Fintech 🧠 Food - 7th August 2022 - Robinhood layoffs, Coinbase up 60% & Is Fintech more Finance or Tech?

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Hey Fintech Nerds 👋

Hope, optimism, and a sense of "we can do this" are choices.

I posted on LinkedIn this week that I felt Coinbase was one of the best-run businesses operating in Crypto. The regulatory scrutiny is misguided, given some of the bad actors in the space. 

And my god, people came out of the woodwork to correct me.

A certain type of person loves to hate on Tech, especially Crypto. And generally defaults to "things need to be done the way we've always done them" to be safe and secure. 

And I get it.

The economy and the news don't feel optimistic, especially when we hear about Robinhood laying off 23% of its staff and having been fined for AML violations. And I doubt this will be the last slap on the wrist a growth Fintech company gets in the coming years.

Growing in a regulated space is hard and needs to be done thoughtfully.

But if you listen to the pessimists, investors shouldn't have any appetite to allocate to risk, and all of these businesses are overvalued and ultimately doomed.

But. 

Just when you think Crypto and Fintech are dead, Coinbsae pumps 60% on the back of integration with Blackrock Aladdin. If you're unfamiliar, Aladdin is the software platform used by a large % of the global asset management industry (like Prudential, BNY Mellon, Met Life). Crypto is coming to the street, gradually, then suddenly. 

If you're from more of a banking background, this would be like integration with Jack Henry, Finastra, or FIS. Being "integrated" doesn't mean immediately available to those clients, but it means it's an option, and Blackrock doesn't announce things by accident.

It seems the market doesn't know if Fintech is finance or tech.

Maybe it's both.

So this week, I wanted to rant about why I think there's still a long-term giant opportunity in Fintech as an industry.

There are still huge problems to solve. And with the pace the industry moves by itself, they won't get solved quickly. 

Lets' choose optimism.

Weekly Rant 📣

Is Fintech, finance, or Tech?

Fintech got a glow up over the past 5 years.

It has been the hottest sector in tech over the last half-decade, driven by everything from Plaid almost being acquired by Visa to a massive run-up in public stocks like Paypal, Robinhood, and Square (sorry, Block). 

If we look back at the last Fintech cycle, companies like Prosper and SoFi haven't completely disrupted banking, so you could argue that this wave of Fintech companies will go the same way. Quietly, becoming a part of the landscape. 

Banks and consumer finance companies tend to even out around 4x, whereas software is closer to 16x. 

But PayPal and Block have made a meaningful dent. BNPL has drawn a significant amount of lending away from credit cards. 

And the infrastructure space is even more interesting.

Providers like Marqeta, Galileo, Socure, Incode, Plaid, MX, Atomic, Pinwheel, Unit, Bond, Synapse (and everyone I forgot to mention) have changed the landscape. Some have also been effective in selling to incumbents. 

Internationally, Nubank has flipped LATAM upside down (and now has 1m Crypto users). Monzo and Starling are big enough to be top 10 banks (or soon will be), and Grab Financial is a regional monster across southeast asia. And that's before we mention Africa with Kuda, Interswitch, Chipper (I could go on). 

The real winners, though, had been the payments companies; Stripe, Adyen, and Checkout are all monsters in their own right.

The rate of company formation has never been higher, but the amount of businesses that become billion-dollar revenue businesses is also staggering. Financial services are being disrupted; it's happening over multiple decades and in waves.

So I think a few things are true at the same time.

• Consumer Fintech is hard, but consumers are hurting.

• The infrastructure is still the most broken part of Fintech.

• And the biggest areas of financial services TAM are still untouched.

• DeFi will happen, gradually, then suddenly. 

Consumer Fintech is hard.

In this week's Good Reads (below), I highlight former Monzo CEO Tom Blomfield's story of how Monzo grew from 0 to 1m customers. The team had a vision and execution but also had fantastic timing and moments of good fortune that Tom covers. The market was ready for something new.

Today, does the market need another digital-only bank or Neobank?

Not if the thesis is building a better UX than traditional banks.

But the consumer needs help.

Inflation has hit, consumer spending power is down, and wealth is not getting created. The bottom 40% of society has less than 1% of all wealth (and declining), the under 35s are doing worse than their peers from 5 and 10 years ago, and now they're getting hit by inflation. 

For most people, their most significant source of net worth is their home. But with asset prices at an all-time high and mortgage rates going up, that is a goal that's further away than ever.

The consumer that can't own a home and has less disposable income to save needs help. 

And not getting paid two days early, to run out of money two days early.

