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  • Fintech 🧠 Food - 31st July 2022 - Why is it easier to get into debt than build wealth? Revolut losing risk exes, and Citi's comback.

Fintech 🧠 Food - 31st July 2022 - Why is it easier to get into debt than build wealth? Revolut losing risk exes, and Citi's comback.

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 18,753 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

I had the fortune of spending time with some of the world's best consumer advocates this week. A key topic was that despite our efforts in Fintech and financial inclusion, the wealth gap has stubbornly not budged. It continues to get worse.

Overall, living standards are improving globally, and yes, Fintech companies are providing remarkable innovation to help people in need, but outcomes and data matter.

Moving the needle means changing wealth creation, and that's the focus of this week's Rant 📣

Also

👀 Revolut loses five risk execs. Will it ever get its UK banking license?

👀 Citi makes a comeback driven by trade and treasury services, the bit of banking you need to know more about

PS. Who’s coming to Fintech Devcon? See you there?

Another long one this week; if your email client clips the content, click here for the website version.

Weekly Rant 📣

Why is it so much easier to get into debt than build wealth?

The assumption baked into our financial system is if you have money, you can afford to take a risk and build wealth; if you don't have money, you are not worthy. But, it's perfectly fine for you to take a loan if you have a low income; lenders just want to ensure you are at least likely to pay it back.

When a lender evaluates you for a loan, they look at two broad categories, affordability and credit worthiness. Affordability is how much income you make, and creditworthiness is your likelihood to repay. 

But to invest in most assets in financial markets and build wealth, the only critical requirement is to make more than $200k per year. There is no measure of "risk worthiness." 

We've had decades of incredible growth in financial assets and stock markets, yet the rich are getting richer, and the gap between rich and poor continues to widen.

For most people, capital markets are a pyramid scheme they bought into way too late.

And it's getting worse.

We haven’t improved relative equality despite our technology, robots, and qbits.

Does that seem utterly ridiculous?

To me, it is.

So I wanted to unpack

  • Why affordability matters in lending

  • What exactly is creditworthiness

  • How data is changing credit

  • Mainstream investable assets

  • How do we make them "safe."

  • What is a sophisticated investor?

  • The wealth gap enforced by regulation

  • The importance of risk in building wealth

  • The effectiveness of today's risk management in wealth

  • A data-driven approach to risk

Affordability matters in lending.

As a lending business, you could give everyone who walks through the door a $10m loan, but you'd go out of business quickly. If a borrower doesn't have the available (liquid) income or assets to make repayments, likely, they won't repay. 

If they don't repay, you'll have given away all of your capital and have no chance of getting it back.

But affordability isn't creditworthiness.

The importance of being "creditworthy."

(Aside, the word "worthy" is a tad patronizing; we need a better one, like "credit winning" or something)

A person or business who is financially responsible is more likely to repay than one who isn't. 

Consider a high-earner who spends more than their monthly income vs. a more modest earner who has never missed a mortgage payment. The high earner may have better affordability but is less creditworthy. 

The mortgage example is why often a bank that collects your direct deposit may be more willing to lend to you than others. They see both your income and your outgoings. 

If you apply for a loan or mortgage with a bank that doesn't collect your direct deposit, this is why they often ask you for bank statements and pay stubs. They're trying to get at the same information. 

Another indicator of creditworthiness is past performance. If you have six credit cards with countless missed payments on all of them, there is a good chance you'd miss a payment if you take a new loan as a customer. (Some lenders might like that because they can charge fees, but mortgage lenders steer clear). 

Credit agencies (Experian, Equifax, and TransUnion) are data businesses whose core business is to compile lending performance data about a consumer and turn that into a credit score. In the US, this is the "FICO score," and just your "credit score" everywhere else (because you yanks love a brand label with your kleenex and hoovers).

Each lender develops a series of processes to understand if a customer has affordability and creditworthiness. Typically these are bucketed into "credit underwriting." Although underwriting at different lenders may include more activities, the core answers the question, "will we get paid back?".

Each lender also draws its own lines in the sand.

What do we define as affordable if we lend for a $300,000 mortgage? $60k would be 5x annual income, and $100k would be 3x yearly income. During the last two major bull markets (2006 and 2021), many lenders saw 10x annual income as "affordable."

And what makes someone creditworthy? Perhaps someone with zero missed payments, a mobile phone contract (paid monthly), and a FICO score above 600. Or maybe the lender would look at FICO scores of 550 if the affordability was much higher. 

