Fintech 🧠 Food - Sep 2nd 2022 - Is Crypto a scam or just full of scams? Klarna results, Ticketmaster does NFTs and the trouble with real estate Fintech.

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Hey Fintech Nerds 👋

As I sit back and look at the industry today, a few things are happening simultaneously. It feels like the global south is getting new infrastructure APIs, whether LATAM or Africa; that's exciting to create a new generation of companies. 

It also seems that post-pandemic, Fintech is one big global community. The capital is still US-centric, but it's deploying everywhere. And that's a good thing for ecosystems with an entrepreneurial spirit but lacked capital and experienced investors. 

Meanwhile, Europe and the US correcting and getting used to high inflation and a high cost of credit. Lending is sexy again. Yet everyone is sour on BNPL. Those two things feel contradictory to me.

And over the horizon, Crypto is still there. Not dead; brands are still experimenting with it, but the hype has gone, and it's not in the mainstream media. That's good, but we must make it usable for the mass market in this quiet period.

Some folks need an enemy.

Is Crypto the enemy of financial services?

I’m not so sure.

Famously Michael Jordan would hype up an enemy in his head to perform better. Maybe for an individual, that can work, but for companies, teams, and industries, it’s destructive. TradFi isn’t the enemy of Crypto and vice versa.

I think we can have nice things if we look for opportunities to win together instead of pointing fingers.

This week's Rant is about how we can make Crypto better, and in things, I cover Ticketmaster doing NFTs and Klarna's results. 

Have a good week, everyone (and long weekend if you’re in the US).

I'm out next week on vacation, so Brainfood will be back on the 18th Sep! 

Weekly Rant 📣

Is Crypto a scam or just full of scams?

This week, Coinbase, FTX, and Binance received letters from the House Committee on Oversight and Reform asking what those companies are doing to protect consumers from scams and fraud. 

One democrat called out "the lack of central authority to flag suspicious transactions," the inability to reverse transactions, and consumers' general lack of understanding "make cryptocurrency a preferred transaction method for scammers."

I agree consumers lack understanding and that transactions are irreversible, but that’s not something a central authority needs to solve. It’s something the industry needs to solve.

Separating the good from the bad.

Crypto is simultaneously the most sublime and ridiculous subject in the world. There are hacks, scams, frauds, and the worst of all things. But there's also some of the most incredible innovation, talent, and possibility I've ever experienced (as you can probably see, I can't stop ranting about it). 

1% of Crypto is the best of us. It's a thoughtful Vitalik Buterin, privacy-preserving technology, an upgrade to the global financial system, and new business models that empower consumers and businesses. 

99% of Crypto is scams; rug pulls, hacks, and shitcoins. It's Axie infinity being hacked, Luna imploding, investors managing risk like degenerates themselves (*cough* Three Arrows *cough*)

Both of those things are true.

But Crypto has a power law. And most of the capital and attention ultimately ends up in the most credible places.

So how do we make this situation better?

Several things are going on at once (as always). So let's unpack.

• Skyrocketing prices attracted users to Crypto.

• And where there are users, there are fraudsters.

• And they have many attack techniques.

• Fraud is an unspoken rite of passage in financial services, but it doesn't have to be that way.

• Crypto is the financial system's digital twin (h/t Fintech Blueprint for that line) and will solve real market problems.

• But we only get the benefit if we work together to make it better

Crypto got pretty close to the moon 🌙

Bitcoin was over $60k, Eth flirted with $5k, and tokens like Solana went parabolic, going from $3 to over $100 through 2021. Coinbase added 42 million new consumer users in 2021; Crypto.com, FTX, and Coinbase all dominated the Superbowl with ads and sponsored just about every sporting event and stadium known to man.

If that's not mania, nothing is, and it is clear that it wasn't sustainable. 

Where there are users, there are fraudsters.

The critics of Crypto have a point. Especially when it comes to scams and fraud. While everyone was distracted by the price rise, the FTC estimated US consumers lost $1bn to fraud. 

This list of the top 10 Crypto scams is incredible. For example, OneCoin is estimated to have scammed more than $4bn from consumers. This story is so unbelievable that a friend of mine, Jamie Bartlett, created an entire podcast series dedicated to it, and if you haven't heard it, I promise you it's your new obsession. 

The problem with Crypto fraud is it impacts everyone. 

CeFi exchanges and wallets suffer fraud losses, regulatory fines, and possibly lose access to their banking partner (which could be existential). DeFi wallets lose access to all on-ramps and fiat supply points. Fintech companies and financial institutions see Crypto as a black hole that creates costs and a bad user experience. 