It might not be practical, but I'd love to see

1. More innovation in "rent-to-own." We've seen fractionalized property investing. We've seen rent payments contribute to building credit scores. We haven't seen properties that can be gradually paid for while paying rent. You have to wonder who the landlord would be and why. But I sense this is a huge infrastructure investment for the right ESG-focussed asset manager. There's still a lot of capital looking for the right place to deploy in financial markets, and VC returns aren't the easy bet. 

2. Better advice for consumers. The financial advice from an actual wealth manager is still 1000x better than most Fintech company apps because it's tailored to an individual's life and context. If AI can generate art, why can't it aggregate all of my bank accounts, optimize my savings, debt, and insurance and file my tax return at least 90% of the way?

3. Genuine business model innovation. In financial services, we're beginning to see subscriptions come in and add value to younger demographics. Ad-supported has been tried and failed many times, but is there something more there? The age of everything is funded-by-interchange, and that's-ok-because-its-growing may be coming to an end. So what replaces it?

Giant TAMs are still untouched.

If consumer Fintech is crowded, so is investing, SMB, and growth (B2B) Fintech. But that leaves a lot of whitespaces. 

• Global Transaction Banking has long been a cash cow of large banks like Citi. Managing a large % of the cash for corporates like Apple, Meta, Shell, and Coca-Cola is non-trivial. These established large corporates are often tightly coupled with their banks after decades of ERP-to-bank integration. They'll also sell a suite of banking services and give away the FX to get the lending (in some cases). This is hard to dislodge, but also why I think Brex is moving upmarket; companies like Rho are focused here too. Who will be the next Global Transaction Bank? Heck, even Goldman is making a play for it.

• B2B payments. Then there's that credit Suisse Slide that 1,000 founders and VCs used, showing global consumer payments at $52trn and B2B payments at $125trn. Of which $82trn was domestic payment rails (like ACH). We're still very early here, companies are starting to look at B2B checkouts, and you can accept payment via card on some invoices (e.g., with Xero), but I don't think the answer is another corporate spending card startup. 

• Capital Markets. I don't know that we've seen Fintech go super deep into Capital Markets (in the VC-backed sense), but Crypto has started. FTX (and now Coinbase with their Aladin integration) could become major trading venues and market actors in their own right.

The infrastructure is still broken.

Take payments.

Even the most modern global payment systems use a standard called ISO20022, the current version of the standard was published in 2013 and is based on XML. 

XML was all the rage in 2003 as a modern alternative to sending custom text file standards. Similar in structure to HTML, it found its niche in dealing with documents (for example, Microsoft Word's .docx file format is XML based). As you'd expect with a compliment to HTML, it's good for helping display and format data.

It's less good at dealing purely with data. And as we've moved to an API-driven economy JSON, modern software engineers prefer it because it is more data-oriented and simpler to use.

Meanwhile, the Bank of England, Fed, and SWIFT are all upgrading their core payment infrastructure to use ISO2022. 

This glacial pace is required because changing a national payment system is like a heart transplant for an economy. Non-trivial. But it also requires getting every major bank and market actor to adopt the same standard. 

Then each organization treats the file format slightly differently. You'll find random characters from Bank 1 that don't show up from Bank 2. It's the wild west.

The slow change in infrastructure creates space for disruption.

We've seen this initially with abstractions (companies that build better APIs on top of national payment systems like Form3, PPRO, Modulr, etc.). But most of this ultimately settles down to a bank or national payment infrastructure. 

Note: The same is true for other protocols, too, FIX for FX and securities, FPML for derivatives, etc. 

The entire value chain of financial services (from onboarding to customer service and collections) can now be delivered by a provider with a turnkey API. 

DeFi will happen, eventually.

This is why DeFi payments will happen. Over time they will move from being chaotic and risky to robust and scalable. 

There's no chance Stablecoin payment rails and platforms are ready for the kinds of payment volume we see in a national payment system. But, according to Dune, $154.1bn has been transferred with Stablecoins in the past 7 days. It has a way to go compared to FedWire, which averages $4.3trn per day. But we know change is gradual and then sudden in tech.

Instead of FIX, PML, ISO20022, ISO8583, and the roulette wheel, "how has this counterparty implemented this ancient standard, and what do they mean with this return code." We get DeFi.

Open, modular, upgradeable. 

At the moment, yes, also not as secure as we need it to be, but that is a solvable problem. 

Fintech is sometimes more tech than finance, and sometimes the opposite.

If it looks like lending, it's finance. This can be a great business if you really get lending. If you don't, steer clear.

If it looks like payments, it can be a great consumer and B2B proposition if it's solving enough of a market problem.

If it looks like infrastructure, how wide can it be? Abstracting one part of the value chain is no longer cool. Finding your wedge into the whole value chain is cool.

ST.

