Fintech 🧠 Food - 3rd Jan 2021: Bitcoin $34k, Ant Group reg issues, and the map for the future of finance

Hey everyone 👋, thanks so much for coming back for more brain food, covering four fintech's that caught my eye this week, an in-depth look behind some of the biggest stories and best content of the week. It's the "I know kung-fu" version of what happened in fintech. Apparently. :)

You're going to want to check out the tweets this week, some absolute gold in there.

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Weekly rant 📣

I believe in 10 years; most banks will be dumb pipes.  A few will be smart pipes, and even fewer will have found relevance beyond that in the world of fintech. Neobanks will move up closer to the customer problem. Providers will move down to make the infrastructure easier to access. A few incumbent banks will get that. Most won’t.

Banks are full of intelligent people and spend plenty on innovation. Their issue is culture. Even if one leader gets it, the culture is perversive. 

In the back of my head at all times are the things bankers would say when you make a statement about fintech. I think it comes from the years in the industry.  Every time a fintech gets brought up by a junior staff member, someone older, possibly less informed, will say things like "well, we do that" or "I remember the 2000 tech bubble."

But incumbent banks have a point. They have all the market share.

Bankers have data on their side. If anything, banks have too many deposits, too many customers believe the economy is the problem, structural market change.  Interest rates are low because of the pandemic; they can't lend because of the pandemic, and consumers aren't spending because of the pandemic.

Bankers ALWAYS do this; to them, the share price is driven by the external event.  

Exhibit A: Do you remember the Swiss currency crisis? Yeah, no, nobody else does either except the C-suite at your megabank or your trader buddy, who's a bit weird. 

When you're a megabank, the markets' daily tide becomes all-encompassing, the focus becomes micro. When you focus on the short term data or, worse, the wrong data, fintech isn't that scary.

Banks exist in a culture of rampant short-termism.  A focus on quarterly results, tech projects that run on annual cycles, and a c-suite where 3% have any background in technology is a recipe for strategic disaster, and you can see this in their share price.

The measurement bankers care about is Return on Equity (ROE). According to Mckinsey, the bad news is that ROE will be in the toilet for the next five years.

Cue banker in the back of my head 

OMG ZZZZZ.

Everyone else is moving to the cloud too. That's not a differentiator. That's more of the same.

The problem for banks is not cyclical; it is structural.

In that world, growth comes to those who can adapt. Banks no longer worry about being dumb pipes because that is what they *are*.  

Strategy options when you're strategically f*cked 🌍

Banks need a new map.

You may have seen this picture before; it's a way to think about the financial services market.

• Rails = How money moves (Visa, Mastercard, SWIFT, ACH, etc.)

• Capabilities = All the things you must do to access rails (KYC, AML, Fraud prevention, etc.)

• Products = Deposits, Loans, Mortgages etc 

• Services = customer focussed solutions (e.g., Get paid early, automate my finances)

• Journeys = Embedded finance (e.g., Build an online store, fund it and accept payments)

• Contexts = This is the most crucial part, what customer is the solution or service solving.

Historically the banks looked to their left and right for competition in this picture.  Citi would compete with Wells and Chase in financial products. Most banks still don't think of their competition coming from above (unless it's big tech for some reason).  

Competition from above: So, where Square, Quickbooks, and even Shopify are playing is closer to the customer problem, it isn't banking products. They have banks behind the scenes doing that.  Square is closer to the customer problem and closer to the value capture as a result. By moving up closer to the customer they get more growth and more engagement.  

Competition from below: Banks always saw the B2B vendor space as their supplier base. Now it's not so simple. Banks were historically the leading supplier of affinity credit cards or payment acceptance, but now some fintechs are far better at enabling the market to do that.

B2B fintech (capability providers) makes it easier for fintechs, big techs, and anyone else to deliver their customers' financial services. B2B fintech businesses had a massive 2020 and seem likely to continue to grow in 2021.

Banks have competition from above, where the strategy is to solve the customer problem, build for engagement, and use that to create growth.