A credit committee takes these decisions (in most cases), which is a group of professionals who have spent a decade or more lending through good times and bad.

Set against all of this, each lender also has countless regulatory obligations. They have to ensure "fair lending" and no discrimination based on race, ethnicity, or gender.

At least, that's how it should work.

This isn't a rant about lending, but I'd be remiss if I didn't point out that despite the good intention, laws, and best practices, lending has been, at best, a blunt instrument. Available to the rich in easing life and a trap for those at the bottom of the income ladder.

Loan officers and credit committees are human.

The benefit of humans is that they have the experience that algorithms and machines often lack. The downsides are that humans are expensive, can process low volumes of loans, and carry biases (whether intentional or not). 

Data is changing credit.

The amount of data humans create continues to grow exponentially. Like all exponential growth, it's easy to ignore over the short term and impossible over the long term. (Remember the pandemic and case growth?)

I've lumped the ways this data is used into two categories

  1. Algo's based on behavior

  2. Algo's based on alternative data sources

Behavior: I often cite this classic blog from Affirm for behavior-based data as an example. While lenders often look at countless variables to understand if a customer will repay, the data Affirm has shown that the current repayment state is the most accurate way to predict a future state. 

This is massive. 

The data shows that a customer who may have had poor credit two years ago might be a better customer than someone with perfect credit who missed last week's payment. (Immediately, I have to caveat that the model is trained on BNPL in a bull market and may not apply to all lending types or across the whole credit cycle).

But if this trend holds up for all lending types, we could be more financially inclusive. Why let an old bad debt get in the way of a good new customer?

But Algo's alone isn't enough; we need more data than cash flow to get this right.

Alternative data: Bank account and payroll data have absolutely changed the game. 

With bank account data, we don't have to guess if you pay your bills on time; we know. We don't have to ask customers what they pay on credit cards every month; it's in the data. 

With payroll data, we get a precise monthly income figure and, in many cases, the ability to pull funds directly from the paycheck (so even if someone has terrible spending habits, the lender gets paid first). 

Now combine more data with better Algo's, and what do you get?

The financial services old guard likes to sneer a little at the Fintech lenders using this type of data, but consider Tomo Credit, the zero fees, zero APR credit card. In their Series A funding announcement, the CEO also stated they have a 0.11% default rate. 

For context, that's not exactly going out of business numbers.

Market data is misleading (people confuse a delinquent (late paying) customer with a default (never paying) customer).

But, if you believe the FED, then at least 1.73% of all credit products are currently 30 days late paying, and the Experian benchmark suggests 2.53% of credit cards are defaulting. And that number could get much worse as we head into recession; the index stood at 4.3% during the brief pandemic market shock in ~April 2020.

If these numbers all stack up, the model used by Tomo Credit isn't using credit history, has no fees and performs better than traditional approaches. I’m curious and excited to see if their defaults can stay lower than credit cards over the cycle, and if they do, that’s a breakthrough.

Alternative data + cashflow-focussed Algo's = better outcomes.

We can get to more inclusive lending with human oversight and data combined.

What has any of this got to do with investing?

Consumer investing.

The mainstream has a small window of assets they can buy in capital markets. Bonds, Stocks, ETFs, and mutual funds are commonly made available via registered brokers. These are considered "safe," and you can have them in your 401k. 

How assets become "safe."

With a few exceptions, most investable assets available to consumers are "securities." The definition of security is the subject of much legal debate (and in the US, an awkward test called the Howey Test).

But before we get to Howey and the orange groves, think Stocks, ETFs, Bonds, etc., for now. Any entity that sells securities must be registered with the securities and exchange commission (or their equivalents in other jurisdictions). 

The SEC was formed in 1933 following the stock market crash of 1929, in which tens of millions of people lost their net worth in days. Investors had pilled into stocks and seen their net worth balloon as the market continued to move "up only." This led to excessive speculation, risk-taking, and, worse, outright scams that created massive social consequences. Half of America's banks failed, and 30% of the adult population was unemployed.

The SEC worked to ensure extreme crashes like 1929 could not happen again and created a series of rules designed to make stock markets safe for consumers with two core principles.

  1. Disclosures: People should access all relevant information to avoid buying stocks that sound good but have significant issues (as in 1929). Stocks are registered in the EDGAR database; in theory, every investor has the same information about a security.

  2. Oversight of market participants: Exchanges, brokers, funds, and rating agencies must "put the interests of the investor" first and treat them fairly and honestly.

Not all assets are “securities.”

