Fintech 🧠 Food - July 11th 2021 - Wise listing is European Fintech's coming of age, also Pleo's a Unicorn and the Circle SPAC

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Weekly Rant 📣

What the Transferwise (Wise) listing means for Fintech and the UK

The Wise listing is a watershed moment. For Wise, it is the culmination of a slow, steady march of growth and profitability. For the UK, it's a real Fintech unicorn not only listing but up nearly 20% in the days since it did.

Wise saw the bankers blindspot.

The gap between "it will never happen" and "it always was" seems very small. You have to remember that this "Fintech" thing isn't viewed quite the same by European banks as the CEO of JP Morgan, Jamie Dimon (who sees Fintech as the biggest threat to his business).

I recall conversations in 2015, where bankers quickly wrote off Wise (then Transferwise) as "just doing what a bank does" and did not understand how it could make any money. Bankers thought it was all marketing, netting, and low-margin business.

Bankers live in a bubble of high income, based in one country, and have not lived the experiences of an increasing percentage of the population. The UK has around 9.5m people born abroad (roughly 1 out of 7 people, so translating to the US would be equivalent to 50m people).

Wise made an experience that was utterly broken, much more straightforward. Especially for the migrant population. Have you ever tried to send money cross-border via your bank? The payment can take weeks, cost upwards of $40, and may not even arrive with your recipient in a small percentage of cases.  

It's no surprise that the two founders of Wise were immigrants to the UK (from Estonia), nor that one of the earliest angel investors (Shamir Karkal, one of the founders of OG Neobank Simple) was himself an immigrant to the USA.  This lived experience shaped a product that existed in the blindspot of the incumbents. A massive, growing, and now profitable blindspot.

Fintech is not only here to stay; it's profitable and better for customers.

Remittances are a growth market.

Remittances are (depending on the estimate) growing at 15% to 25% CAGR, with $503bn sent home by workers in the USA, UK, and UAE. This figure is larger than overseas aid or direct investment by richer countries into developing countries.  

Yet, the average cost of remittance is still 6.8%. The UN actually has a sustainable development goal to get this figure down to 3% because of the massive impact remittance payments have on people's lives in developing economies.

Wise has had to work hard to build deep infrastructure and business partnerships to lower this cost.

But for Wise, remittances are a Wedge product.

Since 2012 Wise has been the benchmark for consumer remittance and cross-border payments, but their product suite is broader. Wise now offers debit cards and its "borderless account" that allows you to send or receive payments "like a local" in 10 different countries.

Wise powers other FX offerings (e.g., Monzo, Gocardless, and Bolt), and they also announced their intention to get into stocks to diversify its offering for its 10m customers. In effect, Wise is how money would work if it didn't matter where you were born or where you worked.

The listing is a coming of age in many ways.

The UK stock market hasn't always been kind to tech businesses, but that has changed. Take Ocado, an early Instacart like play in the UK (founded in 2000). Its share price was essentially flat from 2000 to 2018 before seeing explosive growth as home delivery became a thing.  

The UK didn't have a tech sector in 2010.  When the UK government announced its "silicon roundabout" initiative in 2010, the local and global response was to find it quaint and shrug. The reality is now, not only does it have a tech sector, it is the second-largest fintech hub globally (second only to SF, and a hair ahead of NY). The UK fintech investment in 2021 was also 2/3rd of the entire European region's fintech investment.

And now the listing rules are changed. From 2015 to 2020, the UK became one of the world's fintech hubs, but it still didn't have the blockbuster listings. But in 2021, the UK now allows dual-class shares and removed a requirement for 25% of shares to be public.

Wise didn't list to raise capital.  A direct listing will allow investors to realize gains but doesn't dilute the company at all. This is a profitable business that could have listed anywhere but chose the UK.

Europe is still under-priced.

The talent levels are exceptional.  Wise's second-largest office is in the Estonian capital Talin. Revolut has a large office in Vilnius (Lithuania). It's common for fintech and tech businesses to have large engineering offices in Eastern Europe, especially where founders immigrated to the UK and understand the Eastern European landscape. 

The market is massive.  With more than 500m potential consumers, and a combined GDP equivalent to the USA, the area represents a massive opportunity.  

But Europe is complicated. It's not one country with 27 states. It's 27 countries, with different rules and cultures. Yet, the prize for those that can succeed is massive.

