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Fintech 🧠 Food - M2020 impressions, Apple breaks NFTs and Amazon adds Venmo

Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 23,555 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

Well, that was Money 2020 Vegas, the annual checkpoint of our industry, and what a difference a year makes.

The USA will get a ruling on open banking (Dodd-Frank 1033) from the CFPB, but will the CFPB exist to implement it? Everyone is doing embedded finance, and within that embedded lending, Marqeta launched a full BaaS stack, Synctera launched a charge card, and Amazon will let customers pay via Venmo. 

Oh, and Apple is killing NFTs within the app store.

Meanwhile, large banks are posting significant growth from their core consumer lending businesses as the spread between what they pay to savers and charge lenders widens in a higher interest rate environment.

Phew.

So what's going on?

I wanted to do my Rant this week differently, so I'm covering impressions from the show floor. It's more all over the place than the usual format, but hopefully, it's a good feel for those who missed it.

PS: Thank you to Brett Harrison for a fantastic conversation on the showtime stage and all of you who came to say hello. Fintech really is a community, and meeting you all is the best

To everyone I missed, I hope to see you soon. 

Weekly Rant 📣

Impressions from Money 2020 Vegas 2022

The market sentiment 📈📉

1. I heard a few times, "Consumer Fintech is screwed," which, like all one-liners, over-simplifies things (and is unfair out of context). But imagine you're a consumer Neobank reliant on debit card interchange, and you're not one of the top 3 to 5. Why does that Neobank get a fresh round of funding? Especially if the offering is generic. These Neobanks need to diversify and show positive unit economics quickly (as do their bigger competition).

Niche and digital community banks are different because they have brand permission to charge more, go deeper and solve more problems for their users. 

Recently I covered some ways consumer Fintech companies can diversify revenue. Everyone is chasing a similar feature set, and consumer loyalty and being top of mind/wallet will win. 

2. B2B Fintech is better. B2B Fintech companies reliant on interchange typically have more revenue by default. A business customer's standard balances are larger, and their spending is larger. If you're indexed against your customer's spend, and your customer's costs go up due to inflation, you still make your percentage cut of those transactions. With travel now being so expensive, the short-term hit here is probably positive.

I went deep on B2B Fintech last week, so I won't repeat myself much here. Other than to say, top of mind/wallet is everything. 

3. Infrastructure is best. The word "recession-proof" gets thrown around a lot, but everyone needs things that help grow revenue or cut costs (especially when there is a significant unit economics focus). 

There has also been a real shift from incumbents to buyers. Where Fintech companies were "a threat" and “not big enough” to be a supplier, that's no longer the case. If you've been serving Block, Brex, or FTX, you're probably big enough to handle a bank's volume. The issuer processors like Marqeta were the first to move, but now it's the whole stack.

See Fintech Infrastructure wars for more.

4. Incumbents are super well placed, but it's not all good news. The short-term core business is in great shape as the net interest margin (NIM) revenue rises with interest rates. Many banks also have yet to increase their savings rates as lending rates rise. That will change as regulators and advocacy groups pressure that to change, but for now, the spread is good for the core business.

I spoke to one C-suite exec of a regional bank who shared some fascinating thoughts. 

Firstly, the threat of Fintech has reversed 180 degrees; they're now not scared of Fintech companies at all, with the view that the business model is not sustainable. Twelve months ago, they would have said consumer Fintech is the biggest disruptor; now, maybe Apple. 

Secondly, since the downward pressure on overdraft (and other) fees, anywhere between 50 to 70% of the deposit customer base is now unprofitable. As a result, the imperative to cross-sell and go deeper with customers is massive. And the easiest way to cross-sell is via partnerships. The cross-sell imperative is where Fintech infrastructure companies, loyalty, and "Fintech-feature-as-an-API" companies could start to scale.

5. Embedded Finance was everywhere. This theme came from everyone I spoke to, on most panels, and from all directions. It is the uniting force between incumbents and infrastructure and is generally perceived as the big growth opportunity.

We are reaching a phase where everything calls itself a "BaaS" or embedded finance provider because it has an API. There's a significant gap between "having a BaaS" offering and having customers and momentum. Under the hood, "embedded finance" is also starting to have its regulatory and revenue challenges, becoming much more of a lending than a payment story for consumer Fintech.

6. Lending as a Service is a balance sheet game. The killer line of the show for me came from the president of a partner bank who said, "everyone who doesn't have a balance sheet just realized their cost of funds is too high to have any scale." Banks will always have the lowest cost of funds, but the market for the past two decades distorted that with ultra-low interest rates. 

