Fintech 🧠 Food - The Future of Banks

Plus Goldman's big Marcus miss, Nubank keeps crushing and Varo's downround

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 27,750 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

The big rumor this week is Visa is potentially buying FIS. Until we know more, I’m going to say little besides 1) WTF, how does anyone win from that, and 2) If they couldn’t hire Plaid, how the heck will they acquire FIS?

Goldman’s big earnings miss has them taking a knife to the retail banking division. In my view, this is undoing nearly a decade of fantastic work. Perhaps they did too much too fast, but that story inspired this week’s Rant. The future of banks depends on more than just having the right strategy.

The future of banks also involves companies like Nubank and SoFi, which didn’t exist as competitors pre-financial crisis. The next decade could see many more as Fintech companies that deliver the right growth, like Wise, Starling, Monzo, and maybe even the Chimes and Currents of the world, head to the IPO desk.

The path to the future of banking won’t be easy.

It’s hard to get a charter, and keeping it is harder.

Here's this week's Brainfood in summary

📣 Rant: The Future of Banks. Despite the recent performance, most banks continue to erode revenue, profit, and relevance. Exceptions will deliver more engaging experiences closer to a customer context (like home buying or travel). Many will fail, but the opportunity is massive. Perhaps most so for Fintech companies that are or become banks.

💸 4 Fintech Companies:

  1. Stakeholder Labs - Stock ownership as loyalty

  2. Ampla - "Shopify Capital" for any consumer brand.

  3. Vexi - Low interest Credit Cards for Mexico

  4. Ledge - The CFO Command Center

👀 Things to Know:

1. Goldman posts worst earnings miss in a decade Goldman profits fell by 66% YoY to $1.32bn as operating expenses increased by 11% due to higher compensation, transaction fees, and more than $1bn in credit losses. 🤔 Goldman could fund the growth of Marcus, transaction banking, and Apple Card while the sun was shining on its investment banking division. With the cash cow now struggling, some decisions made to grow so quickly in consumer and platforms start to look less sensible in hindsight.

Klarna's QoQ losses fell by half to $182m in the 4th quarter, its lowest in 2022, but marks the largest full-year loss since the company was founded in 2005. Sifted also reports that despite 700 layoffs, the CEO's compensation increased by 35%. 🤔 Market entry is expensive. Klarna had a window of opportunity to break into the US and succeeded. I sense this will pay off for them over time, and if they can continue to reduce credit losses, it will look like a great move in hindsight.

📚 Good Read:

 Varo raising $50m in at a 28% lower valuation than previous round. A 28% down-round is less than Stripe is rumored to be taking (~40%), and in public markets, Fintech companies like MoneyLion and Dave are down 90%. 🤔 2021 was a weird year; anyone raising that year would have had to grow exceptionally to fit their valuation by now. Varo is in the messy phase of becoming a bank, but the prize could be worthwhile if they stick with it. 

Weekly Rant 📣

The Future of Banks

It will be a good year to be a bank but a horrible decade. 

It will be a bad year to be a consumer Fintech company, but a strong decade.

While banks are experiencing short-term success, the long-term outlook is bleak due to profit margin erosion, competition, and stalled growth. Meanwhile, Fintech companies are facing short-term struggles but have massive potential for disruption in the long run.

The future of the financial services market is becoming clearer, and it is one where incumbents ever regain the market dominance they once had.

Take consumer payments preference. Credit and debit cards still dominate, but wallets and BNPL collectively make up 30% of consumer preference. Banks and card issuer's business model depends on being the first choice AKA "top of wallet. But it's hard to be top of wallet when the future of payments could be closed-loop wallets like Venmo and CashApp. 

So what's going on here?

  1. It has been a good time to be a bank. Consumers are still spending, taking on credit to keep spending, and interest rates are high, making lending more profitable. But deposits are getting more expensive; this won't last.

  2. Long-term incumbents are not growing, and margins are eroding. This will lead to the potential break up of banks and create interesting new opportunities for those who want to become banks.

  3. Fintech companies are facing the toughest test yet, and most might not survive. But those that do have a tremendous opportunity. All Fintech stocks are down, but some are more down than others. Understanding why is crucial.

