Fintech 🧠 Food - The future of loyalty

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 25,744 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

I hope those who took time off had a great break; it's good to be back in the saddle. One of the big findings from the reader survey I did late last year was, "please do a TL;DR or summary up front."

So here's this week's Brainfood in summary

📣 Rant: The future of loyalty is data following a transaction and focusing on engagement. Historically, loyalty broke as soon as a customer made a payment because advertising data was dropped when cards or payments got involved. This changes with new approaches and infrastructure providers presenting a white space for Fintech companies to attack. Merchants spend as much as 30% of revenue on marketing but see interchange at 2% as a tax on business. Airlines were the first to figure out how to turn this on its head. Fintech companies could too. How? Data.

💸 4 Fintech companies:

1. Tome - AI lawyer for venture contracts

2. Syncfy - Plaid + Mini Stripe for LATAM

3. ntropy - The ML Nerds Transaction Categorization engine

4. RevOS - Revenue Operations as a Service

👀 Things to know: 

1. Mastercard has been ordered to allow merchants to send payment tokens to competing networks by the FTC. 🤔 This tiny technical change could change the economics of mobile payments in the US. 

2. Crypto on-ramp Wyre is rumored to be shutting down. 🤔 Wyre is an OG on-ramp brand, and if blockchains can deliver a global payments rail, we need on-ramps built to last. 

3. The UN is sending US dollar Stablecoins as aid to Ukraine. 🤔 Based on the trial's success, the UN aims to expand this internationally. Being open and interoperable, Stablecoins cut out the cost and complexity of closed loops or other rails.

📚 Good read: Customer Segmentation by Chaos Engineering proposes algorithms that segment customers better than classic business approaches (like income or age) and that we can work back from the data to create new segments. These segments can then be A/B tested or marketed more effectively.

Other things you said in the reader survey:

Your must-read sections

• 📣 Weekly Rant (51%)

• 👀 Things to Know (22%)

• 💸 4 Fintechs (20%)

• 🕊 Tweets (4%)

• 📚 Good reads (3%)

Seems nobody likes good reads, but that's often my favorite section 🤷‍♂️ (probably because writing those sections forces me to learn). The tweets also weren't popular in the survey but show a high click rate, so they might stay. A whopping 35% of you read the whole thing, cover to cover, every week (dang), with a further 60% reading bits that pique your interest.

Crypto and Capital markets seem more divisive (some love, some hate), and almost everyone loves the first principles, back-to-basics content. You also love it when I bring data and charts (me too, but damn I do this thing weekly, and it's not full-time 😅).

Thank you to everyone who participated. Now back to regularly scheduled programming.

It's gonna be a big year. 

Let's do this.

Weekly Rant 📣

The future of loyalty

Companies go to extraordinary lengths to acquire a customer.

A recent study by Deloitte suggests in the next year; companies will increase marketing spend as much as 13.6%. Companies spend an average of 12 to 14% of revenue on marketing activity. In technology, that increases to 21.6%, and even in "finance," it's 8%.

And after having gone through all of this effort, many of the customers who go ahead and make a purchase may never come back. Data from various sources I found put the e-commerce repeat customer rate at between 25 and 30%. 

Put another way, 7 out of 10 customers you spent a meaningful percentage of revenue on never come back.

The business case for "loyalty" is a no-brainer. Loyal customers cost less, spend more, and boost profits. That's why airlines constantly try to sell rewards cards, hotel chains push their schemes, and Starbucks constantly experiments with its loyalty scheme.

But loyalty is overdue a refresh. 

The end of the cheap money era means the days of ever more marketing spend to acquire customers have ended. If you're in Fintech, loyalty could be the next big thing.

To unpack this, we're going to look at:

• Where loyalty fits in the customer journey

• Types of loyalty programs

• The loyalty infrastructure landscape

• The opportunity for fintech companies

Where loyalty fits 🌀

At an abstract level, a customer buying a product has five key stages.

