Fintech 🧠 Food - The future of BaaS

Plus: My take on Apple Pay Later, Paze Wallet and is Target Red the future of payments? Oh and there's an easter egg on BloombergGPT 🥚

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 29,503 others by clicking below, and to the regular readers, thank you. 🙏

Hey, Fintech Nerds 👋

Happy easter. 🥚

Cancun was lovely; thanks for asking.

But HOOOOLY, moly. 

That last Rant title got a few people mad.

And outside a couple of know-it-alls, my gut reaction was that I felt bad. Bad for the good folks working hard to put the industry right, bad for the new companies with new solutions that I wasn't aware of, and frankly, because there's enough bad news in Fintech right now.

I stand by the content, but clickbait also isn't my style. 

So this week, with some time to reflect and the help of a few constructive folks who reached out to help me fill some knowledge gaps (of which there are plenty), here's the future of BaaS—the automated, compliance-first finance infrastructure of tomorrow. And what we should all be excited about.

In other news, Acorns acquiring Go Henry is interesting. Fintech acquiring Fintech companies for distribution and product makes a ton of sense. Acorns has tried (and failed) for European market entry, which this acquisition helps them with. Go Henry was big enough to have users but reached its growth ceiling and did not expand beyond a bank for kids and parents. The business case for these products is always "Can you grow with your users," which Acorns possibly can. This acquisition is logical, but the devil is always in the execution. I’m not sure this would be my first pick for either party but excited to see what (if anything) they do together.

In the week Frank's founder got charged with fraud for selling a company for $175m and lying about how many customers they had, we continue to see a focus on cleaning up Fintech.

Also, I did not have Bloomberg launching a large language model on my 2023 bingo card. More on that next week.

M&A, value, compliance, and AI. Welcome to 2023.

PS. Rest in peace Bob Lee and my deepest condolences to the family.

PPS. As a reminder, you shouldn't take anything you read in this as gospel. While I've worked in this industry for two decades and delivered my fair share of card programs and bank programs of work, I'm also human. Remember always to do your due diligence.

Lastly. If you’re in London for Fintech Week, come to the first EVER This Week in Fintech x Fintech Brainfood 🧠 happy hour. 👇

Here's this week's Brainfood in summary

📣 Rant: The future of BaaS

💸 4 Fintech Companies:

  1. Two - BNPL for Business at checkout

  2. Beam - Vertical Payments for Construction 

  3. Formance - The Open Source Ledger 

  4. Playbook - The wealth and tax planner in your pocket 

👀 Things to Know:

📚 Good Read:

Weekly Rant 📣

The future of BaaS

Banking as a Service will revolutionize finance just as Twilio did messaging or AWS to computing and storage. The past 12 months have been turbulent for Fintech and especially BaaS providers, but what doesn't kill you makes you stronger. 

And goodness is what's coming next better, faster, and stronger

The Fintech bull market hid bad business models and created a goodwill approach to compliance and approval in almost every company managed. But due to a combination of naivety and one or two bad actors, the landscape has completely shifted.

When I wrote last week, "BaaS is dead," the implication was that BaaS as we knew it is dead. Because:

But what I didn't cover is how everyone is upping their game. Sponsor banks, BaaS providers, and the Fintech companies are all aggressively becoming compliance-first. 

When entrepreneurs and talent go this hard, it's not just to thrive but to survive (in some cases).