  4. Growth matters. The market is still rewarding the right kind of growth. Companies like Nubank, SoFi, and Adyen outperform peers by delivering consistent revenue and profit margin improvement. Nubank and SoFi as banks make great case studies for the future of banking.

  5. So what should banks do? 

    1. Accept the new reality. 

    2. Build experiences closer to customer contexts. 

    3. Big banks must get better at embedding lending. 

    4. Small banks must benefit from big bank slowness (most aren't)

    5. Execute with self-awareness (know what you're good at and what you're not)

Let’s dive in 🐟

1. It has been a great year to be a bank 📈

After a decade of Fintech being the story, rising inflation finally saw the momentum swing back for incumbent banks. 

  1. They were able to charge more for lending without increasing the amount they paid savers (the spread increased)

  2. Investors went "risk-off" and looked for safe, profitable businesses to park their capital.

The spread: As interest rates rose, banks' profitability immediately increased. A bank's profit is the difference between the price it pays savers (e.g., 1%) and the price it charges borrowers (e.g., 10%) minus costs.

(To grossly oversimplify) If a bank had 

  • $100 lent to a borrower, the bank would receive $10 in revenue

  • $100 of deposits, the bank would pay out $1 to the saver leaving $9

  • Assume staff, branches, and IT cost $8; the bank is left with $1 profit.

  • ($10 - $8) - $1 = $1

Banks adjusted the rate they lend to much higher than the savings rates they offer, which changed the math. Temporarily banks could charge more for lending, so now, instead of charging, e.g., 10% for lending, they charged 15% (these numbers are made up for simplicity).

Investors have gone risk-off: When interest rates are low, investors must find risky investments to generate a return. "Safe" investments like bonds or bank stocks performed poorly, but Tech stocks hit all-time highs. When inflation hits and interest rates rise, investors do the opposite and look for safe investments like banks. Banks have seen better performing share prices just for existing (unless they were heavily exposed to Crypto)

This situation is temporary.

The consumer and economy are in trouble

  1. Consumers and corporates are burning through their savings

  2. Consumers are taking on credit and starting to miss payments

Consumers burning through savings: Coming out of the pandemic, consumers had the highest savings rates in history, and banks were paying almost zero to those customers for the deposits. Banks were also not able to lend while interest rates were low.

But now the deposits are running out; remember, banks need those deposits to lend. So we see increased competition for deposits. Banks have now started to offer higher savings rates. 

Look at the trend line. Consumers have burned through more than $1trn to keep spending as inflation has increased the cost of living. At this rate, their excess savings will be gone in 6 months.

Consumers are taking on debt and starting to miss payments: Consumer debt hit a new record of $16.9trn, and credit card balances are up 6.6% in a quarter, the highest quarterly growth since records began in 1999. Younger consumers (in their 20s and 30s) struggle with repayments the most. Missed payments are still not near all-time highs (at 0.6% of consumers), but what happens when the savings run out?

Bank customers won't have deposits; banks have to compete harder for those deposits and might be unable to repay loans.

The volatility of investment banking has now calmed, so we see banks like Goldman, whose revenue is driven by investment banking struggling much more. The big universal banks (like JPMC or Citi) can no longer rely on their investment bank either, and as the economy slows, so too will their corporate banking divisions.

It's going to be a tough decade to be a bank.

And the long-term trend from the last decade wasn't great.

2. Incumbents are eroding. 🗻

With few exceptions, most incumbent financial institutions or providers are eroding in relevance, growth, and margin. 

Managing decline is no fun (I'm British, we know a little about that), and there are exceptions to this rule, but as a sector, banks, in particular, have not turned a corner.

While the large bank stocks recover, the picture is mixed for the rest of the industry. The price-to-book ratio of the sector is 0.33, which is essentially the market saying, "banks are unlikely to grow revenue or profit in the future." Profit margins are down 25% in the last 15 years and are expected to fall another 30% in the next decade. 

Regulation, competition from big tech, and increasing customer irrelevance compound a belief in markets that banks are headed in the wrong direction. 

McKinsey believes the answer is to break up. The universal banking model is dead. Return on equity (ROE), the key measure of banking success, will continue to fall from an average of greater than 15% before 2008, to 9.5% today, to an average of 7.2% in 2030.

