Fintech 🧠 Food - Jan 16 2022 - Checkout, Brex and Zerohash raise, Paypal stablecoin and Opinions vs Choice in APIs.

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☀️ gm Fintech nerds. How's your Sunday? My, it's been a week. Three SMB Neobanks announced the funding on the same day (lol @ their PR teams morning 😂). Checkout.com announced a monster round at a $40bn valuation, and a16z raised $9bn for three funds, so you know for sure everything is going to be Fintech. 

Instead of a sleepy January, we get a holy shit January. Don't get me wrong, if interest rates rise and inflation sticks around, eventually, this enthusiasm might wane. However, there's just too much still happening under the surface for the momentum to stop completely. And in Crypto, it's a whole other ball game. 

🔌Speaking of Crypto, the 2022 predictions show of Blockchain Insider with Visa's Cuy Sheffield did a meaty 7-day download number (over 12k downloads 🔥) If you want to know how we think Crypto plays out in 2022, click here to check it out.

🗣️ PS. Shoutout to Conduit, who is "Stripe for Crypto for LATAM and Canada," who announced their $17m Seed this week (disclosure: I invested)

Weekly Rant 📣

APIs - Buying opinions vs. buying choice.

If you're building a Fintech company, you face the buy vs. build choice for everything you do. You need to get good at making these decisions and knowing your strengths because it has implications on time to market, headcount, agility, and business model. 

If you build, you can grind out slightly better unit economics (which can be meaningful at scale). If you buy, you get to market faster to focus higher up the stack on growth and customer. To understand which choice you should make, we need to unpack the types of API providers in the market and the tradeoffs they create.

API Providers

API first businesses are transforming the economy. Whether it's Stripe, Twilio, or *insert your favorite infrastructure company here*, I think we can all agree they're pretty massive. But they're not all created equal. As a buyer of API products, it can be super hard to tell them apart when they all use the same marketing buzzword.

The benefits of buying from an API provider vs. build in-house were elegantly described in the canonical "APIs all the way down" PackyM as being like hiring people.

API providers essentially take one piece of a business and focus on just that at scale. They reduce both the Capex (initial spend) and Opex (ongoing maintenance) cost of doing a thing as a business. They obsess overdoing one thing well instead of because they sort of have to. It's the reason they're in business instead of the cost of doing business.

I saw a great tweet once that said tech companies are like fractals of other SaaS businesses. (If anyone knows who or where it was, I'm happy to edit this to cite) Put simply; a fractal is a shape or structure that repeats as you zoom in or out. As you zoom into the operations of most tech companies, you see a patchwork of other tech companies, themselves made of a patchwork of other tech companies (made up of other SaaS companies).

But there's a catch. There are countless choices of SaaS businesses for each department, task, or operation in a company. The white-hot VC market has poured capital into infrastructure companies, and there's too much choice.

So how the hell is anyone supposed to choose between API providers?

Fintech APIs

There are now countless API-first fintech infrastructure companies. Fintech Companies can quickly deliver almost any function of consumer or SMB Neobank to customers by hiring an API provider. Everything from onboarding a customer to issuing a debit card or selling stocks is available as an API.

These infrastructure providers dramatically improve time to market, especially in a highly regulated industry, with complex infrastructure. But there are tradeoffs. Often there's no correct answer, just the best answer depending on who you are and what you want to achieve.

We have to understand three things about the market before talking to vendors.

1. The market is a layer cake; one provider sits on top of another who sits on top of another. It is hard to understand who to buy from when they all use the same marketing terms and are the correct answer for someone. Take debit cards, API providers at the top who aggregate payments processors, and other 3rd parties in the middle who aggregate a relationship with a sponsor bank at the bottom.

2. Some providers require you to be more sophisticated. The closer you get to financial infrastructure, the more working knowledge you need about risk, compliance, fraud, AML, payments, licenses, and random-sounding acronyms. 

3. How you intend to monetize matters. Closer to the infrastructure can often yield better unit pricing but at the cost of more up-front and ongoing work. Depending on your income stream, margins, and business model, the effort may or may not be worthwhile. 

