Fintech 🧠 Food - Sep 20th

This week; BaaS 2.0, Brex for Australia, all of the funding rounds, and how changing access to capital changes the game.

Hi Fintech nerds 👋

As you zoom out: Fintech keeps setting valuation records. Its earnings momentum is phenomenal. Meanwhile, Mckinsey seems to think "fintech faces an existential crisis" lol. Yet across the world, big banks comfort themselves with all market share and none of the earnings growth. What does it all mean?

The infrastructure is shifting: We see the emergence of the second generation of fintech infrastructure companies (as Ian Kar points out in this essay), taking Bank-as-a-Service to a whole other level. More instant, cheaper, and faster. Sometimes this is turning into unique products for consumers, sometimes not, sometimes it's producing art. Regardless, this democratization of creating financial products and services is a game-changer. 

But so is how capital is formed and distributed: What's excited me this week isn't embedded finance or a really great identity / B2B infrastructure. It's the possibility of rethinking capital aggregation and distribution. Most people are looking at Defi for this, but the space for a crazy idea in fintech proper is absolutely there.

As always, 4 Fintech's, my news highlights, and good reads.

Ps. Pls share the 🧠 food :)

4 Fintech's 🤑

1. X1 card - The Metal Gen Z Rewards Credit Card

  • This card is built on, which is for me the story. Bank as a Service has been slow, expensive, and involved a ton of vendor lock-in. looks to solve those pains and is becoming a default choice for fintech entrepreneurs.

  • The APR is competitive, so is the balance transfer fee; there's no annual fee and virtual card capabilities. But this looks like an apple card copy + paste. It's not clear why this is any better or worse than anything else?

  • X1 claims to be "limitless by design" because they give you a higher credit limit, and if you use less of that higher credit limit, you can boost your credit score.  

  • The finance nerd in me hates this. Using less of your available credit is good for your score, but giving higher credit limits to people who don't need them can cause financial distress.

2. Card v card - "The first competitive multiplayer bank account."

  • Card v Card releases access codes periodically (nobody knows when), and the users compete to spend all of the cash in the account before the money runs out.

  • It's like if Black Mirror and fintech had a baby. So it's not really a fintech, because the intent here isn't to build a consumer product, but to make a commentary on consumerist culture and frankly send up some of the ridiculous fintech product's being launched lately (👀 @ x1 card).  

  • It's another one using (see a trend here?). The sheer amount of companies trying to drive instant issuance into the market is astonishing. We'll see a wave of creativity when anyone, including artists, can make a fintech. Second Gen BaaS players coming from Bond, Unit (and just broke cover Apto Payments) are reshaping what's possible for entrepreneurs and creators.

3. Cape - Brex for Australia 

  • Cape is positioned to unlock working capital and boost cash flow.  The idea is that a small business prevents working capital loans and uses credit cards and BNPL loans instead. This card comes with baked-in points and the ability to issue sub-accounts as expenses cards for staff.  

  • Cape is also planning to add revenue-based financing for high growth and e-commerce businesses underserved by Australia's big banks.

  • Built by Ryan Pritchard-Edwards, the former MD of Funding Options in the UK, and Neyber / 11:FS alum Edo Omonyi (👋), the team is small, early-stage, but the Australian market looks wide open for this play. (PS. If these guys do a 5-a-side soccer team, it will be 🔥)

4. Swan - Bank as a Service for France 🦢

  • Swan is a new BaaS provider for France that's a one-stop-shop. Swan an e-money license. Meaning it can't issue credit lines, but it can directly handle many risks (e.g., KYC, fraud, etc.).  

  • They also provide IBANs, so if you're a brand using Swan, your users would not only have a card, they'd have a bank account number that works internationally (or at least across Europe and Asia).

  • There is a burgeoning Fintech (and tech) scene in France that Swan could fit neatly into, but the BaaS space is arguably not as advanced as the USA. Societe Generale acquired competitor Treezor, and while they appear to operate independently, space for a strong BaaS provider in France and across Europe could be wide open.

Things you should know 👀🧠

1. All of the funding rounds happened 

(Various sources)

  • Chime valued at $14.5bnNeobank Chime is now the largest consumer, fintech. The valuation is now more than 9x what it was 18 months ago. Chime says they're now profitable on an EBITDA basis. They've not yet fully been granted their charter, but with Varo and Jiko out in front, it seems like a matter of time.  

  • 🤔 My analysis: Contrast this with the share price performance of banks as an index.  Investors are buying momentum and growth, while megabanks worry about market share in their sector.

  • Alloy raised $40m for it's "identity operating system": Their system does more than just onboard customers digitally; it handles transaction monitoring (e.g., did that customer do something that looks illegal), case management, and alerts - the tough stuff.  

  • 🤔 My Analysis: Look at Alloy's customers, Brex, Marqeta, Radius bank; they're quietly powering some of the new generations of fintech's that are scaling at speed. Regtech and B2B fintech is a great place to be.

  • Affirm raises $500m: Affirm partners with more than 6,000 merchants to offer "buy now pay later" at the point of sale. This super low friction experience type of credit increases sales for merchants and affirm used masses of data to train its affordability and underwriting engine to have significantly lower losses than the industry average. Oh, and Klarna raised $650m at a near $11bn valuation.  

  • 🤔 My Analysis: BNPL is here to stay, but is there room for a second-gen of these BNPL companies? Or is it a winner take all market?

