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Fintech 🧠 Food - Ripple vs SEC concludes & $250m fine for Bank of America

Plus, the future of regulation, Revolut's $20m oopsie and is it M&A season for Monzo?

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 32,051 others by clicking below, and to the regular readers, thank you. 🙏

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Hey Fintech Nerds 👋

It feels like we're at an inflection point.

Ripple "won" the case that they didn't sell consumer securities, and a big bank got a big fine from regulators. Is nature healing?

The Ripple case is nuanced. They got dinged for selling securities to professional investors but not consumers. Meanwhile, the former CEO of Celcuis has been arrested, the company fined $4.7bn and sued by the SEC, CFTC, and FTC. It's bad times when the entire alphabet sues you. (Covered in Things to Know 👀)

But here's the thing. This will bring regulatory clarity, and it's game on for the biggest platform shift in 50 years. 

Every major bank CEO has been waiting for the event to catalyze digital assets. This was it.

Then there's Monzo, acquiring a Nordic bank called Lunar 🌙 according to Bloomberg. Maybe it's M&A season for digital banks? (Also in Things to Know 👀)

That Bank of America $250m settlement is a timely reminder that the price of getting things wrong in financial services is massive. (Covered in Things to Know 👀). The fine represents less than 0.1% of 2022 revenue, but the reputational damage will be much higher.

When dealing with money, you're dealing with people's lives.

Their ability to make rent, eat and progress in life can all be determined by how responsible their finances are managed. 

In the same week, news broke of Revolut losing more than $20m to fraud due to an issue with how they implemented payments. (Covered in Things to Know 👀). Fraudsters will find any route to attack. Even a payments system issue. 

That's why I have so much respect for the operators and builders in financial services. This stuff is tough and complex yet fascinating. 

Almost nobody gets into finance on purpose, but once they discover how finance works, they often find a sense of purpose.

Interested in your feedback on a more concise Rant this week (I also went longer on Things to Know)

PS. No brainfood next week with a ton of travel and family commitments

PPS. Happy birthday to meeee (apparently, I share it with Will Ferrel, so happy birthday to you too) 🥳

Here's this week's Brainfood in summary

📣 Rant: We all need to be better for customers

💸 4 Fintech Companies:

  1. Outdid - ZKP-Based identity 

  2. Baskit - The platform for wholesalers (Indonesia)

  3. Pricing Culture - Data platform for alternative assets

  4. Storekit - The order at table or online app for hospitality (UK)

👀 Things to Know:

📚 Good Read:

Weekly Rant(s) 📣

We all need to be better for customers

This week's news from the CFPB and Bank of America is a timely reminder that big isn't always better. 

This week's news that Revolut lost $20m to fraud is a timely reminder that new isn't always better.

The responsibility of anyone in financial services is staggering.

If you hold, move, insure, lend, or invest money on behalf of another entity, you are taking their life, future, and opportunity as a responsibility.

The cost of doing it wrong is catastrophic.

People who've lost their life savings or been scammed often end up severely depressed, or worse, there have been incidences of suicide. Everything we universally despise, from child sexual exploitation, human trafficking, terrorist financing, and organized crime, exploits the infrastructure or mistakes made by companies in financial services.

We want to manage money well because it makes everything better in society.

For better or worse, our economy is predicated on money. You need it to buy things, money to make money, and a house. If you have more of it, you tend to live longer, feel healthier, and the relative cost of staples like food or shelter decreases as a % of income. 

But working in financial services is hard.

You must balance the incentives of your shareholders, customers, and wider society. And sure, you might say, doesn't every company have to do that, and in a way, that's true.

But finance is the incentive mechanism for the species. 

So the incentives placed upon it as an industry become critical to understand.

In this brief Rant, I wanted to look at

  1. Fintech growth company (pre-IPO) incentives

    1. The incentives

    2. The good

    3. The bad

    4. The consequences

  2. Big bank incentives

    1. The incentives

    2. The good

    3. The bad

    4. The consequences

  3. Why regulation isn't bad, but regulation isn't best

    1. Regulation is a balance of negative incentives

    2. Regulation can be prescriptive

    3. Regulation can be very hard to change

    4. The best thing is for the industry to solve a problem before a regulator has to

  4. Rethinking incentives

    1. There needs to be a prize for building supervisory tech

    2. There needs to be a prize for being great at risk management

1. Fintech growth company incentives. 😎

a) The incentives depend on the stage. First, it's just to get the product market fit and show that someone cares and will buy it. Then traction, people will pay, and there could be a huge demand. From there, grow and grow as fast as you can. These typically line up with funding stages (Seed, A, B, and so on).