To be a security the asset must pass the Howey Test, an irritatingly vague rule based on a 1946 supreme court case. An asset is a security if there is an:

"investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."

Sometimes it's obvious, like with Microsoft or Walmart Stock. The investor may not work at either company but usually invests for profits, dividends, or both. And both companies have a workforce, so the investor expects the profits to come from the efforts of others.

These stocks are big, trade on regulated exchanges, and can be bought from regulated brokers with all data available to the public. Therefore in the eyes of the law, they're "safe." 

But what happens if some clever banker wanted to buy oil but set the price today? This "future" agreement is based on a benchmark price that derives its value from a benchmark. It is a complex form of security called a derivative. 

And you can't buy one. 

Because you're not sophisticated enough.

What if you have a friend who starts a company and it secures investment from a prominent VC, and you want to support them by buying $1,000 worth of their ordinary shares? 

You probably can't. 

Because chances are you're not sophisticated enough.

What is a Sophisticated investor?

Sticking with the private share sale.

Meet our friend Regulation D (Reg D), rule 506(b), which states an individual may be an accredited investor if they have a net worth of more than $1m or an income higher than $200k. The top 10% of earners are the only ones who can invest. 

Regardless of career history, spending habits, or mitigating circumstances, a sophisticated investor is someone who can afford to lose on an investment.

(Interestingly, in the UK, consumers can "self certify" to be sophisticated, but the UK has a series of other issues around its capital markets (e.g., depth, supply, institutional appetite), making it less effective at democratizing wealth creation than it could be)

By ensuring consumers can afford to lose before investing, you're ensuring they can't win. 

We need safe, secure, and deep capital markets where the opportunity to create wealth is available to everyone.

The wealth gap is enforced by regulation and market structure.

The issue isn't just sophistication but the cost and burden created by becoming regulated for the suppliers of securities. 

Selling securities to the general public requires becoming a registered broker-dealer. This is an achievable goal (Robinhood, Public, and others have managed it). But the cost is driven by what happens a layer deeper. 

To give a flavor, the market structure of finance in the US is a complex layer cake of: 

  • Investors who buy, sell or hold securities (You, Fidelity, Citadel)

  • Asset Managers who build funds of many securities (Fidelity, Blackrock)

  • Brokers who sell to the legal owner (E*Trade, Robinhood, Schwaab)

  • Banks that offer margin to brokers and asset managers trade with as well as payments access, FX, and more complex contract types (Goldman, JP Morgan, Citi)

  • Clearing Agencies that settle cash and securities (DTCC, FICC, NSCC)

  • Exchanges where broker-dealer's trade on behalf of investors (NYSE, NASDAQ, CBOE)

  • Custodians that hold the underlying asset on behalf of the broker-dealer who maintains it on behalf of the ultimate beneficiary like you or me (BNY Mellon, State Street, Northern Trust)

(The above is an oversimplification, and many of these actors play many roles, the point is, the damn thing is a maze). 

Figuring out what security clears through what route is like playing the Japanese Pachinko game. In the game, a small metal ball drops vertically from the top of the machine and bounces down through obstacles. Players hope the ball will land in a lucky spot to receive a reward, but it is a game of chance. (Of course, the securities markets are not games of chance, but they're complex af). 

The critical point here is much of this maze exists on purpose.

As just one example: Custodians are required to keep assets separate from their bank balance sheet. This "separation of concerns" is key to separating the risk a bank would take from its customer assets. This is sensible and comes after decades of lessons from recessions, depressions, and financial crises. 

In fact, in isolation, every bit of market structure makes sense. Every rule also makes sense in isolation. 

But the maze of regulations and providers also adds cost and complexity.

To offer securities, you must get a license as a registered broker-dealer (not cheap). To offer funds, you must buy them from an asset manager (adding cost). You must also find a clearing agent connected to a clearing house (like the DTCC). Then you have to post margin and get a custodian.

We've baked risk management into the infrastructure.

The actors, the roles, and the stage are set in stone.

New technology often only fiddles at the edges instead of making meaningful changes to the market dynamic, and that's why new wealth creation is so hard. Regulation is like gravity; it pulls the market structure in specific directions with intended and unintended consequences.

(Yes, there are market dynamics at play here too. Assets like buying a tranche of loans from a Fintech lender are hard to buy because the level of due diligence is high, and it should be.)

There has been a recent wave of API first brokers and clearing agents (e.g., Drivewealth, Embed, and Alpaca) who provide access this market for Fintech companies. This is an excellent and positive development; now, almost any Fintech company can offer US stocks to their users.