To bring this to life, let's imagine creating a Neobank for people who love wine. We have several choices about who our providers could be, and these impact how we get users and monetize. 

Choice 1: How high up the stack should you buy?

The Neobank could have working "live" cards in as little as four weeks with some all-in-one API providers (e.g., Bond, Synapse, Unit, Treasury Prime, Lithic, and everyone else who I didn't name here too). Many of the "Banking-as-a-Service" providers fall into this category. They do the up-front heavy-lifting on bank partnerships, 3rd party integrations, regulation, customer service, and more.

Or the Neobank could go slower, focus much more on building its stack, and work directly with core processors (e.g., Marqeta, Galileo, i2C). This approach would take longer but could result in more choice over vendors and better unit economics (in this model).

The answer depends on 👇

Choice 2: How much complexity do you want to manage? 

Some people love jigsaw puzzles with 100,000 individual pieces to them. Others would rather avoid the puzzle entirely. To some degree, every business is a complex puzzle, but where you choose to fight this complexity may vary. (Also, the reality is, you never really eliminate complexity in financial services, but you can limit it significantly).

Our Neobank could focus its efforts on building relationships with wine stockists, communities, and the proposition that makes them stand out. They could focus on the business model and understanding the value they bring to their customer. 

Or the Neobank could go deep into the payments infrastructure themselves, which would require building sophisticated fraud and compliance tech and teams. The risk here (as every Neobank founder will tell you) is how often Neobanks get hit by fraudsters shortly after launch. The reward could be improved user experiences (imagine the Neobank is in the cannabis sector instead of wine. Here building an in-house owned fraud/compliance team might be the whole value proposition of the business because payments just getting access to banking in this sector is hard)

The answer here also somewhat depends on 👇

Choice 3: How do you intend to monetize?

The Neobank could monetize through the debit interchange. We've seen this as the default option for most Neobanks whose primary revenue is customers using the card for everyday spending in the US. Interestingly, European Neobanks struggled to make interchange revenue lucrative (although a recent change by Visa and Mastercard for international interchange now means Monzo's revenue is spiking as people travel internationally again). 

If this is a primary source of revenue, unit economics start to matter more, so maybe going down the stack and taking on more complexity could be a good idea.

Or the Neobank could monetize through subscriptions, real-time payments, tips, wine merchant partnerships, or even wine club memberships. If the center of gravity is their community, then avoiding complexity and focussing more value is essential.

I actually think this one matters less than people realize for most Neobanks. If you're mass market (e.g., Chime), then yes, it's a primary revenue source and unit economics matter. But if you're community-focused, there are many other ways to monetize. As regulars will know, I'm also a big fan of the modern Fintech Super app approach (combining everything from stocks to savings to Crypto in a single app). Finding more sources of revenue is a good thing but requires a deep understanding of the customer problem domain.

For non-banks like Shopify can monetize payments (it's more than 50% of revenue), avoid complexity, and buy super high up the stack (from Stripe). Shopify buys Stripe's opinion about how payments should work. Chime buys the choice offered by more in-house build and direct integrations lower down the stack.

So which should you buy?

Buying Opinions

As Packy put it, hiring an API is like hiring someone to run that team for you. APIs are a great way to scale someone's opinion. They make choices about preventing errors, risk, or even running a team and productizing those choices. If you could hire the best fraud or AML team in the world, but the catch was, they were only available as an API, would you still buy it?

Can that provider do the thing they do better than you?

For me, this comes down to; if you're buying an opinion, who's opinion are you buying? 

Buying Choice

Hiring an API can also mean having a lot of configurability and choice in who your 3rd parties are. If you already have strong opinions or are class-leading in something, the ability to bring your provider (or choose from a marketplace) can be hugely compelling. Do you want the ability to change providers over time? 

Are you confident you can get value from having that choice?

Choice comes down to; is that choice real, or have I just moved by tech and vendor lock-in somewhere else?

What should you pick?

That depends on who you are and what you want to achieve. 

It depends on what your core skills are, and what will have the most impact on your business.

Buying the Opinion: For things like Fraud, I’d want a Unit 21 or Sardine AI to automate those concerns for me. Confident they will almost always do it better than I can.