The future is bright. So let's do this 👇

  1. The long term need for BaaS

    1. The market needs innovation

    2. The finance infrastructure is complex and needs abstraction

    3. Every banking product as a service as a massive unlock for cross-sell

    4. BaaS will turn banking into a utility as AWS did for compute and storage (eventually).

  2. Where BaaS got stuck

    1. Time to market is now the wrong pitch

    2. The business case was too narrow (stacked on debit)

    3. The early niche use cases hit a growth plateu

    4. The unit price was high and took advantage of a tech bull market

    5. The offering wasn’t truly global

  3. How sponsor banks are adapting

    1. Much more firmly in control across the board

    2. Requiring much more diligence before a Fintech program can go live

    3. Partnering directly with Fintech infrastructure companies for automation

    4. Their larger Neobank customers now face direct regulatory scrutiny.

  4. How BaaS providers are adapting

    1. BaaS providers require you to have a banking partner.

    2. Some BaaS providers hired very senior compliance people

    3. BaaS providers are also improving oversight for banks.

    4. BaaS providers deliver the best of multiple sponsor banks

    5. BaaS providers are going enterprise (and so is pricing)

    6. BaaS providers unlock better unit economics through complexity

  5. How Fintech companies are adapting

    1. Price dicipline is mission critical

    2. BaaS can provide value that goes beyond price

    3. Facing into complexity

    4. Competing on compliance and trust

  6. The future of BaaS

    1. Automated and compliance-first

    2. Default global

1. The long-term need for BaaS

Last week I covered the initial business case for BaaS from a startup perspective. Over the short term, it reduced the time and cost to bring Fintech products to market. In turn, this unleashed innovation. We saw banking for immigrants and low-income populations, earned wage access, and a revolution in spend management.

However, the longer-term business case was unclear, and I still firmly believe in it. 

a) The market needs innovation. Would we have an entire earned wage (EWA) access category if it wasn't for BaaS? Maybe. But I'm not sure. It would be non-trivial to combine open banking (checking account balances and payment history) with a cash advance to a KYC'd debit card and account without BaaS partners.

EWA has become so popular that large banks like Citizens, PNC, and US Bank have started offering it. Spend management has revolutionized business expenses and travel so much that JP Morgan is launching a Navan competitor

BaaS can't take exclusive credit for these developments, but it should take a substantial portion of the kudos for it. 

Banking is a risk-averse business. That is an excellent feature if recent events have taught us anything. But we need a natural tension that innovators bring.

b) Someone needs to be aggressively tackling complexity. Understanding financial services regulation's infrastructure quirks and gnarly weirdness is a massive competitive advantage. But it's also a huge time and cost sink. It is a case of picking your battles. The engineer can understand it and build it, but is it right for your business to do so?

The BaaS providers are perfectly positioned to tackle the complexity because they have economies of scale. They're not building one business. They're supporting 100's. 

Going deeper into the infrastructure and building closer ties with multiple industrial-scale partners can take a decade. Benefits start to accrue when hitting the scale, like seeing common errors and being able to fix them before the customer sees any issues—or seeing billions of transactions and being able to spot fraud patterns.

Finance infrastructure is still too hard for everyone to tackle all at once. FedNow won't fix it (just like UPI and Pix alone didn't. They unleashed innovation and fundamentally changed the economics, but that's another story for another day).

c) "Banking" as a service, not cards as a service, creates huge unlocks. The core issue facing many consumer and B2B Fintech companies is moving beyond their wedge and cross-selling. That's hard to do when the entire business is predicated on a debit card banking stack and customer relationship. Unsurprisingly, many are already going deeper into savings, investments, treasury management, and even working capital lending. 

BaaS is creating true banking competitors. This chart from the SVB fallout speaks volumes. Two of the biggest winners after the SVB fallout weren't chartered banks but Fintech companies (Mercury and Brex). 

Side note this problem impacts banks too. Every bank that opened an account digitally is struggling to cross-sell. When the relationship is core checking, the mobile app is a hard real estate to maximize and near impossible to relationship build from.

Delivering this breadth of offering takes multiple partner banks, providers, and a whole heap of regulatory and compliance complexity. For example, you may have KYC'd, and KYB'd a business customer for one product, but for another partner bank with another set of requirements, do you have everything you need? Can you prove that?

Each regulated financial product has a long tail of complexity that follows it, and each sponsoring bank has its own requirements about how they should be managed. It would be like if each hardware vendor still sold an operating system, and you had to configure your software to run on their OS and hardware before launch. 

Wouldn't it be great if that had an AWS to get rid of the config? 

d) The longer-term business case is shifting, becoming the ultimate utility. Twilio and AWS shifted to turn something that was a data center or an entire department into a utility that could scale up and down as needed.

