Fintech 🧠 Food - I'm Long Fintech Talent, The DeFi Hacks and Marcus gets its wings clipped - 16th October 2022

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Hey Fintech Nerds 👋

We live in strange times. 

At Macro, the global order is shifting, and the stability we once counted on has evaporated. And for many consumers, it feels the same day to day.

Every week more layoffs, more hacks in web3, and more regulatory pressure appear. 

This week's tweets (bottom of the email) stood out as little snippets of the time we're living in. (I really recommend scrolling all the way down, taking a read of those then reading the rest of this post, it puts it all into a bigger context).

We’re in a time of change.

But for some, perhaps a time of opportunity.

Goldman is closing Marcus as a direct-to-consumer brand but taking the opportunity to double down on the Apple partnership with a savings and direct deposit offer.

Speaking of opportunities. 

📌 I had the opportunity this week to record a little snippet video about interviewing the now-former President and CEO of FTX US, Brett Harrison, at Money 2020. "The Sardine and the Whale" is an all-time classic name for a 30-minute fireside 👏 

Is DeFi dead? What happens next in Crypto? Should TradFi and Fintech companies still pay attention? I cannot wait. 

See you there?

Weekly Rant 📣

Change creates opportunity

I’ve spoken to four separate people in career transition this week and looking to make a move in Fintech.

They’re hyper aware of the market backdrop, and thinking through the next move.

I found myself saying the same things and thought it made sense to share it for a wider audience in case any of you find it valuable.

The Fintech market isn’t what it was 12 months ago.

It feels weird writing about layoffs.

Almost like writing about marriages ending, or a tragic accident, I have an inner desire to avoid the whiff of schadenfreude that some folks have watching growth companies stumble. 

News of Brex laying off 11% of its workforce caught the headlines this week. Often the people losing their jobs may be high performers; they just happened to be on the wrong team. For example, Brex is now exiting SMBs as a sector; therefore, that whole team is no longer needed. 

Change can be scary but creates opportunities for individuals and the whole industry.

Individual opportunities.

I have a ton of sympathy for talent going through a layoff. It is a shock and upsetting and can have massive consequences on an individual and their entire family. Especially the underprivileged or those early in their career.

But I believe talent will always find a way.

When a ship sinks, often the first to leave are the most confident swimmers. 

Not all Fintech talent may feel confident.

But they should.

You should.

It's a tight labor market. Yes, layoffs have started, but we have near-all-time-high employment levels in most developed economies. This is especially true for rare skill sets and industries.

What you do matters, and people need it.

Banks are still spending heavily on digital and need talent with cutting-edge experience.

Some industry parts are cyclical, and debt collection, underwriting, and compliance expertise will get a heavier focus as cost-cutting, and regulatory pressures really bite.

And truly great engineers, product, design, and salespeople are always in demand.

The demand is there; you just have to know where to look.

So where should you look?

• Look at the market dynamics in Fintech.

• Look at the change in banking.

• Consider the gaps between the two

• And position yourself accordingly

Look at the market dynamics and look at who has an opportunity.

I spent some time at the Goldman EMEA Fintech conference this week, listening to various VCs under Chatham house rules try to avoid platitudes. 

It's funny; they'd almost start with a VC trope and then spend the next 5 minutes adding nuance and rationale.

• "Don't raise unless you have to." This one is no surprise, but chances are the last round was a better valuation than the next one will be. So why book the loss unless you need the cash? And look for alternative sources of finance if you need it (more on that later).

• "Flat is the new 3x." If you do have to raise a "flat round," are the investors signaling they back this company to grow into its valuation someday.

• "Flat rounds aren't really flat." The valuation might stay the same, but the terms and conditions could change dramatically. Liquidation preferences and dilution of common stock are making a big comeback.

• "We're backing our portfolio but being selective." The big caveat here was so long as unit economics are trending the right way, or there is very high conviction, they will. 