But fundamentally, they're a layer over the infrastructure and regulation. The maze still exists, as does the law and ruleset that created the maze.

The cost and complexity of the current system are high, but the argument can be made that the system works. Bad actors are often fined, and consumers are often prevented from taking overly risky bets. When something goes wrong, there are processes to make them whole. 

Risk management isn't nearly effective or inclusive as it could be.

Remember disclosures? One of the most significant risks to investors is "information asymmetry," We solve that by requiring publicly listed companies to make disclosures in the EDGAR database. 

Is this meaningfully protecting investors? Answering that with two questions for you, dear reader.

  1. Do you own stock? (Probably yes)

  2. Have you ever searched the EDGAR database? (98% chance no)

I'm being a smidge unfair; the disclosures in EDGAR are picked up by journalists and outlets and then widely shared by data companies. But does this data meaningfully prevent the little guy from getting crushed when Gamestop pumps and dumps? Nope.

Do disclosures or margin requirements prevent payments for order flow, monetizing users' trading activity? Nope.

Disclosures are a fundamentally good thing. They're just implemented in the best tech we had at the time, with the context of the last crisis, rather than being upgradeable and open like software.

The same is true in oversight. The fact that oversight exists is fundamentally good, but the technology and approach aren't upgradeable. 

The legal system is an append-only technology. This locks in costs, biases, and issues into the current market structure and unintentionally creates a high hurdle for consumer investing.

And with sophisticated investors. The fact we check someone can afford to invest is good. 

But we have no idea if they're risk-worthy. 

A person earning $300,000 per year may spend half of their monthly income gambling, and stocks are another way to gamble to them. Another person earning $80,000 may be sensibly pilling income into a 401k, saving for a rainy day fund, and have some opinions about real estate or biotech. 

It's much easier for the first person to invest in a biotech startup than the second. But I'd argue the second person is much more risk-worthy. 

(And don't get me started on actual gambling, which is available regardless of your income or risk-taking history).

Today the data says the little guy always loses, no matter how sophisticated they are. And our market structure makes that worse, not better.

But what if we had more data?

In many cases, it's now possible to check someone's payroll, checking, savings, investments, 401k, and even their Coinbase account. 

From all of that 

  • What % of their income is going into savings? 

  • How often are they saving? 

  • What is their approach to investments when they make them? 

  • Buy and hold or YOLO leverage?

What if we used this data to identify the risk worthy, and that "score" made them "sophisticated?" 

The new API-first providers, like Drivewealth, etc., are amazingly well placed to be platforms for this type of innovation. But we need the compliance and regulatory nerds to unlock the potential of wealth creation (as is always true, ❤ compliance nerds)

Let's not just measure the inputs. How did that change their financial picture if a consumer can be risk-worthy today and then get risk (like leverage to buy more stocks)? How did that change their financial health?

We must stay focussed on outcomes.

(Note: The FCA's new Consumer Duty regulation requires financial services firms to focus on customer outcomes and data)

And a better UX pattern?

For all the talk about consumer education, there's less talk about its effectiveness. 

Sure, Robinhood has a great learning center, and a whole network of Youtubers has sprung up. Public.com has done marvelous things with its community, and Reddit's investor sections have some incredibly useful insights and tools. 

But the core UX gets information about a stock or investment, then buys, sells, or holds the asset. 

Some questions to ponder:

  • Could we grow users as they demonstrate through data and usage that they have risk-worthiness? 

  • Could we "unlock" new capabilities as users do so

As a kid, many of us loved Seasame Street (or your generation-appropriate equivalent TV show) because it was educational. If you look back, that thing is non-stop counting, letters and education. But at the time, it felt fun.

Because we humans love learning, especially when it doesn't feel like learning.

The art of great products makes it a joy to use, not just for engagement but for outcomes.

How do we get more engaged consumers, more joyful UX, and measure outcomes?

I think much of this can be done (and is starting to be done) in Fintech today.

But.

We have an opportunity to start from scratch.

With DeFi, we're creating a new, open capital market. 

Transparent by default, inclusive by default, and open to a fault.

This new market is small, and like any toddler learning as it falls over and picks itself back up optimistically, learning the next lesson and becoming stronger. 

DeFi's pace of change and its open data present an incredible opportunity for us to:

  • Be data-driven in supervision

  • Make disclosures in the public domain

  • Build new UX to ensure users are becoming risk-worthy

  • And demonstrate a user's risk-worthiness through their on-chain history

Everything is different in DeFi, from how custody works to the types of risk that need to be managed (e.g. how good is your bank at handling smart-contract risk?).