Listings like Wise will help change the pricing equation.  And entrepreneurs and early employees will be entering the Angel investing ecosystem to help create the next generation of fintech business.

Since the listing rules change, we may see other massive fintech companies like Klarna and checkout.com look to list in the UK.

Every VC is opening an office in NY right now, especially for Fintech. But London is actually bigger. What a time to be in Fintech (which, by the way, CB insights just confirmed is by far the hottest sector in tech).

Great job to the Wise team and founders. It feels like they're just getting started

ST.

4 Fintech Companies 💸

1. Spinwheel - Embedded Debt Management

• Spinwheel provides tools for apps to help their users manage debt. It provides data and analytics to help users prioritize debt to pay, payment capabilities, and pre-built UX.  50% of US households carry student debt, and 81% claim managing debt is a high priority.

• Building a great UX for problem debt feels like the kind of thing every Neobank (and incumbent) would want to add but never focus on. Providing it as an API is interesting because it scales the capability.  A single part of the value chain as an API is becoming increasingly common, with e-KYC, fraud, and AML.  But now we're getting more primitive, with collections and debt management. 

2. Toqio - Whitelabel Embedded Finance UX

• Toqio has a suite of pre-built products to allow brands to go to market with finance quickly. For example, cards, deposit accounts, and onboarding. Toqio would sit on top of BaaS providers (like Railsbank) and bring together e-KYC and many other solution parts into pre-built products.

• Tech companies like to build, but they'd never develop their own (for example) email client.  The great thing about BaaS is it meant faster time to market; the downside was you still had to build your own experience. Whitelabel gets you the whole stack and faster.  The problem with Whitelabel is it comes at the expense of control. There's a gap between Whitelabel and BaaS for something truly configurable and that has all of the benefits of time to market.

3. Symmetrical.ai - Global Payroll API (UK based)

• Symmetrical provides the ability to run payroll, access payroll data, and programmatically pay people.  This can be used by global gig-worker platforms, employment platforms, or even Fintech businesses to embed global payroll.

• Payroll APIs have been hot in the past 12 months, but they're typically in one Geo. I often joke you can have whatever you want in Fintech, but it can't be global.  For companies that operate in multiple markets, the fintech stack abstracted to the global level is super valuable.  

4. Valk - The platform for private markets

• VALK provides an end-to-end platform for deal creation, data room management right through to contract negotiation and secondary markets.  Much of this work is still being done in excel and with PDF contracts to date, and software solutions that do exist, typically relate to a handful of asset types.  

• VALK is asset agnostic, so where companies like Carta have become standard in managing company creation and venture portfolios, VALK can be used for any asset type in private markets.  VALK is built on Corda and automates the underlying contracts with that platform (meaning it also likely friendly to large financial institutions).

Things to know 👀

1. Pleo becomes a unicorn with a $150m raise.

• Pleo sells expense management and SMB / Corporate cards (think Ramp or Brex). Pleo offers single-use cards, receipt capture, and integration with accounting platforms.   Pleo claims to be on track to hit $100m ARR (split 70% from interchange and 30% subscriptions).

•  Denmark-based Pleo has more than 17,000 SMB customers, mainly in Denmark, Sweden, Germany, and Spain. With the funding, Pleo aims to go deeper into the UK and Irish markets. Pleo has also expanded into invoicing, employee reimbursement, and plans to move into lending over time.

• 🤔 My Analysis: That number of customers seems relatively low. For example, Tide, a UK competitor, has around 400,000 customers.  There's an important distinction. Tide and Starling are SMB bank account experiences (that bake in a Stripe-Atlas-like experience and invoicing). They're operating accounts. Expense management cards are a different category, adjacent but different. But if Pleo were to generate 100m ARR off 17k customers, that would be ~5.8k ARPU. 🤔🤔🤔🤔.  If this adds up, it says two things, one Pleo is estimating a lot of growth, and two, expense management is a much better wedge than operating account.

• 🤔 My Analysis: Pleo has raised from major funds that historically focussed on the US like Bain Capital and Thrive (although Thrive also invested in Monzo).  This is part of a trend where growth capital from the US is coming into European Fintech. That wasn't happening ~ 2 / 3 years ago.

• 🤔 My Analysis: The breakaway momentum of US-based SMB services like Ramp, Modern Treasury has definitely driven investor interest in the category.  I wouldn't be surprised to see big rounds for other European players like Penta, Tide, or even Coconut coming soon (although interestingly, Coconut* just completed a crowdfunding round).  