("Universal banks" do consumer, business, corporate, and investment banking on a global scale. The bigger the bank, the lower its cost of funding for lending. Banks that offer a broader range of services are also more diversified when for example, investment banking has a bad quarter; the rest of the bank can balance that out).

I disagree with Mckinsey, the universal banking model isn't dead, but most universal banks aren't making the best of their superpower. Universal banks have the biggest balance sheet, and the market needs that lending.

In Fintech land, everything the company is now trying to lend. Today, smaller banks (e.g., Meta, Cross River) or specialist capital markets lenders provide this lending. This is a missed opportunity for banks to participate in the Fintech and big Tech wallet boom that will continue in the next decade.

But you could argue that this Fintech thing will go away. So why bother?

3. Fintech companies are facing a hard year, and many won't survive. 📉

Fintech stocks are down as much as 90%. We've already seen companies like Fast shut their doors, and mass layoffs are the new normal. You'd be forgiven for thinking Fintech is dead.

Fintech companies can't continue to be valued at 50 to 100x revenue, and repricing to the industry's long-term averages (5x to 10x) will be painful. 

Layoffs will be painful.

That's not the end of disruption for banks.

Far from it

  • Big Tech companies continue to eat market share. Wallets like Apple Pay and companies like PayPal are a bigger part of the market.

  • Fintech companies have fragmented the deposit base. Chime, Current, SoFi et al. may not always own the direct deposit, but they have siphoned deposits away from the primary banking relationship.

  • The focus on profitable revenue is creating sustainable disruption. Revenue is vanity, profit is sanity, and cash is king. This has always been true. The nature of venture is to burn cash to grow faster; it is naturally high risk. But if companies can show good and improving unit economics and growth. Then we might have something.

  • Laid-off workers will build new companies. It's already happening; the founder and pre-seed stage feels alive again.

  • Fintech companies will become cost-disciplined and focus on their core. The age of hiring a team and building it ourselves for world domination is gone. That's a good thing. Specialists can often do things better, faster, and cheaper (or at least two out of those three)

The opportunity is massive.

As I wrote two weeks ago

And payments are a big deal. EY Estimates the global payments market to be worth $240trn (yes, trillion), of which payment Fintech companies represent a $2.17trn market cap. 

Payments disruption is less than 1% done.

That's just payments. Now think about storing, borrowing, exchanging, or investing in assets. Leaner, meaner Fintech companies can be much more disruptive than those spoiled by all-time high venture funding environments. 

Fintech companies need the right kind of growth to deliver sustainable disruption; some are already doing that.

4. The right kind of growth matters. 💸

The market might have overpriced the wrong kind of growth, but the right kind of growth is still what the market wants.

This fantastic piece from Bain Capital lists 5 takeaways:, 

  1. Younger publicly listed Fintech companies have fallen further than their incumbent counterparts. In this market, everything has been reduced in price. But the more interesting analysis is who lost the least.

  2. Profitable fintech companies do best. Companies growing consistently and serving enterprise clients continue to do better. Slow and steady wins the race.

  3. The market is rewarding, growing at "just the right pace." I read this as sustainable growth. This kind of growth is harder to fake with market dynamics (like low-interest rates meaning everyone does real estate. Followed by high-interest rates, and suddenly everyone is a lender).

  4. Strong and sturdy is winning, but it doesn't mean you can't take on more risk; it is just harder. This is a fantastic point by the BCV team. The nature of venture is taking risk and contrarian bets, and right now, the market is betting on consensus because it is risk-off. That doesn't mean others won't thrive; it's just harder now the easy money is out of the system. 

  5. Fintech is an ugly duckling. If we're patient, there are swans (and even black swans) in the Fintech company category. They might be overpriced now relative to public comparisons, but there will still be great businesses. Patience is a virtue, after all.

(I have paraphrased and re-interpreted their blog quite liberally above, but it captures the spirit + my opinion. It is, however, worth reading yourself for deeper context).

To throw some examples out there.

Nubank keeps crushing: Nubank has 74.6m customers, with gross profit increasing 137% YoY, and ended the year with a net income of $113m. The revenue growth is driven by customers increasingly adopting the lending products Nubank offers. The insight is that those who can become a bank and get lending work can be profitable growth stories. So Chime, Varo, and others might have a bright future if they can bridge the gap from here to there.