Self Build: For something core to what you do, like say storing balances and accounting, having your own core could make a real difference (or at least your own lightweight ledger like Fragment)

Buying Choice: For something where the provider landscape is changing (e.g. there are many partner banks), having a BaaS provider who can work with many is likely worthwhile.

Choice or Opinion?

As with all things in life, there’s no single correct answer. There will be multiple billion-dollar companies being built today with one approach, and multiple billion-dollar businesses taking the other.

As a bias, the API I'd want to buy is the self-driving API that lets me jump in and take the wheel when I either want to or need to. Does this provider give me all of the data I need to trust their opinion or form my own? Then yes, I can ignore and automate this part of my business until I need to take it over.

I'd trust Chef Ramsay's restaurant pick more than my own and Garyvee's pick of NFTs more than mine. But maybe sometimes I just want KFC.

That's the thing with opinions. Everyone has one.

ST.

4 Fintech Companies 💸

1. Accrue savings - Save Now Pay Later (SNPL)

• Accrue is a savings app that gives discounts and cash rewards for saving an item from a specific merchant. Users select an item they want (e.g., a Casper mattress), set their savings plan, make regular deposits, and earn cash rewards. 

• 🤔 A decade ago, this would have been marketing tech since the model essentially sells new customers to merchants. The nuance here is how effective BNPL providers have acquired, converted, and reactivated consumers. For ethical brands who may worry about harming consumers from BNPL, Accrue is an excellent alternative. Every BNPL provider should have this feature. Its strength is that it's a shopping app that does savings, not a savings app that does shopping (even though the core experience is saving). 

2. Lipa Later - BNPL in Kenya

• Founded in 2018, Lipalater is a "BNPL" provider with exclusive partnerships with retailers like Carrefour (think Walmart). Unlike US and European competitors, most customers are charged interest on credit. Lipa is aiming to expand into Tanzania, Ghana, and Nigeria.

• 🤔 The BNPL provider Merchant partnerships game is a land grab. Those able to expand their market presence fastest win; the merchant partnerships have been sticky. I can't think of a major merchant who's changed their BNPL provider? (Maybe you know one, but it certainly doesn't seem common).

3. Liveflow - Quickbooks to Google Sheets

• Liveflow automatically updates spreadsheets from Quickbooks to prevent manually copying data from accounting to internal dashboards. This gives businesses a direct view of their budget vs. actual P+L.

• 🤔 Spreadsheets won't die. For every SaaS platform that is "better than spreadsheets," the flexibility (and muscle memory) of accountants and finance ops folks are hard to match.

Speaking of niche accounting tools

4. Heard  - Accounting as a service for therapists

• Heard provides accounting, payroll, and tax management for therapists. Heard specializes in the nuances of the therapy industry and provides an online platform (supported by human accountants) to improve tax returns.

• 🤔 The involvement of humans who understand the nuances of an industry made me wonder if this is really "4 Fintech Companies worthy." But then it struck me; this is inverting where to start in finance. Accounting is the operating system of SMBs and the right place to solve the more complex problems they face.

Things to know 👀

1. Checkout raises at $40bn Valuation

• UK-based "stripe competitor" Checkout.com has raised $1bn from Altimeter, Dragoneer, and the Qatar Investment Authority. The new funds are to help with its US expansion. Checkout's value has doubled in the past 12 months. 

• 🤔 Checkout's major European competitor is the Netherlands-based Adyen. Adyen's customer base is arguably larger (older?) and more complex payments clients (McDonald's, Virgin, Spotify). Checkout has some traditional companies (e.g., Pizza Hut). But Checkout has specialized as Europe's payment innovator at scale, with Fintech companies like Wise and Klarna as customers. Checkout also has major Crypto businesses like Binance, Circle, Monday, and Crypto.com as customers. 

• 🤔 For some context, Adyen's current market cap in 2020 was $70bn, and it did 2020 revenues of $407m. Checkout.com did 2020 revenues of $250m, and its closest valuation at the time was $20bn. It also grew revenues from $150m to $250m between 2019 and 2020. Even as investors go risk-off in Public markets, Checkout.com is a growth machine, and payments are the monster growth engine for Fintech. 

