Fintech 🧠 Food - 5th Dec - Stripe Treasury, Moov, Amount, Revolut & Smiling curves in financial services

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. :)

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Every few weeks, fintech goes a bit mad. This week is one of them. Stripe launched its bank-as-a-service platform and Stripe Capital. Revolut launches payment acceptance, a16z leads a Series A into Moov, Amount raised $81m, Visa partnered with Circle for USDC, Justin Timberlake invested in a Neobank. Monzo raised an additional $60m. And much, much more.

To try and give it some context this week, I wanted to Zoom out to the thread that unites Moov, Stripe, and Amount.

The manufacture and distribution of financial services are changing. Those closest to the customer are no longer the banks. Those driving R&D are no longer the banks either. Why?

In 1992, Stan Shih developed the smiling curve for the personal computer industry. The Y-axis shows value add, and the X-axis on the far left is R&D, and the far-right is sales and marketing (i.e., a traditional value chain).

In the personal computer industry, you might think about someone like Nvidia, creating the cutting edge R&D silicon that drives the industry. On distribution, Razer or Apple built an audience to sell and market their products. In the middle are the thousands of commodity part manufacturers who sell volume products at scale for low margins.

This is what's happening in financial services.

Banks are neither leading the R&D nor winning at the cutting edge of sales and marketing.  

Historically banks owned nearly the entire supply chain, including branches, data centers, custom-built software, customer interaction, brand, fraud prevention, risk management. Everything. Over the decades, different vendors provided pieces of the banking software stack, but it was very much an industrial machine.

Most software in banks was written before the development of modern engineering practices.  The code is also often written by the lowest-cost outsourced bidder (or the one best at enterprise sales).  

The talented, detail-obsessed problem-solvers in banks weren't building deep software infrastructure; they worked in the spreadsheets to drive more value from the balance sheet.  With a few exceptions, many banks saw engineering as a commodity skill, not a differentiator.

Banks had the good fortune of high-interest rates, and the orthodoxy of making money remained unchanged. Take deposits now, lend, manage risk, and help people move money—simple, profitable, sturdy. Innovation in banking happened on the trading desks, creative ways to package and re-distribute risk (and we know how that turned out).  When you're wildly profitable, why fix the non-differentiated bit?

The senior leadership at banks (and suppliers around the banks, consultants, tech vendors, and even regulators) got used to the way things get done. In a 2015 survey, Accenture found only 3% of CEOs and 6% of bank board directors have any professional tech experience.  

For 50 years or more, the benefit of technology for banks has been to reduce the cost of distribution.  Moving to telephone banking, online banking, mobile banking all reduced the cost of distribution. But it did something else. Each new layer of modern technology encased the previous in cement. The IT real estate became ever more complex as senior leadership pushed to reduce the cost of distribution, attract more deposits, and lend more.  Banks traded short term growth for long term growth.

The orthodoxy of senior leadership across all bank sizes is to drive in year returns, aligned to the budget cycle. But then the world changed.

In 2010 two Irish brothers founded Stripe.com, both incredible intellects and first principles, thinkers. The Collison's could not understand why it was so hard to make payments on the internet.  Stripe from its early days has a culture of profoundly understanding customer and elegant R&D around the mess that is global payment infrastructure.  Perhaps their first insight was that they would become the registered merchant, allowing their customers to become "sub-merchants." Taking some of the regulatory burden themselves could make life far more straightforward for their customers.

Today Stripe is full of thousands of tiny nuances that industry orthodoxy just wouldn't have tried. Engineers built Stripe for engineers. Stripe is detail-obsessed and looks for the small changes in deep infrastructure that yield massive customer outcomes.  Those that more closely understand the infrastructure have a competitive advantage in fintech.

Their mission to grow the GDP of the internet sounds wild in its ambition, but like everything, Stripe is astonishing for its mental clarity and its resilience to scrutiny. The more you think about it, the more obvious it is driving everything they do.  They're an actual mission-driven company. Not a company with a "corporate mission."

Two product launches this week by Stripe continue that pattern.  

Stripe Capital allows Stripe customers to extend lending to *their* customers.  Meaning Stripe gave its customer (e.g., Shopify) the ability to lend its company (small merchant). Ben Thompson has a fantastic write up of this platform approach here.  

