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  • Fintech 🧠 Food - Nov 15 2020 - Why Fintech B2B is massive, $37m for BaaS Railsbank & $10m Kuda

Fintech 🧠 Food - Nov 15 2020 - Why Fintech B2B is massive, $37m for BaaS Railsbank & $10m Kuda

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. :)

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This week team 11:FS launched episode 1 of Decoding BaaS. The team did an incredible job, and you should watch it. It features insights from folks at Bond, BBVA, Chime, Galileo, Jack Henry, Marqeta, Synapse, and many more!

Is B2B fintech hype or reality? Is fintech infrastructure changing the game or not?

Fintech twitter has been fire this week (skip to tweets of the week at the bottom if you want to see what I mean), but this one thread got people talking. 

Will Quist thinks the opportunity is narrow; despite Jack Henry, FIS, and others having $200bn in market cap, they don't create pain for customers. By building digital wrappers around the core, we can solve anything for customers.  Will thinks new banks will run on new core infrastructure at some point, but the big banks will cement themselves as utilities for innovators to build on. So in summary

1. There's no customer pain we can't solve

2. We can wrap the core to solve most things

3. Banks will become platforms

Firstly, it's very rare you'll see a megabank or large bank that does things like real-time transaction notifications. Why? Because their core can't do it. It seems like a small thing, but real-time notification is one tiny, seemingly insignificant feature that customers love and had no idea they needed. Why? Because "hey, did that payment go through" is filled with anxiety. Now imagine that but at the API level.  If a bank cannot do real-time in their systems, they'll have a hard time delivering substantial value as a platform.

Secondly, we've achieved a lot by wrapping cores in better APIs. A bit like how hybrid cars are a lot more efficient than non-hybrid. They're also not the answer; they're a bridging technology. As Shamir pointed out, we had useful APIs in 2006 for account aggregation, but along came Plaid and made it better. My hypothesis is we're in a series of waves or horizons getting closer and closer to the deep infra.  Deep infra is harder, but companies like Moov.io are getting closer to it.

Thirdly, banks becoming platforms is a whole subject to unpack. The megabanks may achieve this with their existing core and look to turn their cost centers into profit centers (e.g., KYC, fraud screening). However, I think it's highly likely someone like Jiko or Clearbank (UK) will emerge and build a new Bank-as-a-Platform. These new players could have a substantial competitive advantage over the megabanks have because they have a more modern, cheaper, and more capable core. If a bank wanted a sustainable advantage in being Bank-as-a-Platform, they'd need a clear conviction about the market need and the factors that will help them win.  Banks often think their asset is the plumbing itself. The asset isn't the infra they have or connect to; it's their licenses and trust.

Lastly, new banks are already running entirely new cores (Monzo, Starling, and just this week, Nigeria's Kuda). Companies like Mambu and Thought Machine are making rail inroads with banks globally. That's not in the USA yet. But that's a matter of when not if.

Stripe and Shopify made their business on serving small businesses that became big. Increasingly everything is fintech (h/t @ Angela Strange); these younger bank platforms are much more likely to build their own core or use off the shelf solutions. Smaller fintech's are some of the earliest adopters of B2B fintech platforms.

New B2B fintech closer to the core is harder to win, but the prize is massive.

Shoutout to Will for getting everyone talking, though. Threads like his are why fintech twitter in 2020 has been a highlight of my year.

4 Fintechs 🤑

1. Kuda - The mobile-first challenger bank for Nigeria

  • Kuda has built a mobile-first challenger bank packed with everything you'd expect, no fees, real-time notifications, and spend categorization and budgeting. But they've done this in a much more challenging market than Europe or the US, achieving a microfinance banking license from Nigeria's central bank.  

  • Kuda *built their core banking in-house*. I spoke to Kuda's CEO on Fintech Insider News (that drops Monday on your fav podcast client), who said this was much faster and cheaper than working with any of the vendors out there.  They just raised $10m, the highest ever seed for an African company.

2. Truebill - PFM with bill switching

  • Truebill is growing in a market becoming crowded with PFMs like copilot and snoop, but customers love this stuff. When these apps work, customers rave about them; if you can save a customer $100 a month, they're quite happy to trust you to cross-sell them other products.

  • There are many cynics of the financial health space, but I'm convinced it's all about customer value. Banks adding a pie chart isn't financial health because it doesn't add customer value. PFM apps work better when they're not bank branded, and *they save you money*.  The layer above banking is where the new subscription revenue potential is.  No surprise then that Truebill just raised $17m in its Series C 

3. Mythra - The credit card for gamers by gamers

  • OMG, yes. The rewards points card has much more closely mirrored how game point systems work, and rewards are available on Steam, Xbox, and Playstation.  Each swipe gives a random reward box. What's in that box could be a $2000 laptop or just their currency (Gems).  

  • Gems are like airline miles, but "much easier to redeem." They also have challenges like "buy something from amazon" to get extra Gems. Mythra is gamification for gamers by gamers. I love this so much, and at the same time, watching the video demo, I can't help but feel the UI has a long way to go. Mythra is an example of the stuff big banks won't do, but that has a massive market.  How long till we see Razer do this? Or Epic? Imagine the VBucks debit reward card for teenagers (with parental oversight).  There's just SO much potential in fintech.

Paycaptain - Payroll platform & financial wellbeing (UK)

  • Paycaptain is a payroll, banking, and financial wellness platform that works with employers to remove spreadsheets and manual payments runs.  It also allows those employers to offer their employees a financial wellness platform. The amount of SMB finance teams still doing manual payroll calculations is staggering. This is needed. I'm surprised banks don't package this sort of thing up with their accounts for SMBs more often.

