivid money is a Revolut competitor, with the complete collection of Neobank features like spend, save, buy stocks, and more. The account can hold dozens of currencies and offers ETFs and cryptoassets. Users can also create sub-accounts called "pockets."

• 🤔 My Analysis: It is interesting how "feature complete" the super app category needs to be in European retail Neobanks.  The lack of interchange revenue appears to have driven a much broader feature spread than we see in most US-based Neobanks.

• 🤔 My Analysis: The team behind Vivid has roots in Russia's Tinkoff bank, one of the early, profitable challenger banks (and a great case study if you haven't heard of them).  Tinkoff made a name successful at lending, which makes me think that Vivid may head that way before long.

Good Reads 📚

1. Brex - The future of business banking and cash management

• The Brex founders had initially tried to create a VR startup, but as immigrants found, they were denied a credit card to fund business expenses. Business credit is traditionally written based on founders' FICO scores, regardless of the health of the business. Card adoption in business is still minimal (at 4% of payments) compared to checks or wire.

• The initial Brex product was a charge card with 10x to 20x a personal credit limit, available in 24 hours. Within three years, they had 20,000 business customers.  Brex Cash is now the center of Brex and the heart of its customers' financial operations. Brex removed all fees on ACH and Wire transfers, offers 40x faster payment initiation than incumbents, and provides seamless integration to accounting.

• 🤔 My Analysis: Brex just raised a $425m at a $7.4bn valuation.  Say all you want about fintech valuations; Brex is incredibly significant because it's aimed at the bit of banking that is still profitable. Retail Neobanks will have a hard path to profitability (unless they bolt on stocks, bitcoin, etc.), but Cash Management has so much more scale and potential.

• 🤔 My Analysis:If you thought retail banks were lazy and slow, cash management is a whole other level.  The majority of banks still expect their clients to upload payments via FTP or an online portal.  Some banks have transaction banking APIs, but those APIs are often poorly documented, poor performing, and subject to all kinds of suck. For example, a bank will reject a payment sometimes and not tell its customer why (legally, it often can't because of "tipping off rules"). But the issue could have been the bank didn't have enough data, or something went wrong in one of their systems.

• 🤔 My Analysis: Banks are often beholden to systems running at scale for decades, that transaction $trillions daily, that nobody truly understands.    As a result, a bank may reject a transaction just because it doesn't have enough data.  Brex has the advantage of having a much newer technology stack and follows modern software engineering best practices. If a transaction fails, they could try again, try another route or even collect more data.  

• 🤔 My Analysis: Brex should be the case study every Global Transaction banking CEO is obsessed with and terrified of.

2. How Petal CashScore works

• Petal was one of the first fintech credit card offerings launched in 2016. The original mission was to expand access to credit to the 50m Americans without access by innovating with data and underwriting.  The problem with data, especially financial data, is its low quality. Petal spent years perfecting a system to clean and understand from raw data how stable a customer's income was, recurring bills and how much they save month to month.

• In credit, learning often means losing money. But by going through the process of lending to customers and training their model, Petal was able to predict the credit risk of thousands of consumers who haven't had credit before.  Petal has now taken this model and put it behind a single API, "Prism Data."

• 🤔 My Analysis: Getting credit right requires a lot of data, time, and patience. Buying that via an API feels like a no-brainer, especially if the model learns from its customer's data.

• 🤔 My Analysis: Petal bootstrapped a credit bureaux competitor by building a successful credit business. Given how often Experian and Equifax are having data breaches and how exclusionary the whole system is, I'm all for that! 👌

Tweets of the Week 🕊

That’s all folks 👋