Fintech 🧠 Food - The future of embedded finance

Plus: Will FIS acquire Bond? Monzo hits profitability, JP Morgan has a large language model and Identity in the age of AI.

Thanks for coming back to Fintech 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 32,031 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

I feared this week would be quiet.

Then I see that Jason Mikula believes FIS will buy Bond 

(The names Bond, FIS Bond). 

Customers complain that they can't withdraw their deposits from the Apple savings account. Monzo has hit monthly profitability, and JP Morgan has trademarked a large language model for stock picking (IndexGPT).

As ever, I'm trying to distill all of this into trends. This week's Rant is about how embedded finance is putting on the big boy pants.

Time to mainstream this mofo.

That means more partnerships, more complex products, and, well, more.

My favorite story of the week, though? EA Sports will include Nike NFTs in their next set of sports titles (Madden, "FIFA," etc.) I love this because it makes complete sense. Look at the pattern. Sneaker-heads who love sports, DraftKings, and open-loop digital commerce. Play with those three ideas for 10 minutes on paper, and it makes so much sense.

It's gonna be a big summer. Let's do this.

PS. I'll be at M2020 all week. Come say hi, especially if you wanna catch more fraud 🐟👀. Given I'll be packed next week, it also means a week without your regular dose of Brainfood on June 11th. Will be back at it from June 18th :).

Here's this week's Brainfood in summary

📣 Rant: Embedded Finance is mainstream

💸 4 Fintech Companies:

  1. Oscilar - Risk workflow orchestration 

  2. Onyx Private - Private banking for the inheriting generation.

  3. Fishtail - Trade Finance for the rest of us

  4. Ballerine - Open source SMB risk orchestration

👀 Things to Know:

📚 Good Read:

Weekly Rant 📣

Embedded Finance is Mainstream.

By 2030 embedded finance will reach $440bn annual revenue.

BCG says embedded finance revenues will be 5x to 11x, depending on your segment.

Every bank is trying to survive the deposit drought and high interest rates. Embedded finance is a great way to do just that.

And since the opportunity is so strong.

Everyone wants in.

The big moves are only starting to surface.

The 19th largest bank in the US (Fifth Third) acquired a BaaS provider.

In the same week, Jason Mikula tweeted a rumor that FIS might acquire BaaS platform Bond. 

Late last year, quietly, one of the UK's largest banks (Natwest) created a JV with a BaaS provider which I'm hearing is gaining significant traction.

Embedded finance is now the core strategy for some of the world's largest banks and digital businesses. 

With brokerage and treasury management, we may not need sponsor banks for deposits(!)

Embedded finance is changing shape.

  • Embedded finance started as (debit) cards dominated. It is becoming multi-rail.

  • Embedded finance started as small-provider-dominated. It is becoming a level playing field of incumbents and smaller players.

  • Embedded finance started with native digital businesses. It is creeping into the analog world (e.g., fleet cards).

  • Embedded finance started with payments. It has become all products (like investing, deposits, and lending).

  • Embedded finance was distributed by the software provider primarily. Increasingly banks are doing distribution more directly with provider's support.

  • Embedded defaulted to running on insured bank deposits. It might shift to brokerage and treasuries.

Today the market is complex, with every financial product for every customer and every distribution approach having some offer available. The maturity of these offerings varies by product, customer, and geography.

One thing is clear.

All finance is becoming embedded.

All of it.

So let's unpack. 🛅

  1. Recap: What is embedded finance?

    1. It happens in a brand's digital experience. The brand has control over the experience (to some extent). The customer drives the experience. The experience is automated (or mostly automated). The experience is real-time (or mostly real-time)

      1. 👴 Historic pattern: This was historically offered by smaller banks, an API provider, and distributed via a card or e-commerce checkout page. 

      2. 👶 New pattern: New segments are emerging at the frontier of embedded finance. 

      3. 👶 New pattern: As the revenue pool grows, incumbents enter the more established embedded finance verticals.

  2. The customers of embedded finance 

    1. Born Digital exists because of the internet and was born after 1995. Digital Nomads added digital to a business that existed pre-internet. Finance-first is their primary customer use case, and value is something in finance or adjacent, such as a bank or fintech company. Non-finance primary customer use case is anything but finance (transport, energy, retail, travel)

      1. 👴 Historic pattern: most embedded finance activity happened with Digital-Finance and Digital-Non-Finance brands. 