• "Focus on profitability is true for most but not all." This is perhaps the most annoying trope. It's really getting to the rule of 40 growth or better and focusing on unit economics. But that's not true for everyone (see below).

• "If your time is now, double down" - The reality is some companies are still crushing it, perhaps even more so. The demand is overwhelming if you offer high deposit yield to early-stage Fintech companies or have cleantech finance widgets. Like most of Fintech saw in the pandemic. Regtech is also massively focused as regulators pressure Fintech companies and their partner banks.

My impression is that if you're a startup at an early stage, the VC market is closed unless you're killing it on the rule of 40 growth or Adam Neumann. 

If you're a talent at the seed stage, conviction matters. But the VC market may change in ~ 6 months (as Macro re-organizes).

If you're late stage and a long way from profit. Worry. There are great products here, but PE and M&A could be on the cards.

Ok, I'm being glib.

The market will turn. 

But if you're a talent, there are new winners in the new reality.

Some are taking advantage of the external market shock (suddenly high-interest rates), and like Fintech in the pandemic, I sense that growth won't last. 

Others benefit from long-term systemic changes like the energy crisis and the push for more consistent financial services protection in Crypto and Fintech.

Make your own mini-thesis about who wins in the new market, how long these market dynamics last, and where to position yourself accordingly.

Outside of just Fintech companies, growth companies are now looking at alternatives to VC cash, like making their deposits work harder and lending.

Do Banks and Fintech companies go from foe to frenemy to fren?

The bank's role in all of this change.

Things aren't easy for the banks either. While interest rates go up, demand for lending decreases as loans become less affordable. Customers in a cost-of-living crisis have fewer savings, and therefore the balance sheet banks can deploy is reduced.

Yet when it comes to those same banks, they're well-capitalized after the global financial crisis (GFC). Where once VCs were chasing Fintech companies to buy equity, now the banks can step in and deploy debt.

Pun not intended, but speaking of stepping in, Step raised a $300m debt facility just this week from Tripplepoint Capital and Evolve Bank and Trust. If that name sounds familiar, that's the same Evolve bank that does all of the partner banking.

Balance sheet power matters. 

Banks with a small deposit will have an upper limit on how much they can lend. Larger banks 

What was once a story of small partner banks + Fintech companies is now an evolving landscape of lenders, bigger banks, small banks, and Fintech companies. Regionals and larger banks can now make a play for Banking as a Service. 

The outlier in the market for me is JPMC. Jamie Dimon has staked his reputation on dramatically increasing costs to chase the market structure change Fintech created. Launching travel sites, launching in the UK, acquiring countless Fintech companies, and going after BaaS.

Whereas Goldman pushed similarly, they ultimately couldn't sustain the high investment cost (covered in things to know below).

The lesson here is that banks can't build it all alone; otherwise, things get way too expensive to sustain, and by the time they're just starting to bring in revenue, the investors and internal P&L owners are revolting. 

Fortunately, there's a whole ecosystem of Fintech companies that can

1. Provide better infrastructure for new business lines

2. Be distribution partners for the balance sheet

But the starting point shouldn't be, let's build an entirely new core and bank that looks like the old one but with modern software. Then attract deposits with a great savings rate and use that as a launch pad to become a universal bank on a new stack. 

That's not wrong; it's just missing the bigger question.

What has changed in the market? 

And for me, what has changed is that infrastructure got massively unbundled and re-bundled. Understand that we might land somewhere different for each part of the value chain.

Speaking of landing.

We're about to land in a different market in 3 to 5 years.

A more balanced market.

Fintech companies became genuinely massive by market cap. At over $100bn, both Block and PayPal would compare against some of the world's largest banks. 

But the market cap can be misleading.

As we're now seeing.

Markets want stable cash flows, not just growth.

Markets correct.

But customers and usage are real.

With 44m MAUs, CashApp has more consumers and active users than all but the top handful of global banks. 