It blew my mind to learn that, on average, 55% of attempts to fund Crypto wallets with cards are declined (shoutout to Adi at Sardine for that stat). That's because banks are de-risking the sector and so much fraud. But when declining fraud, you're also turning away legitimate customers. Lost revenue for exchanges, complaints, and costs for financial institutions.

We can make this better.

But only if we understand the attacks.

Some examples of scams and fraud.

Fraudsters have several main techniques to trick users, and it's worth arming ourselves with knowledge of what they are so that we can fix them as an industry.

• Rug pulls: A developer creates a token and begins to "wash trade" (keep buying the token from themselves with different accounts) on smaller exchanges to pump up the price. Investors and telegram groups notice this, so they'll try to pump the price further before insiders vanish with the funds. Chainalysis says this type of scam represents 37% of scam revenue in 2021. 

• Fake advisor scams: An attacker pretending to be a financial advisor or from tech support contacts a user promising riches or to help them access the Crypto markets. Targetting with the elderly, they "help" the user create an account with remote screen sharing software before blanking out the screen and stealing the user's funds. (Note, this is a massive issue for the whole of financial services, not just Crypto).

• Giveaway scams: Ever seen "enter now to win 1 ETH" on Twitter? Chances are, that's a scam. It might be brazen and ask for something like your wallet recovery phrase (the 16-word phrase wallets like Metamask give to users to help them get back into their wallet). Or it might do something clever like wallet sweeping.

• DeFi wallet sweeping: A bad actor assigns a script to your DeFi wallet and monitors the Blockchain for any transactions associated with that wallet. Any time it sees a transaction, it can intercept and create a new transaction before the user realizes what happens. This type of hack can appear to the user as if a Crypto buy or sell just failed and the money is in a black hole.

• Phishing scams: Phishing in Crypto looks like elsewhere; you'll receive an email with a link to a website that looks like a Crypto exchange but is designed to get you to enter your secure login credentials so they can be stolen.

(Note, with the possible exception of sweeping, most of these attacks happen in TradFi, ultimately, this isn't a Crypto vs. TradFi thing. It's good guys vs. bad guys thing.)

There are many potential solutions to each of these, but first, we must recognize that:.

Fraud is the unspoken rite of passage in financial services.

Last week at Fintech Devcon, a panel of absolute luminaries talked about "what they wished they knew about fraud at the start of their careers." 

And I think it's stuff we should all know. 

I loved this from Shamir (CEO of Sila and founder of OG Neobank Simple); when asked, "when did you learn about fraud?" his response was, "When I saw we had lost about $400,000 and had no idea it was happening." 

Lesson: You will get hit by fraud as soon as you go live, and if you can't detect it, you'll lose money without knowing why.

Tommy Nicholas, CEO of Alloy, had a killer line "Fintech and Crypto have excellent fraud market fit." As growth companies with tech backgrounds, early-stage Fintech companies often focus on customer acquisition and security. Very few entrepreneurs create a company to prevent fraud; they do it to solve a problem.

Lesson: Naive builders are targets for fraud

Soups Ranjan, CEO of Sardine, added, "most of your fraud will come from your own customers, what we call first-party fraud." We seem to think that KYC means we've done compliance, but that's not the case. People will sign up for accounts with their real identities and claim, "Oh, the ATM never gave me the cash," or start buying things and sending chargebacks claiming e-commerce merchants never delivered the goods.

Lesson: Where fraud comes from isn't always obvious.

All of this will only get worse as money increasingly becomes real-time. As money gets faster, the ability to reverse what went wrong gets harder, and customers are shit out of luck. 

CEO of Orum Stephanie Kirkpatrick finished the panel with two killer points with a call to arms that, as an industry, we have a responsibility to step up and make that possible through educating each other and our users.

Lesson: It's not the fraud team's job to stop users from getting scammed; it's yours, mine, and everyone.

EDUCATION is on all of us

(Side note: keep an eye on the Fintech Devcon website because they will publish this panel, which was incredible).

Crypto still has enormous promise.

In the bull case for DeFi (Brainfood, 3rd July 2022), I outlined that Crypto is a parallel financial system that is

1. Natively global. Instead of getting stuck at each border, it works the same everywhere (or should, but regulation might kill that). But historically, the only way to prevent that was to have a nation-state and law enforcement catch the bad guy. We could do more together, but we must partner across global borders instead of thinking nationally.

2. Natively digital. Programmable money and programmable assets could automate every kind of transaction and contract. But programmable money creates many new attack vectors; we need ways to increase confidence in what is being published and used.

3. Permissionless. Anyone can build a smart contract, wallet, or application, just as anyone can build a website or send an email. Permissionless will reduce the cost of innovation, but only if we flush out rug pulls and scams.