      2. 👶 New pattern: New customer segments are emerging at the frontier of embedded finance

      3. 👶 New pattern: As the revenue pool grows, incumbents enter the more established embedded finance verticals.

  3. The products of embedded finance

    1. Collecting payments is going multi-rail and opening new use cases.

      1. 👴 Historic pattern: Collecting payments is via a card.

      2. 👶 New(er) pattern: Collecting payments is multi-rail.

      3. 👶 New pattern: Multi-rail unlocks new payment flows and use cases. 

    2. Making payments is going multi-rail and becoming opening more complex use cases.

      1. 👴 Historic pattern: Payments are almost always made with a card online.

      2. 👶 New(ish) pattern: Consumers and businesses pay with multiple rails.

      3. 👶 New(ish) pattern: Business payouts are a battleground.

    3. Storing value is more insured, has a higher yield, and is more competitive.

      1. 👴 Historic pattern: Storing value had standard insurance limits and niche providers.

      2. 👶 New pattern: Competing on theoretical FDIC-insured limits.

      3. 👶 New pattern: Brokerage-as-a-service. Using treasuries as a value store with a higher yield. 

    4. Borrowing is becoming more embedded, complex, and B2B

      1. 👴 Historic pattern: Borrowing value was mostly consumer BNPL and earned wage access/credit building.

      2. 👶 New pattern: Consumer Neobanks pivot to lending and push hard for a charter.

      3. 👶 New pattern: A type of lending-as-a-feature-as-an-API. 

      4. 👶 New pattern: More sophisticated B2B borrowing (lending) products as an API.

    5. Investing is less about meme stocks and more about responsibility and diversification

      1. 👴 Historic pattern: Investing value was about dopamine-driven day trading.

      2. 👶 New pattern: Responsible investing as a default.

      3. 👶 New pattern: Digital-only Private banks. 

  4. Distribution is less niche and more mainstream and more competitive

    1. In the early days of Fintech, the providers to Fintech companies and embedded finance were niche players. They won a massive opportunity by being one of the only games in town for a huge and growing market demand. 

      1. 👴 Historic pattern: Sponsor bank + BaaS program manager + Fintech or SaaS company does a debit or prepaid card. 

      2. 👶 New Pattern: Bigger banks here to play. 

      3. 👶 New Pattern: Banks leading the sale directly.

      4. 👶 New Pattern: Incumbent providers M&A.

      5. 👶 Possible pattern: Brokerage-as-a-Service a new category.

      6. 👴 Possible pattern: Headless banking. 

  5. How this plays out

    1. ... You gotta read the below to find out 👇😁

It would require months of work and endless tables and diagrams to show all of this variety, so for this Rant, I'm focussed on the delta from what was typical to newer trends. It assumes some knowledge of embedded finance, but I've attempted to re-use a first principles explainer to give it some grounding.

1. What is Embedded finance? 🤷‍♂️

I wrote in "the future of embedded finance" as follows

Embedded finance is a regulated financial product that shows up at the point of need.

The point of need represents a moment, context, or experience a human or business has. Maybe they're shopping online, doing work, doom-scrolling, or trying to find a new house. The core activity is not "doing finance," but it's doing something else. The financial product then shows up in the context of that activity. 

Regulated financial products are any service that requires someone in the value chain to have a license from one of the many regulatory agencies for that product to be offered legally. Obvious examples are FDIC-insured checking accounts, any form of lending, or interest-bearing savings accounts. 

The business case is also worth recapping

Embedded finance unlocks engagement and revenue for brands. 

Embedded finance is the ultimate engagement creator and friction remover because nearly every activity involves finance eventually. It creates more engagement by removing barriers to paying, getting paid, or between systems. 

Epic games bake in their payment experience to Fortnite to create more engaging consumer experiences. Shopify embeds payment acceptance and expense cards to keep users on the platform and deepen the value they create. 

There are less obvious examples too. Uber lets its drivers cash out earnings immediately into a debit card, ensuring that drivers want to use the platform and feel the reward instantly.

Embedded finance is an astonishingly effective source of revenue for brands. More than 50% of Shopify's revenue comes from financial services (of which most of that is payment acceptance).

You'll notice most of the examples are 

  1. Related to a consumer

  2. Related to cards (or BNPL)

  3. Typically offered by a digital brand 

👴 Historic pattern: This was historically offered by smaller banks, an API provider, and distributed via a card or e-commerce checkout page. Accepting and making payments on a card is still the core of at-scale Fintech offerings in embedded finance. 

