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  • Fintech 🧠 Food - Jan 17 - Plaid & Visa divorce, $300m for Blend, Rapyd & MX, and a Marcus / Marqeta marriage

Fintech 🧠 Food - Jan 17 - Plaid & Visa divorce, $300m for Blend, Rapyd & MX, and a Marcus / Marqeta marriage

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. :)

You're going to want to check out the tweets this week, some absolute gold in there.

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Another nutso week in fintech. 🤯

Fintech did that thing again where too much happens. Blend raised $300m, Rapyd raised $300m, Grab Financial raised $300m, MX raised $300m, Capchase got $60m, oh and there's the small matter of Plaid (or Visa depending who you believe) walking from the acquisition. That's before we get to Modern Treasury raising, Goldman partnering with Marqeta and Walmart doing a fintech. I cover some of these later in "things you should know," but there's one story this week that is a microcosm for everything else happening.

(PS, Curve raised $95m, and Revolut is applying for a UK license)

Weekly Rant 📣

Back in January, when Visa announced the acquisition of Plaid, the $5.3bn price tag for a company that aggregates account data was viewed by many as either an overpayment by Visa or an excellent result for Plaid (read: a bit pricey).

On Tuesday, news broke that "Visa abandons planned acquisition of Plaid." The Wall St Journal immediately set this against the context of a DOJ lawsuit that alleged the acquisition would allow Visa to "maintain a monopoly in the online debit-card market." This would create higher prices, less innovation, and higher barriers to entry for online debit services.

On Wednesday, Axios then put up a story claiming officially "Visa and Plaid mutually agreed to scrap the deal, with no termination fees to be paid."  Apparently, what really happened is Plaid got cold feet because it knows it's now worth way more than $5.3bn, and the DOJ driven delays gave it an escape route.

History is always good context.

Plaid is the ultimate aggregator.  It enabled almost anyone to use account data to verify identity quickly, build new credit models, or make signing up to a PFM super slick. Fintechs could build faster; consumers got new apps. What's not to love?

Banks hate it.  Banks lose the relationship with the customer and exclusive rights to that data. Banks have always been protected by regulation, but Plaid effectively created a way to arbitrage the bank's data by having users provide their online banking username and password. Others (like Mint.com and Yodlee) had tried the same route, but Plaid was the first to build an experience so good that it became mainstream.  

Despite the best efforts of banks to complain or break Plaid, though, most of the time, Plaid works so well that it's become a meme. "Plaid for X" is an entire investment category.

What next for Plaid?

Fintech twitter loves this move (Sar Haribakti did a great hot takes summary). Some of my favorites include.

  • Covid probably grew plaid volume massively, meaning more revenue and growth.

  • The market for other exits (IPO and SPAC) is now much stronger than in January.

  • Plaid could be worth up to $30bn privately (that's half a Stripe!)

  • Plaid will do stuff it wouldn't have without Visa over its shoulder, and that's good.

  • YC has a Plaid for X Geo every batch; their acquisition growth options are significant.

  • Does this break Visa as a landing spot for fintechs?

What next for Visa?

This is good for Visa's legacy business.  Visa analysts like Tom Noyes point out Visa no longer has a regulatory distraction. Visa enjoys 10 to 15-year operating agreements with the banks, and that's such a crucial part of their long term revenue. Tom also questions the price to earnings multiple for Plaid (he places their revenue at $35m at acquisition, but I've seen estimates in the region of $100m to $200m, and 50x revenue isn't that nuts for fintech in public markets right now. Look at Square).

My take:Visa needs to find a life beyond cards, and the banks needed a way to protect against big tech building alternative rails. The best placed to build alternative rails are players like Plaid.  Visa may now look at other routes to start to own non-card, real-time payments.

What next for payments? 💳

The US is in dire need of a real-time payments infrastructure that is open to market participants beyond banks. The US bank lobby is exceptionally effective at regulatory capture (as Bill Gurley often laments). You can see this in the constant delays to FedNow, the proposed real-time payments infrastructure.

Contrast this with the UK, where Transferwise has direct access to the UK's faster payments (real-time) payment infrastructure. The UK also has a regulator mandated open banking that includes data and payments.  In other words, in the UK, "Plaid for payments" is not only possible. It's mandated.  Across Europe, players like Tink, Truelayer, and Yapily are competitive with Plaid in this area.

Excitingly Europe also has the emergence of real-time bank account payments at checkout. Players like Vyne and Banked are like if Plaid and Fast.com had a baby. We see similar regulations and developments now across APAC, the Middle East, and Africa.  

The USA is in such a weird spot for open banking and payments. On the one hand, Plaid in the USA is much more successful and mainstream than open banking in the UK or Europe despite the regulatory barriers. Plaid is the leader in a winner take most market (albeit MX and Finicity would dispute that).

If Plaid could be Plaid + Fast.com - that would be exciting.  