Things to know 👀

  • Deel is a platform that lets employers manage a global contractor base and pay them in more than 150 countries. Deel has added Bitcoin, Eth, or XRP "near-instant" withdrawals as a payment option for these contractors. It's a partnership with a16z stablemate Coinbase, and employees will need a Coinbase account to get paid.

  • 🤔 My Analysis: There are markets where crypto is faster and cheaper than being paid in US dollars and converting.  For these long-tail countries, having a payment rail that works and is near-instant could be attractive.  

  •  🤔 My Analysis: Again, the steady mainstreaming of crypto continues.  Bitcoin is quietly over $16,000 and not a single headline or mainstream news piece.  

  • Railsbank is well known as a UK Bank-as-a-Service provider, but it is much more known for its Credit-Card-as-a-Service offering in the US. This funding is for US expansion.

  • 🤔 My Analysis: Smart move going into credit; first, debit is a crowded space in BaaS.  Per Mythra this week, there's so much space in credit cards to differentiate. 

  • 🤔 My Analysis: The US has a history of organ rejection of European fintech, but Nigel Verdon is an OG, and this isn't a direct to consumer play. They're up against homegrown Deserve (whose investors include Goldman and Accel), so it's by no means an easy race, but there's room for more than one player.

Good reads 📚

  • National banks are less impacted by fintech because they're too big. Community banks are either facing being acquired or becoming partner banks for Bank-as-a-Service platforms.  Regionals are the sweet spot for companies impacted by fintech. They're big enough to invest but small enough to feel the pain if they don't get it right.

  • Alex gives the example of a regional bank responding by 1) Reducing branch footprint for digital. 2) focussing on "relationship products" (e.g., mortgages) that are harder for fintechs to do. 3) Building a vertical digital bank for healthcare professionals.

  • 🤔 My analysis: Reducing branches and doing more mortgages makes sense, but the chutzpah of building a digital bank for healthcare is inspiring. I love this (and Alex for noticing it).  Getting closer to the customer problem, wrapping yourself around them, and adding value is the future.  Go deeper into the customer problem, and you get to differentiate. 

  • 🤔 My analysis: These digital-only offerings can also be 100% greenfield (which is often cheaper and faster than changing their legacy). This is where new core providers get to play. Digital only, deeper customer engagement propositions are an attractive strategic hedge for a bank of that size. It's the right idea, but execution is everything.

  • Wait; what? The former Greek Minister of Finance Yanis Varoufakis asks a daring question "Imagine an agreement between central banks that would allow for global trade imbalances and climate change to cancel each other out."

  •  Yanis argues commercial banks need the competition, fiscal stimulus would become instant and zero cost, and instead of printing money and giving that to the big banks in the hopes, it gets to you. The bank could create a transparent view of how money moves around the economy with a new platform. The bank could create a new Bretton-Woods system to manage trade imbalances and climate change.

  • The new monetary system would create a new coin (K's) that allow cross border transactions at a free-floating rate. Net exporters would all pay a trade imbalance levy. Proceeds from these levies would fund climate change mitigation projects. Net importers and exporters pay the difference in their imbalance in K's, creating an incentive to diminish trade imbalances.  Yanis says this is doable, but the problem is political and not technical.

  •  🤔 My analysis: This article is worth your time because it's plainly written and not as whacky as it sounds.  Don't get me wrong; I don't think the Bank of England has any interest in competing with commercial banks (it has said so often, in phenomenally well-researched papers). The rest of this isn't that far away from where some central bank policy thinking is.

  • 🤔 My analysis: The Swiss central bank is actively working on a Central Bank Digital Currency initiative to make cross-border payments much more efficient and cheaper. Former Governor of the Bank of England, Mark Carney, has been a leading voice in the economic cost of climate change and managing that through policy. Policymakers worldwide are battling global trade imbalances, and China has already launched; its consumer CBDC into a pilot. The US dollar maybe a decade or two away from losing its position as the global reserve currency.  You could see how all of this could happen. Countless crypto projects are trying to do some or all of the above, but the change must come closer to the infra.

  • 🤔 My analysis: In 1969, the IMF created special drawing rights to manage a lack of reserve in certain currencies. When the dollar is weak, the SDR typically does well (e.g., 1978 and 2008. Post-2008, China wanted to exchange US Dollars for SDRs. Not surprisingly, the US wasn't a fan of this idea.) In essence, solving trade imbalances and climate change mechanisms may mean dismantling the US Dollar as a global reserve currency. The US has almost no incentive to dismantle its reserve currency position in the global economy. Speaking of digital assets.

  • Novi is facebook's wallet, "Libra" is their digital token and network that provides an alternative mechanism to move money worldwide. Libra claims to eliminate credit risk, settlement risk, and counterparty risk.

  • 🤔 My analysis: They get 7x VISA network speeds in laboratory conditions where everything is running on the same ultra-high-speed network, and they do everything in memory.  This test wasn't exactly real-world conditions.

  • 🤔 My analysis: Also, they have a requirement that you can only make one transaction at a time, and if you have a single failed transaction, then your account stops working. It is a reasonably standard Byzantine consensus protocol. It has value and is interesting, but it is not a VISA killer.  

  • 🤔 My analysis: With all of that said, I still think there's room for a new global coin at the wholesale level (e.g., Yanis Varoufaki's K coin). There is also room for much more open consumer and SMB facing financial rails that are real-time and global. Both these things are likely to happen and are a case of when not if.

Tweets of the week 🕊

That’s all, folks. 👋