So there are risks to be managed. Yes.

But we must not recreate the maze.

The temptation is to bring all actors in DeFi into the existing regulated system to "make it safe."

That would miss a once-in-a-generation, perhaps once-in-a-century opportunity to build a much more hopeful, fair, and efficient financial system.

Instead, let's start with the consumer outcomes we want.

Let's start with data as the measure and transparency as the principle.

Then let's build a better market structure and better oversight.

ST.

4 Fintech Companies 💸

UK flavor this week 🧂

1. Bondsmith - Savings and BaaS for Wealth Platforms

  • Bondsmith partners with digital wealth managers and their software providers to enable cash savings. Typically customers of a wealth management firm leave their cash savings at a bank, making managing wealth holistically harder. Bondsmith has an e-money license in the UK and can enable UK wealth managers to get to market quickly with cash savings and scale the product over time.

  • 🤔 This feels like a no-brainer add-on to wealth management, and they already have a solid distribution partner with FNZ (which has a 50% market share of digital wealth management platforms). Solid.

2. Fluency - CBDC as a Service for Banks and Governments

  • Fluency has built a dual online and offline CBDC payment rail targeted at central banks and financial institutions and is working with the Federal Reserve, ECB, and Bank of England research arm. They also support interoperability with private stablecoins, traditional payment types, and the broader DeFi ecosystem.

  • 🤔 There are plenty of companies vying to be the provider to central banks, but Fluency is one of the few directly focussed on that one goal. This means they have a broader coverage of central bank projects. Long term, a provider who can help build the technology that bridges existing central bank payments into the new DeFi rails feels like a solid bet. Who that provider ends up being remains to be seen.

3. haruko.io - Institutional portfolio management for digital assets

  • Haruko provides real-time risk and pricing analytics in a single gateway for institutions to buy and manage digital asset exposure. Haruko has built connectivity to CeFi and DeFi exchanges and has been built to integrate with financial institutions existing systems. Clients can manage their portfolio through a single interface because Haruko unifies and cleans data from different venues, exchanges, and protocols. 

  • 🤔 The institutional interest hasn't left DeFi in the bear market. The trades and the volume may be lower, but the infrastructure is still quietly building. Often large institutional buyers want to access Crypto via their existing brokers. Haruko is well placed to provide software to those institutional brokers (like large banks). They're far from the only platform that does this kind of thing, and my sense is their ability to access their clients will make or break this business.

4. Stonepay  - Experian for International B2B trading businesses

  • Stonepay aims to solve the late payment problem for companies trading internationally. As companies make confirmed payments, they gain a trust score on Stonepay, and on-time payments get an even higher score. Companies can then use these reputation scores to decide how much credit to extend their suppliers as the network grows.

  • 🤔 I'm surprised this doesn't already exist (if it does, dear reader, please point me to it). Traction and network effects will be key for Stonepay, they're very early, but if I were in the data business, this is the kind of IP I'd like to be pushing. Imagine adding this to the countless payment orchestration businesses and pulling data from accounting software to automate reputation building. 

Things to know 👀

  • Revolut has seen the resignation of 5 of its most senior risk and compliance executives in recent weeks, according to City AM. This includes the Money Laundering Reporting Officer (MLRO), Head of Compliance, data protection officer, and deputy MLRO. Revolut is regulated as an e-money provider in the UK and has long sought a banking license and authorization to provide Crypto services in the UK (currently under a temporary order). Revolut says staff turnover is common in high-growth companies.

  • 🤔 The Revolut CEO is openly critical of the regulator, and headlines like this won't help their case for a license for Crypto or banking. It is the regulator's job to ensure stability at financial companies on behalf of consumers. This level of staff turnover can't be dismissed; to the regulator, it looks like something is up. 

  • 🤔 I wonder if Revolut management has committed investors that they will secure these licenses? Given how often they're in the media talking about intent and the company's notorious KPI-first culture, there has to be some motive to getting it done quickly. 

  • 🤔 Because honestly, Revolut may be better off without a banking license. Starling and Monzo are now quietly building lending businesses (Starling even hit profit through its mortgage lending). But Revolut is in 30+ markets and offers stocks, Crypto, small business acquiring, and much more. If management thinks being regulated is hard now, they're in for a shock if they ever get a license.

What, the world is falling apart, and you talk about a bank doing well? YES, this has to be understood if you're a Fintech operator or builder.