The lesson from history is also one where AWS was initially seen as riskier and not something enterprise would touch. Besides small tech startups, early adopters were the porn industry and online gambling markets. But then those small startups got big, and the infrastructure providers reacted.

Today there isn't a large tier 1 global bank that does not have a cloud strategy and a significant portion of its workloads running with one of the big 3 cloud vendors. Cloud vendors are now subject to the highest level of government compliance oversight and pass bank-grade inspection. 

The future of BaaS will play out the same. 

2. Where BaaS got stuck

BaaS was a victim of its early success. A flywheel effect hit as more Fintech companies got funding, more non-finance brands wanted to launch cards, and more BaaS providers came to market.

But that created a race to the top on time to market. The fastest time to market and the cleanest API wins in a highly competitive market. Those dynamics aren't bad. They're just not immediately compatible with the conservative nature of handling customer funds.

Now:

a) Time to market sales pitch is no more. BaaS providers aren't selling that pitch and, if anything, are cautioning prospects against trying to launch too fast.

b) The business case was too narrow. BaaS was really cards-as-a-service. And that's great; there is a lot you can do with cards (a surprising amount). But it's not everything. Today BaaS providers have gone much wider in the financial products they offer, infrastructure providers they partner with, and sponsor banks they support.

c) The niche it served has hit a plateau. The growth in BaaS won't come from another consumer debit card with simple onboarding and a clean mobile experience. The large banks have upped their game here but have fallen into the same trap. Incumbents have a high cost to operate an account (because of their aging technology and branch network) and an imperative to cross-sell. Consumer Fintech companies and mid-sized consumer banks have a lot in common. They need to go wider and deeper with consumers.

d) It must offer a better business case (unit economics). Last week I wrote about how the BaaS providers who shared debit interchange revenue with their clients would hit a natural ceiling. Suppose the cost per account was multiple dollars per month, and the Fintech company had to share the majority of interchange revenue. In that case, they'd reach a scale where they wanted to displace the BaaS provider or find an alternative. This, too, is changing as BaaS providers offer more nuanced regulatory structures to reduce cost and achieve economies of scale and as Fintech companies regain price discipline. 

e) It needs to go truly global. As big as BaaS has become, it's not in the same league as payment acceptance (like Adyen or Stripe's core business). And those companies are not in the same league as big tech companies like Spotify or Netflix who have been much more successful at international growth. 

Default global is coming, however. As companies like NIUM, Routefusion, and now Paytrix make international something that just works. (Prediction, this will become something every BaaS needs to do eventually).

The market is adapting to these imperatives. The sponsor banks who have quietly worked hard to build stable balance sheets and automate their compliance may not have made headlines for share price or deposit growth, but they're having a moment when it matters. 

3. Sponsor banks are adapting

The age of programs going live in 4 weeks has gone. The best sponsor banks are responsive and helpful, but there is a default "prove yourself" posture across the board instead of the default "goodwill, and we'll keep an eye on you" posture. (Although to be fair, many sponsors already had this, those that didn't are the ones that had more troubles).

a) Sponsor banks are firmly in control. Banks always had the legal and regulatory "power," but the events of the past 4 months have only heightened their willingness and ability to wield that power. Trust now has to be earned. An example I heard last week was that "penny testing" is no longer a thing. If you're unfamiliar, during the early days of building a Fintech product, sending tiny transactions (pennies) was a way to prove your technology and processes could move real money before going live. This has all but gone and may not come back.

b) Fintech programs are now running the gauntlet to get live. The default "prove yourself" posture impacts the contracts Fintech programs sign with sponsor banks. They're committing to much more onerous requirements and must prove their controls, understanding, and capability before they get anywhere near live. This is a net positive for consumers and businesses but will impact time to market.

c) Sponsor banks are partnering with Fintech infrastructure for automation. Sponsor Banks are partnering with eKYC providers like Socure and compliance infrastructure partners like Unit21, Alloy, and Sardine* (Note, I learned last week that both Unit21 and Alloy have dashboards for partner banks too). Sponsor banks now have better data and real-time analytics about their sponsored programs' performance. 

