Fintech 🧠 Food - The Complex Future for FedNow

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Hey Fintech Nerds 👋

Everything is RTP.

It has been a big week for real-time payments in the US. Plaid announces Plaid Transfer; Visa debuts Visa+, and by all measures, FedNow should begin rolling out in July. Then Twitter partners with eToro for stocks and crypto purchases. With Bitcoin over $30k, it may not be dead just yet.

Faster payments are the new default, but faster payments won't be a payments nirvana. They create new risks like scams, and in many markets, they reduce the revenue and margin for payments providers. 

Meanwhile, UPI, Pix, and the rest of the world with Faster Payments are attempting to link their payment systems together internationally and have been battling these market dynamics for some time. There's a ton we can learn by looking internationally. But of course, the US is always an exception, for better and worse. That's the focus of this week's 📣 Rant, and I cover Visa+ and Plaid Transfer in Things to Know 👀.

AI and LLMs, in particular, are slowly gaining traction as the compliance team's manual work and investigation buddy. I love the idea of chat as a compression algorithm for complex tasks. This new hype no doubt has every large corporate starting a flavor-of-the-month project to work with LLMs. While some banks block it, Bloomberg launched its own LLM, which is impressive by all accounts (covered below too).

And as everyone forgot about Crypto, Twitter announced stock and crypto purchases. Banks are taking tokenization seriously, and Bitcoin crossed $30k. There's less hype now, but just as much real progress. That's exciting. Tokenization is going to be a game changer.

Now grab a coffee, sit back, and let's dive in 🏊‍♀️

Here's this week's Brainfood in summary

📣 Rant: The Complex Future of FedNow and RTP

💸 4 Fintech Companies:

1. Zamp Finance - Brokerage as startup Banking

2. Unipe - Earned Wage Access (India)

3. Loanscout - Data tool to identify lending prospects

4. Effectiv - Fraud and Risk Workflow 

👀 Things to Know:

1. Visa launches Visa+ to make P2P payments interoperable.

2. Plaid launches instant payouts

📚 Good Read:

1. a16z State of Crypto 2023

Weekly Rant 📣

The Complex Future of FedNow and RTP

Thesis: The launch of FedNow this summer has excited the Fintech world because it introduces government-mandated real-time payments (RTP). But don't pin your hopes on this launch, or you'll be very disappointed. 

Christmas/Diwali/Eid is canceled. 

FedNow isn't the droid you're looking for.

But it is absolutely going to change the payments landscape.

As a native of the UK, I've experienced faster payments for the last 15 years and often like to joke, "Hi, I'm the ghost of Fintech future," but this tweet from Tom Noyes captures it nicely. There's a lot we can learn from RTP by looking internationally.

Real-time payments are table-stakes for a modern economy, and they will dramatically reduce the cost of moving money for consumers and businesses. The introduction of FedNow will shift the payments landscape by undercutting banks, payments companies, and closed-loop wallets. 

But 

RTP will reduce some risks (like insufficient funds fraud) but introduce new ones (like scams). The US is a weird animal with many competing payment rails and a complicated banking sector. 

International successes came with concentrated banking markets, governments that could enforce adoption, and willingness to accept trade-offs (like no taxation in Brazil).

Will the Fed wield a stick big enough to make this happen?

The US is an exception to almost every norm. 

That is both its biggest strength and its most infuriating challenge. It defaults to private sector solutions co-opted by the government and layered over the web of aging infrastructure and laws. 

So let's unpack 👇 

1. Why do we want RTP

• Instant payouts are meaningful to people

• Instant liquidity is amazing for merchants

• Promotes financial inclusion

• Safer for vulnerable consumers

• Reduces certain types of fraud

• Increases GDP(!)

2. Whistlestop tour of international RTP models

• a) The UK / Singapore / Australia "Faster Payments model."

