Fintech 🧠 Food - Oct 10, 2021 - Google kills Plex, Fireblocks makes KYC and DeFi compatible & Why Facebook shows the dangers of becoming Incumbent

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 8,484 others by clicking below, and to the regular readers, thank you. 🙏

☀ gm 

Hope you all survived the great Facebook blackout of 2021? Me? I was stuck without a roaming signal in Barbados with a tired baby and wife trying to get back to a hotel. Thankfully the old-fashioned mobile phone signals still worked, and a friendly local helped us call a taxi with a baby seat.  

🔌 Have you ever wondered what a DAO is? Is a Decentralized Autonomous Organisation actually a thing?  When Vitalik wrote about DAOs in 2013 he described companies defined by and almost entirely run by software. Today's DAOs look more like internet native, community-led governance, where transparency is enforced by Blockchains. But that is the dullest part about them. The most exciting is what this enables.  In this week's Blockchain Insider Episode, Jess Sloss from Seedclub and Fintech Tiktok superstar Kyla Scanlon guide us through DAOs, and what you need to know.  You don't wanna miss this one.

Weekly Rant 📣

Facebook and the dangers of becoming incumbent.

In case you missed it, the Cloudflare blog breakdown of what happened is a phenomenal summary. The short version is that every internet server needs to tell others how to reach it and think of it like giving directions to your house. They do this using Border Gateway Protocol (or BGP), which tells the biggest routers on the internet the possible routes to a server or IP address. In short, Facebook stopped announcing routes BGP, meaning if someone typed Facebook.com, DNS providers like Cloudflare couldn't find it.

The memes were epic. My personal favorite is anything Squid Game related, but also, this thread on Twitter was exceptional. 

Why did this happen?

The conspiracy theories were inevitable, but perhaps the most logical suggestion comes from an analyst at Forrester. Mike Proulx told the BBC that Facebook simply made a configuration error during a routine update (which Facebook later confirmed). Facebook has spent the last few years consolidating its technical operations to reduce costs and become more efficient.  

It's hard to cut costs without cutting quality.

Cost-cutting doesn't sound like the Facebook of 2009, or even May 2012 when it IPO'd. For context, in 2011, Facebook launched the Open Compute Project. Having experienced such significant exponential growth, Facebook realized it had to redesign its data centers from the ground up. They redesigned everything, servers, power, cooling, and even the server cabinets and racks.  

Facebook could use commodity hardware (think, the type of stuff you'd buy in a store) rather than specialist server equipment to deliver massive scale. By having all of this cheap hardware run in parallel, Facebook achieved unmatched performance and scale.

The kind of company that rethinks data centers from first principles is rarely the kind that has an outage due to a config error. That's because Facebook has become an incumbent.

Company cycles 🚲

Meet the Adizes corporate lifecycle

The phases are fairly self-explanatory, but the short version.

• Courtship: It's just an idea

• Infancy: Founder-led, minimal process is a good thing; needs to learn quickly.

• Go-go: Rapid growth, still founder-led. Headcount doubling, not enough process. Beginning of management and professionalizing.

• Adolescence: The transition from founder-led to management-led. The ambition of the go-go phase is paired back and focussed. Often turbulent time.

• Prime: Growing at the speed of "go-go" with the same optimism, but now professionalized and delivering. 

• Stability: A company becomes an industry leader but loses its hunger. Change slows down; why mess with something that keeps working? The business model tends to be cast in stone.

• Aristocracy: The company is making more money than ever before, but the market is changing. Customer attitudes are changing, and the company's biggest successes are via acquisition, not in-house development.

• Recrimination: As profits are harder to come by, management fights each other, focusing on cost-cutting.

• Bureaucracy: To solve the in-fighting process is introduced to bring stability with lower costs. The paperwork chokes innovation and growth. The company is alive because of whatever moat it has (regulation, scale, etc.).

• Death: Companies rarely die in one go. Instead, they chop off and sell parts of their operations. Maybe overseas territories or an unprofitable business unit. Until one day, the company itself is bought by someone larger and stripped of its assets.

Those phases almost tell the story of Facebook perfectly. When Facebook IPO'd in 2012, it was still in its prime, with its growth ahead. It entered aristocracy with the acquisition of Instagram and Whatsapp and now finds itself in recrimination.

Customers don't love the Facebook brand; Facebook is better at copying than it is at innovating. Perhaps most damaging is Facebook's reliance on advertising at the core of its business model and how its ad-targeting platform is now viewed as a dangerous weapon to democracy by many Governments.