But this is shifting in two ways

👶 New pattern: New segments are emerging at the frontier of embedded finance. As the customer type changes, the products they need change. In turn, changing how the product is distributed

👶 New pattern: As the revenue pool grows, incumbents enter the more established embedded finance verticals.

We're moving into embedded finance 2.0.

2. The customers of embedded finance 🛒

Again borrowing from myself.

Brands can be 

When we talk about embedded finance, we usually mean born digital non-finance brands, adding a regulated financial services product at the point of need. They are rewarded with engagement and revenue if they do this in context and create convenience. Phew.

Of course, digital nomad brands can use embedded finance too, and present an utterly massive opportunity.

Now a layer of complexity. 

Each brand can be early-stage, mid-stage, or late-stage. Earlier companies prioritize time to market and customer acquisition. Mid-stage now, it's less on growth, unit economics, and vendor consolidation. Late-stage (or public), efficiency, and profitability matter.

💡 Historic pattern: If we take our 4 types of business (Digital, Analog, Finance, and Non), overwhelmingly, most embedded finance activity happened with Digital-Finance and Digital-Non-Finance brands. 

👶 New pattern: More "analog" non-finance businesses, like vehicle fleet management companies, construction, and even energy companies, look to embed payments in their offering. As everything goes digital and becomes software, finance follows it. Getting embedded.

Case in point, fleet management cards like AtoB and RelayPayments 

👶 New pattern: More "analog" finance businesses like banks, brokerages, and insurance firms are entering the embedded finance market as providers. 

3. The products are going wider and deeper 🧮

Borrowing from my previous explainer again

Most financial products are one of the following types

The dominant use case has been collecting and making payments. 

a) Collecting payments is going multi-rail and opening new use cases.

👴 Historic pattern: Collecting payments is via a card. Merchants overwhelmingly collect card payments in eCommerce; companies like Stripe and Adyen help them collect that. When a Shopify merchant collects a payment, Shopify provides the service to the merchant, and Stripe provides that service to Shopify. Shopify collects payment revenue, and so does Stripe. 

👶 New(er) pattern: Payments are multi-rail. The ability to accept every kind of payment via every rail is becoming a new default. When most payments happen on a card, most checkouts could default to the consumer-grade experience even if the buyer uses an expense card. Accepting payments via ACH, SWIFT, and even wallets like Venmo and CashApp is becoming mainstream. 

👶 New pattern: Multi-rail unlocks new payment flows and use cases. "B2B checkout" has become a new default. Balance is an example of a company that combines the consumer-grade card checkout experience. Business buying is harder, with options like paying with an invoice, after delivery, and with an option of ways to pay (like Wire, ACH, and even checks). Expense management cards attacked the problem one way; B2B checkout comes the other. 

b) Making payments is also going multi-rail and becoming more complex

👴 Historic pattern: Making payments. Consumers and businesses typically make payments in embedded finance using a card. API provider companies like Unit and Stripe target SaaS companies that want to put their brands on a card. This allows companies like Cleo, Ramp, and Angelist to give cards to their customer and generate revenue at every transaction. 

👶 New(ish) pattern: Consumers and businesses pay with multiple rails. Issuing a card is (relatively) easy; helping people pay from their bank account via ACH or wire is a little harder. Open finance is starting to get a foothold as a payment type, especially for large transactions like paying a tax bill or a car deposit. That card-like convenience for a push payment is becoming normal.

👶 New(ish) pattern: Business payouts are a battleground. From Modern Treasury to Melio and Nilus to Primer, there's a lot of difficulty managing those payments. It's not as simple as hitting "pay" when you're a business, and it's a refund. Instead of starting an ACH or a Wire via their bank (or Neobank), that capability is popping up in specialist payment automation platforms. Over time, the multi-rail payout becomes a default in any "operating system." This wasn't seen as embedded finance, but if you're instructing a payment in something that's not a bank or Neobank, it's embedded elsewhere. 

When the payment happens elsewhere, why can't the storage?

Glad you asked.

c) Storing value is more insured, higher yield, and into brokerage.

👴 Historic pattern: Storing value. Most of the value on a card in embedded finance lived in a bank. In the US, most commonly, an FBO account held at a bank allows a Fintech company or brand to store money "for the benefit of" their customer insured up to the FDIC threshold of $250,000. (In the UK, those deposits can and quite often do sit at the Bank of England). We've seen two new patterns after the banking crisis and the interest rate rise.