Banks have competition from below, where the strategy is to be a platform for others, enabling financial products to be embedded elsewhere to create growth.

So, where does that leave you? 🤔

Anyone could use this map. Draw your own. Plot your products, your competitors, and your customer’s contexts. Who’s above you? Who’s below you?

The "customer contexts" bit of this picture is the key; as you look left to right across that product set, there are customer segments that are well served (consumer retail in the US) and ones much less so (corporate treasury in Botswana). So if you use this picture and think about geography and the financial product, it becomes easier to spot the opportunity.  

Whether you're a fintech looking to attack the market, an incumbent, large or small: Fintech is indeed 1% finished.

4 Fintechs 💰

1. Hatch bank - Bank as a Platform

• Hatch provides a fintech platform "powered by hatch APIs," which allow fintechs to offer loans, deposits, and payments products.  Importantly they wrap their expertise in those verticals around the offering. Arguably, Evolve Bank and Trust is the closest competitor, which is intentionally partnering with fintechs and turning its expertise in risk and compliance into an asset for fintechs. Hatch powers the exciting HM Bradley and Wisetack (both worth a look). This how to monetize a banking license in the next decade at scale. If someone with a bigger balance sheet could execute this, we'd be off to the races.

2. Atlantistech - India / SEA Neobank 

• Atlantis is a tech platform that will power multiple Neobank brands across India and SE Asia. To date, they have launched their first in India (with 8k on the waitlist). It's an exciting op model that I've not seen others do. In India, the ubiquity of big tech payments solutions and micro-lending is enabled by incredible infrastructure, but India doesn't have that big Neobank player yet. Perhaps it doesn't need one, but folks like Niyo, Open, InstantPay, and now Atlantis could offer more resonant and richer services than big tech platforms do to a rapidly expanding middle class.

3. Rendin - Estonian Proptech rental platform

• When people hear Estonia, they often tune out. Don't be that person. Estonia has an incredibly progressive digital government and serves as a fantastic launchpad into eastern Europe and beyond.  Rendin is packaging rent with insurance and 100% digital landlord and tenant experience. Around 30% of the European adult population rents a TAM of 150m potential renters.  We'll see many more playing in that space as owning a home becomes both less achievable and popular in the coming decades.

4. Ramp.Network - Embedded Crypto API 🏍

• If crypto continues to take off through '21 (almost inevitable at this point), we will probably see all kinds of companies want to bake purchases of crypto into their existing user flows.  Ramp has created a super simple API first solution that will appeal to apps earlier in their journey, where PayPal partners with a Paxos, the fintech app of tomorrow might start with something like Ramp.

Things to know 👀

1. Another Bitcoin all-time high ($34k and counting)

• By 3rd Jan, Bitcoin had reached a new all-time high of over $34,000 from $19k just a month earlier and 12 years to the day since its launch.  Mainstream press from the BBC and CNN has covered this dramatic rise. Eth has also followed suit at over $800, nearing its all-time high.

• 🤔 My Analysis: Should you buy/sell/hold? Time horizon matters. Not investment advice. What you do comes down to opportunity cost vs. risk. I'm from the school that Bitcoin will either go to $0 or $1m, and it's not gone to $0 (nor is it likely to).  So your opportunity cost is that if you sell now, you miss out later. The risk is, you may need the income now. That choice is yours and yours alone, so you do you (and preferably speak to an investment advisor and don't risk any capital you can't afford to lose).

• 🤔 My Analysis: What's driving the price? Supply and demand. Forget "intrinsic value" or transaction speed or anything like that.  

• 🤔 My Analysis: Most of the objections against bitcoin have issues with features, not bugs. There's a core of traditional finance folks who measure bitcoin as a currency. It performs poorly if you measure it that way. Bitcoin's value proposition is digital gold. It's slow, it's expensive, and it costs quite a bit to move. For most investors, that's a good thing.

