Fintech 🧠 Food - 4th July 2021 - Robinhood IPO, Current.com does Defi & Why the net is closing in on Binance

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 6,694 others by clicking below, and to the regular readers, thank you. 🙏

Happy 4th of July to those of you in the USA, and to everyone else, happy Sunday 👋. This edition of BF has quite a crypto slant to it, and honestly, that wasn’t intentional. It seems that Fintech and Crypto are colliding in a big way, with some major stories this week, where Crypto is a feature of Fintech. But it feels like we’re transitioning to Fintech the UI for Crypto.

Perhaps the best example of the potential I heard this week was in a conversation with the Tala CEO and Founder Shivali Siroya. As a platform that serves customers in emerging markets, Tala sees its brand as key to helping bring consumers into Crypto responsibly. Crypto provides Tala users with cheaper cross-border payments, and importantly, a savings yield that would not otherwise be available to their customer base.

Cuy Sheffield Head of Crypto from Visa and Diogo Monica CEO of Anchorage joined Shivali and me to discuss: Why does Crypto matter on the Fintech Insider podcast. (Which of course you can check out on your favorite podcast client :).

Weekly Rant 📣

Robinhood - The Marmite of Fintech

Marmite is a sticky black paste, a byproduct of brewing beer with a flavor so distinctive it's hard to describe. Think of a salty, soy, and yeast flavor with the consistency of engine oil. Sounds appetizing? Some people love it with a fervor usually reserved for their favorite sports team or recording artist. The Marmite brand has become widely known in the United Kingdom for its divisiveness. 

Robinhood is Marmite.

Love or hate Robinhood; you can't ignore them; they are possibly the most influential Fintech in the world. For supporters, they represent incredible UX, financial inclusion, and a massive Fintech success story. For detractors, they're getting a consumer who doesn't know better addicted to gambling on meme stocks while selling the data to Wall St for a profit while selling risky financial products to first-time investors.

And it's been a big week for them; first, FINRA announced Robinhood had settled an enforcement action for more than $70m. Then Robinhood announced its IPO. No doubt, hoping their regulatory issues are behind them. But let's unpack both.

In case you live under a rock - a potted history of Robinhood.

Robinhood is the consumer brokerage app. They pioneered "zero-fee trading," slick mobile-first UI attracting millions of customers.  Robinhood can arguably be credited with leading the consumer wave of interest in stocks through 2020 and 2021.  

Not only does Robinhood let users buy stocks, but it also lets them borrow to take out much larger positions (options trading). This borrowing means a retail customer can benefit from 2x, 5x, or even 10x leverage. A $2,000 stimulus check can now "buy" (with a call option) the equivalent of $20,000 worth of stock. If the stock rises, that $2,000 can return much more than simply buying the stock would have.

With the pandemic, Robinhood saw massive user growth as the consumer received their stimulus checks, big tech companies boomed, and the meme stock was born.  Robinhood spawned countless Youtube experts, DIY investor groups on Reddit, and a gold rush for the consumer in the stock market. It had never been so straightforward to get in.

As the stock market boomed, led by consumer interest, people who'd never been in the stock market before were finally benefitting.

But this rise hasn't been without controversy.  Alexander Kearns, a 20-year-old student, committed suicide after using Robinhood and appearing to have more than $730,000 in debt outstanding.  Through 2020, Robinhood also suffered a series of outages as their platforms could not keep up with consumer demand. While this is typically a high-quality problem, consumers complained about missing investment opportunities while the service suffered outages.

Robinhood also suffered the mother of all margin calls when $GME (Gamestock) saw a massive rush of consumer appetite for investment. So many investors wanted to buy the stock that Robinhood had to post enormous collateral to the DTCC so huge that they would have gone insolvent had their investors not stepped in.

The regulatory response was inevitable.  The last major consumer-led market bubble was 1929, and regulators take a dim view of giving the consumer too much leverage. Yes, the consumer can get rich, but they can also end up in massive debt.

So in the past week, we saw the FINRA judgment into Robinhood's behaviors and practices, and, oh my.

This regulatory judgment is savage.  

The headline alone from FINRA's press release about the $70m in penalties Robinhood will have to pay is a brutal sentence.

"Firm Ordered to Pay Approximately $70 Million for Systemic Supervisory Failures and Significant Harm Suffered by Millions of Customers"

Robinhood has effectively been accused of

• Supplying misleading information to consumers

• Offering options trading to customers that it was not appropriate to 

• Systems outages resulting in losses for consumers

The release says that Robinhood's service misled consumers about how much cash they had and the displaying of inaccurate negative cash balances (the very issue that led to the suicide of Alex Kearns).  