4 Fintech Companies 💸

1. Nada - Invest in Cities like Stocks 

• Nada is an account with a debit card that lets users invest in, earn, save and spend real estate as an asset. Users can start with $250 and do not need to be accredited. Users also get cashback for owning real estate. Users can also fund their accounts with home equity. 

• 🤔 I feel so conflicted about this. Many apps are democratizing real estate investing, but few link it to a debit card, cashback, and everyday spending. That's neat. But allowing users to spend their home equity feels like a recipe for financial disaster and wealth destruction if it is not done responsibly. In the coming recession, people will look for a lifeline. Access to home equity is definitely better than high-cost debt, but I'm hoping Nada encourages more wealth creation over time. Either way, though, this is so neatly packaged and well done.

2. Peach - Pay down debt with every payment

• Peach provides consumers an everyday spend card for $5 per month that helps pay down debt. As consumers spend, they earn rewards, roundup transactions, and use this pot to pay down the highest-cost debt at the end of each month. Additionally, Peach provides a suite of CRM and spend management tools that support users if they like their bank account.

• 🤔 Peach is really well packaged and focused. Link your bank account, and ambiently start paying down debt. I'm curious about the $5 fee; in the age of every company is a Fintech company, I actually think being willing to charge is sensible. It will qualify for consumers who see enough value to pay that amount monthly, and it's an actual revenue model outside of interchange (huzzah!) There's also a feedback loop, the more everyday spend on this card, the quicker you pay down debt. 

3. Ivella - The debit card for couples

• Ivella is a debit card that allows couples to split any payments made automatically at ratios they choose (e.g., 50/50, 60/40). The card is pre-funded and provides a single view of both transactions. Couples can go back and "re-split" any transaction if, for example, one person went wild and bought a PS5 with the Ivella card. 

• 🤔 This is how joint accounts should work. In fact, it is how the Monzo joint account does work. But Ivella is for people "not quite ready for a joint account." Which is smart. Some relationships don't last forever, but using P2P payments for the shared bills still happens. And it could always become a joint account later. There's a nuanced understanding of the target audience here that's to like. Ivella feels like a feature, not a product. One of the big Fintech all-in-one-don't-call-it-super-app apps could do this (e.g., CashApp, Venmo or even Chime). 

4. Financekey - Treasury and Payments Ops for Europe

• Financekey allows finance and IT teams to manage integrations to multiple banks and build a single dashboard view of payment operations. Users gain real-time visibility into accounts held at multiple banks and currencies and can create automated workflows (e.g., sweeps). The platform also supports more sophisticated banking API tools like beneficiary management to prevent users from logging into 10+ corporate UIs to set up new payees. 

• 🤔 Financekey is based in Finland, which uses the Euro, but is surrounded by local trading partners (Sweden and Denmark) with their own currency. Any Scandinavian business with global ambitions likely also has dollars and multiple bank partners to help manage those. This is an important point because most payments orchestration or treasury ops solutions have focussed heavily on workflow but less on managing multiple banks in multiple Geos. This is in the sweet spot of global transaction banking (GTB), the cash cow of the financial services industry. If I were a big bank VC arm, I'd look at this closely.

Things to know 👀

1. Robinhood fired a quarter of staff, and fined for AML violations

• Robinhood has released 23% of staff, following a 9% cut in April with a particular impact on marketing, operations, and program management. Robinhood reported $318m of Q2 revenue, down 44% from 2021. CEO Vlad Tenev said on the company blog that they had expected the 2021 growth to continue into 2022 and hired ahead of demand and that this headcount reduction "is on me."

• Robinhood has been fined $30m by New York's Department for Financial Services (DFS) because it "failed to invest the proper resources and attention to develop and maintain a culture of compliance." Crypto contributes ~25% of overall Robinhood revenues, and Robinhood noted it has significantly improved its compliance operations since 2020.

• 🤔 The memestock growth and 2021 were unprecedented, and Robinhood had been burned with outages for not keeping up with demand. It's easy to see how they wanted to focus on maintaining growth, but surely that growth couldn't go on forever. I recall quietly, in 2021, many of us acknowledging we were in a bubble, and when thats happened, some risk management as a CEO was appropriate.

• 🤔 The line "this is on me" is compelling and superb leadership from Vlad Tenev. Robinhood's CEO has sounded whinny in the past (like when talking about payment for order flow or the Gamestop issues). It always had an air of "its the markets fault, its the DTCCs fault." But this, this ownership and accountability looks really really good and buys trust. 