The narrative of the past 5 years can be grossly oversimplified to

• Banks are slow and can't compete because they're battling legacy costs and high regulatory burdens after the global financial crisis.

• "Banks can't do innovation" - because of political fighting, it becomes too expensive to compete before revenue arrives.

• Fintech companies are "eating the banks' lunch" because they're faster and have much better UX

• Fintech companies are naive in compliance or trying to avoid it altogether.

Perhaps this is typified by Jamie Dimon, noting he was "scared shitless" of Fintech companies.

Consumer Fintech looked like it could actually disrupt banking like the internet disrupted newspapers and the recording industry.

That's not what has happened.

Events change things.

And sometimes reveal hidden, more complicated truths.

Operators in banks got tired of things being viewed this way, and most Fintech companies know there's a bank behind the scenes powering everything they do.

The best Fintech companies are the ones that not only grok compliance but that push the boundaries and improve on what had always been seen as a tax on doing business. 

So I think that leaves us with a much more balanced market.

• It's not just small banks doing BaaS and embedded finance. This will create choices and more product variety for consumers and businesses.

• Consumer Fintech has numerous categories and business models. Some will take the hard road to become banks, and others will go wide. 

• Businesses want their deposits to work harder than ever. A $10m round making a 4% yield can pay for two engineers (although in reality vs. inflation, it's really -4% in cash terms, still it's better than leaving cash in an account losing 8% annually!)

• Bank-driven lending has demand again for consumers, Fintech companies, SMBs, and corporates. Fintech companies can help distribute that, and the banks are the most consistent source of capital because they have balance sheet power.

Opportunity in the new normal.

Banks and businesses creating deposit yield and lending have a massive opportunity in this market. 

Talent that understands how to build for deposits, lending, the needs of VC-backed startups, compliance, underwriting, or how to design better experiences for all of this has a massive role to play in the future of finance.

A few folks reached out in the past few weeks for advice on what to do next.

And the reality is a lot of it depends on you. 

• What are you good at? AKA, "what's your superpower." Who needs that, and why do they need it. Based on your market analysis will help you figure out your pitch for companies.

• What do you care about? It's easy to turn this into soundbites, but do you really know what you enjoy and your actual priorities? Imagine your perfect day if money wasn't an issue. Now figure out who will pay you to do that.

• How much does stability matter to you? Market turmoil is a great time to make contrarian bets. And in general, if you're under 20, take as much career risk as possible (unless there's some extenuating circumstance). But maybe your mental health and happiness are in a much better place with more cash, or you're older and have a family.

• Stage matters: Corporate has a negative perception that isn’t always warranted. You'd be surprised how much banks have changed, especially the good ones. Engineers are hallowed like they are in tech companies in some teams. Banks and PE are looking at Fintech and M&A; could you play there?

• Stage matters: Mid-stage needs efficient operators and scalers. If a company has to get its unit economics better and get organized, are you that COO type who can whip it into shape and lift the key OKRs without damaging velocity?

• Stage matters: Super early needs contrarian bets, risk takers and people who can make it happen no matter what. Do you have super high conviction and the risk appetite to get it done?

Know yourself, know the market and find your opportunity.

I guess this is my love letter to Fintech talents out there.

We spent the last 5 years changing the shape of the industry, but the job isn't done.

The labor market is tight. 

And someone needs you.

You got this.

ST.

4 Fintech Companies 💸

*Denotes I have a small angel investment 😇

1. Oops Finance - The App that makes you better with money

• With Oops, users can track their everyday spending and become better savers. It helps users stop wasting money by nudging them to categorize every payment and transaction. 

• 🤔 Oops helps users build accountability with clever design. I had to dig deep to figure out why this is more than just another PFM app, and the user reviews gave it away. Accountability is why. Oops is like that friend who holds you accountable. The app gives users data and consistent feedback. There are literally thousands of PFM apps, but something about Oops's stripped-back and focussed design is brilliant. Which makes you wonder, what should it become when (if) it grows up?

