Fintech 🧠 Food - Oct 31 2021 - Mastercard does Crypto, Monzo gets its Mojo back and why Money 2020 was a Changing of the Guard.

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☀ gm. My 3 weeks in the USA finally ended, and I'm excited to be home. Exhausted but grateful for having met so many of you. Too many to mention, but if we caught up, thank you, and if we missed out, I'll be back before too long, promise! :)

Weekly Rant 📣

Money 2020 and the changing of the guard

Now Money 2020 - from 2021 - is a wrap. Some big brands didn't show up, but the show floor was packed; as a result, it felt like new Fintech had completely taken over. The old vendors and banks all had their meeting rooms but fundamentally, who this show is for and what it is about has shifted.

The show made me think about 2018 (the last time I did Money 2020 Vegas). Plaid was a much smaller company back then, FTX hadn't been founded yet, and Crypto was heading into a long dark winter. Sure those big brands will be back next year but this year felt different.

The signs of maturity are everywhere. 👴

High valuations are the new normal.  Since Plaid / Visa, $15m seed rounds have become commonplace. This isn't unwarranted with later-stage Fintech companies in public markets performing well, but we've also been in a very long bull run for tech stocks generally. You have to wonder how long this can last.  

The competition is intense. Fintech, especially in consumers, is no longer novel. When CashApp and Paypal have nearly every feature imaginable, a new consumer app has a long way to stand out. Chime built its wedge with "get paid early," which has been a growth engine given that 70% of Americans live paycheck to paycheck. Chime also made their business on interchange and now credit building, but is the future for them to follow Square and Paypal building an ecosystem, or become the home of the direct deposit?

Consumer Neobanks are chasing better unit economics. If you've watched 4 Fintech companies over the past months, there is no lack of new consumer-focussed Neobanks launching. But there's a chasm emerging. To improve their unit economics, the consumer Neobanks go deeper down the stack (with varying degrees of success). The Current CTO told me this past week, they've brought nearly all payment processing in-house. This makes a more cost-efficient platform that can go wider on features, but we haven't seen that yet. Most consumer Neobanks are some ways from being either a bank that lends or a Super App. Monetization and profit will be essential (and the whole "tips" thing is weird to me).

Execution will become the advantage. The one thing I don't see is those countless examples of beautiful product design. I hate to say this, but all Neobanks are starting to look the same. Some have metal cards, some have rewards, some are for couples, some focus on excluded communities, but they're all the same product. Some look to add Crypto (or DeFi yield) that may change, but even then, Robinhood, Square, and Paypal could quickly follow. There is oceans of space to improve how consumers manage their money (but I'll come back to that). The earned wage access products show the way forward, using cash advances as the wedge but actually helping people save more. Next, up is bill switching and becoming that "direct deposit manager." If you manage someone's direct deposit, changing it isn't that far away.

The SMB focussed Neobanks like Ramp, Mercury and Brex have a whole different execution-style and pace.  I put this down to these organizations being earlier in their cycle and attacking the deeper regions of the financial services business models. They also have much better unit economics by default. That aside, Ramp especially has a staggering feature velocity. There's a lot more admin in day-to-day expense management or running a business, but I think the consumer Neobanks could take inspiration here. Imagine if you could manage your personal subscriptions and utility bills the way a startup can with the countless B2B Fintech companies?  

B2B Fintech providers are becoming ever more niche. As the Banking-as-a-Service space matures (and the Compliance-as-a-Service), each stack layer has an emerging B2B provider who has a new wedge. For example, this week, 4 Fintech companies include Pave, who have pre-built and trained AI models for many account data use cases. The hypothesis is, everyone is using account data and writing the same code to exploit it; that's a B2B business. The B2B provider space looks like fractals; the more you zoom into a significant player like Plaid or MX, the more you see other small businesses who do one bit well. It feels like eventually consolidation in B2B provider land is inevitable, but not while private valuations are so high.

But perhaps the most significant trend:

Everything is Crypto. At Money 2020. NYDIG had a major presence, and some of the biggest mindshare went to crypto companies like Paxos or Zerohash.  

Crypto has moved from speculative asset to absolute talent magnet. But perhaps nothing demonstrates this more than a conversation I overheard between one of the most dazzling stars in Fintech attempting to recruit a hot talent. It went something like this.