👶 New pattern: Competing on theoretical FDIC-insured limits. Every Neobank, BaaS provider, and actor in B2B Fintech has followed the banking crisis by securing significantly more theoretical FDIC insurance by sweeping deposits across multiple banks. This is especially important for business customers since it’s often businesses, not consumers, who actually have deposits above 250k. This broader trend is a shift back to trust as the core narrative.

👶 New pattern: Brokerage-as-a-service. Using treasuries as a value store with a higher yield. Almost every B2B Neobank and increasingly embedded finance platform serving businesses offer high-yield savings. A category of companies provides the ability to buy US treasuries quickly on top of a brokerage account, and most Neobanks (like Mercury, Arc, etc.) now offer this too. 

d) Borrowing value is becoming more embedded and more B2B. 

👴 Historic pattern: Borrowing value. Actual lending activity was limited to "buy now pay later" for consumers and credit builder cards until recently. There was some innovation in earned wage access and cashflow-based underwriting for consumers, but often, these were direct-to-consumer plays (i.e., sign up for a Fintech app that does earned wage access).

👶 New pattern: Consumer Neobanks pivot to lending and push hard for a charter. Digital banks like SoFi, Monzo, Starling, and Nubank are all driving toward profit via lending. Neobanks without a charter have a harder task. The problem with lending is never demand (especially in this market); it is supply. If you don't have deposits, your supply of capital to lend is oxygen. Many lending businesses die from getting this wrong. The US has several smaller banks and PE shops specializing in this type of lending, but this will get harder for Neobanks focussing on sub-prime and near-prime. The obvious solution is a charter. Easier said than done. 

👶 New pattern: A type of lending as a feature as an API. Student loan repayments are a complex product, but if you want to add that as a feature, you can (with Spinwheel or MethodFi). The jury is out on if these businesses sink or swim for me. Again it all comes to managing supply, demand, and credit risk. Lending is hard

👶 New pattern: More sophisticated B2B borrowing (lending) products as an API. Last week I wrote about trade finance as an offshoot of the B2B BNPL craze Fintech has been going through for the past 6 months. We're moving from invoice financing for SaaS into much more complex working capital loans. This is in the heartland of banking. It's starting by serving growth companies but following the trend into more analog businesses too. Any business born in the past 20 years is more likely to meet its finance needs with a Fintech company than a bank directly over the next decade.

Stripe Capital provides lending-as-a-service, which is hard to do without payment data, but increasingly, Stripe capital for everyone else is becoming common. Companies like Codat and Rutter can combine various payments providers to build workflows to get that data. Combine the payments data with lending-as-a-service APIs, and you've disaggregated small business lending. 

The charge card is interesting too. It’s an interesting cash flow management tool for startups as designed because they don’t have to pre-fund the account. That’s hard to pull off with compliance and regulation. Stripe joins Unit offering this, and I expect more to follow. It’s an ideal cashflow management solution and a natural extension of spend management in embedded finance.

More sophisticated products, more use cases.

(Long term, a lending business is a lending business, some of the smaller ones here will fall away, and others will get charters, but that's a whole other rant).

e) Investing was about stocks now its about diversification and alternative assets

👴 Historic pattern: Investing value was about dopamine day trading. Whether meme stocks or Crypto, the instant, urgent, consumer-grade design was the default. At the infrastructure level, companies like Drivewealth and Alpaca became the APIs, and a layer down Apex Clearing the infrastructure to unlock these markets. 

👶 New pattern: Responsible investing as a default., 401 Financial, and countless others whose names escape me position themselves as more responsible investment apps. They help you think long-term. Another good example is Parthean, like if NerdWallet and ChatGPT had a baby, helping users converse about their money. Fintech is learning the lessons of its 2021 dopamine binge and returning the other way. That's a good thing.

👶 New pattern: Asset (and revenue) diversification. I see a real-estate, whiskey, or private equity investing app or service for the mass market every week. Historically alternative asset investing funds had high minimums and were reserved for the ultra-wealthy. These assets are becoming available through API providers and exist as a feature in existing trading platforms or as entire businesses focussed on these assets.