SoFi is doing well: SoFi's net revenue grew 60% from last year. Net losses shrank from $0.15/share in 2022 to $0.05/share. Total deposits rose 46% from prev quarter and more than 700%(!) in 2022. SoFi is solidly on track to be profitable by the end of the year. SoFi has (you guessed it) plenty of lending businesses working for it and is diversified. Its Galileo acquisition is also interesting; you can see how they have the pieces to be a bank as a platform. The devil is in the execution, of course.

I could mention Wise, Adyen, and others here delivering that growth. The insight for banks (or Fintech companies that want to become a bank) is that it is possible to grow and have a charter

But in 2023, Fintech isn't just companies that do finance.

Every company will be a Fintech company. 

We need to consider both direct-to-consumer Fintech companies and embedded finance.

5. So what should banks do? 🤷‍♂️

A big brand is no longer a right to win deposits or lend to customers.

It's no longer enough to copy+paste Fintech features into the core mobile banking app. 

Finance is everywhere, from new Fintech apps, e-commerce points of sale, and every Big Tech wallet. It's also becoming more niche, with Fintech apps for communities, professions, and the unbanked. New categories like earned wage access or cash-advance are now the norm, and BNPL has established the "shopping app that also does lending" model.

The consumer doesn't care who offers their finance.

They care that it works and it is convenient. 

This has several implications for banks.

  • a) Wallets are the new accounts. The deposit bleed will worsen as wallets grow their market share.

  • b) A few banks need to build more engaging experiences. By getting closer to the customer context (like searching for travel). However, most banks will do this terribly and shouldn't bother.

  • c) Big banks need to serve the embedded finance market. Since the financial crisis, non-bank lending has exploded. The new interest rate environment changes the economics. If we accept that embedded finance and wallets are the new normal, an area bank could win if they can execute.

  • d) Smaller banks can be nimble. A fraction of smaller banks has already proven to be better at building engaging experiences and serving embedded finance than big banks. But the vast majority are still frozen and missing the opportunity.

  • e) Knowing what to do is 1% of the job. Execution is everything. It takes a disciplined multi-year investment to show growth that's just right, not too fast or slow. 

a) Wallets are the new accounts: Wallets are the consumer center of gravity for financial services. They exist above the account layer. From the Future of Payments

🤔 What is most exciting about wallets is the ability to put together the data and the payment. Imagine how much easier online pharmacy would be if a wallet could tell you who you claimed to be (identity), that you had a prescription (credential), and then let you ship medicine to your address.

The more time passes, the more the upside for wallets starts to feel unlimited for me. A bank account is just another thing that sits in a wallet. But for these wallets to succeed, they must be interoperable with as many rails as possible, manage identity and privacy and gain wide adoption.

Now, look at the charts on wallets again. 

An aside on B2B. I suspect B2B needs a similar model to emerge (we need "cash management" and global transaction banking for digital businesses). Halfway between Modern Treasury and Mercury is something I can't quite reach yet. But looks like the cash management + trade and working capital desk at Chase or Citi but for the 21st century.

But who gets to be a wallet?

Can a bank be a wallet?

Can a wallet be a bank?

💡 The insight for banks is that offering a mobile app account is not enough. Recognize the new consumer reality and solve it. Not just with debit cards that are available via Apple Pay

b) A few banks need to build more engaging experiences. This means getting closer to the customer context, like "I'm looking for a place to live," "I'm searching for a new car," or "I need to travel on business." 

It means intentionally building home-buying, car-buying, and travel agent experiences. 

That's why JP Morgan is launching a travel agent

If you want to see what the future looks like here, look at the Chinese company Ping-An (from Ping-An the tech giant masquerading as a finance company)

Insurance has long had an engagement issue. Customers don't want to talk about insurance, play with it, touch it, or anything. Typically, you hear from your insurance company once a year around renewal, making the relationship very much about price.

Realizing this, Ping-An finds any excuse to build engagement that has nothing to do with insurance at first glance and everything to do with insurance at second glance. Ping-an creates auto services, health care services, or even peer-to-peer lending services as an excuse to engage with customers.