2. Ant Group Overhaul ordered by Chinese central bank

• Another big story over the holiday break has been the kicking Jack Ma, and Ant Group has finally gotten from the Chinese central bank. Jack Ma has been an outspoken critic of financial regulation, and Ant Group recently had their IPO halted.  The regulators are not pushing for a breakup of Ant. Still, they are moving for Ant to "rectify violations" in its credit, insurance, and wealth management business as well as protecting personal information better in its credit rating business.  

• 🤔 My Analysis: China is pushing for Ant to be fully licensed and "not engage in unfair competition." When you take China out of it, this looks like what you might expect any large tech company to be facing in the west.

• 🤔 My Analysis: China had a massive P2P lending issue a few years ago, forcing regulators to react. Out of control lending has negative consequences, and it's not a surprise to see regulators step in. The temptation is to view this as China putting Jack Ma in his box. It's not not that. But it doesn't surprise me that regulators need to regulate.

• 🤔 My Analysis: There are lessons here for big western techs eyeing financial services as a new revenue line or part of their future.  Get licensed, know the regs, and play well with others.  The best innovators in fintech are the ones who can make regulation work for customers.  The worst are those who ignore regulation. Innovating for customers will always be push/pull.

3. The US passes historic law to ban anonymous shell companies

• When passing the "National Defense Authorization Act," Congress also passed new rules that require all companies to provide beneficial ownership information to FinCEN.  This is one of the most important anti-corruption measures ever passed by the US Congress.  The US currently ranks 2nd behind only the Cayman Islands for financial secrecy (how easy it is to hide from the taxman and lawman). 

• 🤔 My Analysis: This makes it much harder to drop dirty money into the US and is a good thing. It's just a shame it doesn't apply to charities, churches, and companies with more than $5m in revenue and 20 employees in the US. Still, the US will likely force many nations that live and operate in dollars to follow suit.

• 🤔 My Analysis: The biggest issue with financial crime today is the outdated assumptions and controls the system relies upon. Without a simple digital identity for individuals and businesses, the global financial system is a web of paper and legacy technology that is incredibly opaque. Solutions like the Interbank Information Network (IIN) from JP Morgan help here, but regulators need to look closer at what technology can now do.  

• 🤔 My Analysis: Rather than requiring more process, regulators could require better data capture, storage, and sharing.  The crypto industry arguably has the best model for what this future could look like (with standards such as InterVASP). 

Good reads 📚

1. 10 Thoughts from 2020 going into the next decade

• The team at John Street highlights ten themes they're paying attention for '21 where demand is structural, not cyclical and where the inflection points are for: Alternative Assets, B2B Fintech APIs, Institutional Crypto, Fintech M&A, Insurtech, Open Source content, Payments, Investing, SPACs, Vertical SaaS. This is an excellent read, and I can't do each of those topics justice, but I wanted to pick a couple and add some color.

• Rally- an alternative assets platform gained real traction this year selling equity in collectible cards, baseball cards, watches, comics, and even whiskey. As this market gains data providers, the returns in this type of asset class could be significant. The authors talk about real estate, private shares, and even LP interests becoming democratized.

• 🤔 My Analysis: I agree massively with the points they make, which were quite comprehensive, but I'd add a couple of areas that excite me they didn't mention. One is digital goods (Fornite swag, limited edition music) with secondary trading. The other is the financing of the entire creator economy.

• Fintech M&A (and exits).  We already see this (e.g., Sofi Galileo), but next year with more IPOs coming (possibly Affirm, Chime? Coinbase? Marqeta? Stripe?) Will that lead to a handful of acquisitions. There's also legacy fintech who may look to buy 2nd and 3rd place players to retain some relevance in B2B fintech.

•  🤔 My Analysis: Again, I massively agree. To add a lens, the game that is playing out is companies are broadening their offering from "left to right" in financial products. Let's say you're Marqeta, and you offer debit cards; adding credit cards, lending, and maybe share dealing would make sense.  

Tweets of the week 🕊

That’s all folks 👋