2. Crypto exchange Kraken is a bank (Finextra)

  • "Cryptocurrency exchange Kraken has secured a bank license, with Wyoming's approval to create a special purpose depository institution (SPDI). "With the charter in place, we can operate a fully independent bank that will reduce our reliance on third-party financial institutions and even help launch a new wave of innovative products for our users."

  • 🤔 My Analysis: This isn't what it seems. The Wyoming charter requires 100% of all reserves to be held in custody.  For most folks in crypto, that's a feature, not a bug. For Kraken, the real advantage is about access to the payments rails, reducing their costs. It may also give big institutional investors who wanted to get into crypto some comfort that their assets will be safely guarded. Although, the OCC did recently announce any bank can hold crypto

  • 🤔 My Analysis: This is more about making what Kraken already did more efficient.  Although it seems to me like everyone wants to be a bank until they are, then they see that getting a license is hard, keeping it is harder. Make no mistake, though; crypto is mainstream. The CeFi exchanges like Kraken and Coinbase are making significant inroads as the on / off ramps for crypto to the old finance world.  

3. There's an API for interbank rates from JP Morgan and Clearbank (Finextra)

  • Tools like Currency Cloud allow fintechs (and non) to have competitive FX rates that they can integrate simply. As that business scales, fintechs then often make an effort to integrate into the banks aging infrastructure to reduce operating costs. In effect, it's worth the effort once you have scale, but it's not easy to do.

  • 🤔 My Analysis: JP Morgan and Clearbank just cut out a layer of infrastructure by offering a full client money account and FX API at interbank rates.  Interbank rates are the equivalent of cutting out the retailer and going straight to wholesale.  

  • 🤔 My Analysis: This is cutting much closer to the low-level infrastructure of correspondent banking and underlying accounts with an API. Fintech's could build differentiated pricing and international payment capabilities with this API. It's also intriguing to think about how non-fintech's would use it—score one for the banks.  

Good reads 📚

1. The New Bank that Could Change the Game - 

  • "Jiko Group became the first fintech to buy a national bank. Who cares? Say its founders. For them, that's not the sexy part. Combining a broker-dealer account with a banking account and a debit card creates a 'non-deposit deposit' that turns safe Treasury bills into everyday spending money. But this may just be for starters as the founders set out to build something 'awesome.'"

  • 🤔 My Analysis: Jiko has done something genuinely new and exciting to me as a fintech nerd. When you put a deposit in a bank today, that bank then, in turn, takes that in buys Treasury bills (making a spread in the process). In banking (and investing), Treasury bills are used just like cash. Jiko's insight is, why can't consumers, and more excitingly, corporates buy T-Bills directly?  Well, you need access to the underlying infrastructure, and for that, you need a banking (and broker-dealer) license.  

  • 🤔My Analysis: Merryl Lynch tried this idea in the 80s. Whether Jiko is a flash in the pan or a step-change remains to be seen. But, I get excited when people rethink the assumptions of the banking business model. When they read the regs, they understand the infrastructure and get licensed. 

  • 🤔My Analysis: Trust me when I say if they get this right, CFO's will lose their minds for Jiko.  Banks are slow, painful, and barely add value for some of the biggest corporates; they're a necessary evil more than trusted partners.  If Jiko plays it right and lands in the right places, this model could be really disruptive. It will remake the industry, or it won't; the risk here is that Jiko early rather than wrong.

2. A Tale of Two Stocks (Blog on Embedded Finance by Ajit Tripathi)

  • "You can't wrap an old business model on top of a discontinuous technology change and win. You might survive for a bit depending on existing barriers to entry, but you definitely won't lead, and you most probably won't thrive."

  • 🤔 My Analysis: The banking industry's performance as an index since the financial crisis has been awful, and since the pandemic, the worst of all sectors. Banks benchmark themselves against each other and not other sectors. This is a mistake, and the people selling them advice are profiting.   

  • 🤔 My Analysis: The hardest thing to innovate is the business model.  Banks have seen "innovation" as solving a creativity or delivery speed problem. In reality, they don't have that problem, their apps are not bad, and their market share is growing.  

  • 🤔 My Analysis: Banks have some incredible assets the market wants to consume as a commodity. They seem to be fighting the trend rather than embracing it as a platform.  Maybe it's time for a crazy idea here and recognizing what banks do well. It's not distribution. Investors are buying earnings growth, and banks cannot show that. Maybe there's a crazy idea in there somewhere...

Tweet of the week 🕊

John Piazza covering Apple Cash Family: 

That's all, folks. 👋

So, how are you feeling? Is fintech facing an existential crisis? Or just getting started? Big themes for me this week

  1. Second generation fintech infrastructure companies are coming of age.

  2. Baking in compliance with BaaS providers takes away the pain in the short term but at the cost (potentially) of long term flexibility.

  3. Being able to quickly and affordably create a B2C fintech doesn't mean it will succeed, but it does unleash creativity.

  4. The fascinating stuff is happening at the deeper infrastructure layers as the megabanks go live with APIs. 

  5. Big banks have assets they undervalue and have confused market share in a shrinking market, with growth.

  6. Although there are now some dabbling in real-time APIs and showing what could happen if they enabled the market change rather than fought it

  7. Fintech has never been more exciting

Til next week :)