This is a crucial investment, given how BSA/AML was critical to the regulator's concerns.

d) Large Fintech companies face direct scrutiny. Today the regulator goes after Neobanks with millions of customers directly. In the few examples where a tiny sponsor bank sponsors a massive Neobank, the regulator is now acting to check that power imbalance.

The sponsor banks also have willing partners in the BaaS providers.

4. BaaS providers are adapting

The importance of the BaaS provider in managing risk can't be understated. 

Unlike storage or compute, core primitives like store value (deposits) and move value (payments) come with a long tail of responsibility far greater than "don't fail." Storage has to work and be fast. Sometimes it has to meet data privacy rules etc. But storage doesn't have FDIC insurance or chargebacks. 

A good way to think about BaaS providers now is as the tech department of the bank. They're imbued with all the responsibility that the core business requires and must enforce the compliance requirements for delivering products. Except now they're "tech departments" for multiple banks. And that's where the economies of scale come in. 

A major element of regulatory pushback on sponsor banks recently has been their oversight of "3rd parties," specifically as it relates to BaaS providers. But now:

a) BaaS providers require you to have a banking partner. In the early days of BaaS, the core relationship the Fintech company might have when it was young was direct with the BaaS provider. They always needed to contract with the sponsor bank, but when so small, they'd operate for testing under the BaaS providers relationship before later being introduced to the bank. Not anymore. The BaaS providers now require Fintech companies to have a banking partnership before getting near live. 

b) Some BaaS providers hired very senior compliance people. Despite being the "tech department," BaaS providers have recognized their critical role in managing compliance on behalf of their bank partners. By bringing in industry experience, they can adopt product, procedures, and client-facing posture to manage the complexity of operating in financial services. BaaS providers can place processes on behalf of the banks to (for example) review an advertisement before it goes out to consumers. 

c) BaaS providers are also improving oversight for banks. Don't hate; automate. Being technically minded, BaaS providers naturally see a manual process as something they can improve with technology. The obvious benefit is reduced manual work for the Fintech company and sponsor bank, but the less obvious benefit is oversight. BaaS providers have a treasure trove of data, which becomes the natural way for a sponsor bank to have a risk dashboard. Partnering with companies like Cable or Themis, they can ensure policies are aligned across their portfolio of Fintech companies. Partnering with Unit21, Alloy, and Sardine*, the BaaS providers, can help sponsor banks actively collaborate on cases for AML or fraud. Digital. Real-time. Awesomeness. 

d) BaaS providers deliver the best of multiple sponsor banks. Not all banks are created equal. Some are amazing at SME lending, others at payments, and some are incredibly tech-savvy (and even built entirely on modern infrastructure). No single sponsor bank is ideal for every use case and every product. To meet the imperative to cross-sell and deliver more innovative products, Fintech companies need multiple partners. Finding the right bank for the right use case is key. BaaS providers remove the heavy lifting of technical integration and now bring a compliance specialism. 

e) BaaS providers are going enterprise (and so is pricing). Enterprise pricing is different. The pay-as-you-go model for the long tail differs from providing account services to companies with $100m+ ARR. This is an expectation as BaaS providers increasingly supply more mature SaaS businesses and non-finance brands. Higher volumes and more complex sales unlock better pricing tiers and more sophisticated buyers. 

f) BaaS providers unlock better unit economics through complexity. I remember having a conversation with a banker a few years ago who couldn't understand why Stripe was so popular when the sticker price was so much higher than the bank offered. My answer was simple; Stripe is an iceberg. They're the canonical example of removing complexity from financial infrastructure. This approach includes simple things like re-trying a transaction that failed at one bank with another bank (a "waterfall"), or complex things like building machine learning models from trillions of transaction inputs. 

When you bring this to BaaS, it all still applies. Except on the issuing side, there are even more complicated choices. Should you use an FBO account or manage your ledger yourself? Which providers should you partner with and how do you integrate them? How will you monitor transactions across 3 sponsor banks and 10 financial products? 

Removing the complexity, automating it, and continuing to invest gives economies of scale. These economies of scale push down the unit cost of the financial product and massively reduce the hiring a Fintech company has to do. 