• b) India UPI model

• c) Brazil PIX model

3. Lessons from international RTP

• a) Faster payments markets tend to have concentrated (not fragmented) banking sectors

• b) India had a national identity scheme and removed 90% of cash from circulation

• c) Brazil mandated the use of PIX and aimed to solve huge social challenges (like Brazil)

4. US Exceptionalism is why we can't have nice things (RTP)

• a) The US regulatory structure is fragmented: 

• b) The US banking sector is fragmented

• c) The US already has RTP rails

• d) The US government often takes decades to implement banking sector changes:

• e) The US has the world's most dynamic private sector, already solving many of the RTP problem space

5. Things everyone forgets about FedNow

• a) Not all banks will be ready

• b) Push to card is a thing

• c) Wallets matter:

6. What happens next

• a) Don't expect a stampede

• b) Mo' payments rails, Mo' problems

• c) Fee compression (maybe!)

• d) Further out, the Fed can achieve multiple objectives (bye checks)

7. Closing thoughts

1. Why do we want RTP

Real-time payments are a must-have in the 21st century. We can instantly communicate at the speed of light, stream movies, and now AI can write stories. But in some countries, moving money can still take three days. 

• Instant payouts are meaningful to people: RTP That means a consumer with an insurance payout can begin rebuilding their life immediately. Or imagine your friend calling you in an emergency. You can instantly send a P2P transfer to help them out. 

• Instant liquidity is amazing for merchants: It also means a business who have sold a product gets its cash immediately instead of waiting days for it to clear, which is vital in industries like retail with razor-thin margins.

• Promotes financial inclusion: The Gig worker gets paid immediately, and the immigrant can be paid into a digital wallet even though they don't have a home address. This grey economy sector used to live in cash which is often less safe. In Brazil, 60% of the population works in the informal economy; PIX is designed to reduce that reliance on cash and promote safety.

• Safer for vulnerable consumers: Checks and cash can be stolen by abusive partners or if you live in a bad neighborhood. One of the main benefits of digital wallets is that vulnerable persons regain control, and it's harder to steal. This is one of the key reasons mobile money succeeded in Africa, where women could gain more economic power, according to CGAP.

• Reduces certain types of fraud: Fraudsters and opportunists will often pay with funds available today, then quickly remove those funds before the part they're paying can collect. Exploiting the delays in systems like ACH that take 3 days to clear is one of the most common fraud attacks impacting Fintech companies (and very solvable with the right fraud partners)

• Increases GDP: According to Deloitte, real-time payments have created anywhere from 0.4 to 0.8% increases in GDP in markets like the UK, where they have been operational. 

Not all RTP is created equal, however. At the abstract level, separating closed-loop services like Venmo and PayPal from public infrastructures like UPI and PIX is important. When I think about "RTP," I'm referencing the public infrastructure instead of closed-loop wallets offering RTP (with TCH sitting in the middle).

As an observer of the US Fintech scene, many folks get excited about FedNow because it can change the landscape like UPI or PIX did. "UPI for the USA."

Reality is never that simple. India is gonna India; the USA is gonna USA.

2. International RTP models

Not all RTP is created equal. There are many models, but generalizing three major types provides a helpful frame.

a) The UK / Singapore / Australia "Faster Payments model." The UK introduced "Faster Payments" in 2008 allows consumers and businesses to send anywhere from £0.01 to £250,000 ($312k) to any UK bank account instantly and 24/7. The service can be accessed through telephone, online, or mobile banking. 

Singapore FAST allows up to $200,000 SGD, supporting QR codes and linking phone numbers. Australia's New Payment Platform (NPP) lets consumers send up to $100,000 AUD and supports linking phone numbers. 

Technically Japan and Switzerland beat the UK to faster payments, but the UK was the first to make it ubiquitous, benefitting from the rise of online banking at the same time. Over time, Faster Payments has opened to non-banks like Wise for direct participation and has become a default feature in local Fintech wallets and apps indirectly (through suppliers like Modulr and PPS). 