The founders and staff often have stock (or options), and assuming they're venture-backed, the investors also have stock. By its nature, Venture is looking for companies that can grow rapidly and disrupt markets. 

The core incentive is to grow and grow as fast as possible without breaking the business or exploding. This was especially true during the Fintech boom of 2021, where valuations got way ahead of historical norms. Today we've reverted to looking for "Rule of 40 growth." 

b) The good outcomes are solving new problems in novel ways. Fintech companies popularized cash-flow underwriting, earned wage access, and made accepting payments online significantly simpler. Expenses universally sucked before the modern spend management Fintech companies emerged, and nobody thought about the UX of CFO tools.

Fintech companies were the first to adopt 100% digital onboarding, they normalized connecting account aggregation as a feature, and they were the first to adopt using Payroll as a way to secure lending.

While it's hard to empirically prove the benefit of every single Fintech company. But my hypothesis goes like this:

  1. Growth companies validate new market opportunities exist

  2. Having early adopters who can grow quickly creates a new set of suppliers to serve them.

  3. The incumbents often copy features and services that prove to be successful

  4. Those suppliers that grew with the Fintech companies became large enough to supply the big banks

  5. This drives innovation, choice and better outcomes across the whole economy

c) The bad outcomes happen when chasing growth at the expense of risk. Fintech companies hate friction. If you're trying to grow, any friction at onboarding, making a payment, or becoming an active user is bad for business. 

These companies know that the faster they can onboard, fund, and get a user using an account, the more likely they will get an active (revenue-generating) user. The drop off at onboarding consumers is at least 60% from users who download to users who become active. Any improvements there can be massive for growth. 

The problem is that onboarding is the key to preventing fraudsters or money launderers from opening an account. Less friction can sometimes mean more fraud. (Although it doesn't have to 🐟). 

Another great way to incentivize growth is with low fees or consumer offers. Zero-rating fees make a compelling consumer offer but also limit revenue and profitability.

Consider companies like Better.com and Reali, who offered "buy before you sell" or cash offers to consumers to get them to take out a new mortgage. This generated a ton of growth but was also extremely capital-intensive. 

Growth is good, but sustainable growth is better.

d) The consequences are regulatory pushback, consumer harm, and Fintech companies having to find profitability. Growth company incentives aren't always aligned fully with customers. 

Fintech companies have had it much harder lately. 

Regulators are investigating BNPL, "tips," and the nature of embedded finance and Banking as a Service. We saw Revolut's auditor quit over an accounting disagreement, and Jason Mikula is on a one-person mission to help Fintech companies fix their website claims of FDIC protection.  

While low fees and competitive pricing is a huge benefit in the short term, the search for profit can gradually erode this initial value proposition in the long term. Bankers have rightly complained for the past decade, "Let's see what happens to those low fees when they have to turn a profit."

Consumer harm is real when a Fintech company isn't able to manage credit risk or stop fraud. Since the pandemic, fraud rates have increased massively for everyone, but the smaller Fintech companies and their bank partners are especially exposed. These companies often lack the experience and budgets of their larger counterparts. 

Often the, experienced founders play a longer game. CEO of Sardine Soups said on Twitter recently 

"Every time I think about a fintech idea, I realize I'd have to build the fraud & compliance infra to support it first. "

Speak to any serial founder in financial services, and you'll hear similar things. It's one of the most counterintuitive industries there is. There are countless little things incumbents do that seem silly to the outside observer but exist for a reason.

The trick is understanding why those processes exist and finding a better way to execute them. 

2. Big Bank Incentives 📊

a) The incentives are driven by shareholders and regulation. Publicly traded banks report quarterly results, and their largest shareholders are often the world's largest funds or fund managers. For example, Vanguard has 9% of JP Morgan, 8% of Citi, and 8.5% of Wells Fargo (Blackrock has over 7%). 

Banks are generally seen as stable and offer high dividends. Investors allocate to banks to give their portfolios a solid base and return through those dividends. As a "yield stock" and stable investment, investors don't want to see a bank taking too many big risks and look for it to become more efficient over time.