If Facebook were a person, it woke up one day to find out it was the bad guy in a movie when they were supposed to be the good guy.

Most founders don't build companies to make the world a worse place. But there are unintended consequences of business models. When a business model becomes core to keeping the lights on, it becomes near impossible to change.

Big tech companies are slowly becoming Big Incumbents.

What has any of this got to do with Fintech? 💸

Back in 2017, most senior executives at banks thought Big Tech would be the main threat to their business. The big McStrategy houses would put out reports claiming Big Tech is coming and that the world would follow the China model, where tech companies would increasingly own payments and become super apps.

Big Tech could have been the great leveling force for financial services. Pushing the banks to be manufacturers, in the same way, they made the Telco's down to be a commodity in the mobile phone market. But the Big Tech companies haven't executed.

Apple Pay has become a significant payment type, but it hasn't yet achieved the ambition of being a ubiquitous payment type. In a sense, it could never be because Apple is staunchly a premium brand with the top 20% market share of mobile handset sales. Everything Apple does is about creating an ecosystem and experience lock-in for those premium customers and nobody else. They monetize all of the interactions in their walled garden, but it's got walls. Apple is not Ali or Tencent's level of ubiquitous - they're a better experience for their customers. It's really well-executed affinity and embedded finance, but it's not likely to displace banks entirely.  The business model is selling more devices and Apple services revenue at its core.

Amazon has countless gift cards and has "Amazon Pay" but doesn't have a material consumer bank like offering to date. Amazon has partnered well for BNPL and SMB lending, but Amazon's business model is partnerships to drive more marketplace sellers and GMV through their e-commerce monster. 

Bringing up the rear is Facebook who's Facebook Pay may claim millions of users, but I can't name anyone who's ever used it. Regulators and governments vomited all over Facebook's attempt to build its own currency/stablecoin (Diem). Facebook efforts to make Whatsapp payments a thing just aren't working (except where it partners well, e.g., with Shopify). Facebook is excellent at ad targetting; Facebook is god awful at Fintech. Facebook's business model is ad-targeting and selling, not microtransactions or payments.

None of these businesses lack talent. Often they're staffed by some of the world's best executives, engineers, and operators. But they can't do things outside their core business model(s). 

Big Tech is now the Big Incumbent.  

Fighting incumbency 🥊

Being an old company doesn't mean becoming an incumbent. There are vanishingly few good case studies, but I submit two for your consideration.

Adobe: In 2011, Adobe made 97% of its revenue from software purchases, and its share price averaged at $40. In 2021, more than 85% of Adobe revenue comes from SaaS, and their share price at the time of writing is $578.  Lesson: If you're willing and able to commit to a business model change, you can win big.

Twitter: Through much of the late 2010s, Twitter was better known for Donald Trump's tweets and horrible abuse than the business itself, but Twitter has got its mojo back. In the past 12 months, Twitter has shipped numerous features like Fleets (which it then killed) and Twitter spaces (arguably destroying clubhouse). Much of this can be traced back to Jack Dorsey coming back as CEO of Twitter and spending years clearing tech debt before dramatically increasing product velocity.  Lesson: If the product isn't evolving dramatically, it's dying.

Lessons for Fintech and Financial Services 💡

The promise of Fintech was to massively improve the customer experience of financial services for everyone. Fintech has improved financial inclusion, helped people feel in control of their money, and fundamentally reshaped the competitive landscape. 1 in 4 VC dollars is heading towards Fintech, and it is unquestionably, the hottest sector in tech.

But now, large Fintech companies are somewhere between prime and aristocracy. As we see multiple billion-dollar valuations, massive IPOs, and seemingly new monster raises daily, we can't get drunk on the hype.

Banks and the financial services industry had relied on its regulatory moat at the expense of the customer. But that's now changing. As I wrote a couple of weeks ago, monsters like JP Morgan Chase have woken up.

Neobanks have millions of customers but must now find profitability. BaaS providers and B2B infrastructure providers are reaching their stride but are they sustainable? Will they become profitable? Things change when companies hit the public markets.  

Standing still is dying. ☠

If banks think Fintech and Digital are hard, Crypto will be orders of magnitude harder to deal with. Some Fintech companies will embrace Crypto and DeFi, while others will shun it. But ignoring Crypto is not an option because it represents a business model shift.