Why build FedNow when you can abstract it from the banks with APIs?

Maybe the DoJ was right?  

Maybe we will see more innovation with Plaid outside of Visa.

If I'm in big tech, looking to build a consumer payments experience, this move by Plaid would be very exciting indeed.

But what about the banks? 🏦

For a bank, being regulated is now a net negative.  Banks cannot lend at nearly the scale and velocity they used to (because of high tier 1 capital ratios AND historically low-interest rates).

I actually don't think the banks are out of their minds bemoaning the combination of regulations they must work within.  Fintechs arbitrage interchange revenue through the Durbin Amendment and rely on smaller banks' regulatory wrapper.  Fintechs and big techs can scale finance products massively without ever putting together the infrastructure banks had to.

But rather than complain about it and try and lobby regulators to turn against fintechs, what if banks leaned into providing an alternative payments rail. Get behind something like the digital dollar initiative, a stablecoin, a CBDC, FedNow, something, anything!

Banks have a massive balance sheet, are on the hook for compliance, and have a license to print money (literally). What if, instead of being a burden, that was a massive opportunity? What if, instead of a cost, it was an opportunity?

As always, with banks, the issue will be culture and execution. But they have a window to make the right investments, partnerships, and moves.  

Banks lost the consumer API opportunity by moving too slow. The opportunity now is institutional grade APIs and the best balance sheet and rails for embedded finance.  Early moves suggest Goldman gets this, but the race is only just beginning.

The key will be the right partnerships, the right technology internally, and the right culture / operating model. Wrapping the existing core technology stack in an architecture that has been designed from first principles to support many fintechs and work B2B2B2X isn't easy, but it's something we've given a lot of thought to at 11:FS towers.

4 Fintechs 💸

1. Minna - API for Subscription management

  • Subscription management is everywhere.  The ability to pause or manage Netflix, Spotify, or that subscription you forgot about is emerging as the killer-app for neobanks nobody saw coming. Minna provides several tools like utilities switching, subscription management, and tracking. It's live with several European banks (including Danske, Swedbank, and ING). They just raised $18.8m led by Element Ventures to expand into the USA. One to watch. I'm surprised we didn't see this in every PFM sooner, but their loss is Minna's gain.

2. Rho - If Brex and Modern Treasury had a baby

  • Rho is a single platform for both collaborative finance, payables, receivables, and commercial-grade banking. There are several perks like 1.5% cashback, support from bankers, and global payments in 36 currencies (currency cloud is that you?). If I worked in transaction banking or corporate M&A, the sheer amount of players in this space would be terrifying. The portals from major banks to do what Rho does are straight out of the 1990s and god awful.  Growth SME banking is a crowded segment of fintech but has so much room to run.

3. Wealthkernel - Drivewealth ++ European stocks

  • Drivewealth has become the defacto B2B fintech API for anyone building a Robinhood clone or add stock trading to their neobank. Wealthkernel (who just raised a £4.5m / $6.1m) offers access to the UK and European stocks and ETFs in addition to US stocks. Wealthkernely also has a white label Robo-advisory solution, regulatory wrapper, and automated portfolio management (read: it does a lot more than most robo's).

4. Braavo - Revenue-based finance for mobile apps and games

  •  Revenue-based finance is having its moment. Clearbanc is going from strength to strength, and upstart pipe.com is getting a ton of buzz with its concept of revenue-based financing as an asset class. This type of financing has been popular with e-commerce, but Braavo focuses on apps and game studios in particular. Nice niche.

Things to know 👀

1) Checkout.com, Rapyd, Blend, and MX all raised massive rounds.

  • Checkout.com, Rapyd, Blend, and MX all raised significant amounts this week. Checkout.com is now Europes largest fintech and has seen massive growth in the wake of the pandemic. Unlike many emerging payments players, they're both a payments processor and facilitator (they own more of the pie). Rapyd focuses on online global payments and disbursements, another area that saw rapid growth in the pandemic. MX is a plaid competitor with some neat data categorization tools, and Blend provides a mortgage and consumer banking suite for digital loan origination.

  • 🤔 My Analysis: Online payments businesses are thriving. They were doing well pre-pandemic and continue to go from strength to strength.  The fintech market is almost certainly nearing its local top, driven both by a surge in consumer adoption and market appetite for growth stocks. In the past decade, payments businesses have gone from boring manufacturing like parts of the economy to one of the hottest things happening in tech. We've come a long way.

  • 🤔 My Analysis: Companies like Blend, which helps banks replace their digital front end with white label solutions, are having a great time.  Without branches, banks have been screwed, especially for more complex products like mortgages.  The problem for banks is what happens when every bank uses something like Blend? The focus will shift from front and middle-office to back-office quickly. Mortgage core transformation and competition is coming.