Robinhood also "failed to exercise due diligence" before letting its customers place trades. Meaning consumers who were not fully aware of the risks were allowed to trade options.

By settling, Robinhood neither admits guilt nor innocence, but it does effectively end the regulatory investigation.

Which clears the way for their IPO

And the IPO looks massive.

Every fintech commentator has a great take on Robinhood's IPO, so I'm going to quote a few here.

Firstly, John St Capital breaks down the key figures for the IPO.

• 2019E 5m accounts, 2021E (est) 18M accounts

• $137 ARPU puts them way ahead of Neobanks

• Payment for Order Flow (PFOF) is 72% of their 2020 revenues

• 17% of March '21 revenue from Crypto

This from Marc Ruby also caught my eye.

It seems like coming to the rescue of Robinhood size months ago worked out exceptionally well for Ribbit Capital.

Lastly, this from Frank Rotman gives a real insight into a Robinhood trader's worldview.  

Robinhood has had an incredible run, and there's no question the vast majority of its users love it. It's poised for IPO, but it's had plenty of speed bumps along the way.

So what can we learn from Robinhood?

1. Right product, right time.  Robinhood is a behemoth in fintech terms; it has more users than Chime and Varo combined. It generates higher ARPU than the Neobanks, and its UX is the benchmark that every stock trading app is copying. There can be no doubting the achievements of Robinhood and that they have changed the industry. But;

2. There's a fine line between a financially inclusive and financially irresponsible product.  Reducing friction in UX and automating has brought millions of consumers into the stock market and helped them benefit. But reducing friction in UX may also have had disastrous consequences. I don't think anyone at Robinhood intended for the harm that consumers suffered, but we should all learn from them.

3. Hire great lawyers and compliance people.  $70m is a drop in the ocean compared to the growth in users, revenue, and valuation Robinhood has seen in the past four years. By settling with FINRA (and no doubt, putting in place more robust compliance controls) 

Robinhood is here to stay, and here's hoping they continue to put as much effort into managing risk as they had historically in reducing consumer friction.

Being a brand that looks after customer's money is a huge responsibility. Those that can find the balance of managing risk and reducing friction have a fintech superpower.  

Robinhood is a force for financial inclusion, but it has made mistakes along the way. No surprises then, that Robinhood now has haters in Fintech and regulatory circles. But you know what they say; no haters, no success.

Love it or hate it, we can learn a lot from it.

ST.

4 Fintech Companies 💸

1. Numeral - Modern Treasury for Europe

• Numerai provides a platform to orchestrate manage banks, payments, and all of the accounting that comes with that.  Finance operations teams are still dealing with legacy file formats, SFTP uploads, and the countless errors and issues dealing with old systems. Numerai replaces numerous spreadsheets and manual processes with a single platform (and set of APIs).

• Global transaction banking (banking for corporates) generates $1 trillion in revenues annually. It dwarfs the revenue for consumers and SMB banking, but it presents unique challenges. Most corporates have many banks, operate in many markets, and have complex accounting challenges. For European corporates, post-financial crisis banks have pulled back from many markets. There aren't many regional European banks that do it all. An abstraction layer like Numerai is a powerful solution.

Crediverso - Credit Karma for Hispanics

• Crediverso sources financial products from partners. This enables Crediverso to solve specific community challenges like sending remittances and lenders with progressive underwriting approaches. The platform is free to users but monetizes through commission and revenue share agreements with its partners. 

• The US credit system is still unavailable to significant parts of the US population (something the founder saw firsthand with his parents).  With 62m Hispanic American's, Crediverso is addressing a massive (and growing) market that traditional lenders have had a language barrier with and poorly understood.

NansenAi - Bloomberg for Crypto

• Nansen ingests more than 90m Eth wallet addresses and their transaction activity so investors can discover new investment opportunities or respond to market events.  For example, if a large number of a token are moving, Nansen would show where they're moving to, meaning the investor can understand what is happening and potentially how to react.

• The fantastic thing about Crypto is how transparent all of the data is. The challenging thing about Crypto is making sense of all of that data and separating signal from noise.  The combination of wallet data and on-chain data gives a unique set of insights in a way that is well presented.  