Talent is excited because Crypto presents entirely new financial rails, where any financial product can be created. Everything from flash loans (loans that you take out, trade, and repay in a single transaction) to self-repaying loans (where your deposits pay your interest) through to real-time cash streaming (literally, get paid as you earn). This is drawing talent because these primitives are open, composable, and permissionless (for now).

So, where does that leave Fintech? 💳 🤷‍♀️

Fintech 1.0 (consumer) has matured, and consumer Neobanks are coming to IPO. Fintech 2.0 (embedding with B2B providers) is evolving and heading for competition, and we'll come back to Fintech 3.0 (new rails).

But I'm generally of the view, there's still so much more to do in all three categories.

The direct deposit is fair game.  Switching direct deposit is the ultimate cognitive load for the consumer, fraught with anxiety and things that could go wrong. But with earned wage access, credit building, consumer PFM, getting paid early, and now payroll APIs, we have all of the puzzle pieces to slowly attack the direct deposit.  

Think about all of the things that happen after a paycheck lands. A consumer immediately starts moving money into different pots, a little in Robinhood, a little in Crypto, maybe some into the joint family account, and so on. Who's managing that well? I imagine it's the ultimate vision of countless Fintech companies, but nobody has nailed it because the whole thing is interconnected. It's still too fragmented.

Credit is just getting warmed up.  Yes, BNPL is everywhere, but the past 12 months saw the launch of niche credit card products or lending secured against assets like your car, but we could see a lot more with the advent of "embedded lending," we could see a lot more. Various "Credit-as-a-Service" providers are now available like Railsbank, Canopy servicing, and Deserve (cards). There are also loan-origination platforms like upstart.com that have been around for years, and BaaS providers are adding a lending partner.  

Credit is a different beast from debit or payments. The business model of credit is literally giving away money, which is a great business model in a bull market (like now), but more complicated when credit is tighter (like during recessions). Some products will last, some won't, but it's never been faster or cheaper to launch a credit product.

Financial products aren't that innovative.  Using alternative data (e.g., payroll or open banking) to offer credit to the under-banked is an excellent step, but the end result is usually some sort of existing product. We see things like cash advances, short-term loans, or credit cards with limits that gradually increase. It's effectively data-driven underwriting but not product personalization.  

This is because which customer gets credit is a decision made by the loan's originator (the Fintech company). The type of credit product is defined by the underlying platform the credit is booked on. So if you got a loan from Fintech 123, but their partner bank is Bank XYZ, and that bank's systems can't write personalized loans, then you are out of luck. Tech forward partner banks like CDW, Cross River, and SVB can all make it work, but the core products haven't seen the creative flair that underwriting processes have. 

Multi-currency / Borderless accounts are just getting started.  When Wise and Revolut changed cross-border consumer payments, they built a killer wedge product (that they have now begun to cross-sell around); this feature works everywhere. As services like NIUM, Airwallex and others have made "spend like a local" an embeddable feature. Expect to see it everywhere.  

Everything is Crypto. In good reads this week, I cover Matt Harris' latest Forbes piece, where he elegantly describes "decentralization" as the next macro trend in Fintech. I first heard this idea from a guy who worked for a bank back in 2015; he described Crypto as "real Fintech" because everything else was an abstraction over the existing rails. 

Crypto has real regulatory, usability, and adoption challenges ahead of it, but the flood of talent from Fintech will help with all of those.  

What should we do with all of this information? 🤔

• Fintech 1.0 (Productized) - Great product and execution still wins.  Companies that can drive more diverse sources of revenue and go deeper down the stack to reduce unit costs can become massive. Most Neobanks are nowhere yet in credit (except for LATAM and cash advancing). Creativity on product will come from those who find partners with more modern core systems and platforms.

• Fintech 2.0 (Embedded) - Multi-currency everything has to become the new default. Especially when dealing with online businesses or e-commerce. It's also now table stakes to have "the best of all of the Fintech features" everywhere, and luckily, there's a good Fintech API provider who does just about every feature as a service. The trick is knowing who they are and how to bring those together into a coherent product.

• Fintech 3.0 (Decentralized) - The first use case offers consumers (and now businesses) high yield savings or simple Crypto buy / sell/hold. If we re-orient around the wallet / Dapp (Decentralized App) paradigm, then Web 3 promises entirely new financial primitives, business models, and data ownership. What happens when a consumer can take out a self-repaying loan? What does it mean when someone in emerging markets can hold USD stablecoins and accept them as payment? What happens when financial primitives are available to developers of games, music, or even manufacturing equipment? 