  • 🤔 My Analysis: Fintech is definitely benefitting from the market going risk-on driven by an unprecedented stimulus. One day the music will stop, valuations will come back to earth, and the bankers will cry, "we told you so!" But when that happens, these fintech businesses have significant revenue and a path to profitability.  Valuation is vanity; revenue is sanity, profit is reality.

  •  Goldman's Marcus will partner with Marqeta for its consumer checking card issuing. In other words, Marqeta is the payments processor of choice for Goldman's digital-only bank. Marqeta unlike many legacy payments processors has much cleaner open APIs for its partners which Goldman says "will allow us to create a personalized, feature-rich banking experience for our customers"

  • 🤔 My Analysis: Issuer processing is a great business. Incumbents like Global Payments Inc command a P/E ratio of 114x earnings, 10-year contracts with large banks, and stable, profitable cash flow. It's also a hard business to break into on the issuer processing side. While the acquiring (merchant) processing side has seen a massive change with wave after wave of e-commerce, it has been slow progress for challenger issuer processor companies like i2c or Marqeta. But that is now changing.  Goldman selecting Marqeta and not an incumbent as their issuer processor is a moment in time.

  • 🤔 My Analysis: A few have wondered if Goldman has cash management APIs, why does it need a partnership with Marqeta? I'd put this down to scheme connectivity. It's unlikely Marcus (or Goldman) has direct access to the Visa and Mastercard rails.   Issuer processing is something that makes sense to outsource. Some banks still do it internally but complying with EMVco and PCI/DSS standards is challenging and expensive.  It's the ultimate example of economies of scale.

  • 🤔 My Analysis: Like all new entrants, Marqeta isn't as feature-rich as some of the incumbents, but it is gradually adding to its processing capabilities.  As the 10-year contracts start coming to term in some other large banks, will we see more big names make a move?

Good reads 📚

I went Macro on you this week

  • This work from Yakov Feygin is a great history lesson in how the US dollar expansion outside the US in the 1960s / 1970s created a massive inflation problem. As the dollar weakened against gold, greater international business activity demanded new credit. This led to the creation of the Eurodollar market, which had no official backstop. The supply of dollars began to expand offshore, and there was no official way to limit it.

  • As the supply of dollars increased, oil producers had to raise prices; in turn, firms and businesses raised their prices, leading to inflation.  To deal with this eternal inflation, regulators began "money manager capitalism," noted for rapid deregulation of finance.  Lending became increasingly deregulated, and housing became a special kind of asset that could be widely held and appreciative relative to savings or income.  Housing became an appreciating asset that could be used as a substitute for falling wages. This has benefitted a politically powerful cohort who bought their first house in the 70s and 80s.

  • Then, in 1994, China pegged its exchange rate to the dollar, creating a long-term trade surplus. This surplus helped China stem its inflation while also supplying cheap goods to the west. The cheap goods to the west began an "inflation dividend" so that while wages didn't rise in the west, neither did the price of goods. This article points out central banks are now wondering if inflation should make more of a comeback.

  • 🤔 My Analysis: This was such a good read, and it puts into context the generational wealth gap and the problem faced by younger generations.  The rich get richer, the poor get poorer, and you can see that in political instability. We have to fix this. Not just with fintech, but systemically.

  • The dollar is decreasing in value vs. hard assets at an incredible rate, leading to a restructuring of the global monetary system. For decades calls for a "dollar collapse" have not happened but now it's different. The petrodollar system requires the US to run a trade deficit with the rest of the world to supply the world with dollars to price energy (the article explains it well, trust me). The flaw in the system is it relies on the prudent management of the USA's checking account.

  • The USA now has a shrinking share of global GDP; the Euro and other currencies are now gaining a global trade share. China has weaponized the petrodollar system against the USA. China uses its dollar surplus to invest in infrastructure (like rail, bridges, and ports domestically and internationally).  

  • Meanwhile, the US is now ranked bottom in developed nations for social mobility, and beginning of the wealth inequality began with the petrodollar systems creation

  • A year of wages no longer covers a year of family expenses for most Americans, while CEO pay has moved from 20x the average worker in 1965 to over 200x today.  The USA now has to choose between controlling world trade and policy via its currency or forgoing that position in the world to benefit its real economy and stability.

  • There are a few ways this could play out. 1) A move to regional reserve currencies and more competition for reserves 2) An IMF neutral reserve currency 3) A return to the gold standard 4) Bitcoin

  • 🤔 My Analysis: This is a crucial lens through to view CBDCs.  If competing potential global monetary systems are emerging, having a well developed CBDC is a strategic national asset.  

  • 🤔 My Analysis: The USA has a history of co-opting private market infrastructure as critical national infrastructure (e.g., card networks). The USA has also terrible at building a national financial market structure (It's less FedNow and more FedNever for real-time payments).  What if the Fed co-opted existing stablecoin initiatives as its CBDC to benefit from market-led innovation in a way that China wouldn't dare to?

Tweets of the week 🕊

That’s all folks 👋