I suspect we'll also see lending to SMBs via "embedders" become much more prevalent in the next two years as an under-explored opportunity.

7. Crypto didn't vanish, but it wasn't as loud. It wasn't a topic brought up, and while a good portion of Sunday was dedicated to Crypto, the juxtaposition was notable (see the next section for more).

The show 🎭🎡

1. Where 2021 was the Fintech party, 2022 was a party for the end of this Fintech cycle. Last year, you couldn't escape Crypto advertising, and the incumbents were nowhere to be seen (partly because, post-pandemic, they hadn't got marketing in place to get there). But also, the prevailing mood last year was to forget incumbent anything; this is a Fintech show.

This year, the booths and marketing activities likely came from a marketing budget set before the market correction. Next year, we'll get a fair reflection of who's doing well in this market.

2. This year felt more international, but not international enough. It's the first time I've seen in-depth content on LATAM and Africa at M2020. The Vegas show could become the "global" summit of their entire calendar if they do it right (and think about how to incorporate things.

Yet this tweet from Brad stood out to me.

As much as investors are excited by the global opportunity, the industry participants in the US are still very inward focussed. And maybe missing their growth opportunity as Fintech becomes "default global."

3. The content leveled up. Sunday became my favorite day of the conference, with America's Got Access focussing on a pitch competition for diverse founders, a ton of web3 content, and crunchy payment topics. It was nerd paradise. The team also had a well-soundproofed podcast recording booth with headsets for the audience, another great touch, and some super conversations. And perhaps the killer nerd moment is the CFPB announcing 1033 live on stage.

Money 2020 was always known for networking, but the shade you could throw was content. Not anymore. It's arguably too damn big, and it is a shitshow of client meetings and FOMO from all-the-other-things-you-miss-while-doing-this. But that's what happens when everyone is in the same place.

My takeaway 🍝

When everyone else is fearful, be greedy. 

The investment market is frozen because the gap between the price buyers is willing to pay for stock and sellers are willing to sell is too massive.

But every cycle creates opportunities.

We needed a return to a focus on unit economics. The world didn't need another "growth at all costs" copy + paste Neobank, but it needs entrepreneurs who solve problems. More than ever.

So pick your biggest problem.

And let's solve it.

Until next year.

ST.

4 Fintech Companies 💸

1. Zirtue - True peer-to-peer lending

  • Zirtue provides a simple model for an individual to create demand and for others in the network to set repayment terms. Low-income consumers often prefer a payday loan to ask friends for support because the terms and timeline can be awkward. Zirtue also creates transparency by letting someone pay for a specific bill (direct bill pay) and automates payments. 

  • 🤔 When I see P2P lending, I often immediately recoil, but this is taking something that has already happened and improving the consumer experience. Zirtue was the winner of America's Got Access talent competition, and the world needs this type of thinking. I wonder if they could repackage this as an API and have every consumer Neobank adopt it?

2. Xiggit - Benefits as a Service for hourly workers

  • Companies can offer their hourly workers benefits by linking their payroll provider, and Xiggit will manage deductions directly. Their pricing is simple ($10 per employee per month) and packages employee savings and education programs in the offering.

  • 🤔 Simple SaaS pricing plus an ever-growing hourly workforce is a good recipe. I confess I have no feel for how substantial the opportunity is for Xiggit, but if they can get distribution, why wouldn't this be a smash hit?

3. Totem - Banking by and for indigenous people.

  • Totem is a Neobank that focuses on giving back to a tribe and community for a Native population. Users can create checking and savings account and manage bill pay, goals, and savings like many Neobanks.

  • 🤔 During onboarding, Totem asks the user to select their tribe affiliation and then pre-packages how a user can give back (e.g., to education, housing, career, or other services). As mentioned in the Rant, Neobanks like this that focus on a large and underserved community can generate much more than interchange revenue. They are ultra-high affinity and top-of-mind/wallet for their users.

4. Fundstory - CFO tool to manage debts

  • Fundstory allows CFOs to find their risk score (a business version of a credit score), match it with "non-dilutive capital" offers, and manage the associated documents and terms. 

  • 🤔 The timing here is fantastic as growth companies look to debt to help them extend their runway and manage their cash flow. The Fundstory website needs to be clearer because they've separated their product into four products. On some level, that makes sense because the complexity and schleps they manage on behalf of CFOs are significant. Still, it could be so much slicker. That aside, 

Things to know 👀

As part of iOS16.1, Apple introduced new rules for NFTs that will allow users to "list, mint, and transfer" NFTs, but the owner of an NFT cannot unlock any features within the app. Users can only purchase NFTs directly using Apple's in-app payments.