• 🤔 European expansion is complex because of various payment types and regulatory requirements. Europe has many payment types (IDEAL in the Netherlands, Vipps, and Swish in Scandinavia) that have local market requirements. For regulation, take Anti-Money Laundering (AML) as an example: In Europe, payments providers have to submit suspicious activity reports (SAR's) to countless regulators in different formats. In the US, there's just one, FinCEN. 

2. Brex, Novo, and Qonto SMB Neobanks all announced raises on the same day

•  Brex raised $300m from TCV and Greenoaks. The company that started as a spend management card now provides cash accounts, cards, and spend management into a single dashboard. Novo raised $90m at a $700m valuation as the Miami-based SMB focussed Neobank passed 150k customers. Not to be outdone, Qonto raised $552m at $5bn led by Tiger and TCV and with 220k accounts. In their round, both Qonto and Novo note that they "built their core," which improves their unit economics over time. 

• 🤔 SMB and corporate banking have been a steady growth and profit source for incumbent banks for decades, but the growth of Brex, Ramp, Mercury, Novo, and others will massively impact their revenues. Unlike consumer Neobanks where the direct deposit still went to the incumbent, SMBs are running their entire financial lives with these new Neobanks. 

• 🤔 The smaller and mid-sized, industry-focussed banks will likely feel the impact the most. Regional banks could solve for specific geographic industries (like mining or farming) far better than their national counterparts. 

• 🤔 Building your core is time-consuming but pays off in the long game if you’re aim is the best unit economics. Vs. Incumbents, these Neobanks have a massive advantage. Incumbent tech infrastructure cost per account per year can be anywhere from $60 to $100. I'd be shocked if these guys were running past $10 per account and more likely close to $2. Vs. Building on BaaS providers, the tradeoff is more nuanced. While a BaaS provider may be more expensive, they also outsource much of the R&D and maintenance of infrastructure. For some, that's a price worth paying; for others, it might not be. Outside of the core, in things like onboarding, or fraud, just about every Neobank is outsourcing. 

• 🤔 The revenue potential for SMB banks is massive. Brex charges $49 a month for the account, and average deposits in this sector can go anywhere from six to nine figures. If these Neobanks get charters, they could use those deposits to lend at scale. Many are waking up to modern infrastructure can supercharge lending. Where incumbents ask the same questions of a client they've had as a deposit customer for 20 years because that's all their systems allow, modern Neobanks have a log of every action and transaction you ever made with them. The potential for sophisticated ML as they scale their data about customers is immense. 

I couldn't help myself and had to comment on all three of these stories, a bit shorter analysis than usual, but it's all so damn compelling. Why do I love this stuff so much? 😅

3. Everything happened in Crypto (again). Zerohash raised $105m, PayPal confirmed a potential stablecoin, and Goldfinch raised $25m.  

• 👀 Zerohash, a "Stripe for Crypto" provider, announced its Series D just three months after a $35m Series C. Pre-built integrations to Crypto infrastructure providers to enable use cases like crypto rewards, trading, and "earn" Crypto through clean APIs. 

• 🤔 It's tempting to look at that and think VCs have lost their minds, but every Fintech and Neobank are now trying to shoehorn Crypto into their offering. Without a simple API, the Crypto space is a spiders web of complexity. This is needed in every significant Geo where Neobank's are a significant force in the market. 

• 👀  PayPal confirmed they are exploring a stablecoin backed by the US Dollar. The confirmation comes after a developer found hidden code and an image in the PayPal app. A spokesperson said that PayPal created these app assets in an internal hackathon and that it would world closely with regulators "if and when [it] seek[s] to move forward."

• 🤔 "Stablecoin's" are such a hot-button issue for financial regulators and the #1 concern they have about the Crypto industry period. The market is moving faster than regulators can keep up. The regulators face a private sector that's moving faster every day and significantly outnumbers them; no wonder they are overloaded. 