Today as a consumer, I don't struggle to move money domestically. If I want to send it, I ask for an account number and sort code (routing number equivalent). Or, to get paid, I offer someone the same data. There have been efforts to create a single database to link it to phone numbers, but why, when account number and sort code are good enough?

In the 15 years since launch, check and cash use has cratered. 

b) UPI (India) model: From 🧠 India the Bull Case for Fintech

UPI can be accessed from major wallets, banks, and chat applications such as Whatsapp, PhonePe, and Paytm. It enables everything from QR code payments with merchants peer-to-peer and e-commerce. To promote adoption, the central bank capped the fee service providers can charge merchants for payments at 0, limiting revenue growth potential for banks and Big Tech players. 

UPI is now India's dominant non-cash payment method (41% of all digital transactions), followed by debit and credit cards (27% and 12%). UPI only launched in 2016 and now dominates. However, the government massively helped it by introducing a single national identity scheme and removing 90% of cash from circulation.

c) PIX (Brazil): PIX was launched in November 2022 to allow consumers and businesses to make instant transfers, 24/7, using banking or Fintech apps using aliases like phone numbers and email addresses. Within a year 30% of all digital payments used PIX, and it's now ubiquitous across social media and e-commerce. Consumers can pay bills, receive payouts, and make cross-border remittances. 

When launched by the central bank, the immediate objective was to target 60% of the population who work in the informal sector. Of course, by March 2021, something else happened. A certain global pandemic made moving cash at a distance much harder and less desirable.

Before PIX, businesses needed a merchant account or acquirer to accept payments, but with PIX, they can offer a simple QR code or Alias to get paid instantly. There are also no fees for the business or consumer. Like India, the zero-fee environment limits the revenue potential of the payment type. Critics in Brazil say the central bank has harmed the private sector, competition, and innovation.

3. Lessons from Global RTP rollouts

Each market is trying to solve challenges based on its circumstances. The beauty and benefit of RTP are in the eye of the policymaker holding the legislative pen. 

a) Faster Payments have similar dynamics:

• Concentrated banking sectors: The top n largest banks in each market control ~90+% market share, and very few consumers have direct banking relationships with long-tail banks. Where the US has thousands of banks, very few markets resemble this.

• No apparent local competition: The UK and Australia didn't have large, widely adopted instant payment methods to compete with upon launch.

• Government and regulators can act quickly to enforce changes in the banking sector. This ability to decide and convince the industry to adopt is why these services succeeded. "Acting quickly" and "the government" are not in the US lexicon.

• Relatively wealthy with a large middle class: While this is true in the US, it makes these services meaningfully different to Brazil or India, where the goal is to solve massive social problems. 

b) India and UPI are near impossible to replicate in the US:

• Existing national identity infrastructure: It isn't hard to KYC and onboard people to a new payments service or app if you already have a government-sponsored, biometric identity system. Payments and fraud are usually identity problems dressed in complexity. India was able to take a short route.

• Huge social challenges to solve: India's strategic objective to remove cash and create financial inclusion. It has a massive rural population, and micro enterprises run most of the economy. Cards and their related fees are simply prohibitively expensive for most people. India had to do something else.

• Desire to ensure neither Chinese nor US big tech wallets dominated: India sits between East and West spheres of influence and is enamored by neither. As Chinese and US-based big tech companies began to invest in and enter India, India pushed back. They retain control over pricing, regulation, and market dynamic by mandating all services to use Aadhaar (identity) and UPI for payments. 

• The ability of the central government to act decisively: Can you imagine the US government removing ninety percent of all US dollars in circulation? Me neither.

c) I doubt we'll see PIX in the US, either: Brazil doesn't have the same dynamics as India, but there are similarities. It aimed to solve social problems, wanted to avoid US big tech dominance, could be decisive, and was willing to introduce zero-fee pricing.

d) The side effects of RTP: Some properties emerge in all RTP implementations

• Check and cash use fall off a cliff: Why post a check or try to send cash at a distance when it's just as easy to use your phone?