What really excites me is what happens when you mash up all of these ideas? What happens when you consider the trade-offs in UX vs. permissionless innovation?

Fintech may be at a mature point in the cycle, but it's also just getting started.  

The talent has spoken.

And there's still so much to do. 

ST.

4 Fintech Companies 💸

1. Pave - Fintech Insights as a Service

• Pave allows Fintech companies and Neobanks to gain insights about their users and build new functionality (like predicting an overdraft is coming and offering a wage advance).  Today, many companies have to build this capability directly from the underlying raw data and train their ML algorithms. Pave has done this once and at an industry-wide scale, allowing developers to focus on their user experience and differentiators.

• 🤔 Building data-driven functionality often requires lots of data, especially when training ML.  It's no surprise that nearly every Fintech or Neobank helping consumers save, budget, or manage bills ends up building the same capability. Pave doing it once is another example of the Fintech-Feature-as-a-Service. The industry is now at such a scale having specialists like Pave makes a ton of sense. I wonder if a business like this scales internationally (or needs to) and by segment (e.g., beyond consumer).

2. Migo - Embedded Lending (Nigeria & BR)

• Migo provides an API that allows Merchants, Telcos, and Fintech companies to offer Lending to consumers.  Customers of Migo can offer overdrafts, BNPL, and credit cards to consumers from Apps, USSD, SMS, Whatsapp, or POS terminals using data from those sources and the user's device to score credit risk.

• 🤔 Migo is essentially a credit decisioning engine offered via an API and backed off to lending partners. What is unique is Migo has built experience using Telco and emerging market data to understand consumer credit risk. Migo can also support companies that have their own lending license. There's a huge need for Lending based on alternative rails and data in markets like Brazil and Nigeria. Embedded Lending might be more interesting in markets where credit risk has to be underwritten based on data. I also really like Fintech outside the US as a theme. It is getting plenty of attention but requires local knowledge to execute well.

3. FloatMe - Instant Cash Advances Fintech

• FloatMe provides instant cash advances of up to $50 as customers are between paychecks.  FloatMe connects via open banking to the users underlying mainstream account and then advances the cash to that account.

• 🤔 Depending on the study, 65% to 70% of Americans live paycheck to paycheck. Paycheck to paycheck is also a thing in middle income. Around 40% of Americans making over $100,000 a year also live paycheck to paycheck. Aside from being staggering, this stat says that cash advances are an absolutely critical feature and the killer app of Fintech. When Chime introduced get paid early, it grew massively and earned wage access products have become a lifeline to millions. This is an indictment of late-stage capitalism, but it's also a warning sign. If these services avoid becoming another debt cycle, they will be measured by their ability to get people out of that cycle. This is where PFM goes from "nice to have" to life-changing.

4. Incard - Neobank for e-Commerce store owners

• Incard combines a Ramp like expenses card with a multi-currency account and accounting integration for e-commerce store owners. Customers can keep balances in USD, EUR, GBP so you can "pay and get paid like a local."  Incard also integrates with multiple e-commerce front ends and platforms like Gmail, Google Ads, and Twitter.

• 🤔 E-commerce merchants that sell things online may need to source their goods in China and advertise with Influencers in San Francisco from their office anywhere in the world.  Imagine someone who runs a subscription business with those Geo's; today, they'd be taking an SMB account from someone like Brex or Ramp, managing currencies with something like Wise borderless account, and then integrating all of that with their Google Ads and other data sources. Incard really is an operating system for e-commerce.  I imagine it looks like where Shopify wants to take Shopify Balance. Add Lending to something like this, and you've got the drop shipper in a box operating system.

Things to know 👀

1. Monzo raising £300m ($412m) at £3bn ($4.12bn)

• Sky News reports that Monzo is due to raise £300m at a £3bn valuation, with £200m of that coming from new investors.  This is almost 3x higher than its £1.1bn valuation early in 2021, a down round from a previous investment.

• 🤔 It's hard to be a bank.  Monzo's feature velocity almost completely stalled not long after it got a full banking license. Around the same time, Monzo didn't aggressively activate lending (if anything, the opposite), and interchange revenue isn't a good way to survive in Europe (at 30bps).  Regulatory scrutiny increased dramatically from operating a payments business to running a full bank, a lesson for anyone treading the same path. Getting a banking license is hard; keeping it is harder.