• 🤔 The term "Stablecoin" needs a make-over, like how Crypto became Web 3. USD-backed Stablecoins are the same as USD. There's some nuance, but if regulators set the parameters for what makes that true, Stablecoins = CBDC. I can imagine this would be the quickest win for the USA and regulators. The work is non-trivial, but if the Fed declared the parameters for "private stablecoins" to be considered USD, the USA would win the future. The world would choose between open, engineer-friendly USD and closed state-controlled Chinese CBDC. If Circle, Paxos, or even Maker got an account at the Federal Reserve 🤯

• 👀 Goldfinch, which provides financing to 3rd party lenders with DeFi, announced a $25m Series A led by a16z. Since April, loans on the protocol have grown from $1m to $39m, and Goldfinch says more than 230,000 borrowers have been "reached." Lending has been deployed in more than 18 countries, including Brazil, India, and Kenya. 

• 🤔 Most DeFi loans are overcollateralized (For every $1 borrowed, you must deposit $1.50 or more). Goldfinch has split the DeFi model by allowing local market lenders to receive stablecoins to fund their existing lending businesses. These local market lenders have to fund their lending from somewhere. To them, Goldfinch just looks like another investor. For the investor side, if you're buying emerging market debt, Goldfinch provides a single marketplace to access countless small lenders worldwide. For those investors, that's a way to reduce the cost of buying those loans dramatically. Goldfinch (and Credix) are building a two-sided marketplace, where being overcollateralized might be worth it for the investors. I smell a ton of regulatory risk coming their way, but if they're smart, they'll look very closely at what AAVE is up to with Arc. 

Good Reads 📚

1. Wtf is Web 3?

• The magnificent Cobie provides one of the most balanced perspectives on "Web 3 vs. Web 2" I've seen. Cobie points out Web 3 has gained massive traction as a term, but it's almost 50/50 in some areas as to if it's a complete scam/hype or worthwhile. Cobie defines Web 3 around two concepts. Decentralization of power and ownership of value.

• Web 3 supporters talk about how decentralization will help us move away from platforms, distrusted institutions, and build a web where users can share in the value it creates. Critics, too, have a point, will we need tokens to operate a toaster? Are we building a world where it's impossible to stop things like child pornography from being widely available? So who's right?

• If Bitcoin has gone from dark web money to institutional asset, then maybe shared ownership can be "a forcing function to break existing conventions on how tech companies can or should operate." Yes, in Crypto land, VCs are getting better terms, but everyone else can participate in the growth and ownership in many cases. Those who fund risk should benefit from the reward (VCs), but that opportunity should be available to more people. In summary, Web 3 doesn't exist yet; perhaps a mix of transparency and brilliant minds can make a difference to the world that Web 2 helped create.

• 🤔 This debate has seen everyone from Jack Dorsey accuse VCs of selling fools gold to the founder of Signal (Moxie) make detailed technical arguments against Ethereum.  This reminds me of the debate around Java in the early days. It was Consensys I first heard say, "Ethereum is Java." Java was never the perfect language; it was buggy, hard to use, and slow in its early days. It was worse than its alternatives in every dimension except for the Java Virtual Machine and runtime environment. It's possible to be technically correct about Web 3 and wrong in aggregate because it's not just a question of what's the best tech. 

• 🤔 Decentralization is a misleading term because it sounds absolute. The reality is decentralization is a spectrum of less centralized and more centralized. Where performance matters, more centralized wins, where decentralization and security matter more decentralized wins. What's new is that the default model is not entirely centralized, just about everything in Web 3 not.

• 🤔 Token Ownership is a game-changer that few have fully understood. I didn't cover it this week, but there was an airdrop by a competitor NFT marketplace to Opensea called Looksrare. Looksrare sent everyone user of Opensea (that's transacted over 3Eth) some of its tokens (LOOKS). Those tokens now trade for ~$4 each, but that's not the point. Every holder of those tokens can "stake" those tokens. Looksrare pays 100% of marketplace trading fees it earns to token stakers. Opensea is valued at $13.3bn and has a 2.5% take rate; Looksrare could end up being a genuine alternative owned by the masses. (Although it should be said, being purely decentralized has some UX and wash trading issues still, the point remains, anything in Crypto is forkable with the right incentives, including the users). 

Tweets of the week 🕊

That's all, folks. 👋

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