👶 New pattern: Digital-only Private banks. Again in the past 3 months of Brainfood, this pattern of digital-only Schwaab has appeared. In this week's 💸 4 Fintech companies, I cover Onyx Private, which is as much a lifestyle brand as a money manager. They offer every kind of banking and finance product, with a digital concierge who can give financial advice or get reservations at high-end restaurants. Over the next decade, trillions of wealth will shift to millennials, and companies like Onyx are betting those inheriting wealth would rather manage it digitally. 

4. The distribution 🚢

The biggest area of change is distribution. In the early days of Fintech, the providers to Fintech companies and embedded finance were niche players. They won a massive opportunity by being one of the only games in town for a huge and growing market demand. 

That's not true anymore. And the interest rate environment makes things even more interesting (pun not intended).

👴 Historic pattern: Sponsor bank + BaaS program manager + Fintech or SaaS company does a debit or prepaid card. Typically the sale was led by the intermediary (i.e., the BaaS program manager or if it's the issuer processor). As a Fintech company, the primary contact felt like the BaaS provider and the sponsor bank was a partner. A critical partner, sure, but the partner. The market had two other key dynamics. Firstly, the large banks were not involved directly. Secondly, incumbent processors (like FIS and Fiserv) weren't benefitting from BaaS, embedded finance, or Fintech in the same way as Marqeta, Galileo, or Stripe. 

👶 New Pattern: Bigger banks here to play. Fifth Third moved to acquire Rize, and Natwest is quietly making moves. Goldman powers the Apple card and no doubt has ambitions beyond that. HSBC embeds account openings in Netsuite, and any bank that's a large treasury and payments bank for corporates can look at embedded finance as a natural extension of what they do. 

👶 New Pattern: Banks leading the sale directly. As the opportunity for banks to acquire deposits and lend via embedded finance has increased, so has its relative importance. With that comes owning the sale, productizing compliance, and a tech-first approach. The pioneers here were the smaller sponsor banks, but do not underestimate the sophistication of banks. Some will build, some will acquire, and many will partner. This is a generational partnership opportunity, and land grab for Fintech infrastructure companies.

👶 New Pattern: Incumbent providers M&A. There are BaaS providers who lack distribution to banks, banks that want deposits via embedded finance, and processors (like FIS, Fiserv, etc.) in the middle. M&A fixes this. Whether the FIS rumor is true or not, expect more M&A., Especially as the 300,000 BaaS platforms that raised struggle for their next round. We'll see a power law where most of the revenue goes to a handful of providers. The nuance here is the rapid product expansion (from section 3) which could create another cycle of M&A and future category winners. Speaking of.

👶 Possible pattern: Brokerage-as-a-Service a new category. This is all enabled by companies like Atomic Invest, which partners with BNY, perishing to unlock the treasuries side. A couple of weeks ago, I covered Zamp, a Fintech company that looks and feels like a Neobank, but instead of being built on a sponsor bank, all deposits are stored as treasuries at BNY. Expect more custodians and brokerage partnerships to appear and the BaaS platforms to start offering this as a feature.

👴 Possible pattern: Headless banking. Column, Solaris, and Griffin are examples of banks with a charter that are only available via APIs. (To some extent, Clearbank in the UK is similar, but it only makes payments) Starling is a bank that has built (most of) its infrastructure from the ground up but also has a BaaS business. These companies can productize their risk appetite directly as an API. I wonder if one of these companies eventually becomes an acquisition target for a big incumbent too? The regulatory scrutiny on this type of offering is heavy, and I'm 50/50 on if it survives or thrives. But also, if you zoom out, it is a logical offering. 

Although with anything in finance (and humanity), logic rarely dictates.


5. How this plays out ▶

More embedded finance. More revenue. Concentration in the mature products, opportunity in the whitespace product.

I often go back to the value chain of a universal bank. Look at everything they do, every department, and every revenue line. Now imagine that thing needs to get embedded and distributed headlessly. 

That's the future.

Regulation is coming. Risk management is coming.

But these are good things. We want this. 

Embedded finance had to finish education and get a job.

Enjoy your weekend, folks, and for those of you at M2020 Europe, see you there 👋


4 Fintech Companies 💸

1. Oscillar - Risk workflow orchestration 

Oscillar provides no and low-code workflows for fraud, compliance, and credit risk decisions. The tool aims to reduce manual effort by integrating multiple providers and tailoring machine learning models to their client's data. The platform also features case management and aims to combine all their client's data into a single platform for real-time decision-making.