The leadership is responsible to their largest shareholders and clients and is the face of any serious issue with the regulator and Government. A large global bank might have 10 CEOs of divisions and upwards of 200 in the "c-suite." 

They're incentivized on 

  1. ROTE (Return on Tangible Equity). Is profit a % of shareholder funds. Below 10% is awful, 15% is OK, and anything above 20% is considered market-leading.

  2. CI ratio (cost-income ratio). The measure of costs relative to income. Anything above 50% is generally considered high; anything below is better. 

  3. CET1 Ratio (Tier 1 Capital Ratio). The highest quality of regulatory capital held 

However, the biggest incentive by far is not being in the news for a scandal involving some large technology screw-up. I remember meeting one bank who, in three separate meetings, joked about being "not the fastest land animal" for some shareholders; that is a feature, not a bug.

The incentive in the C-suite is not to drive hockey stick growth; the job is to not take too much risk. Banks face a trilemma of what they can do to drive profitable growth without increasing costs or damaging their CET1 capital.

(The above is a V1, and needs work, I’ve never worked in ALM so forgive me if it lacks nuance banker pro’s)

b) The good outcomes are banks as shock absorbers and operating globally. Financial crisis aside, the larger banks can generally weather any storm. Consumer and business deposits held at a large bank are typically safe, and the biggest banks can handle massive transactions on behalf of the world's largest corporations.

Large banks facilitate global trade, operate the economy's plumbing and provide the lion's share of lending to consumers and businesses (directly or indirectly). They have the highest regulatory burden and work closely with law enforcement to manage sanctions and prevent economic crime. 

For better or worse, banks are the police of money, the ultimate enabler of Fintech companies and critical infrastructure. The short-term focus of their shareholders and KPIs creates a reinforcing feedback loop for stability.

c) The bad is focusing on cost more than service and chasing revenue through fees and (sometimes). Seemingly good business models or growth opportunities may be too risky or negatively impact regulatory capital.

The most effective way to consistently push out costs for large banks is to move customers from branches into digital experiences and more of their tech real estate into the cloud. Large banks may have outsourced the more manual internal processes but still have structural costs in departments like Trade, Payments, and markets where PDFs and paper contracts still dominate. The primary goal is to reduce the cost of distributing. This can impact service levels in some product areas. 

The banks incentivize their large corporate customers with pricing, scale, and offering comprehensive solutions. This can impact their margins and forces them to try to be all things to all people. 

The biggest incentive is a high switching cost. Changing direct deposit and primary bank relationships is either hard or feels hard for consumers and corporates. Large corporations might have countless integrations into their systems or buy because of the pricing. 

Banks take advantage of this high switching cost by adding fees to create revenue growth.

d) The consequence is large systemic failings, a lack of innovation, and regulatory capture. Yield stock companies' incentives aren't always aligned with customers. 

Miss-selling scandals, AML breach fines, and "junk fees" mean that banks make up 4 of the world's top 5 most penalized companies. They rarely create a breakthrough innovation for customers or voluntarily remove fees or pricing. Their growth often comes through M&A, which can have the effect of limiting consumer choice. 

While focusing on cost and short-term revenue targets is rational for a bank, it harms growth in the long term. Gen Y and Z consumers open more accounts with Chime & PayPal than the largest banks in the US combined. This disruption is coming to all products and all segments. 

Being a cash cow also makes them a slowly dying cow.

There are, of course, exceptions. When JP Morgan Chase announced they were doubling tech spending, their CI ratio shot up to nearly 70%, and shareholders were unhappy. Since then, they have steadily recovered as tech investments, M&A, and market entry to the UK have proven successful. 

A handful of banks have had long-term leadership and have buy-in from their biggest shareholders (I'd add Capital One and Santander to that list). Like a franchise sports team, consistent leaders deliver compounding results over time. 

The trick is giving leaders time to earn that support level, and buy-in is extremely challenging in a market focused on short-term results.

3. Regulation isn't bad, but it's not best 🤝

a) Regulation acts as a counterbalance to commercial incentives. Creating rules that must be followed by law and consequences enforceable as fines regulation creates an entirely new incentive. The incentive to not get fined, and more importantly, to avoid the reputational damage associated with being investigated and found to have failed. 

b) But regulation has limits. But regulatory agencies are public services that get their authority from Governments. There might be 1000s of things they could do or might even want to do for the better. Still, without authority, they cannot do simple things like use modern tools and software. There's also the challenge of being able to retain staff on a government salary who could make much more elsewhere. 