  • Shares in Citi jumped 10% on news that Citi's Trade and Treasury Services (TTS) posted a 33% jump in revenue with higher net interest and fee growth. Much of this can be attributed to rising interest rates for US dollar-based lending. The market's business also saw a 25% revenue boost from currency (FX) and commodity volatility. 

  • 🤔 Trade and Treasury Services (TTS) is the bit of the bank that serves large complex corporates. Treasury management is how large corporates manage their cash, lending, and supply chains. Imagine how many currencies, and markets Coca-Cola or Mcdonald's operates in. Imagine what happens to them when the dollar moves or the global supply chain is disrupted. Treasury Services will help move dollars between accounts in different countries (payments), and Trade will help provide lending to cover the cost of buying goods that haven't yet been sold. 

  • 🤔 Trade and Treasury Services is the profitable bit of banking that Fintech companies aren't attacking (much) because it's really hard. Creating pools of cash in 100s of markets requires a bank to have licenses in those markets and access to the payment systems. Lending to a global corporate at a competitive rate requires a deep understanding of the nuances of their business and market dynamics. The corporate treasurer is a sophisticated buyer and requires specialist teams and heavy investment to deliver on their expectations.

  • 🤔 If anyone in Fintech is headed that way, Rho and possibly Brex are the candidates that came to mind. Brex has started integrating with ERP solutions used by corporates like Oracle Netsuite or Microsoft Dynamics. This goes way beyond just offering a corporate card and spend management suite to growth companies. I sense a giant like Coca-Cola is less likely to jump to a new Fintech company tomorrow, but growth companies may be corporates tomorrow. Brex caught some negativity for focussing on enterprise customers, but it is a rational move.

  • 🤔 Remember I said Incumbents don't call it a comeback? This results season is a real shot in the arm for long-suffering bankers who have heard the Fintech crowd kick and beat them down for being slow and expensive. But they are still slow and expensive it's just the market turned towards them. Banks live or die by interest rates, but the great ones will become platforms that enable Fintech companies. Hubris sucks no matter who's winning.

Good Reads 📚

  • DeFi may be disrupting the last part of finance untouched by Fintech companies, Capital Markets. Lending businesses have to raise capital before they can distribute it to borrowers. The last decades have seen innovation in deploying lending but little in raising capital. Giorgio gives the example of Credix which is building a credit marketplace and helping lenders in emerging markets raise capital. 

  • Credix has three core components in its marketplace; investors, underwriters, and the deal. Investors provide capital and receive LP tokens, underwriters (institutions that evaluate the deal provide first loss capital), and the deal represents future loans approved by the underwriters. Because underwriters are first-loss capital, they're incentivized to support deals they're less likely to lose money on. 

  • 🤔 We're in an experimentation phase for "real-world" lending on DeFi, and only time will tell if it's sustainable. But like how radio was worse on the internet at first, unless you lived on the other side of the world, I sense the value initially is that this is global in nature. It will be a while before DeFi is meaningfully more efficient than established debt capital markets.

  • 🤔 These are high-risk markets and credit quality matters. These protocols will live or die by the quality of underwriters they attract in their early days. A handful of lenders like Goldfinch, Maple, True Finance, and Credix all have unique approaches and are early. Giving away capital is easy; getting it back is hard. Do the collection of underwriters in DeFi have experience investing in emerging market lending businesses? I guess we'll find out.  

  • 🤔 It's a common theme how many DeFi real-world lenders ultimately live on top of MakerDAO. The promise of an elastic central bank for DeFi is working.

  • 🤔 There's a role missing in the market, a sort of underwriters guild. Crypto has selected for the highest returns over the shortest time horizon, but its long-term viability now requires the opposite. DeFi needs to get boring. Good underwriting could create investment opportunities for the whole world and do a lot of social good (deploying capital to lenders in emerging markets). But there's a reason not everyone does that; it's super, super high risk. Let's lean into the transparency of web3 and DeFi and do this right from day 1. 

  • Stripe has reportedly cut its internal valuation by 28% to its last funding round. This pales in comparison to public market Fintech companies that have dropped by 60 to 60% in some cases. This impacts staff who have stock options because 409A is the metric used to value those options. 🤔 So I guess we won't see Stripe IPO any time soon. 28% down on $95bn isn't that far down, suggesting a belief that revenue growth is still strong, and Stripe can grow into a more significant valuation in the coming years. This is a boon to employee acquisition without taking a valuation cut on the investor side.

Tweets of the week 🕊

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)