🤔 Oscillar is a very well-packaged workflow solution. Risk teams have 30+ data providers and maybe 10+ 3rd parties to integrate, so they rely on engineering teams for change. This is a problem. But is it a feature or a business? For the early stage, it's absolutely a business because compliance cost is going up, but the budget to hire humans is not. But tools like Alloy, Sardine*, or Unit21 have a lot of this capability baked in and do more too. The differentiator as companies scale is can you play well with other tools, or must you be the only tool? I'm torn. Is this a wedge feature that can be the base of a business, or is it a category? Can enterprise buyers justify another workflow tool? 

🤔 The founder is a genuine legend. Neha co-founded Confluent and was one of the co-creators of Apache Kafka. I have zero doubt she can run circles around my thinking on this, and I'm excited to see what this team does next. 

2. Onyx Private - Private banking for the inheriting generation.

Onyx unifies banking and investments into a single app. Users can have multiple checking accounts, a cash sweep account, and treasuries. Users can also manage up to 4 family members through the app. The investing service includes "personalized portfolios" and tax loss harvesting. The in-app chat is a full concierge that can provide research, recommendations, and reservations for dining, travel, and gifts.

🤔 Up-scale digital-only wealth management is hot right now. Over the coming decade, trillions of wealth will transfer from the 70+ generation to millennials. This is one of the all-time greatest transfers of wealth ever, and Onyx Private is betting that the younger generation will want a digital solution to manage wealth vs using the provider their parents or family did.

3. Fishtail - Trade Finance for the rest of us

Fishtail is a trade finance automation platform that helps SMBs buyers and forwarders, and marketplaces get more from their supply chain. The platform features digital onboarding, financing within 48 hours, and automated payouts to 3rd parties. Users can automate invoicing and collections and offer better payment terms to their buyers. Fishtail serves the electronics, pharma, and freight services sectors, with 46% of goods originating in India and 50% arriving in Mexico.

🤔 This team might have cracked the code. Fishtail's flagship customer imports generic insulin to Mexico at scale. This buyer historically couldn't get financing even though diabetes is the second-leading cause of death in the country. This supplier now provides generic insulin to hospitals and the government of Mexico. Opening India to LATAM and other less prominent trade routes is a massive opportunity. They may be on to something if they can follow this with 100 more deals of the same size. My guess is they have partners for the financing on the back end. If I were a global trade finance bank, I'd want to get close to these folks ASAP.

4. Ballerine - Open source SMB risk orchestration

Ballerine allows banks and fintech companies to automate KYC and KYB decisions. Users can collect documents digitally, create rules, and manage workflows and cases through the Ballerine dashboard. 

🤔 I count at least 7 risk workflow tools in the past month in Brainfood (and many more on the cutting room floor). This category is obviously hot, but being open-source is a new twist. It allows banks to easily host the service "on-prem" (in their data center), which is still a big deal for many of them. It's hard to tell what the advantage of endless workflow tools is if they can't offer better performance. Is our only goal reducing manual cost, or do we meaningfully reduce risk KPIs too? The services that help us detect more fraud and lend with lower losses will likely all have a workflow, and the workflow tools will probably focus more on the business case. But I can't unstick the idea that these are businesses that get acquired by the bigger players eventually (and even incumbents like, say NiCE systems or Verafin)

Things to know 👀

Monzo reported a net income of £214.5m ($266m) to the year ending Feb 2023 with monthly profits through Jan and Feb. The revenue was driven by a spike in lending revenues to £164.2m, with total losses for the 12 months were £116m. The bank now has 350,000 monthly subscribers with 7.4m customers in the UK (the 7th largest in the country by users) with total deposits at £6bn ($7.42bn)

🤔 The bank that didn't want to lend wins by lending. Monzo was an everyday spend card for many of its formative years despite having a full UK banking license. Part of this was due to a focus on simpler product growth, but after a failed attempt to expand to the US (just as the pandemic hit), the refocus at home was probably timely. 

🤔 Monzo was late to the business accounts game. Where Starling had business accounts and scaled dramatically during the COVID small business lending, Monzo was on the back foot. Today they have 250,000 business accounts and are strongly coming into this space. Once again, Starling may be a step ahead, having acquired a mortgage business. But regardless, if you wind the clock forward 5 years. We'll have two massive UK banks with a breadth and depth of product offering on par with most UK high-street banks. 