Most agency staff would love to use better tools, but something as simple as government procurement holds them back. With the rise of supervisory tech or "Suptech," this has started to change, but it needs to happen at a much larger scale for the digital age.

c) Regulation is tough to change. Because financial service regulatory authority comes from the Government, it's often the case that changing it requires a new law to be passed. There are exceptions, but even those involve political or partisan complexities. As a result, regulation starts to resemble sedimentary rock; layer and layer gets added but rarely changes unless there's an earthquake like the financial crisis or it is pushed for by politicians as a priority.

d) It should not be the answer to everything. Few senior regulators view their role as having priority over the private sector. In the best case, they provide a framework so private can manage risk and enforce when there are obvious errors. The nature of regulation is to provide rules, guidance, and frameworks, then have the companies manage risks. 

The big companies are subject to periodic examinations and everyone submits their data to regulators. From the supervisor's perspective, they're hunting for needles in a haystack with imperfect tools. It's far better if the industry manages this itself.

In many cases that does happen

In the traditional model, regulators identify risks, design policy, and leave it to the industry to implement (perhaps with the support of industry participants and consultations). 

Other risk management models don't involve a government agency having primacy.

  1. Self-regulation. Self-regulation is where an industry self-regulatory organization (SRO, like a stock exchange) identifies the risks, designs policies, and implements risk management.

  2. Co-regulation. The industry and regulators identify risks together, implement risk management, and share progress transparently with regulators. Together they design policy in a sandbox-like environment. (This is what GBBC Digital Finance proposed for DeFi instead of an SRO). 

  3. Industry codes of conduct. The FX Code is a set of principles for good practice in the foreign exchange market following the LIBOR rigging scandals of the 2010s. It does not impose any rules or substitute for regulation or laws but provides a framework for the gaps between jurisdictions. FX is global in nature, and so are its risks; by adopting an industry code, the industry itself can manage the gaps between nations. (Remind you of Crypto much?)

With the biggest risks in our industry, the options above are sometimes explored but are often not the default because they lack adoption and momentum.

(Especially in digital assets; that's why I'm working so hard to build an Open Standards Council, to bring one central point for best practices in tokens and digital assets. PS, thanks to the 30+ of you that reached out last week, please get in touch if you want to help out.)

There's so much more we can do.

The Regtech movement of the past 5 years has been a huge step in the right direction. As has organizations like the Association for Innovative Regulation (AIR), the Cambridge Center for Alternative Finance (CCAF), and RegTech association. They bring together regulators, governments, and innovators, produce great concepts, and greatly serve the industry.

The challenge is what happens next.

After a "tech sprint" (A hackathon where we don't say the word "hack" because that's bad if you're a government), what happens then?

Usually nothing.

We need better prizes.

4. Rethinking incentives

I listened to an interview with Mr. Beast where he shared the sentiment (paraphrased)

It's easy to get attention with negativity. It's much harder to make positivity entertaining and rewarding.

The same is true with policy. 

Finding ways to hit and punish people is easy, but it's not the most effective if we want better long-term outcomes. Despite banks being 4 out of the top 5 most heavily fined companies on the planet, we're still seeing f*ck ups on a monumental scale. Don't get me wrong, this stuff is hard. But it's also a back office cost.

The fines don’t work.

Just this week, bank reporting of suspicious transactions is still rated “poor” by half of Europe’s supervisors.

From Wikipedia:

The phrase "carrot and stick" is a metaphor for using a combination of reward and punishment to induce a desired behavior. 

If regulation is the stick 🏑, the carrot 🥕 is growth and new revenue. 

We need way more carrots. 🥕🥕🥕

a) There needs to be a prize for building supervisory tech. There are vanishingly few examples of tech companies that successfully sold to the Government. I can think of three. SpaceX, Palantir, and Chainalysis (and maybe now their competitors). Getting through government procurement is a gauntlet that makes selling to a bank look easy. Yet, entrepreneurs and founders could build amazing tools

Agency staff would love these tools, but they're hamstrung by how they can buy them. This is one of those tiny details nobody pays attention to and I'm obsessed with. 

b) There must be a prize for being great at risk management. Nobody notices if an underwriter, fraud officer, or AML officer does their job well. Yet compliance can account for up to 30% of the costs of running a large global bank. If I were a policymaker or someone in HR at a bank or Fintech company, I'd want to rethink that. We should celebrate success even in abstract numbers. Knowing what we didn't detect and having the right data is challenging, but let's consider what might be possible. 