5. How Fintech companies are adapting

a) Price discipline is mission-critical. The advantage of a Fintech bear market is it creates a dynamic where negotiating on price is normal. Fintech companies are rightly squeezing more value from providers. But getting this value means being an informed buyer and doing the hard yards to figure out how everything works lower down. People like to talk sh*t about the traditional providers the BaaS companies abstract (like FIS, Fiserv, etc.), but those companies exist for good reasons. Knowing your BaaS provider and its constraints helps you get closer to a fair price. 

b) BaaS can provide value that goes beyond price. Value includes the ability to drive revenue and remove drivers of cost (like manual work). As the BaaS providers have matured, they offer a wider array of products from more partner banks. We may be close to figuring out cross-sell in digital. The best example is the shift to Fintech banks after the SVB collapse, but this trend has already started and will continue. 

Just as the cloud vendors gradually moved up from primitives like storage and compute into offering just about every operating system, virtualization, and even ML environment, the BaaS providers are moving up the stack too. Anything that reduces manual work is absolutely gold in this market (for banks too). What used to require a team of 10 can now be done with 2 people and deliver better value (cost savings and/or increased revenue, reduced risk, you name it).

c) Facing into complexity. Easy mode BaaS is to take a vanilla setup with an FBO account structure. But that doesn't give the best unit economics or cross-sell potential. A Fintech company can also manage a ledger and be responsible for accounting for individual customer funds. That requires a heavier lift but creates better unit economics (and that's before we get into on-core vs. FBO).

d) Competing on compliance and trust. I'm sick of mentioning the SVB fallout now, but it's an example of this point. Neobanks and Fintech companies are fighting over who has the highest FDIC-insured deposit base. This is built on deposit-sweeping infrastructure banks have used for decades but is symptomatic of a wider trend.

Nobody wants to be the Neobank that can't operate because their partner went under. That's existential. The pendulum swings to performance in compliance, fraud, and risk. That is the best thing that could have happened for our industry.

6. The future of BaaS

We need a new mental model for BaaS because the "AWS of banking" doesn't fit. Here's one I heard this week that fits much closer. 

Customers belong to the bank, and programs (The Neobank or non-bank brand embedding finance) are bank branches. Like a branch, the program has to ensure all the sales and marketing activity complies with the bank's policy. The account deposits live in the bank's central systems, and the branch is a servicing arm. When you use that mental model, being a Fintech program is a digital-only "branch" but with far wider distribution and a separate brand. Like a branch, it could be the home of cross-selling and where future value accrues for consumer and B2B-facing financial services. 

The distribution disruption is just getting started.

3rd parties that manage technology (BaaS providers) are IT departments for all involved. Both the bank and program benefit from the technology from the BaaS provider, but like a bank IT department, they're subject to much scrutiny and oversight from the bank. Where things differ is imagine if the IT department also had staff in the branch. The BaaS provider ensures the program ("branch") behaves correctly and meets the conditions set out by the bank.

The future of BaaS is bright in this mental model.

BaaS will deliver the automated, compliance-first, materially higher-performing financial services infrastructure the market craves. 

It will become default global as new providers open up the complexities of international payments.

The challenge of the past 12 months will pay off.

The market is complex.

And it's always evolving.

But here's the thing I love.

Fintech as an industry has a culture of aggressively chasing complexity. There's an army of nerds who love that one random detail that makes a big difference. It's like a humble brag and where social capital is formed. 

On one level, that's high school snooty BS and intimidating to newbies. 

But with positive intent, that culture is where the competitive advantage appears for innovators.

The complexity was something the banks left to a department. 

Fintech operators attack it.

I see it daily at Sardine*, and I know it's true about the competitors (Unit21, Alloy, I see you, big respect). I see it in clients and companies gracious enough to share their time with me for conversation.

That's why Fintech will succeed.

That's why BaaS will succeed.

Damn, I love this community.

But let's stay welcoming to people on the learning journey, as we do.

ST. 