🤔 This is a victory lap week for UK Fintech companies, but I worry about the next generation. The UK now has two of the world's premier digital banks. Anne Boden is stepping back after Starling's profitability has soared, and Monzo is not far behind. To all the bankers who said it couldn't be done. They did it. But also, who's next? The UK's competitive advantage was always policy; it may have lost a step here. London is still New York + SF + Washington DCDC in a single city, but the market isn't as big after Brexit. The UK must deliver on the Financial Services Bill in the next Parliament to regain momentum. 

🤔 The Monzo "brand" is a massive competitive advantage. Their net promoter score is +67. In context, UK bank HSBC is around -14, and Santander U.K is at +27. Even the mighty Apple gets +47. Customers love this thing. But it's fading; a few years ago, that was +81. The path to profit might also be a path to losing what made them so special.

🤔 The contrast with Revolut is striking. Despite their 25m customers and much deeper feature set, Revolut has broken up with its accounting firm and been denied a banking license in the U.K. Blitzscaling is great for growth but rarely compatible with trust or regulation.

Following the huge success of ChatGPT, JP Morgan filed a trademark for "IndexGPT" earlier this month, an "AIAI program to select financial securities." The service will tailor securities based on customer needs. JP Morgan must launch a product within 3 years of filing to secure the trademark, with analysts suggesting they intend to launch.

🤔 Selecting securities is a highly regulated activity for AIAI to be doing.

It's worth noting creating an Index is very different from recommending a user buy that product. It makes you wonder what this product looks like to the user. But then, the ETF and Index market needs a shake-up; they've been one-size-fits-nobody for too long.

🤔 We need better ETFs and indexes. If IndexGPT is building something more personal, that makes sense. There's an interesting Fintech company called Thematic that lets people create indexes (e.g., Lenny Rachitsky has an enterprise SaaS index)

🤔 Fintech companies have stayed away from more regulated activities. The closest comparison in Fintech is, which helps users research securities via a ChatGPT interface (Alpha). I also wrote about Parthean a couple of weeks ago, which helps users converse about their money via open finance and a chat interface with humans behind the scenes.

🤔 Don't underestimate JPMC's AIAI skills (or tech generally). It used to be easy to beat up the banks for having terrible tech, but that's not true (and for some, it never really was). On the one hand, "the big bank" JP Morgan banned its employees from using ChatGPT. On the other, it has one of the most sophisticated AIAI and ML teams in financial services. When it comes to fraud detection or capital markets, they're world-class. JPMC initially got a lot of analyst pushback for investing heavily massively in tech, but they're turning that around with moves like this.

🤔 JP Morgan has 13,000 open positions for tech and operations roles. They also just offered jobs to the 7,000-strong First Republic workforce. Thirteen THOUSAND. If you just got laid off from a big tech company and need a high salary and interesting work. Banking is starting to look quite good right now. This is exciting because it means more engineers who get the complexity of delivering in a highly regulated environment, frustrated by the slowness of a big org, who might go find the next big amazing company.

Good Reads 📚

The ability to rapidly generate content will worsen the already growing digital trust problem. 80% of Americans consumed fake news last year, 4 in 10 had accounts compromised, and merchants spend 13% of revenue managing fraud(!!). Great quote here Trish uses "If you solve identity, everything else is just accounting." Humans need to know they're interacting with reputable businesses and people and that their data is private.

🤔 AI bots and agents need identities too. It's fine (even likely) that bots will start to act on our behalf, but Trish raises an interesting question, how do we signal to others that we sent this bot? That it's not some fraudster pretending to be Trish? Bots need identities too. 

🤔 KYC and KYB is such a small component of identity and trust. As an industry, financial services saw onboarding as a check box process and a cost to be managed. Protecting identity and users from risk is a 24/7 game of complex inter-related subjects. We won't solve the trust problem unless we solve the base assumption of what these processes are here to do and how we work.

🤔 13% of revenue is a massive tax. Getting better at fraud detection is a no-brainer. The fear was that better fraud controls would always harm conversion and revenue. The reality of the "loss of digital trust" age is the opposite. These are data science problems.

🤔 Privacy and identity protection are not just human rights but cybersecurity measures. The less PII and customer data you can store or see, the less likely you are to be hacked as a business. We're shifting from the age of collecting as much data as possible to win at the ad-targeting game to collect as little as possible to win at digital trust. 

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.