Financial services are the incentive structure for the species.

But its incentives are messed up.

Let's fix that.

ST.

4 Fintech Companies 💸

1. Outdid - ZKP Based identity 

Outdid is an app that allows users to verify their documents without ever sending the raw data to the business they're verifying with. Once users have scanned their documents, the company receives "proof" that the user is over 18 or "not from the USA." Outdid claims to be 100% fraud resistant with a guarantee of authenticity vs. the ~13.2% fraud rate on documents in the industry.

🤔 Zero-knowledge-proofs (ZKPs) are cool and finally ready for prime time. A ZKP is cryptographic proof that something is "true" without revealing the underlying source data. The example often given is "this user is over 18" without revealing their date of birth. This is a huge win for privacy, but until very recently didn't perform well for day-to-day use. That's now changing, and you should pay attention to ZKPs.

🤔 Being "100 fraud-resistant" is a huge claim. That claim is either naive or Outdid solved nuclear fusion and teleportation too. The website doesn't give much away, but 100% confidence of a document's authenticity from an app? I'll believe it when I see it. The idea of a ZKP-based identity network is the right long-term answer for privacy and cyber risk, but it also has a cold-start problem. 

2. Baskit - The platform for wholesalers (Indonesia)

Baskit provides a SaaS platform for wholesalers who buy from long-tail farmers (e.g., coffee producers) and distribute to retailers. Wholesalers can build a more complete inventory picture, access more buyers and optimize pricing and margin. Baskit then uses this data to provide supply chain financing to wholesalers in partnership with banks and P2P lenders.

🤔 Taking supply chain data and adding finance is a nice theme for considering global, long-tail supply chains. Supply chains can be especially hard to access at the last mile. Small farmers don't always have relationships with large multinational retailers or corporate distributors. This is a great space for the "SMB wholesaler" who can build relationships with buyers to play a risk management and distribution role for both sides. 

3. Pricing Culture - Data platform for alternative assets.

Pricing culture creates an API that connects asset issuers with asset exchanges and platforms. The platform supports everything from racehorses, music, and real-estate Reg A, Reg A Series, and Reg CF securities. The API provides aggregation, enrichment, and structured data for investment.

🤔 Capital markets tokenization and disruption start with alternative assets. These assets are often sold in small communities, with sellers unable to access the big and large sellers unable to get the data they need to buy at scale. Consider a market where artists like Justin Timberlake and Dr. Dre have sold the master's rights to their music catalog to professional investors. 

4. Storekit - The order at table or online app for hospitality (UK)

Storekit allows restaurants, bars, and hospitality businesses to quickly build features like "order at the table" or order online menus. The white label app can be rapidly branded, create QR codes, manage payment, and help guests track delivery if ordering take out.

🤔 Why shouldn't apps build their own hospitality app? The pandemic made "order at the table" a thing; consumers now work from home more days per week on average. A boutique, regional brand doesn't have to hand over all their online delivery to the food delivery apps. With their own app, they can build loyalty feedback loops. This is what massive merchants like Starbucks do well, but doing it as a platform for long-tail is interesting. The question is if this becomes a wedge to owning all of POS. I've been dubious of these QR code niche players in Fintech (and seen many be born, have mediocre success, and sell or die). But timing here could be everything.

Things to know 👀

According to the FT, Revolut would erroneously refund the transactions with its own funds when certain transactions were declined, resulting in a $20m loss in its US subsidiary. The problem stemmed from the difference between European and US payment systems. The platform would automatically refund users when payments were declined. 

The FT says organized criminal gangs would encourage users to have an expensive item declined (due to insufficient funds) online, get a refund, and then cash out the money at an ATM. The indecent was spotted when the Revolut partner bank noticed it had less cash than anticipated. 

🤔 As a user, this looks like free money. You buy something online, and its declined, and now the amount you were declined is suddenly credited. So you try to spend $30, but you get declined and are credited $30 instead.