2. Spleet - All-inclusive living

• Spleet is a platform that connects apartment owners to renters who can then split upfront rental costs monthly, quarterly, or annually. They call this splitting "rent now, pay later." The platform also helps users pay "all in" for utilities, water, gas, waste, and other amenities.

• 🤔 The burden of paying the first and last month's rent, when not receiving the deposit from your existing property, is a barrier to moving for many worldwide. But in Nigeria, it can often be required for a year or two years of advance payment. This solves a huge problem and could unlock the rental market. Spleet's approach The "all-inclusive" part is what Adam Neumann's flow is trying to build, except much more targeted and straightforward.

3. Sugar Wallet - Weirdly simple investment

• Sugar wallet simplifies investing by offering users three funds (balanced, growth, and conservative) and automating investing. Users can set investments on autopilot at payday and round up spending daily.

• 🤔 There are plenty of apps like Sugar in features, but very few in feel. A bit like Oops, Sugar's design aesthetic is clever. The team is Kiwi (from New Zealand) but aims at the 143 users in APAC who regularly save but don't invest. These apps live or die by the revenue they can create through fees and AUM. Tough to become massive, but as we saw with Nutmeg, there could be many willing acquirers someday.

4. Payable* - Modern Treasury for Europe

• Most finance teams use spreadsheets to count payments coming in and manually make payments out. Payable provides a single dashboard and API for multiple bank accounts instead of dealing with bank files and spreadsheets. Customers can build automated payment flows, automatically reconcile payments to accounts and build new experiences for their clients.

• 🤔 If every company becomes a Fintech company, every finance team will have a nightmare managing the new payment flows created by the product teams. Unless you've done it, you'd have no idea how painful dealing with the files various banks spit out can be. Those files were built for big enterprise ERPs like SAP, not humans with spreadsheets. The category Payable operates in is crowded to say the least, but the team is founded by Checkout.com, Truelayer, and Stripe employees and has plenty of first-hand experience with the problem they solve.

Things to know 👀

1. Binance network and Solana-based Mango Markets hacked.

BNB (or Binance Smart Chain), the 5th largest Blockchain and token by market cap, suffered a "bridge hack" last week, resulting in a hacker creating an estimated $570m in new tokens. The attacker was able to exploit a vulnerability in the Binance Bridge to create these tokens and take them. The impact had been limited by the fact that the attackers could not take their funds off-chain, and Binance was able to shut down the network to contain the issue.

Mango Markets had more than $100m stolen by manipulating prices through an "Oracle" (price feed). Mango Markets is a Solana-based platform for swapping digital assets and futures contracts. The hacker manipulated what Mango thought the price was of collateral they had on deposit and used that to take out loans from Mango Treasury.

• 🤔 Binance Chain is not Binance the exchange, but they're closely aligned. Binance uses the BNB coin as a reward token for activity on their platform, but it also forms the basis of the BNB chain. But Binance does not run the Binance Chain; independent validators operate it. In my opinion, the chain lives and dies around the edges of Binance; while some apps and marketplaces use it, it doesn't have the same developer street cred as Ethereum Solana or Polkadot et al. 

• 🤔 The bridge is often the weak spot. When developers build a network, they create a security model for that network. When someone builds a bridge between networks, they make the security model for the bridge. Almost nobody is building a holistic security model for users on multiple chains. Hackers are exploiting that.

• 🤔 Oracles are also a consistent weak spot. If an exchange is getting its price from somewhere, attacking that feed effectively "changes" the price the asset appears to be available for.

• 🤔 Headlines about hacks do not help the cause of making Crypto legitimate. But remember Mt Gox? DeFi is still extremely early, and these issues will be fixed and gradually become rarer. The potential for DeFi to be a more transparent, fair, and efficient global financial system still exists and will long after these hacks are a history lesson. (I often quote the IMF Global Financial Stability report from April 2022 that found DeFi is meaningfully lower cost infrastructure than TradFi).