Ness - Health insurance that keeps you healthy

• Ness aims to align the incentives of consumers and the insurer by going around the employer and going bottom-up for customer acquisition (direct to consumer).  Their wedge product will be a consumer card where the user is rewarded for making healthy spending choices. The reward is redeemable on wellness care (like therapy or vitamins). 

• Most health insurers aren't incentivized to keep you healthy.  Their focus is on reducing sick-care costs because the average plan lasts three years (along with the average length of employment). Money spent keeping you healthy will benefit their competitors more than them. This means long-term health improvers like exercise, Vitamin D, and therapy are rarely paid for by insurers.

Monie - The high yield interest app (5% APY)

• Monie offers 5% APY on USD deposits. Users link their bank account (via open banking), deposit USD, and begin making the return.  Monie takes a customer deposit, converts it to USDC (the stablecoin version of USD), and then lends that to institutional investors in the crypto market.

• Monie is the latest in a line of "high yield" consumer-facing apps like Eco.com and Linus. They're being transparent about how the return is made but not leading with being a crypto offering.  This is an interesting wedge into other things that are Crypto but don't shout about it. There's lots of competition in these high yield accounts, and differentiation will depend on what comes next.  (I've also heard from a few sources the 5% figure is so high it feels like a scam, lower may be better)

Oh hey! While you’re here. 11:FS launched 11:Money this week. It’s our “here’s one we made earlier” version of a Neobank. If Banking-as-a-Service platforms are Stripe, then this is Shopify. A template-led, highly configurable set of rules, workflows, and experiences from the world’s nerdiest fintech nerds; 11:FS.

Click here to learn more and get yourself a demo :)

Things to know 👀 

1. The net is closing on Binance.

• In the past week, the UK, Canada, Thailand, and Cayman Island regulatory authorities have all announced some action or criminal complaints against Binance.  The UK has banned Binance from connecting to any of the UK payments or banking infrastructure directly. The firm is also "not authorized to conduct crypto business" in the UK.

• Binance is by far the world's largest crypto exchange, dwarfing its nearest competitors, with more than 66% market share.  Binance was one of two leading exchanges for illicit bitcoin flows in 2019, with ~$770m moving to the platform from allegedly criminal enterprises, according to Chainanlysis.

• 🤔 My Analysis: Stuff like this is why we don't have a Bitcoin ETF yet.  While Binance maintains it has adequate crypto controls, former insiders tell a different story, where growth has been prioritized over safety.

• 🤔 My Analysis: Regulators want to reduce risk, Binance wants to move quickly. Often, the discussion is regulation vs. Crypto, but I find that reductive.  Most regulators (including FATF) accept Crypto as a reality but want to see better investor and consumer protections.  I'd argue they often default to 20th-century solutions to 21st-century problems, but that's why we need to collaborate, educate and lean in.  The answer isn’t no rules, it’s better rules.

• 🤔 My Analysis: Crypto is global, regulation is national. We need global, industry-led solutions to Crypto policy.  While the industry is spending a massive amount lobbying Washington, that's not where the issue is. If the future of finance is global, we need a global high watermark for managing risk.

• 🤔 My Analysis: Binance is a very different beast to Coinbase.  Where Coinbase is the "good cop" with regulators, Binance is much more bad cop.  Its corporate structure doesn't have a clear head office, and it has a network. Being "offshore" allows them to arbitrage different jurisdictions and regulators. This helps them innovate faster but makes the risk of criminal much higher.

• 🤔 My Analysis: Binance has also been wildly successful and innovative. Its Binance chain and Binance Coin (BNB) have spawned creativity and unique projects. BNB is the 5th largest coin by market cap (ahead of the mighty Doge).  Binance may have created the template others follow. It may also have set the industry back five years with institutions that view the space as dangerous, highly leveraged, and rife with criminality.

2. Current.com partners with Compound Treasury

• Neobank Current, which has more than 2m users in the US, has announced it has partnered with Defi lending platform Compound Treasury.  This partnership will allow Current users to access the much higher yield APY available from Defi markets.

• Compound has a series of interest rate markets that run on the Ethereum blockchain.  When a user supplies a token (for example, USDC), they instantly begin earning a variable interest rate (every Ethereum block, or ~13 seconds). Non-technical users can supply their tokens via wallets like Coinbase or Argent.  

• Compound announced its treasury product designed for non-crypto native businesses, fintech companies, and financial institutions to offer a high-interest yield on USDC.  Compound treasury abstracts a lot of the pain of dealing directly with the protocol (like key management, interest rate volatility, and more). Compound Treasury is a partnership between Compound, Fireblocks, and Circle.