• 🤔  Robinhood was doing everything: Crypto, Debit cards, web3 wallets, launching in new markets, options trading, M&A. Perhaps now is time to stand back and look at their core business if memestocks and Crypto booms aren't driving growth? Robinhood is trading at 6.25x revenues (on a run rate of $1.2bn), compared to e*Trade, which trades at 4.6x revenue (on $3bn revenue). It will probably stick around, but where does growth come from? Or does it just become a part of the landscape now?

• 🤔 Robinhood's track record with regulators is not good. Memestocks, options trading leading to suicides, payment for order flow, AML failings. That's an awful rap sheet. Robinhood compliance costs will continue to go up while its growth is constrained. This is why compliance matters; baking it into your growth strategy is so important early on.

2. JP Morgan is Building a Travel Agent

• JP Morgan is building a full travel business where consumers can book everything from a domestic flight to a safari. JPM acquired a travel agent and booking software, is building airport lounges and will launch a website in the coming months. The goal is to manage an entire shopping and travel experience (think Expedia or Booking.com). JPM has seen that travel rewards are the key driver of card spending, but they're hard to redeem and work with. By building the all-in-one solution, they're hoping to drive that flywheel. They're also considering launching similar "all-in-one" services for the car buying industry. 

• 🤔 It's not as crazy as it sounds when you think about how AMEX has always aligned itself to travel. Consumers and businesses spend significantly on travel, often driving high single purchase amounts (and therefore good interchange revenue). I think there's another angle too. The under the 30s are ditching banks but love travel. Going to where the customer is instead of expecting them to come to you is smart. 

• 🤔 Generally, I'm a fan of finance embedding itself deeper into the problem space. Companies in China like Ali and Ping-an have been doing this for more than a decade, where they operate travel, healthcare, home buying, and car buying "ecosystems" that just happen to be backstopped by their finance offerings. This tighter coupling allows you to go deeper into bits of a customer journey that were previously disconnected. Ok, you bought your flight but couldn't use rewards. Oh, and the insurance you want isn't available in this country. Tightly couple all of that and wrap all the lending, insurance, rewards, and travel together, and presto, a lovely experience. It's Apple-Esque done right.

• 🤔 Cars and autos could be a huge ecosystem to attack. Buying a car is possible on finance today, but running it, insuring it, accident cover, servicing it, then one day selling it is a schlep. All that stuff creates consumer and business admin, and where there's admin, there's opportunity.

🥊 Quick hit - Nubank hits 1 million Crypto users in less than one month. 🤔 Who says banks can’t do Crypto? Remember, Brazil is the market where Facebook just cannot launch payments no matter how hard it tries. Brazilian regulators are no joke; this is another example of Nubank executing.

Good Reads 📚

1. How Monzo executed growth

• Monzo Co-founder and Former CEO Tom Blomfield tells the Monzo growth story from 0 to 1m customers from 2015 to 2018. Monzo used a Prepaid card as a "prototype" for a full bank, but Prepaid cards are horribly loss-making, so the team only budgeted for 10k and couldn't imagine more demand. But by the time they became a full bank three years later, they had 600,000 prepaid cards. Tom also directly invested time with journalists instead of firing off press releases as the UK press was getting excited about startups in 2015 / 2016. 

• The initial launch was limited to 3,000 users, and scarcity was an intentional tactic (drawing on Gmail and early Facebook as inspiration). The early app lacked numerous features consumers expected from a bank but obsessed over details like merchant logos and emojis. This, combined with a promise to be human and plain speaking, created a brand that people identify with in the UK as powerfully as Apple, Patagonia, and Tesla. Monzo's "golden ticket" and "better with friends" became growth flywheels driving 5% compound weekly growth through 2017. 

• 🤔 This is a great read for any entrepreneur or anyone in growth. Tom admits some of their luck and timing, but there are some growth tactics here I haven't seen repeated often or well. Not everyone has Monzo's brand, but you have to start somewhere.

• 🤔 Where is the next great consumer Fintech company coming from? In a world of 1000s of faceless debit cards and banking-as-a-service, what's missing? Do we have Fintech App fatigue? I'm honestly stumped here. I think re-aggregation and embedding are going to be important themes. A few folks are building the private wealth management for the mass market that manages tax, bills, your house, your insurance, etc., but that's a hard slog. 

• 🤔 It's hard to explain Monzo's feel to non-UK folks and non-customers. Similarly, it's hard to describe why some of you love Apple, Superhuman, and your Tesla. It's 1000s of small details done well as a package. To this day, I'll end up in conversations with folks from the US and go, "oh yeah, Monzo does that; check this out." They really are the Superhuman of mobile finance experiences. It's almost a shame they became a bank. They might have grown much faster and been more global if they didn't. 

Extra Credit

• What happens when a Neobank goes Bankrupt?

Tweets of the week 🕊

That's all, folks. 👋

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