• Cards are fine: Even India hasn't seen a material decline in card usage. However, cards have lost their opportunity to dominate like they do in the US or elsewhere.

• New scams & fraud explode: Faster payments = faster fraud (tm). Scammers realize that if they trick someone into sending money, they can move that from their receiving account long before anyone realizes something went wrong. Moreover, RTP models often rely on the consumer to authorize the payment hence "authorized push payment fraud."

• Payments revenue is compressed for many market actors: Because they're offered as a utility, RTP services are intentionally low fee. Market participants that monetized payments as part of their revenue are threatened. This is intentional and creates a "level playing field." 

4. US Exceptionalism is why we can't have nice things (RTP)

The US, of course, is not India, Brazil, or the UK. It is an exception to every rule to the core. That's both good and bad. But for RTP, it's essential to understand.

a) The US regulatory structure is fragmented: The US has 5 federal regulators for banks (Fed, OCC, FDIC, NCUA, and CFPB) and 50 state regulators that oversee state-chartered banks and credit unions. This makes it stupidly difficult to get any consistency or coordination. That's before we get to the SEC, CFTC, and the various government agencies that weigh in too. 

The UK has two. 

Two. The FCA and the PRA (a division of the central bank). And the UK government believes the current UK regulatory setup is too complicated and should be consolidated 😂.

This regulatory structure makes deciding who should implement a new regulation harder than getting the banking sector to adopt it. The government can't act as fast as it does in the faster payments markets, India or Brazil. 

b) The US banking market is fragmented: With nearly 5,000 commercial banks and over 3,000 credit unions, getting near 100% adoption of anything is a challenge. While the 4 largest banks control ~50% of assets, and the top 20 is closer to 70%, the long tail matters. Local businesses and main street USA still rely on their local banks and credit unions as specialists. 

Getting 100% adoption might be easy to enforce with the largest banks, but local banks with smaller IT budgets could take much longer to move.

c) The US already has competing private-sector RTP offerings: The Clearing House (TCH) is owned by the 20 largest banks in the US. As of this week, Plaid offers RTP through connectivity to TCH to its Fintech customers. But everything is a game of adoption. Where Visa and Mastercard are accepted everywhere, most other payment methods have an asterisk—most except ACH.

The Automated Clearing House (ACH) is much more adopted (near ubiquity). It does offer same-day ACH, which saw $1.75trn of volume in 2022 vs. RTP on TCH with $75bn. While it doesn't offer real-time, companies like Plaid, Orum, Astra, and Sardine* let Fintech companies create the illusion of RTP. They create a fraud/risk model and credit the consumer before receiving funds.

Then there are the wallets like Venmo, CashApp, and the Zelle service, each with a significant volume of real-time payments already.

d) The US government often takes decades to implement banking sector changes: Dodd-Frank, a law passed in 2010, has elements (like section 1033) yet to be enacted in 2023. Getting any new laws passed in Washington without a crisis or compelling event is challenging. Even then, it quickly devolves into a partisan issue that is louder and more extreme than G20 peers.

e) But the US does have the world's most dynamic private sector: The US's inability to act centrally is both a weakness and a strength. It ends up creating incredible private-sector solutions to public challenges. Companies like Stripe are built in the US, not elsewhere, and they remove the complexity of the underlying infrastructure because the reward is greatest in the US. Having the world's most dynamic private sector is no bad thing. It's just a thing to remember as we zoom in on FedNow.