4. Composable. Anyone can build on top of another service. E.g., Uniswap (exchange) + Aave (lending market) + NFT escrow = NFT lending marketplace. Composability can create waves of innovative new financial services products if we can set a high watermark of financial responsibility.

5. Transparent. The US Government doesn't know precisely how many US Dollars are transacted daily, but this Dashboard from Dune shows the precise amount for Stablecoins. Transparency can help root out bad actors if we balance privacy adequately. 

These attributes will be a game changer, but only if we act as an industry and community to flush out the bad actors.

I overheard someone on a podcast say that email used to have a spam problem, and now largely, that's gone away. Scams, hacks, and fraud are much gnarlier than spam and require much more coordination than a few email clients auto-filtering things.

Let's solve this together.

Many solution providers are working to solve these challenges, but unless we all get a lot smarter, we're going nowhere fast.

TradFi folks, Crypto isn't your enemy; talk to them, work with them, don't hate, collaborate.

Fintech and CeFi Crypto folks, you will get hit by fraud, but so are all of your peers, and if you reduce it, TradFi card issuers will stop declining cards as often. Don't hate; collaborate.

Oh, and DeFi folks. Being "non-custodial" doesn't let you off the hook. Metamask wallet warnings are a good start, but what else could we do? 

If we solve this issue, we improve the industry reputation and maybe just maybe get to deliver on its promise.

Besides.

If you could prevent someone from losing their life savings, would you?

Me too.

ST.

4 Fintech Companies 💸

1. Front - Digital Broker Aggregation and Advisory

Front provides access to various brokerage accounts (like Robinhood, E*Trade, Coinbase, and TD to provide users with a single view of their portfolio. Front then scores your portfolio based on diversity of holding, risk, and your goals. It backs this up with market data, community, and the ability to "follow" power users. 

• 🤔 The great Fintech rebundling is upon us. As users have more Fintech apps, they need more aggregation. The real-time, no-fee stock bubble of 2021 is firmly behind us, and perhaps old-fashioned long-term investing is back. Robo was slow and hard going, but this is more interesting. Aggregate the accounts users already have and then potentially cross-sell them things that are missing from their portfolio. Front is legally a digital investment advisor; what's unclear to me is if they'll fall for every advisor's trap, which is only selling the funds that benefit them the most.

2. Method - The debt management API

Method allows developers to verify, connect and pay user debts through an API and create experiences like balance transfers or debt payment automation. Method bakes in compliance requirements (like KYC, account validation, and payment confirmation). 

• 🤔 As Fintech pivots into lending, APIs built to solve lending use cases make a lot of sense. For example, balance transfers are a key customer acquisition tool for credit cards but are often manual and painful for the card issuer. That as an automated API is a massive time and cost save for the Fintech company. Or sometimes, just tracking what balance needs to be paid on what due data is painful for consumers. Why not automate that and make sure debts are always paid on time? If everything is lending, everyone needs a lend management API. 

3. Knot - The switch everything API 

Knot's first product, "card on file switcher," solves one of the users' largest anxieties about direct deposit switching; "what will happen to all of my subscriptions and bill pay." Card on file switcher automatically updates your card information at merchants like Starbucks, Netflix, or Amazon. Knot will also have a subscription canceller and a password changer (especially useful if a password you use has been compromised and you're not a Lastpass user). And "account creator" allows the creation of an account on a merchant site immediately with autofill. 

• 🤔 This is the logical step after Payroll APIs, find all of the objections users have to switch and automate them. Knot is well named, its finds all of those gnarly little problems and aims to solve them. I sense the magic here is actually "Plaid for merchants" (like Rutter) but packaged as use cases. I could imagine consumer Fintech companies using this to win more share of wallet, especially Neobanks who don't yet have the direct deposit. 

4. Anchor - Unit for Nigeria

Anchor works with multiple bank partners and Fintech providers to package accounts, savings, investments, cards, and payments into a single platform. Fintech companies and non-bank brands can offer these products in minutes through a single developer platform.  

• 🤔 Banking-as-a-Service is a loaded term; historically, it meant debit cards or credit cards with BIN sponsorship offered as an API, but today the picture is much more complex. For me, Unit (and Treasury Prime and everyone I forgot) are a good case study for going multi-bank, multi-product via a single developer platform. That's a value-added to developers and Fintech companies because cross-selling becomes much easier. Bringing that to Nigeria (and then expanding) makes much sense as consumer Fintech in the region is exploding in popularity.

Things to know 👀

1. Klarna losses triple as it expands in the US

Klarna reported a pre-tax loss of $580m, up from $170m in the same period a year earlier. Revenues hit $950m (up 24% YoY). Operating expenses were driven up by increased credit losses in the US and the acquisition of the shopping comparison service Pricerunner. Klarna had been profitable until 2019, when it began expanding into the UK and USA, driven by venture capital. 