For example, in the auto "ecosystem," Ping-an acquired a majority stake in HaoChe, a Chinese car leasing start-up. What does that have to do with insurance? Ping-An mines the data from HoaChe, such as car servicing frequency, location history, and car purchase habits. HoaChe now claims a 76% market share in online car sales in China. Ping-An gets to use all of that data not only to train it's underwriting engines but to embed insurance at the point of purchase.

💡 The lesson from Ping-An isn't to build everything from scratch but to buy + build + partner with absolute clarity over where the financial product sits in that customer context. McKinsey would call this an "ecosystem strategy."

💡 There's huge potential for acquisitions if banks can get it right. Many of these experiences have already been built by Fintech companies with terrible business models. These companies are now much more affordable and ripe for acquisition.

c) Most big banks must figure out how to serve the embedded finance market. The banks that have historically provided wholesale lines of credit for earlier stage Fintech companies have been smaller. This reality makes sense when considering that a small Fintech company historically is typically high-risk and low-reward. Many will go out of business, and the bank has to oversee the compliance setup at that Fintech company to ensure it doesn't create massive new AML or fraud risks.

For most global transaction banks, Fintech companies are one of their "high-risk sectors," meaning they'll only serve that Fintech company when it gets freakin big. This is starting to change in the payments teams at the big banks now, but less so in the wholesale financing division.

If providing payments to Fintech companies is hard, providing lending to them is harder. That Fintech company must set up a fair lending practice and demonstrate they can be a worthwhile investment. A start-up with no track record of lending is a tougher sell. 

💡 A bank with a larger balance sheet could offer a Fintech company the best deposit rates and a wholesale line of credit. As specialists like Silicon Valley Bank struggle with tech re-pricing, there's a window of opportunity to win this emerging segment.

💡 Productiziing compliance is the key to becoming the "Balance Sheet as a Service" provider. The best approach is to productize compliance and increasingly partner with the Fintech ecosystem of credit workflow providers. These API-first SaaS companies can help the bank keep risk inside a window. Companies like Cable, Themis, and Sardine* also help banks manage the downstream policies, fraud, or AML risk for Fintech companies. 

💡 I'm yet to see anyone try to build a proper wholesale bank competitor as a Fintech company or disrupter. There is a market opportunity for a disruptive, greenfield wholesale bank (maybe Goldman will take some of that with its new transaction banking division).

d) Smaller banks can be more nimble (and many are). Smaller banks are already executing on the opportunity to build new brands for niches and serve the embedded finance opportunity.

Panacea Financial is a bank for doctors and vets owned and operated by Primis (an FDIC-insured bank). While we've seen plenty of consumer Fintech companies that are not banks attack niche opportunities like this, vanishingly few banks have done so, and even fewer have succeeded.

The US is littered with sponsor banks specializing in providing services to Fintech companies (Bancorp, Meta, Coastal, etc.), and in Europe, names like LHV in Lithuania consistently appear. These specialists deepen their offerings and play to different strengths (like consumer, SMB, deposits, or lending).

💡 Despite the numerous examples, most small banks don't do this. Many aren't set up or lack the risk appetite to get into this space. But they have to get good at something. The alternative is a gradual slide into irrelevance.

💡 As the market swings to credit, mid-sized and regional banks have a bigger opportunity. Silicon Valley Bank did well here historically, but folks like FNBO can now pivot their traditional co-branded credit card business into more of a credit-as-a-service offering.

💡 The recent challenges faced by Evolve and Silvergate show that becoming a sponsor bank is not an easy path. Winners are the ones who can nail compliance and automation (again, Cable, Themis, and 👋 Sardine* help here).

e) Knowing what to do is 1% of the job. 

Goldman had the right strategy.

They wanted to go direct to consumers, build an embedded finance business and do partnerships like Apple Card. Goldman also had great talent and a greenfield technology estate and was willing to acquire companies (like Greensky) to help it get where it needed to be. 

But when the market turned, the leadership balked.

This is what happens when you put investment bankers in charge of a consumer division (from 📚 Good Reads below)

Goldman's deal-making culture doesn't make a great cards, lending, or platform business culture. I always felt the pressure to do the deal (sign Apple to Apple Card, complete the Greensky M&A) was prioritized over doing things correctly. No matter how good the strategy or approach, the deal is 1% of the work. Execution is everything. This led to rookie mistakes like agreeing to take on all of the credit risks from Apple Card but letting Apple have a say in underwriting. 