As we move from Web 2 to Web 3, a whole new generation of projects is ready to solve problems for consumers, businesses, and the market. The opportunity here is staggering, but so is the threat for those that aren't willing to learn the lessons of incumbents.

Even if Crypto runs through Q4 and then crashes in Q1. Web 3 is coming.

In 1999 .com stocks were "overpriced" in a 3-year time horizon. But were they overpriced over 10 years? 20 years? Crypto has a ton of hype and likely a bubble that will pop, but it's also a paradigm shift. Both things are true.

If you're a bank, if you're a fintech being big isn't enough. You need to be faster, humble, and committed.

ST.

4 Fintech Companies 💸

Moves Financial - The all in one Gig Worker Neobank

• Moves combines many features in Gig economy-focused apps like earned wage access and cash advances in a comprehensive package.  Moves allows a gig worker to manage many platforms (e.g., Instacart, Uber, Lyft) and see a single view of their cash position and spend from a Visa debit card.

• Built on Unit, Moves is a tremendously well thought out proposition. Gig workers often run small businesses out of their personal accounts, and tools aren't built to solve their complex needs.  Moves combines the best of many Gig worker-focused apps from the past 18 months into a complete package. I'm a fan of details in the execution that show the founders deeply understood the customer problem, and Moves has that in spades. Great job.

Januar - The payment account for Crypto in Europe 

• Januar provides an IBAN (account number) and accounts for businesses that want to manage Crypto in Europe. For the past half-decade, it has been too hard for Crypto businesses to get accounts.  Januar is hyper targetted at these businesses with a simple offer to help build treasury management and payment flows between fiat and Crypto.

• Januar holds a Danish payment license and is aimed at the emerging institutional Crypto ecosystem in Europe.  Brokers, exchanges, funds, and traders are all bumping into the same roadblocks of getting an account and on/off ramping with Crypto. Even significant funds or institutions with long-standing banking relationships cannot meet client demand for Crypto, held back by their existing banks. The simplicity of this proposition makes it powerful. They're competing with established players like BCB Group in Europe, but this market has space for more than one player for sure.

Passionfroot - The creator operating system

• Passionfroot combines a sales pipeline, CRM, collaborations, treasury, and payments for creators into a single platform. Creators essentially run a small business across 10+ platforms, with significant admin overhead. Passionfroot aims to combine and automate much of this work.

• Today creators are screenshotting their stats, creating media kits, managing emails, DMs, and countless invoices and paperwork.  We've seen both Stir and Creative Juice enter the creator tools market, with embedded finance at the center of the business model. What's neat about Passionfruit is the depth of understanding of the creator workflow. 

Floatfi - Simplifying the Financing of Mental Healthcare

• Float provides tools for mental health practitioners and carers to provide their patients with billing and insurance tools.  The app helps patients make claims against their insurance and not worry about being out of pocket.

• 1 in 4 Americans struggle with a mental health condition, but 70% of clinics don't accept insurance. The number of patients seeking support for their mental health doubled since the pandemic. When suffering from poor mental health, money worries can make things much worse. When you're in debt, you're 2x as likely to be depressed or have anxiety (and vice versa). Financial health and mental health are very linked. This example of aggregating things that already exist into a great user experience can have a massive real-world impact.  I also expect this is excellent business; more patients going into clinics = more revenue for the clinics and a more effective workforce in the economy.

Things to know 👀

1. Google is killing Plex

• Google is shutting down Plex, its enhancement to Google Pay digital wallet, that included enhanced features for checking accounts and debit cards and partner banks.  Plex offered account aggregation, PFM features, and some signature Google special sauce around data and offers to its customers. The product appealed to smaller banks who couldn't afford to build out their own digital mobile front end, and the headline partner was Citi.

• 🤔 Big tech can't get Fintech right in the west.  Outside of Apple Pay, and some BNPL partnerships, there are vanishingly few examples of big tech companies winning at consumer Fintech. Facebook has had countless attempts and miss-steps from Facebook Pay to Diem; Amazon "intends" to launch its consumer checking account but never does. Facebook is also trying to win India and Brazil with Whatsapp payments but has a tiny market share.  Big tech is the loser in the "embedded finance" movement, because like many incumbents if something isn't a core business model competency, they struggle to do it.

• 🤔 The product was always right.  I really liked the execution of Plex as a product. It was much more than PFM; it helped split bills or order food at restaurants. Plex had the best of Google assistant and Google data expertise.  It's the product I wish every bank and Fintech had built. It's that well done.