• 🤔 Klarna laid off 10% of its workforce and is tightening lending to new customers, but the founder said in a quote to CNBC the benefit of that will come later. Headcount reductions don't show up in annual reports immediately, but the short-term nature of BNPL loans means their balance sheet can look healthy quickly if they change their credit policy. 

• 🤔 The fact that they're tightening lending suggests they use looser lending as a customer acquisition tool. And this is what gives many people cause for concern with BNPL as a category. Hook someone on cheap borrowing, and then have them come back for more. The long-term non-performing loans (NPLs) for BNPL as a category isn't a known number like credit cards (which the St Louis Fed reports on). 

• 🤔 But ultimately, it can be great for users. What's important is that customers' overall financial health improves over time rather than declines. Credit cards with 0% balance transfers can be tempting and create a persistent debt cycle. Whereas typically, BNPL gives consumers a sense of control, that one line of credit for that one thing (like clothing). As BNPL starts to add credit scoring and open-banking-based underwriting, I think it will also find its equilibrium. 

• 🤔 And BNPL can be profitable too. Klarna has already proven it can make a profit when not expanding into new markets and competing with well-established competitors like Affirm and Afterpay. The market correction is forcing BNPL providers to switch from growth at any cost to proving their underlying business is sustainable, and I think that's a net positive. 

2. Ticketmaster partners with Dapper for NFT Tickets

Event ticketing company Ticketmaster will use the Flow blockchain (famous for NBA Topshot) to mint tickets as NFTs for select events. The NFTs will be collectible memorabilia and also function as "proof of attendance." Ticketmaster isn't going all-in but is keen to see how events perform and move from there.

• 🤔 I guess NFTs aren't dead just yet. I was doing some day job stuff earlier and saw NFT marketplaces are averaging $16m in sales per day. If they're not going away, where do they fit?

• 🤔 NFTs are assets with functionality that exist on a global, open CRM. The asset (like a ticket stub) can be used in the future after the event (so you could access another event for free or be airdropped with 1st-anniversary memorabilia). And because the CRM is global in theory, any developer can interact with someone who attended that event. Want to target anyone who attended the last Superbowl? Here's your CRM.

• 🤔 Where do you store the festival t-shirt from a one-off metaverse event if not your web3 wallet? Festival t-shirts, mission badges, and ticket stubs have all been collectibles humans value as event memorabilia for decades; having a digital version of this is a logical step, especially as we enter the metaverse. 

• 🤔 Imagine if the tickets were NFTs, they could be sold on any secondary marketplace. That way, the ticket seller always has the option of a fair price, the buyer has some confidence they're getting a legitimate ticket, and the issuer is making a % of the secondary sale. Scalpers would have to work a little harder to sell an NFT ticket, and if they did, that fraudulent transaction would be visible forever on a Blockchain for investigation and follow-up.

🥊 Quick hit: Jiomart and Whatsapp live with shopping in India. Jiomart is a subsidiary partner of the largest retailer in India, Reliance Retail, and Jio, the largest mobile operator Jio (who are both parts of the Reliance family of companies).

• 🤔 This is like partnering with Amazon Marketplace, AT&T, and Doordash in one move. Amazon itself has struggled to enter the Indian market, and Meta has struggled to establish Whatsapp. Its clear partnerships are the way forward for western big tech. Whatsapp is very popular in India and now has a real opportunity to establish itself as a retail and payments player. 

Good Reads 📚

1. Real-estate Fintech is in trouble

The pandemic created a boom in re-locations, home buying, and extensions as people looked to change their living situations. Real-estate focussed Fintech companies hired incredibly fast to keep up with the new demand they saw in this real-estate gold rush. As interest rates rise and the market corrects, demand has reversed, and the Fintech companies are now laying off anywhere from 20 to 30% of staff.

• 🤔 Mary-Ann argues for a return to a "lean-and-mean" focus on the startup runway and burn. I agree, but I can see how Fintech companies fell for this trap. It wasn't clear the pandemic would end, and it's tough to turn away customers and revenue. 

• 🤔 The problem was that many "me-too" Fintech companies were flush with VC cash, competing for the same customers with giveaways and risks like "buy before you sell" offers. Things that help you stand out in a bull market can crush you in a bear market.

• 🤔 But we do need innovation in real estate, not just making it easier to buy properties but the whole ecosystem around property management and rent-to-own. Most consumer wealth is concentrated in their retirement fund and home. If we want more financial inclusion and better long-term outcomes, we need more homeowners and more ownership. 

Tweets of the week 🕊

That's all, folks. 👋

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