5. Things everyone forgets about FedNow

Despite its challenges, FedNow is happening. I used to call it FedNever jokingly, but July 2023 is the date. Here are some things to remember (big thanks to this thread from Walt for some of the inspo).

a) Not all banks will be ready: Being ready for FedNow means more than integrating the technology; it includes legal, compliance, audit, operations, security, and then signoff from finance. The top 20 banks with giant change budgets and big-name suppliers will be ready. The 95% of banks for whom that is not true means that the FedNow service will be "ready," but how available it is, is another question. 

b) Push to card is a thing: Wallet funding, card funding, and payouts can be done by banks today to offer a similar RTP experience. RTP also comes with fraud and risk management rules baked in, a revenue model, and very little change required at the bank. Banks that didn't adopt TCH may not rush to adopt FedNow unless forced to.

c) Wallets matter: The US can't un-invent CashApp or Venmo. Its users rely on those closed-loop wallets, and now Visa+ has entered the chat.

6. What happens now?

a) Don't expect a stampede: The complexity of the US market and competing incentive of large vs. small banks (and now Fintech companies) will limit the ubiquity of FedNow. There will be early adopters, but most will be large banks already offering TCH. The clamor is likely from Fintech companies, but they lack a direct connection to the Fed or the ability to hold funds there. (It would be an interesting judo move for a BaaS or sponsor bank to offer Fintech companies FedNow much cheaper than TCH and clean up).

That said, the payments industry moves in 7-year increments. The fact that not everyone will use FedNow by 2024 doesn't mean it will fail, far from it. Once live, the Fed could mandate all banks have to support FedNow by a given deadline, and they could open access to Fintech companies.

They might not. But they could.

b) Mo' payments rails, Mo' problems: Another payment rail creates another service fraudsters can exploit. Every RTP system suffers from Authorized Push Payment (APP) Fraud. The shiny new FedNow system will have tools to help financial institutions, like fraud reporting and error resolution processes. But the devil is in the detail. The UK, Brazil, and India all saw a spike in scams and had to implement new services to combat that fraud. 

FedNow has entered the chat, creating another payments rail in the US. Payment rails don't die; they get added to the heap. Therefore, there will unlikely be one rail to rule them all anytime soon. We need some way of aggregating and abstracting them all. If only there were some network of networks (I'm being cheeky, that is the stated aim of the card schemes, provided they don't get too far and get stuck in anti-trust action from the DoJ).

c) Fee compression: How it will be implemented in the US won't create a universal standard but might compress fees. Other payment rails will struggle to offer a pure utility level of pricing. But the fact those other payment rails exist and have adoption means there are vested interests that will drag their feet implementing FedNow.

Still, payments are gradually trending toward real-time and near-zero fees. It may be a law that does it or market forces, but eventually, those fees should start to come down.

Or maybe one day, the Fed just wakes up and chooses violence.

d) Further out, the Fed can achieve multiple objectives. Taking cash and checks out of the economy is a universal goal for central banks. The US stubbornly holds on to checks but could finally banish them with its various RTP mechanisms. The Fed also plays on the international stage with other nations linking their RTP systems (e.g., countries like Singapore and India are linking their payment systems for instant, low-cost cross-border transfers.)

Central banks are also closely considering consumer and business central bank digital currency "CBDC" as a way to displace cash. FedNow would provide a basis for such a service. We might get clues if we look at how the UK is evolving. The UK is upgrading its RTGS a part of its "CBDC" is to research offering APIs to its FedNow equivalent (coming soon).

7. Closing thoughts 🤔

You could see a world where this is trending towards fewer dollars at banks and more at the Fed. Accessed by consumers via CBDC, businesses and Fintech companies could store dollars at the Fed and get access to FedNow. It's not that far-fetched when you consider that the Fed is now back-stopping a significant portion of deposits at some banks after the latest banking crisis. 

Also, think about how many companies are now buying treasuries instead of holding deposits at a bank. In the 4 companies this week, I covered Zamp, which is building a Neobank for businesses over a brokerage for treasuries. (There's another rant about the risk of narrow banking here, but that's for another day).

I doubt the Fed has the political mandate or appetite to head that way. But over the last century, the mandate of the Fed has only ever grown and never shrunk. What happens if the Fed has over-corrected and needs to plunge rates to 0 next year?

Things could all yet change.