• 🤔 Monzo has got its Mojo back.  Monzo has been shipping new features in recent weeks, getting back out with marketing, and now this round. Don't forget that this bank with 5.6m customers is only just turning on the monetization tap.  

• 🤔 When Monzo launched in the US, many felt it arrogant that their wedge was a "great product," but this tweet from Rex Sailsbury stood out to me. Most consumer Neobanks in the US aren't that good of an experience.  If you compare the level of detail that goes into something like Monzo, it's just not there on the consumer side. A great product is in the details, like paying someone next to you (proximity pay) or how the paycheck sorting automation works, not just the user acquisition feature (like getting paid two days early).  I actually spent so much of the last 3 weeks in the US going, "Oh yeah, I love how Monzo does that, see," and getting "oooh, that's cool!" (Which btw is why more people need Pulse)

2. Mastercard merchants and banks will be able to offer Crypto

• Mastercard is partnering with Bakkt to allow any Bank, Neobank, or Merchant to offer Crypto payments or acceptance.  Bakkt is a publicly-traded company that offers Crypto custody (storage), trading, and pre-packaged APIs for merchants and wallet providers.

• 🤔 Visa has been vocal and leading in Crypto; it's no surprise to see Mastercard make a move.  Visa became the first major network to allow Crypto debit cards, stablecoins and even bought a Cryptopunk. Where Mastercard had been the brand of Fintech for many years, major companies like Coinbase, BlockFi, and Crypto.com issue Visa-branded cards.

• 🤔 Announcing all the things. This announcement follows a string of announcements from Bakkt (partnering with Google and FI software vendors like Finastra and Fiserv) to enable banks. As early as 2018, Bakkt launched by partnering with Microsoft and Starbucks to bring Bitcoin to the masses (which never happened). But Bakkt has steadily (through acquisition and its efforts) built a custody and futures business that sees significant volume. Generally, where it is capital markets, Bakkt has delivered, but it remains to be seen if they can deliver on the Mastercard partnership any time soon.  I'm generally dubious of press releases that talk about what someone is going to do. 

• 🤔 Mastercard is a sleeping giant in Crypto. Mastercard has bets in open banking that are still active and is quietly building a multi-rail business (across open banking, RTP, and cards) in many European markets. Where open banking meets Crypto is especially interesting, in my view. Crypto, in many cases, works best when it doesn't try to replicate the KYC / AML model of traditional banking, which creates risk. But open banking potentially helps solve some of that. What if open banking is the real on ramp to Web 3?

Quick hits 🥊

• Klarna and Stripe did a partnership.  This week in "everything is BNPL," Klarna and Stripe announced a partnership to embed Klarna deeper into Stripe checkout. While Stripe already offers many of the BNPL providers, apparently, it's easier now. In return, Stripe will process all of the Klarna customer payments after the initial "buy now" purchase. 🤔 Read: Stripe is getting Klarna's payments volume 📈.

Good Reads 📚

1. A Complete Revolution

• Fintech 1.0 moved from Analog to Digital servicing, Fintech 2.0 from direct to embedded, and now Fintech 3.0 is the move from centralized to decentralized.  To date, everything we have built has been an abstraction on aging infrastructure. The payment and banking rails haven't changed massively in decades. 

• 🤔 You have to love Matt's mental clarity here. He points out that we have such a fixed understanding of what Financial Services can be because of their analog history. What's exciting about Web 3 is the advent of composable primitives that anyone can access. Equally, what's challenging about Web 3 is if everyone can be their own bank, they risk having their own bank robbers? Therefore ultimately, I see centralization vs. decentralization as a spectrum, not a binary choice. Different users will make different trade-offs, and brands with trust can win in this new world.

• 🤔 The new rails will likely live alongside the old rails for some time.  Old technologies rarely vanish; they erode. Cash still exists, checks still exist; heck, most POS terminals still don't understand debit cards from other countries in the US.   This is why I believe the abstraction layers from Web 2 can play a powerful role in Web 3. Struggling with trust/user access in Web 3? Why not use open banking to ensure a wallet has been KYC'd. Want one API provider that can access Crypto and traditional rails? What happens when Stripe or Adyen adds USDC / USDP?

• Much more to say on this, but Matt has really added to the conversation. I feel a report coming.

Tweets of the week 🕊

That's all, folks. 👋

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