• 🤔 The gap still exists for the "private banker in your pocket."  There are now great PFM apps like Copilot or Snoop that go deeper than just giving you data about your spending to manage your personal finances. But there isn't a financial dashboard that not only sees everything but makes it actionable. Plex was a real effort at doing that and a sign of where things need to go.

• 🤔 The partnerships let it down.  Google had partnered with a handful of small banks and Citi. The smaller banks were too small to matter, and it struck me that, unlike Apple / Goldman, the Citi partnership never really got beyond the press release.  You must wonder how much the mid-sized banks feared Google displacing them and were happy for the headlines but non-commital beyond that. You also wonder how much business model matters for an advertising and cloud specialist.

2. Fireblocks launches AAVE Whitelister

• Fireblocks has built APIs to allow institutions to hold, manage and transfer Cryptoassets. As institutions become more interested in DeFi, Fireblocks has partnered with major DeFi protocol AAVE to offer a "whitelist only" version of the AAVE protocol. This allows financial institutions who are required to "Know their Customer" to only transact with other KYC'd entities on the DeFi protocol.

• 🤔 You can have DeFi and KYC.  For a long time, the worry about DeFi has been if it's all anonymous, how is it supposed to ever be compatible with existing compliance.  As far back as 2014, I recall discussions about "whitelisting" addresses to allow institutions to play in these "pockets of light" without changing the underlying protocol itself.  This gives you a best of both worlds where the protocol remains "pure" and permissionless, but the regulated activity can stay regulated. Regulate the activity, not the technology.

• 🤔 This will bring institutions into DeFi.  This is only a proposal to AAVE for now, but institutions could find it very compelling if it passes. Financial institutions are stuck on the sidelines and can see a massive benefit to having a better set of financial rails.  DeFi is an infrastructure upgrade for these institutions, but it also has access to all new asset types that trade 24/7 with near-instant settlements.  

• 🤔 The new asset classes and financial innovation are more important than the infrastructure upgrade alone.  If DeFi and Web 3 live up to their promise, they'll reshape how IP is traded, art, collectible, videogames. If everything becomes finance, those good at finance have a huge opportunity.

Good Reads 📚

1. Rethinking concentration risk in Fintech

h/t Bruno and everyone in this thread for suggestions on "Good Reads" this week. Check out the thread link for more good reads from the Fintech Brainfood Twitterverse. 

• In this phenomenal piece, Akash Bajwa and Chia Jeng Wang argue that in B2B Fintech, the concentration of customers is usually not a bad thing. 70% of Marqeta revenue comes from Square (and the contract ends in 2024), 28% of Affirm revenue comes from Peleton. But generally, B2B Fintech companies, especially payments processors, are incredibly sticky. Affirm has 100% net dollar retention (NDR), Adyen 115%, and Marqeta an incredible 200%.

• Attracting a growth client that can scale is a consistent theme. The alpha generated by these growth clients drives volume for B2B fintech businesses that have usage-based pricing. These "new whale" clients also attract and shorten the sales cycle of other whales (e.g., Marqeta now has Goldman and JP Morgan as customers).  The caution here is, this stickiness applies most when the B2B Fintech is doing some sort of regulated / plumbing/infrastructure activity and works less so for aggregation plays.

• 🤔 Not all B2B Fintech is equal.  Replacing an API that scores a transaction fraud risk might be much easier than replacing a 10-year contract with a payments processor.  

• 🤔 A payments processor can be commoditized. Typically commercial agreements with a payments processor are long and complex, but that's a historical feature. The payments processor is often tightly coupled with many other systems and regulated activities and actors (like a partner bank). Imagine you're Square, and you want to enter a market that your partner Marqeta isn't in. Chances are, you don't want to re-work your entire architecture and plumbing to do a market entry. This is where having a consistent pattern that recognizes and manages the core activities of payments processing in your architecture is helpful. Much of what the BaaS players are building for the bottom of the market may come in-house in the larger players.

• 🤔 I also wonder about the stickiness of BaaS players who are not also payments processors.  Companies like Lithic, Unit, Bond, Synapse all abstract underlying providers, but their moat will be product and experience. Their ability to retain customers will depend on their ability to continue to innovate. Here I'd point again to PackyM's "APIs all the way down," where he points out "hiring an API" works best when something needs to get done, but you don't want to do it yourself.  Early signs are that these BaaS players are so good at product that they will retain and grow their customer base. 

Tweets of the week 🕊

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)