Stripe Treasury lets any platform or marketplace embed financial services. A platform can enable their customers to hold funds, pay bills, earn interest, and manage cash flow. A platform (e.g., Shopify) can offer products like "Shopify Balance," a sort of Brex-inside-Shopify experience. Baking money management into the place where the day to day activity is.

Stripe Treasury is in partnership with several banks (Citi, Barclays, Goldman, and Evolve). Still, Stripe is driving the R&D.  Stripe is leading R&D without being close to the infrastructure, and in doing so, is building an abstraction layer from the global financial services infrastructure. The level of detail Stripe goes to can be best seen in this thread from Patrick Mckenzie. 

For sure, if finance is becoming embedded, an elegant abstraction layer over the crappy infrastructure helps.

No bank is as R&D obsessed as Stripe. But some former bankers are. 🧠

There is a small army of people who've worked in banking or bank vendor technical roles and have seen the problems first hand. When you zoom right in, banking is weird; the non-differentiated code from the 80s is often in some of the bank's most mission-critical.  Those are also the bits you rarely get to change as a bank employee.  

Banking software always had "modules," but they were proprietary, so things like handling payments interfaces were a black box except those who had to build and maintain those black boxes.

One such example is the guys at Moov.io who raised $27m this week led by a16z. Wade Arnold and Bob Smith built Banno, a white label digital banking platform that they eventually sold to Jack Henry. Wade created Moov as an open-source library because he just wished it existed at previous companies.

Where Stripe has done R&D with neat abstractions, Moov is improving the direct interface with the infrastructure. It’s turning the bits that used to be black boxes into open source. It's no surprise then that big banks and fintechs already trust Moov. a16z describes this as "Banking primitives as a service," which is elegant.

What if you're a smaller bank, relied on by the community but without the engineering talent to re-combine the banking primitives?  🏦

This week Amount.com announced an $81m series C led by guess who? Goldman Sachs.  Amount displaces the entire lending value chain for banks, from customer KYC to underwriting, fraud prevention, and account servicing.  Banks can "switch on" a new digital lending capability quickly and have Amount do the rest.

Amount allows a bank to continue its business with almost zero change to its IT infrastructure. It speaks volumes that this is an attractive proposition to banks.

Back to the smiling curve 👇

R&D is driven by these new fintech players, who are deep problem solvers.

Banks are scrambling after all of the announcements this week. Again.

So how do banks avoid becoming a commodity manufacturing business that holds a regulated license?  It strikes me that there are three options.

Option 1: Economies of Scale (e.g., PNC & BBVA), buddy up to grow the balance sheet, find efficiency and scale.  It is an effective strategy, but the best case here is to stand still in revenue growth (in real terms).

Option 2: Find your niches.  Banks have talked a good game about service for decades, but do they understand who their high expectation customer is? Digital communities are emerging, and fintech is serving these niches already. What are they missing? Who's ignored?

Option 3: Play to your strengths.  There's a whole ton of manual work that's being done by partner banks today. There are still vital parts of customer service, fraud checks, or underwriting policy setting that needs people. Could banks scale the regulated bits of activity they have and turn cost centers into profit centers?

Banks will always have their license, which means there will always be someone with a license. But whether the logos we know today exist tomorrow is another question.  

Of the banks, Goldman and Evolve are both well placed. Evolve as a pioneer and willing partner, and Goldman as the scaling partner with the platforms and APIs to benefit from a new market shape. Evolve has found a niche that scales (being a partner bank). Goldman is scaling the niche.

Takeaways 🍜

• The "as-a-service" players are closer to the R&D side of the smiling curve

• The platforms that embed finance are closer to the "sales and marketing" side of the smiling curve

• Banks need to find economies of scale, or their niche, or both

4 Fintechs 🤑

1. Hubuc - Spanish banking-as-a-service with pre-baked partnerships

• HubuC lists Marqeta, Comply Advantage, currency cloud, and Onfido on their homepage. These companies would allow you to create a card, onboard a customer, manage compliance risks, and perform international payments in the same product.  They're playing in a similar space to Stripe Treasury with "empower your customers and employees," but more as a school of fish rather than one giant platform. Interesting.