FedNow is not UPI; it's not PIX. It's a beautiful, strange, American thing like a corndog or the word faucet. 

Remember that the payment industry moves in 7-year increments. 

So I don't think FedNow changes the game overnight.

But any number of things could change that.

It can mandate things.

Primary among those things it could mandate is giving Fed accounts and FedNow access to Fintech and payments companies.

That would be fun.

ST.

4 Fintech Companies 💸

1. Zamp Finance - Brokerage as startup Banking

Zamp offers treasury management and banking features like payments, debit, and credit cards but built over a brokerage account, not a bank account. It also acts as an outsourced treasury or finance team recommending investment portfolios based on the startup or business needs and risk appetite. The brokerage account is opened at BNY Mellon, the world's largest custodian bank.

🤔 The homepage headline uses the current T-bill yield (5%) as the customer acquisition play, but this is a lot more interesting under the hood. Zamp effectively uses treasury bills to create a sort of "narrow bank." I can't help but think this is what BNY would have built if they had the ability and focus on executing. But it also strikes me as an opportunity for every other Fintech company (Mercury, Brex, Ramp, et al.) to go to State Street and build a competitive feature set. Is FDIC a toxic brand now? Is this how "banks" look in the future, or is it a feature for Neobanks?

2. Unipe - Earned Wage Access (India)

Unipe connects employers and workers to give on-demand access to wages, savings options, and spend management tools. Unipe charges a disbursement fee to employees to access wages early, but no interest is charged if the worker pays back on time. 

🤔 Given that loans are repaid from the next salary payment, users have low chances of paying interest. Which makes this feel more like an employer service for worker retention than a lending business. The platform has case studies in construction and retail which make sense against the incredible growth in the Indian economy. Retaining quality staff becomes critical when the demand is higher than the supply. 

3. Loanscout - Data tool to identify lending prospects

Loanscout allows bank loan officers to use 1000s of data points to identify potential commercial lending prospects. Users can identify decision makers, analyze borrowing, and filter prospects by the type of borrowing they have done in the past. Loanscout aims to deliver a short list of pre-qualified leads, and pricing starts at $10,000 per year for banks with less than $5bn in assets (and scales by $2k every $1b after that). 

🤔 Banks need more cutting-edge tech for lending. This is a great product to let niche banks identify the type of niche lending they want to do. That immediately makes me question the market size for Loanscout. Community banks hold $3.4trn in assets, and even if you charged $2k for each billion, there are only 3,400bn assets as a TAM (x $2k = $6.8m ARR). But also, not every business has to be venture scale; this could be an amazing business for the founders or someone's acquisition. They could also cross-sell a ton of other things. I like this product.

4. Effectiv - Fraud and Risk Workflow 

Effectiv allows risk & compliance teams to pull multiple data providers into a single workflow with no code. Effectiv can unite KYC and KYB providers (like Socure and Middesk) with data sources like Sentilink and vouched through its single API and dashboard. Effectiv also provides proprietary ML and rules over the top to benefit from its team's decades of fraud and risk experience. 

🤔 My fear with workflow-only solutions is that they are great features but not businesses. Alloy was the OG risk workflow solution that made it big, but they have a wedge of proprietary tech and had great market timing. Ultimately this is the right pitch, it's the risk and fraud team you hire as an API, and Effectiv already has customers and some traction. Ultimately these dashboards become the operating system for all types of risk, and the battleground will be who gets the best performance. 

Things to know 👀

1. Visa launches Visa+ to make P2P payments interoperable.

Visa is partnering with PayPal and Venmo to make the P2P services work together seamlessly. Users don't need a Visa card, but they create a unique handle (like @name called a Visa Payname+) and share it with the party they want to transact with. Visa is simply the infrastructure between these P2P providers. Western Union, i2C, and Tabapay will also support the new service.