The lesson of Goldman is not to do too much too fast.

Instead.

💡 Know what you're good at and bad at. Self-awareness is critical; play to your strengths and partner with others who fill the gaps. The same old suppliers will deliver the same old results unless something you do changes. 

💡 Be consistent. The worst mistake is to spend big only to kill a project that doesn't have a product-market fit. The big investments should focus on building the services that allow the bank to experiment more in production.

💡 Experiment more. Banks need to stop doing innovation theatre and start doing more things that are real, live, and in production but small scale. Less things in labs and more multi-year investment

💡 Double down on what works. Only when a product experiment demonstrates market fit do you double down. (Again, the PingAn case study here is a great example of how to do this)

💡 Make compliance a competitive advantage. We can see from the troubles facing some sponsor banks and Fintech companies getting compliance right is critical. There are ways to partner to make this easier, but the way there isn't via a standard "new product approval" process. It's a disciplined, multi-year focus on a new set compliance operating model.

The future of banks.

The future for most banks is eroding relevance, revenue, and profit.

The future for banks that can be consistent and get out of their own way is to capture the opportunity the Fintech era presents.

The future for some consumer Fintech companies might be to become a bank.

Who's up for a challenge?

ST.

4 Fintech Companies 💸

1. Stakeholder Labs - Stock ownership as loyalty

Roundtable is a solution that identifies a brand's retail investors and creates a platform to engage with those consumers. They verify shareholders (via open banking) and create a dashboard that can be used to create campaigns to engage those customers. 91% of consumers are more likely to buy a stock they use, and 77% say they're more likely to use a product or service once invested. 

🤔 For Gen Z, the ultimate demonstration of brand advocacy is owning stock in a company. A generation of consumers discovered investing via apps and Reddit; why shouldn't that be a marketing opportunity for brands?

2. Ampla - "Shopify Capital" for any consumer brand.

Ampala provides inventory funding (capital), checking, and "BNPL" for modern consumer brands like food and beverage companies. Ampala promises transparent fees, capital that scales with the business, and flexible repayments.

🤔 There's a boutique drink or cake mix company for just about everything, and they're an interesting potential scaled niche. Banks often struggle to serve this segment, which gets stuck in a catch-22 of being unable to grow without capital to fund their inventory. This looks like revenue-based financing without some of the potential drawbacks. In their marketing, Ampala is noticeably pushing back against "flat fees," which can compound over time and become very expensive.

3. Vexi - Low interest Credit Cards for Mexico

Vexi is a credit card requiring no credit history, security payment, or income verification. It provides cash back, and users will steadily build their credit score by paying back on time. Vexi charges a "commission" for opening the account; users must be of legal age and have a Facebook account. 

🤔 Everything is credit, and everything is LATAM. Does that make this a consensus bet? I have no doubt this product will attract users, but I can't escape the flashing warning signs in my head screaming "CREDIT LOSSES." If Vexi can prove this model and successfully build an underwriting engine, they'll be on to something. However, it will likely take someone who can stomach reasonably high credit losses to backstop this.

4. Ledge - The CFO Command Center

Ledge manages payments automation, workflow, and reconciliation with its no-code platform for finance teams to create a "single source of truth." CFOs and finance teams can match payments, get alerts and create new payment flows in a limited number of clicks.

🤔 This language and marketing copy sounds like how a CFO would speak; that's a good thing. But there are so many companies in this category now. I wonder what Ledge's right to win is? This is strong investors and seasoned operators but its a crowded space.

Things to know 👀

Goldman profits fell by 66% YoY to $1.32bn as operating expenses increased by 11% due to higher compensation, transaction fees, and more than $1bn in credit losses. Credit losses came from its credit card portfolio (including Apple Card) and the Greensky point-of-sale lending business. Goldman has laid off 3,200 staff to reduce costs, and CEO Solomon admitted it "tried to do too much too fast" in its consumer business and hasn't had the talent to execute the way it wanted.

🤔 The IPO window is closed, hurting Goldman's core investment banking division. The rationale for the consumer division Marcus was to avoid the boom and bust cycles inherent in the investment banking division. But the speed at which Goldman has tried to be all banks for everyone has created new risks and costs they weren't ready for. When the investment bank stopped crushing it, their patience for Marcus ran out. Which is a shame; I liked the strategy, not the execution.