2. Nordigen - Freemium Plaid for Europe

• Nordigen believes Plaid and Tink are too expensive.  They currently support 300 European banks (covering 60 to 90% of the given country population). They then charge for things like transaction categorization or other analytics. Freemium is a nice gimmick, but the reality is for anything other than just the data (like user management and roles), Nordigen charges.  Interesting, though, that there's already price competition in a crowded European open banking data market.

3. Homeppl - Assess renters real risk

•  Much like how for credit, user behavior (like paying bills on time) is a much better indicator of if someone will pay you back or not than having a high salary; rental background checks suffer from biases. Homeppl uses open banking to approve 23% more tenants on average, with lower fraud than the industry average. They just raised 2.1m Euros. I like the property tech space and think we'll see much more of it in 2021. Not just around the financial product but the processes before the financial product.

4. Paceline - Financial rewards for physical activity

• Paceline is a fitness rewards platform that gives customers coupons, offers, and rewards in return for physical activity. Interesting how there's a whole world of "financial health apps," physical health and mental health apps, but we haven't come together yet. A good friend Joe Parkin always talks about the three wellness types that intersect most with finance; financial (obviously), mental and physical. Modeling how those interact and inform each other is an exciting space to consider.

Things to know 👀

1. Visa partners with Circle for USDC Payments Acceptance

• Visa announced its connecting its 60m merchants to the USDC (US Dollar stablecoin).  Circle will work with Visa to find card issuers to send and receive USDC payments. Meaning any business could pay any other business, B2B, and those funds are converted into local currency, anywhere that accepts Visa. USDC is near free and averages ~20 second settlement time.

• 🤔 My analysis: I talked a lot about B2B payments last week and stablecoins as a potential alternate rail, but my thought for this week is. If you have companies like Stripe or even Moov that make the connective tissue between the existing rails much easier to use, then is the upgrade path to new rails simpler? Put another way.  If Stripe switched on USDC or Moov allowed you to connect to it, could we see a global, dollar-based rail?

• This week we also saw the tabling of the "STABLE" act, which would hold stablecoin issuers to become banks and fully comply with all banking regulations.  

• 🤔 My analysis: The crypto industry vomited all over this bill, but the bill is designed to limit Facebook's Diem / Libra project much more than smaller stablecoins, I suspect.  PS. There are already two crypto native banks, and banks are allowed to hold crypto in the USA. Most stablecoin issuers are depository trust corporations (e.g., Paxos).  If regulation ever does come, it's more likely to legitimize stablecoins than kill them.  If something like USDC did gain market popularity, it would be massively politically advantageous to the USA.

2. Grab and Ant Group win Singapore bank license

• Of 21 applicants, just four have been granted a Singaporean digital banking license.  Grab will be allowed to offer consumers checking, debit, and credit. The Ant Group entity will serve small and medium-sized businesses.

• 🤔 My Analysis: South East Asia is a crucial battleground for wallets and payment apps, and Singapore often finds itself in the middle of that.  Malaysia, Thailand, Indonesia, and the Philippines all have far larger populations, issuing their digital banking license version.  Gaining a foothold in Singapore is a springboard for these companies to work across the region.

•  🤔 My Analysis: It's interesting who did not get a license, no Facebook, no Google, no Tencent, no Bytedance.  Suggesting these businesses don't expect to be lending. However, the payments race in these markets is hotter than ever. If you ever go to a shop in Singapore, there are already about ten different payment methods. 

• 🤔 My Analysis: It makes me wonder if what's needed in the region is equivalent to India's "UPI" for payments. I also wonder if Chinas central bank digital currency initiative (DCEP) is their form of UPI.

3. Revolut takes on Stripe with new service for businesses

• Revolut launched a service allowing small businesses to accept online card payments in 13 European countries, pitting them against Stripe and Adyen. Companies can accept payments in 14 currencies, and funds get converted at the interbank FX rate.