🤔 This is really one @name universal address to rule them all. Creating a Visa direct addressable name could send or receive value to and from any compatible wallet or service. A few months back, I described this as a universal pointer to a wallet, and the world sorely needs this service. I'm glad Visa has leaped here to get it done. Although, like cards, I suspect we need a standard (like how EMVCo controls how card numbers work and sets rules that Visa, Mastercard, and Amex use). But we won't get that standard unless someone big makes a giant first move. This is that move.

🤔 The big-name P2P wallets missing here are CashApp, Zelle, and the XPays (Google and Apple Pay). Let's give Visa time here; there are many competing incentives in the US wallet space alone. For example, the economics of owning a closed-loop payment system is significantly better than traditional card economics. But the drawback, of course, is the lack of interoperability.

🤔 PayPal owns both Venmo and PayPal. Lol, why didn't this already just work? But also, the payments companies like Western Union make this much more compelling. In theory, any Western Union app user anywhere in the world could send and receive money to and from PayPal or Venmo. That's massive no? 

🤔 This is Visa's network of networks strategy playing out. Visa sees itself as much more than cards. With B2B connect and its attempted acquisition of Plaid it wants to be multi-rail and the flag bearer for interoperability. It's in its DNA and its history. 

🤔 Someone had to do this. The US is filled with closed-loop payment types and multiple RTP payment rails that don't interoperate—starting at P2P, which is now a critical part of the consumer (and business) payment and commerce landscape.

🤔 Holy fraud risk Batman. P2P already had a scam issue, and it's unclear whether Visa+ is anything more than a quiet interoperability layer in the background. So if any wallet could send money to any other wallet, anywhere in the world, without clear rules about what happens, you know fraudsters are gonna be all over that. Visa says it has a recipient confirmation and a "stepped-up verification" protocol. This is precisely where Visa adds value to cards and where they could add value in P2P.

2. Plaid launches instant payouts

Plaid has announced "Plaid Transfer," a service that allows businesses (mostly Fintech companies at this stage) to disburse loan payments, insurance payments, or wages instantly. The service is compatible with an estimated 60 to 70% of US bank accounts and is built on the service from The Clearing House (TCH), a network owned by 20 of the largest banks in the US. Transfer now supports ACH and TCH, and Plaid Signal makes ACH feel instant (by crediting the recipient before debiting the sender).

🤔 Plaid has the perfect UI for consumer-initiated payments or withdrawal approvals. Businesses want to make sure they're paying the right person during payouts. Leveraging Plaid Connect (account linking) to pull relevant bank information instantly creates a slick UX for collecting consumer data. And a smooth UX creates more conversion at checkout. I'm generally bullish on open banking as a great way to start a real-time payment with additional authentication from a user (this is how it works in Europe with something called Strong Customer Authentication). This has become a default way to fund a consumer wallet and could be much more. Plaid might define a "step up verification" standard like Visa+ did. 🤷‍♂️

🤔 The battleground for Open Banking connectivity in the US is conversion. While offering RTP is fantastic, the UX is predicated on connecting successfully to bank accounts. Unfortunately, this has started to break as large banks raise security concerns or look to introduce security standards. So it's the best UX as long as it works. We have to solve that, and I don't think the US introducing open banking regulation (1033) alone will do that.

🤔 Europe has regulated mandated real-time payment rails and open banking, yet volumes on both are disappointingly low to date. That's not to say I doubt they will take off; it's just payment types take a long time to hit numbers. Apple Pay was launched in 2014, and contactless (tap-to-pay) in 2006. Change is slow. But I love using open banking to initiate a real-time payment because you get strong customer authentication (SCA) and data with the payment. The worst thing about cards is the data loss during a transaction and how poorly implemented 3D Secure is in the US. Open Banking is a ready-made solution for that.

🤔 The US is having its RTP moment. But like all things in the US, this will be an exception to the rest of the world. FedNow won't have complete market coverage when it launches, RTP doesn't yet (and likely won't due to its ownership model). That's before we talk about the wallet wars, X-Pays, Paze, Venmo, Visa+, and the competing standards emerging there. The US is a disorganized mess of inefficient federal and state regulations. Yet it has the world's most innovative and capable private sector by far.