  • 🤔 NFTs are loyalty points on steroids. They apply to any user who holds the points and can easily be transferred. NFTs persist long after they're issued and can create new experiences further down the line. So let's say you get a badge for attending a digital concert; that badge may later give you an exclusive video with the aritst who performed that concert. 

  • 🤔 And they're more than speculation. Reddit launched its NFTs and already has more than 3m users. Instead of being a small collection designed to drive up the price, this was a community paying ~$10 for something they enjoy. 

  • 🤔 NFTs had started to unlock new functionality apps already. Games and apps were using NFTs to give access to mint new NFTs or unlock game features. Imagine if Reddit wanted to offer avatar users an early access feature as "power users." They might break the new app store rules if they did so.

  • 🤔 Apple's move breaks some of the utility of NFTs. So much of the potential utility of an NFT is what happens after you buy the thing. They are assets with functionality. Having an NFT could unlock new experiences in the digital world, but only if that is not on an Apple iOS-compatible device.

  • 🤔 In a Fintech market where travel, credit, and Airmiles are back in focus, NFTs could create new forms of engagement. Often the world sees Fintech and NFTs as miles away, but if you frame them as where loyalty meets commerce, they look very different.

Pay with Venmo will be available to select customers in the US immediately and will roll out to all US customers by Black Friday. To pay with Venmo, a user needs to connect their Venmo account to an Amazon and select pay with Venmo at checkout. 

  • 🤔 This moment is a turning point for P2P and non-card payments. What stands out about this move is how tightly coupled Venmo had been to PayPal historically. Amazon always accepted cards and other payment types, but this is the first of the "big" push payment types (like CashApp or Zelle) supported by Amazon. We live in an increasingly multi-rail payments world.

  • 🤔 More payment options = more payments. Conversion at checkout is everything for a retailer, and if a new payment method makes customers more likely to pay, it is worth adding.

  • 🤔 Will CashApp follow soon? CashApp, like Venmo, has many users and is provided by a major e-commerce giant, Block. I mean, why not?

  • 🤔 Amazon's war on card fees continues. Amazon will continue to accept cards, but the more volume it can drive away from cards, the better. As a business that is culturally obsessed with cost and operates with razor-tight margins, new payment types that are lower cost to cards will always be a preference.

  • 🤔 E-commerce and Payments needed some good news. If this story broke in 2021, everyone would be losing their minds, but as the market has turned, the sentiment couldn't be more different. This announcement comes before Amazon results are announced and heading into the key shopping season. Curious to see how 2022 performs vs. 2021.

🥊 Quick hit: 1033 is coming but will the CFPB be around to implement it? At Money 2020, CFPB director Rohit Chopra announced rulemaking to ensure financial institutions that provide transaction accounts provide "secure methods" of making data available "like APIs." The CFPB will take steps to ensure FIs can't prevent the data from being shared and take action on scams and fraud. 

  • 🤔 Requiring APIs is great, but requiring them to work is better. The pain may Fintech operators feel in the US is the effective de-platforming some large banks have done to open finance providers. This blocking creates a terrible experience when consumers try to connect to their accounts and share data with an app. This issue comes down to standards and incentives (banks want a cut if someone is charging to access the data and, frankly, have a duty of care to ensure it is well handled). Simply requiring FIs to share this data via an API won't fix everything. The key will be industry standards we can get behind.

Good Reads 📚

Coatue, an investor in Chime, Didi Money, Monzo, and N26, has published a report on how Fintech plays out over the next ten years. They note financial services is the single largest sector of the economy (bigger than software) and has added $5trn in market cap over the last ten years.

Because financial services touch everything, it is ripe for innovation, but Fintech just experienced its first full investment cycle (2011 to 2021). But Fintech is 2% of the public market cap in finance, and while there are unsustainable business models, there will be lessons learned; the opportunity is massive. They're bullish on the following: 

  • Owning balance sheets

  • B2B is "easier" than B2C 

  • Emerging markets are greenfield

  • Crypto will "augment" payments

  • "The rule of 200" because the rule of 40 doesn't work in Fintech

🤔 This is a super easy read with some fantastic charts. You'll probably see from my M2020 summary I agree with a lot of these points. I'll likely use some of the charts in future rants. 

🤔 Balance sheets matter and the market is re-discovering the first principles of finance. Those with the lowest cost of capital win at lending; it's a universal law. And building a balance sheet takes decades. This means displacing incumbents will also take decades and likely augment what they do rather than disrupt it.

Tweets of the week 🕊

That's all, folks. 👋

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