4 Fintech Companies 💸

1. Two - BNPL for Business at checkout

Two offers instant trade credit to B2B businesses selling online. When a business customer hits checkout, Two will perform a credit check and bring the buyer through an ID verification check. Assuming this completes, Two pays the merchant instantly and manages the line of credit with the buyer. 

🤔 The pitch is similar to consumer BNPL to achieve more sales and higher conversion by offering credit in a checkout experience. What makes B2B unique is that it is halfway between a trade line of credit and e-commerce. Standing in and taking the risk makes this much more obviously a risk-taking lending play than consumer BNPL, funded primarily by the merchant discount. The UX is also longer performing credit checks. But compared to a full invoicing process, this could be a net UX benefit for business buyers. Cards haven't displaced B2B payments entirely because so much is done via credit. This is an area banks have dominated, but specialist e-commerce "BNPL for B2B" or, more accurately, "modern-day trade-credit" providers could play well here.

2. Beam - Vertical Payments for Construction 

Beam is a vertically integrated solution for contractors to manage invoices, payments, and bill payments without paperwork and spreadsheets. The product's core is a project-tracking system that handles each project's finances and has a dashboard overview. The platform integrates with accounting tools like Quickbooks and Sage and is in early access.

🤔 The "project dashboard for X" as a core UX for finance is a trend that's just starting. We've seen a lot of vertical SaaS in Fintech. Still, so many industries lack a good operating system and won't pick a more general payments automation platform for it. Being the operating system for X small business sector is a great alternative to being a Neobank, but it ultimately disrupts the same incumbent—small and local banks.

3. Formance - The Open Source Ledger 

Formance enables Fintech companies and platforms to manage complex use cases like fractional shares, payment fee collection, and "funds in flight." Formance creates a single record of truth for all transactions and resolves the complexity of multiple data sources across payment and banking providers. The platform has fixed fee pricing when a customer hits more than 100k transactions monthly, and the enterprise solution includes higher-level services like a white-label wallet.

🤔 Reconciliation is the hardest thing, and hardly anybody talks about it. Every Fintech company and platform reach a scale where it naturally has to build a ledger for money movement and reconciliation. It's little surprise we've seen countless ledger-as-a-a-service Fintech companies appear. But few have taken this obvious stance on being open source. If I were a Fintech looking to expand into Europe, I'd seriously consider using Formance as an accelerator, if nothing else.

4. Playbook - The wealth and tax planner in your pocket 

Playbook helps consumers increase their net worth by taking advantage of tax advantages that expire annually. The platform allows a user to identify what advantages they are eligible for, move money into advantaged accounts, and automate recurring payments. Users start by connecting their bank accounts, playbook then builds a financial plan and begins the automation.

🤔 The "mobile wealth management app that's good" is a trend lately, and I like it. I haven't used any (I'd love to see the videos on 11:FS Pulse or something). In theory, this product should dominate the market, and everyone should love it, but I worry in time, like many PFM, it's a feature that gets acquired by Schwaab rather than a business. 

Things to know 👀

Users of Apple Pay can now split payments into four interest-free payments over six weeks without incurring any additional fees. Users need to be pre-approved for credit by Apple before making purchases using a "soft credit check." Once approved users get a "Pay Later" option when making in-app purchases. 

🤔 Apple Pay Later is well-named. It works everywhere apple pay does online, making it a "pay later" product in the true sense. It's embedded in the payment, not the purchase journey. It will work at e-commerce (and possibly later an in-store point of sale) with little to no merchant change or interaction.

🤔 There's a nuance here. This BNPL at the time of payment is a Mastercard feature, and by default, merchants must pay extra interchange for the transactions. They're also "opted in by default" by MasterCard. This might not be something merchants want. There is a flag merchant can use to "opt-out," but how many will use this immediately? Is it any wonder merchants lobby against the card networks so hard with this sort of thing?

🤔 The business case for Apple here is to increase the volume of transactions, especially the size. That would increase their interchange revenue and make Apple Pay an increasingly dominant payment method. For Mastercard, it's a way to defend against the rising tide of closed-loop BNPL and payment methods like Klarna and Block (with AfterPay). The payments world is a funny old game. Everyone wants to both compete with and partner with the card payment networks.