🤔 People always assume RTP will impact cards or banks, but the banks are processing most of these payments behind the scenes. The loser here is checks and cash, as seen in other markets with RTP. The banks are in the driving seat here and won't give that up easily. Large banks like JPMC and Goldman have Stripe-quality APIs for RTP available today. Game on.

https://twitter.com/noyesclt/status/1646498457094430721?s=19

Quick hits 🥊

🥊 BloombergGPT is f*cking cool. Bloomberg announced its ChatGPT "competitor" LLM Bloomberg GPT trained on financial data to support highly regulated finance industry tasks. 🤔 What stands out is they trained it on financial markets data. This could help to solve the "hallucination" issue generic LLMs suffered and why they were mostly unsuitable for consumer use cases in finance. I suspect the best use cases will still be internal but still impressive. Wonder if LLMs without human refinforced learning (RHLF) might be the key to financial services over time?

🥊 Clear Street raises $270m at a $2bn valuation. Clear Street is a prime brokerage platform. 🤔 Remember giant raises? I have for some time believed that Fintech would eventually get to capital markets, and it’s wonderful to see that happening. Although, the founders here have capital markets backgrounds, giving them a huge leg up. Prime brokerage is typically a loss leader for bulge bracket banks, but I suspect this platform will do much more in time.

🥊 Former Libra and Meta Payments exec David Marcus launches lightspark. Lightspark is a company that helps developers and companies access the Bitcoin payments protocol Lightning. Lightning is much faster and cheaper to use than the regular Bitcoin network and supported vocally by Jack Dorsey and Block. 🤔 Ethereum has a ton of companies that make running nodes and accessing nodes much easier for developers (e.g., Infura and Quicknode). It's not surprising to see this come to Lightning. The jury is out on if Lightning will gain mainstream adoption as a payment rail, but at least it now could. 

Good Reads 📚

1. a16z State of Crypto 2023

a16z says recent setbacks (not naming it but FTX) underline the failures of centralization, reminding the audience that web3 is not a financial movement; it's an evolution of the internet. Blockchains are computers and the evolution of the internet, where users extract much more value than they did historically. The report zooms out to the longer term and shows that great products are built regardless of market cycles and that crypto is also following this pattern.

🤔 What a difference 2 years make. This report in 2021 would be greeted with astonishment and applause from mainstream media. Now it's doing something entirely different. Staying committed and in it for the long haul. a16z has arguably gone the longest on "web3" of any major tech VC fund, and in the middle of a Crypto bear market, this report represents an alternative to the doom and gloom.

🤔 The killer stat of the report; Ethereum now uses 0.0001% of the energy Youtube consumes. Youtube also consumes more energy than Bitcoin (about 1.5x). Other notable mentions include zero-knowledge proofs (a privacy crypto technology) becoming mainstream and that DAOs continue to grow in engagement. Oh, and people are buying NFTs again. While nobody is paying attention, good things are still happening. 

🤔 The report ignores the financial market's story to tell an internet story. Tokenization is the new "private Blockchain," but tokenization is much more interesting. Tokenization is taking any financial asset and making it work with Blockchains (typically Ethereum or EVM based). That makes them programmable, global, and composable, unleashing innovation. Yes, it's the likes of Blackrock and Citi talking it up now, but tomorrow it is how Fintech eats capital markets. For extra credit, check out ERC-3643.

🤔 I believe these trends ultimately converge. While everyone is excited by AI, all assets becoming tokens and being compatible with the internet creates a default digital, default global economy. The regulation hurdles and bumps in the road are necessary, and my conviction on web3 and tokens has never been higher. Yes, for consumers, but businesses, brands, and the whole economy too.

2. 🗣 Another read if you have time: Disintermediating traditional banking in real-time

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.