🤔 This from Hasan sent to me on LinkedIn strikes me as a highly likely cause of the issue. As "A Decline on card treated as Refund message and then the settlement service was crediting that customer account with amount from Revolut Settlement account." He says, "1. Card processor message not treated correctly, 2. No reconciliation of Card Settlement/Clearing files against daily Card Spend, 3. No reconciliation of Settlement accounts vs. Customer spend, 4. No Insights or Control of transactions volumes with specific cases like Refunds, Declines, Forced clearings, etc." I should point out this happened in 2021 and was likely quickly fixed.

🤔 Fraudsters are creative. I don't know how this one worked exactly but imagine this scenario. A twist on a classic US-based attack: to find a way to cover the gap between when an account is funded and when the funds are available. Funding an account via (for example) ACH may take 3 days for those funds to arrive, but the Fintech company might instantly credit you because they want you to be an active user. The fraudster might fund an account now but not have the funds in 3 days. Then with a second transaction, their "credited" funds at the Fintech can be used to try to buy something online, get declined because the funds aren't there yet, and then get the refund.

🤔 This wouldn't have been an issue in Europe (but Europe has other fraud issues!) The funds from most European banks clear instantly, so the fraudster's step 1 would have failed. However, fraudsters in real-time payments are especially good at scamming users into authorizing push payments (APP Fraud). 

🤔 These stories happen everywhere, not just in Fintech companies. Let's be honest "growth at all costs" may have meant compliance was not the first and only obsession during the Fintech boom. That has flipped upside down and become the #1 priority. These attacks happen across the entire industry, and the best way to solve them is to work together rather than point fingers. To get better, we must be obsessed with fighting fraud together at the industry level. Fintech, Crypto, payments, and big banks. 

🤔 However, Revolut has had a slew of bad news lately. Their auditor quit over accounting disagreements, and they're no closer to a UK banking license (in a time when people who applied later now have theirs). They're an incredibly innovative business, growing and delivering new products. My hope is this bad news is a sign they're joining the big table (because, let's be fair, nearly every brand in financial services has had some regulatory challenge at some point). To win at financial services in the long term, you must spend more time on the hard, crunchy fraud and compliance stuff. That's the competitive advantage.

Bank of America will pay $250m to settle claims that it systematically double-charged customers, withheld credit card perks, and opened accounts without customer authorization. The CFPB says BofA earned 100s million in revenue by charging $35 to users every time they had insufficient funds. The regulator says this fee was not made clear to users and is "an illegal practice that damages customer trust." 

🤔 That fine isn't big. It's around 0.1% of 2022 revenue.

🤔 Timely reminder that the big banks aren't saints. Fintech has had a tough time lately, from BNPL to banking as a service and FTX; you could be forgiven for thinking bigger is better. Bigger isn't always better; better is better. And we must all do better.

🤔 These issues are systemic; banks are hunting for growth and are punished by shareholders for not delivering. As a large bank with a high operating cost, it's increasingly tough to drive revenue growth, especially since the financial crisis. Shareholders demand better results, new regulations are added yearly, and now Fintech companies and big tech have entered, stealing customer attention and deposits. A rational decision is to find a new revenue line. 

🤔 Reputational damage lasts. Consumers remember these scandals, and the bad news sticks. In the medium term, consumers will unlikely exit their direct deposit relationship. Longer term, however, a generation of younger consumers is not choosing the mega banks. This exacerbates the growth problem and becomes a vicious circle of striving for new revenue and growth. The frustrating thing about stories like this is it means the 10s of thousands of employees doing amazing but thankless work like preventing global financial crime will get overlooked. This is a curse on big bank culture, not staff.

🤔 The best way to drive new revenue is a combination of fundamentals and long-term investment. Very few banks have consistently invested in new business lines and grown all of their key indicators since the financial crisis. Keeping shareholders on the side is hard when they view banks as yield stock. Chase was punished by the market when it announced it was doubling its tech investment 18 months ago. Now it doesn't look like such a bad idea. Every bank has pockets of innovation and growth, but few have the long-term leadership and shareholder belief to do that consistently. (To be fair to BofA, they announced a 15% surge in tech spending late last year and are doing well in its trade and treasury business but this is keeping up with the market rather than leading)

According to Bloomberg, Monzo, the UK-based mobile-only bank with 7.5m customers, is holding talks to acquire Lunar, the Nordic bank with 650k customers, as a part of its European expansion. 