• 🤔 My Analysis: Adding Bitcoin for consumer adoption is being replaced by adding high-yield USD deposits for customer acquisition.  Where Robinhood and Square gained millions of new users through offering basic Bitcoin buy/sell/hold, the audience for USDC deposits could be much broader.

• 🤔 My Analysis: The buyer could be fintechs, Neobanks, old school banks, and perhaps most interestingly, large corporates.  If large corporates would consider Bitcoin an inflation hedge, 4% on USD has to be appealing.

• 🤔 My Analysis: USDC is generally considered the much more regulatory-friendly cousin of USDT (or Tether).  Don't be surprised if we see hedge funds and bigger institutions start to get into this space as a result.

• 🤔 My Analysis: High yield in Defi is temporary; as liquidity enters the market, those yields will fall. It's also the wedge product for Defi into the mainstream.  To me, compound treasury's launch is the moment Defi crossed the chasm.

• 🤔 My Analysis: What will come next is a wave of competitors to Compound treasury that broaden the offering into Defi lending and beyond.  The opportunity for the "Stripe of Defi" is there for the taking. 

Good Reads 📚

1.  Expert insider views on Crypto's future

• Mario has collected cases from people close to Crypto for what excites them most in Crypto; comments that stood out included, "What happens when culture is investable." While today the creator economy is about selling stuff to fans, tomorrow's is about sharing upside with fans.  "Tokens allow us to align value between engagement value and financial value."

• Uniswap, with just 21 employees, does the same volumes as Coinbase with its near 1000 employees.  Ethereum is about to implement an upgrade called EIP1559 that will "burn" Eth tokens as its new security mechanism. This will function like a stock buyback, potentially increasing the value of each token.  There are plenty more golden comments like these; you should check out the piece.

• 🤔 My Analysis: The price drop is the best thing that could have happened to Crypto.  We're entering an exciting time where the tooling is maturing, the professionals have arrived, and the potential feels limitless. The voices saying "crypto is a fad" are quieter with each passing day.  

• 🤔 My Analysis: We now live in a world where investment professionals are now entirely dedicated to Crypto.  Crypto is often criticized for not having fundamentals or being all about weird charts, but the reality is very different.

• 🤔 My Analysis: This Brainfood wasn't intentionally nearly all Crypto-related; it's just that's where the action is these days.  Whether it's Robinhood, Monie, or Current, the Fintech / Crypto Venn diagram is tightening. There are still traditional finance and fintech folks who are very anti-crypto, but that number is dwindling.

2. Defi is eating finance.

• Defi is like "cloud-native software for finance."  Cryptonetworks enables serverless financial microservices because they are a business model innovation.  The infrastructure isn't something you pay a vendor for; it's something you pay a network to manage.

• With Defi, much of the internal banking infrastructure is replaced by the network itself (in the same way AWS replaced data centers). But now, it's the core ledger, accounting, and transaction management software that gets replaced.  Instead of the 100s of global ACH systems and core banking solutions, many Cryptonetworks are global and instantaneously accessible.  These networks use a similar / the same login/deployment model (wallets or smart contracts).

• Banks and Fintech's may spend between 30 to 60% of their income on operating expenses. Many of the most popular Defi networks spend as little as 1%. (Although this cost figure benefits from short-term incentives, the business model change drives the cost reduction.)

• 🤔 My Analysis: Defi is a composable infrastructure.  If the ACH gets upgraded in Singapore, nobody in the US benefits. If Ethereum receives an upgrade, everybody in the world benefits. Crypto is a truly global, truly digital finance infrastructure.

• 🤔 My Analysis: AWS was as much business model innovation (taking primitives like compute, storage, and network and turning them into utilities), Defi is doing the same for finance (with primitives like a ledger, transactions, and accounting)

• 🤔 My Analysis: Building the Defi on-ramps is easy; building the off-ramps is harder.  Fintech has been very busy building the APIs that abstract the pain of the infrastructure (i.e., Banking as a Service). But I can't escape the sense we need a way to be backwardly compatible with the legacy infrastructure in a modular and composable way (i.e., Moov.io). When the iPhone and 3G came along, the Telco's didn't go away; they had a series of infrastructure upgrades. Maybe one day, fixed-line telephones go away entirely, but it may take a few more decades.  

• 🤔 My Analysis: PS, did you see a16z raised a $2 BILLION crypto fund this past week? We're still early...

Tweets of the week 🕊

That's all, folks. 👋

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