• 🤔 DeFi isn't yet consumer-ready, but two things are happening simultaneously. 1) It is being pulled into regulation, and 2) Builders are finding solutions to the problems. DeFi will be an upgrade to capital markets at a minimum. I hope regulation doesn't kill new opportunities for consumers to participate in wealth creation.

2. Goldman pairs back Marcus plans.

Apparently, bowing to pressure, Goldman Sachs will no longer pursue checking accounts for the mass market. Bloomberg reports Goldman will also limit their consumer lending but will continue their existing card partnerships.

• 🤔 There goes the case study. When pointing at "who's doing something interesting in consumer, every consultant (including me in a past life sometimes) would point at Marcus. David Solomon would defend Marcus from the market, internal stakeholders, and anyone who wanted to attack it. Absolutely amazing resilience and a case study in how to do something novel in a big org. The reality of being a massive organization with shareholders and incumbent business lines has bitten.

• 🤔 It was a great strategy but expensive execution. Marcus had three legs to their strategy. 1. Becoming a universal bank direct to the consumer across all product types. 2. Partnerships like Apple Card. 3. Starting to offer APIs to get into Banking-as-a-Service. On all three, Marcus had started to deliver some big wins but was far from profitability. So much of this comes down to how big organizations tend to execute rather than their strategy.

• 🤔 I wonder what will happen to the transaction banking ambitions. Global Transaction Banking is a massive and profitable business that's neither consumer nor wealth. Yet Goldman had an interesting play here. Does this get sold off? Or become a part of the wider org?

• 🤔 This creates a ton of space for competitors in all three legs of their strategy, consumer, partnerships, and BaaS. In 2022, most of the larger competitors are now attempting these strategies, and some smaller and regional banks are aggressively chasing the embedded finance opportunity. When Goldman published this strategy, it was market-leading, but now it's table stakes. If I were a competitor, I'd love to take Apple Card off their hands. 

• 🤔 "Marcus" as a wealth brand has a nice feel. Perhaps there's a way to do less and achieve more. This might be a win/win for Goldman long term.

🥊 Quick hits: 

• Check out the new CBDC network from SWIFT. It's a pilot for now, but they've finally reacted. CBDCs and cross-border payments are being attacked from all sides and are geopolitically important. It's still a pilot, so don't expect anything meaningful for a while. But as central banks look at their own CBDC, accessing that cross border via SWIFT becomes much more efficient for banks, institutions, and potentially even Fintech companies.

• JP Morgan Liink partnering with Visa B2B connect in the same week is interesting timing (and during the SWIFTs SIBOS conference). Visa is building a potentially meaningful alternative to SWIFT for cross-border use cases. Where SWIFT is still very much at the institutional end of the spectrum. (I should note, Liink already works with SWIFT).

Good Reads 📚

1. BNPL's biggest problem is that it is unpredictable

Alex walks through a synopsis of BNPL today, where competition is shrinking margins, the cost of funding their lending has increased (due to rising interest rates), and BNPL providers are now making more revenue from fees because customers are late paying. Oof. He then contrasts that with the sense of control, transparency, and product discovery consumers love about BNPL. 

He then makes some recommendations like diversifying the business model, creating visibility between BNPL providers for consumers, and investing in better dispute resolution. This is a must-read and goes beyond the basics into some extensive recommendations. My only thought reading it was.

•  🤔 How does Alex come up with all this stuff? I love content that offers deep analysis and a potential path forward.

• 🤔 The suggestion of data sharing is important but challenging. Consumers should get a holistic view of all of their credit by default. But the BNPL providers are competing to be the sole provider. There’s a fundamental tension to manage, but this is an area to prioritize and will de-risk future regulatory action. Doing it now looks proactive.

Tweets of the week 🕊

That's all, folks. 👋

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