Bank-owned consortium Early Warning Services (EWS) has announced the launch of its Paze wallet, designed to compete with CashApp, PayPal, and Apple Pay. The aim is to have another button at checkout that provides instant acceptance and a slick user experience. Digital wallets continue to boom, and banks are keen to gain their market share. Users can add their existing debit cards to the Paze wallet to pay at checkout. 

🤔 What problem does this solve? From a consumer standpoint, each of these banks already issues a debit card which many choose to use directly at checkout. It helps banks by having a competing product, but "users will use it because it's us" smacks of banker arrogance. Where PayPal and CashApp are much more rounded offerings for merchants and consumers, what will Paze be other than another one?

🤔 Counterpoint. Credit where it is due, EWS executed Zelle flawlessly, and many people doubted it. Why would a consumer choose this wallet over something else? Perhaps the answer is the same; this is for the over the 50s who use Zelle today because they "trust" it. It's an important market, but that would make the incumbent bank strategy essentially go after dying demographics. Great over the next decade, but after that?

🤔 Stupid name; they should have called it Zelle. I guess it Paze to be in branding these days. 

🤔 I get why they didn't call it Zelle though; they can't compete with their internal card divisions. Banks twist themselves into weird jujitsu moves, trying to make the economics of alternative payment rails for consumers work. They don't want to cannibalize the card business, but they also want to grow a new revenue line. I fear that tension and political in-fighting means Paze will struggle to hit its potential, vs. Zelle, which was a massive improvement for consumer P2P using bank apps.

Quick hits 🥊

🥊 EU limiting "anonymous" crypto wallets. EU lawmakers have voted to restrict payment amounts to "anonymous" crypto wallets to 1000 euros. 

🤔 This is how AML works in cash today. If you take more than $1000 (or equivalent) to a bank branch, they'll likely try to identify you. What's new here is that if you give your friend $10,000, there's no formal way to track that. This new rule says that any DeFi protocol, DAO, or NFT platform "controlled by identifiable legal persons, regardless of structure" must impose these limits or require KYC.

🥊  Railsr sells for £414,000Railsr, the Banking-as-a-Service platform once valued at $1bn, was sold to "connected parties" (founders) for £414,000 ($515k). 🤔 The buyout also includes the assets of Wirecard (UK), which appears to be the gift that keeps giving. I'm curious to see what the founders do with the rump of the business and its assets. This buyout is an interesting opportunity to push the reset button and start again. The tech platform here is proven, but the business model is an open question.

Good Reads 📚

The Target Red card is an example of "decoupled debit" used for over 20% of in-store purchases. A user connects their bank account via Plaid to the card, and when they make a transaction, this is "authorized" by the card rail, but the money is pulled from their account via ACH. The ACH "rail" is much cheaper than cards, which can lead to substantial savings for merchants. Alex Rampell estimates Netflix could save $100m in card swipe fees annually if their customers switched to an equivalent. 

🤔 This argument is for 10x better direct debit capability, not decoupled debit. Decoupled debit is starting a transaction via a card and finishing it via another payments rail (in this case, the lower-cost ACH). A direct debit is setting up a recurring "pull" from the bank account for things that look like a subscription (e.g., Prime, Netflix). This autopay feature is common with utility companies and insurance providers but less so with merchants. Part of that is the consumer friction in completing the direct debit form to authorize the company to pull funds from a consumer account.

🤔 The key is the UX. Alex says Target-red-as-a-service is a market gap but in reality, it's direct-debit-as-a-service. Target Red works so well because Plaid has made account linking simple. The hard part is dealing with the infrastructure and massive fraud risk that comes with ACH as infrastructure. A layer over ACH is a huge opportunity if it can marry great UX with removing this complexity and risk.

🤔 The opportunity may be for long-tail merchants rather than the large ones. Giant merchants like Amazon have used every trick in the box to grind down the cost of card acceptance to be equivalent to an ACH transaction (~$0.08). But packaging that as a service for longer tail merchants is more of an opportunity. 

Tweets of the week 🕊

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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.