🤔 This happens when you put investment bankers in charge of non-investment banking divisions. Goldman's deal-making culture doesn't make a great cards, lending, or platform business culture. I always felt the pressure to do the deal (sign Apple to Apple Card, complete the Greensky M&A) was prioritized over doing things correctly. No matter how good the strategy or approach, the deal is 1% of the work. Execution is everything. This led to rookie mistakes like agreeing to take on all of the credit risks from Apple Card but letting Apple have a say in underwriting. 

🤔 Talent matters. You can spend billions with consultants and hire the right people with the right resume, but you can't brute force build a consumer bank, platform business, transaction banking division, and co-brand cards division and expect it all to work. 

🤔 Patience matters. Doing things at this scale takes consistent investment over a decade or more. What happens now? I suspect Goldman may look to sell its Greensky business, slow down investment and tighten its credit underwriting. I doubt it can exit its Apple Card arrangement, but it has to find a way to make that work better over time too.

Klarna's QoQ losses fell by half to $182m in the 4th quarter, its lowest in 2022, but marks the largest full-year loss since the company was founded in 2005. Sifted also reports that despite 700 layoffs, the CEO's compensation increased by 35%. Despite this, Klarna now counts 150m consumers globally as customers, the US is now its largest market, and it expects to return to profit in H2 2023.

🤔 Market entry is expensive. Klarna had a window of opportunity to break into the US and succeeded. I sense this will pay off for them over time, and if they can continue to reduce credit losses, it will look like a great move in hindsight.

🤔 Does that mean they're out of growth mode? The downside of becoming profitable might mean they won't grow as fast. The GMV (total amount consumers spend) via Klarna grew by 71% in the US last year. I'm willing to bet that growth is much slower in 2023, although we have a cost-of-living squeeze with inflation that could also drive that.

🤔 BNPL is still a small part of the market, is it destined to grow more? The chart in the Rant from PYMNTS suggests 35% of consumers prefer credit cards, 33% debit, and BNPL at just over 1%. You could read that two ways. The bull case is that BNPL is just starting; the bear case says it has found its level.

🤔 It is impressive how much consumer preference for Apple Pay and PayPal demonstrate in the chart above. Fintech wallets or payments have "top of wallet" status with about 13% of the market. That's less revenue for traditional players and more for big tech and Fintech. 

🤔 And yeah, the CEO pay increasing 35% in a year of layoffs is not a good look.

Good Reads 📚

Jason cites a term sheet for Varo raising at $1.8bn, which is lower than their previous $2.5bn valuation in September 2021. A 28% down-round is less than Stripe is rumored to be taking (~40%), and in public markets, Fintech companies like MoneyLion and Dave are down 90%. Jason points out that the best public market comparison is SoFi, down 50% in the same time frame. It is trading at 18x revenue, or 12x "book," compared to SoFi, trading at 3.7x revenue or 1.2x book.

🤔 SoFi is a wildly different business to Varo. Varo has four products (checking, deposits, cash advance, and a credit builder card) and claims to have 6.8m customers as of September 2022. SoFi has lending (students, personal, mortgages), credit cards, Crypto, investing, checking, deposits, insurance, and even estate planning. SoFi also acquired Galileo, the payments processor that powers Chime, to help build on its ambition to be a platform. SoFi has far more revenue-generating potential than Varo in the short term.

🤔 It's hard to become a bank, but the prize could be worth it. The US doesn't have many de-new digital banks with a modern tech stack. If banks struggle for growth and profitability, being digital-only and having low-cost infrastructure is a competitive advantage. The regulatory burden of being a bank is much higher than being a Fintech company, so feature velocity suffers, but if Varo can bring that back, perhaps they could be the next SoFi.

🤔 2021 was a weird year. Any company that raised in 2021 and is raising today is at risk of a downround unless they have grown well beyond expectations. In that context, Varo appears to have a great deal on the table, possibly overvalued, as Jason says. I wonder if the fact the deal is led by private equity means they see other opportunities. PE firms understand banking and generally drive a harder bargain on pricing. I wouldn't be surprised if equity investment were one part of something bigger, but I am purely speculating. 

Tweets of the week 🕊

That's all, folks. 👋

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