• 🤔 My Analysis: Revolut already offered a suite of payments and FX tools to small businesses in its core product. Much like a modern treasury or Brex would, it has a suite of payment automation and reconciliation capabilities that business customers love.  Revolut has always competed in offering market-leading FX rates. Therefore, adding acquiring (accepting) payments for these small businesses makes a ton of sense. It's playing to their strengths and gives a USP.

• 🤔 My Analysis: When I saw Stripe Treasury, I expected something beyond card issuing and embedded finance. To me, "treasury" means managing FX and supply chain risk. What's interesting then is how many fintechs are heading this way from different angles.  Moving up the "Fintech is 1% finished" S curve towards scale-up and corporate businesses' needs. Where Brex integrates with Quickbooks or Oracle Netsuite, would Stripe or Revolut build their own someday?

Good reads 📚

1. Are challenger banks the new fintech leading?

• Jason draws parallels between the current wave of challenger banks and the first wave of online lending fintechs that arrived circa 2015. They gathered tech valuation multiples, IPO'd only to find public markets saw them as lending businesses which dramatically drops their market cap.  P2P lending was an innovation (e.g., allowing retail investors to fund borrowers' lending), but the reality was the demand for loans outstripped the supply of investor capital. This meant they had to seek market funding to lend, increasing their cost of capital. The P2P lenders that have survived either became banks (Zopa) or acquired a bank (e.g., Lending Club and Radius).

• Jason then points out there are many different challenger bank types, each appearing to solve a customer problem the market hadn't (with genuine innovations).  What's less clear for all of them is their long-term business model. Are they leaning into being a bank (balance sheet lending) or a tech company? How will Apple Pay / Google Plex's of the world impact their opportunities?

• 🤔 My Analysis: The market loves tech and fintech businesses that lend get to look like tech for a while.  The business model of banking with a long-term low-interest rate growth is increasingly challenging. So a challenger will struggle to keep a tech valuation if its core revenue approach is lending. Even if challenger banks dramatically reduce the cost of acquisition and cost to serve, their basic earnings potential only has so much upside.

• 🤔 My Analysis: Come back to the smiling curve from the beginning of today's brain food.  Revolut is positioning itself closer to all of the business's problems. Stripe is enabling platforms that are already there to offer finance.  

• 🤔 My Analysis: Payments is a product the market loves, but it hates lending. So the strategy question becomes, should challengers lean into payments and ignore lending? I think you can't overlook lending. It's such a vital customer requirement and creates incredibly engaged, sticky users if positioned in the right place at the right time.  

• 🤔 My Analysis: Stripe Capital is an example of lending that shows up in the right place at the right time. How that fits into a more diversified business model is worth paying attention to. Revolut was arguably the innovator of subscription-based pricing models for SMBs.  More payments, more subscriptions, and lending as an enabler rather than the core business model.

2. Lessons from the fintech revolutions of the past

• This article walks through the three fintech revolutions. 

• 1) The expansion of online and digital payments. 

• 2) The dawn of digital, mobile, and unbundled financial services. 

• 3) The imperative of reliable, efficient, and intelligent back-office infrastructure.

• Post financial crisis, the big banks are financially stable enough to weather the storm, but they are not nimble enough to benefit from the opportunity it presents.  The few that are (e.g., Evolve, Goldman) will reap the rewards of this revolution. Banks that rely on batch services and abstractions from legacy will continue to struggle.

• 🤔 My analysis: While I agree with this macro story (and like the framing), it's not just a tech issue banks face. It's education, culture, and operating model.  The way banks fund change, the way they manage vendors, the mck-consultants they've trusted for the last 20 years. All of it has to be understood, accepted, and navigated.  

• 🤔 My Analysis: To their credit, most leaders get that they need digital. But when your leadership has a 3% chance of being technical and relies on the same suppliers, why would you expect a different result?

•  🤔 My Analysis: Banks are like crash dieters; they push hard for a short period in one area, only for the administration to change and chase something else.  The definition of insanity is doing the same thing and expecting a different result. Trying to run a 1990s style bank-wide program to "digitize" isn't going to cut it.

• 🤔 My Analysis: There's room for a UI Path for core banking. Something that gives you value in your crucial value chain now (e.g., Mortgages), but also is a step towards your future self.

Tweets of the week 🕊

That’s all folks 👋