* Discl: I have a small crowdfunding investment in Coconut

2.Circle to go Public via SPAC

• Circle the digital infrastructure provider for cryptoassets (and the principal operator Stablecoin USDC) will go public in a SPAC merger valuing the business at $4.5bn led by Fidelity and Third Point.

• The prospectus has some big numbers and estimates. Projecting $190bn of USDC in circulation by 2023 (up from $25bn today and more than the total stablecoin supply). A great piece from Maya Zehavi suggests this would assume Tether all but disappears in the regulatory crackdown, and USDC becomes an institutional settlement standard (which is not a sure thing at all).

• 🤔 My Analysis: Not all stablecoins are created equal.  While Tether has a questionable track record, Diem (Facebook's coin) scared the bejesus out of regulators, USDC and Circle have had a much better run with regulators.  Stablecoin growth will live or die by perceived legitimacy.

• 🤔 My Analysis: You could argue that Circle, which is not a bank, or a depository trust, still has some lack of regulatory clarity hanging over its head.  My sense is regulators will look to "legitimize" stablecoins but require some sort of license to do that.  Three approaches are emerging 1) Paxos, a depository trust, 2) Circle partnering with banks like Signature, and 3) Maker, which is more decentralized.  

• 🤔 My Analysis: Informally, Circle has always been more credible in the industry with regulators and institutions than many market actors. That's not blowing smoke; it's just true. Consider the difference between this and the Coinbase listing vs. Binance getting global regulator pressure. Coinbase and now (potentially) Circle’s listing is a sign you can do Crypto (with a capital C) and still be regulated; it's just challenging but so worthwhile.

• 🤔 My Analysis: This is a big infrastructure player in Crypto going public, making it quite different from the Coinbase IPO.  Where Coinbase's revenue is overwhelmingly from retail, Circle relies on the crypto native and traditional institutions. Over the long run, crypto infrastructure is much more interesting than consumer speculation. Circle isn't reliant on retail interest in the price but benefits from other use cases. (The same can be said for other Stablecoin providers like Paxos and MakerDAO too).

Also this week: Nordigen created a service that exports your European banking data into a Google sheet for you. It's cool (if you're on this continent :)

Good Reads 📚

1. Fintech isn't creating productivity

• Our economic productivity isn't increasing because new technology is being built to support existing processes and regulations.  In finance, this means "that Moore's Law and Metcalfe's Law are overcome by the actual law and the costs of KYC, AML, CTF, PEP, Basle II, MiFID, Durbin and so and forth climb far faster than costs of transistors fall."

• NYU Stern calculated that financial services create a roughly ~2% drag on GDP. "A good place to start (in the US) would be to allow a national charter for the equivalent of the EU's Payment Institutions, to give non-banks access to financial networks," we also need strong digital identities, instant payments, and more.

• 🤔 My Analysis: Regulation is not a bad thing. From first principles, regulation exists to prevent harm to consumers and the economy. Regulation is public opinion at a point in time. Post-1929, we see rules to protect main st from the stock market volatility. Post financial crisis, we see regulations to prevent banks from taking existential risks with their balance sheet.  

• 🤔 My Analysis: The problem with regulation is not the intent; it's the execution. The way regulation gets made hasn't changed in 100 years. The machine of government does research, writes papers, consults with industry, and passes rules.  New rules get added but very rarely removed.  When they do, it's "deregulation," which often involves removing a safeguard that was actually there for a good reason.

• 🤔 My Analysis: Regtech is helpful but uses software to solve process issues.  When you digitize a paper process, you lock in the assumptions about the world that led to the creation of that process.

• 🤔 My Analysis: We need clinical trials, not sandboxes.  If the last 15 months have taught us anything, it's that even medicine can go super fast if we're sufficiently motivated. While many regulators now have innovator outreach programs and even "digital sandboxes," that is all for naught if we don't have a much faster, much more digital native way of rulemaking.  We can learn a lot from medicine by turning the new rule or fintech approval into a more standardized approach.  Start with small trials that get progressively larger, and use data to guide what happens next.

Also good: Robinhood is the cockroach of Fintech - Where Ron describes how Robinhoods momentum > its regulatory risk. It can't be killed.

Tweets of the week 🕊

That's all, folks. 👋

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