🤔 Feels like a test balloon. Monzo might be in talks, but if they are, I bet they're early, and this leak feels like a "hey, we might be acquiring so who's available." This isn't a bank with a track record for M&A, but it could be good timing.

🤔 Monzo's ambition was always to be much more than a UK-only bank. Their first-ever investment deck read "the first bank for 1 billion people." The hope was digital technologies and open banking might create a new future. 

🤔 Would this be a smart move? After going through several growing pains, and a stalled US expansion, the temptation might be to consolidate in the UK and expand the product range. But I like the ambition. Monzo was always a brand that tried to do the impossible and did so with panache (great word). 

🤔 The Brexit reset. When Brexit happened, several UK-based banks re-examined their ambitions to be pan-European. Revolut, as a non-bank in the UK, could continue to scale across the region, and local competitors began to dominate their regions.

🤔 Is this opportunism? Fintech companies might have great teams, licenses, technology, and products that are struggling for profitability. Despite that, it feels out of character for the bank. Monzo hasn't been acquisitive; they're famously engineering-led and use very few external suppliers, preferring to build in-house. No doubt Lunar would accelerate their Nordic market entry, but perhaps the market timing has helped here too.

The Southern District of New York ruled on Thursday that the sale of Ripple's XRP tokens on exchanges and through its algorithm did not constitute investment contracts. Ripple first sold $728.9 million of XRP to institutional investors and hedge funds, and this did violate federal securities laws. However, this judgment still doesn't clarify what is and is not a security in the US. This is the best tweet thread you'll read on the subject.

🤔 An algorithm can create a token, and a consumer can purchase it from an exchange. Preston makes a good point in the thread above that this judgment has limited precedent value, but I'm hopeful we will see this idea become the norm. We should be able to create new forms of value and have those be the basis of infrastructure. I don't want to see obvious attempts to pump and dump those tokens on consumers. Ever.

🤔 The US needs new consumer protections for Crypto and the standing SEC law, isn't it. Expect legislation. There has clearly been consumer harm in the wider Crypto industry, but the tools regulators have to try and fix often involve trying to classify the thing before they can take action. The big problem with tokens is they can behave like many things, and that's a feature, not a bug. That's why the UK has classified it as neither an investment contract nor property; it's a 3rd kind of thing.

Alexander Mashinsky was arrested on Thursday for fraud charges with bail set at $40m. The CEO of the bankrupt lender pleaded not guilty to 7 counts of misleading investors and price manipulation. The bankrupt lender has also said its $4.7bn settlement with regulators will "not affect its plans to recover customer funds." 

🤔 It's too early to say how this specific case plays out. But when combined with the FTX bankruptcy, we should be in a place in 6 months where the big cases are coming to a conclusion

🤔 Legislation and clarity are sorely needed. Regulation is working in egregious cases, but we need thoughtful legislation for consumer and investor protection. There are great lessons to be learned from international jurisdictions. I happen to live in one. But I'd also point at Dubai, Singapore, and especially Hong Kong.

Good Reads 📚

Jason summarizes a report by the Fisher College of Business that analyzed 2.3m loans made by "Fintech Lenders" from 2014 to 2020. It finds that Fintech lenders heavily rely on FICO scores, charging a higher price to subprime and subsidizing prime. Jason asks, "is charging subprime higher the key lending innovation" and concludes that no, novel products like earned wage access are much more innovative. He notes the report only looked at term loans and did not consider other categories.

🤔 The gap left by banks is filled by Fintech companies that are a massive upgrade on payday lenders. I'd rather have Fintech companies charging a premium to an underserved segment than low-income segments only being able to borrow from loan sharks. 

🤔 Would banks lend more if regulation allowed? The report authors speculate regulators pushed banks away from this segment, which aligns well with banks complaining of the "lack of a level playing field" vs. Fintech companies. 

🤔 I agree with Jason's broader sentiment that cash flow and payroll-linked lending are much more exciting. These areas are only just being considered by the large banks but are the norm in Fintech companies. I'd love to see a report and similar data into these techniques. 

Tweets of the week 🕊

That's all, folks. 👋

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Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a (3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only. (4) I'm not an expert at everything you read here. Some of it is me thinking out loud and learning as I go; please don't take it as gospel—strong opinions, weakly held.