1. Awareness: Becoming aware that a product exists. This can be through search (looking for ways to solve a problem) or general branding and advertising, like seeing an ad on social media or TV.

2. Consideration: Comparing the product, checking reviews, and often budgeting to see if a product is affordable. This might happen at a retailer's website like Amazon or be pure content like a blog or youtube that allows people to weigh the pros and cons. Finally, the user goes to the checkout.

3. Purchase: In the transaction, the buyer gives money to the seller paying with a card, cash, or wallet payment type.

4. Retention: After the transaction, the seller attempts to bring the buyer back to buy more or other products they have to offer. (This is where loyalty often starts).

5. Advocacy: Users love the product so much that they'll promote it to others and actively market it on behalf of the seller.

The goal of the purchase loop is two-fold

• Pre-purchase: Get people to purchase as quickly and effectively as possible

• Post-purchase: Get them to come back often.

In pre-purchase, the metrics for success are often related to advertising performance. How many users that saw the ad clicked through and considered the product? How many users who viewed the product converted into a purchase?

The monsters of big tech like Google, Meta, and to some extent, Amazon are the masters of advertising technology (ad tech). They built remarkably efficient machines to inhale data from the internet or users and target advertising.

The genuinely massive Fintech companies can convert purchase intent into actual purchase. BNPL companies increase conversion; Stripe, Adyen, Checkout, and Paypal are masters of driving conversion for businesses. 

Post-purchase is more complicated. Retaining users is critical, and companies try to do this in many ways. From the simple punchcard (buy 9 coffees get the 10th for free) to Amazon's "subscribe and save" feature, where buying a product monthly is offered at a discount vs. one-off purchases. 

The retention of users is often bucketed into "loyalty" (and we'll cover the types of loyalty programs in the next section). But the reason there are so many different flavors of loyalty is that the purchase loop is broken.

If the ad tech giants built their moats on data, most of that data gets dropped as soon as a user makes a payment.

Data gets dropped in two ways.

1. The advertising data can't follow the transaction.

2. In practice, the merchant data about what the user bought rarely does either.

When a user buys in-store or online, a high percentage of those transactions use debit or credit card rails. When that happens, the data collected by the advertisers or merchant doesn't follow the transaction. 

The advertiser's data is unavailable (because big tech likes to keep its data moats to itself), or there's nowhere to put it in the transaction. 

A card transaction uses the ISO8583 standard and can carry additional data about the item you bought (e.g., FIJI Water 32oz). So why doesn't that show up? 

Often merchants won't add this data because it costs them more to send it (and it might be complex for them to collect from their systems in some cases).

That's why when you see a transaction in your traditional banking app, all you see is the store's name and the purchase amount (e.g., WALMART $4.20). 

So the merchant has to use loyalty to retain their customers.

(There are now emerging Fintech solutions like Spade, ntropy, and Fidel that collect data from multiple sources to infer much more about the purchase, and we'll come back to these later).

Types of loyalty programs. 🎰

Loyalty programs are attempts by merchants to bring people around the loop fully.

The humble punch card is the most obvious loyalty program. It's low friction and low cost. Give the customer a bit of paper and stamp the card every time they buy from you in the store. Buy 9, and the 10th is free!

The challenge with the punchcard is it usually only works at one merchant, is easily damaged, and only works in person.

Airmiles: Flying planes is a loss leader for a rewards program for most airlines. 

In their last annual reports, Delta, AA, and United lost money on their core business of flying people in planes. 

But they make a killing on the Airmiles programs.

During COVID-19, United took out a loan secured by their loyalty scheme subsidiary that valued the scheme at $21.9bn. That's significantly more than the airline was worth at the time.

Airmiles are not like "free coffee" stamp cards. Credit cards changed the game allowing Airlines to take advantage of "interchange" or Swipe fees. 

Every time a customer uses their card to spend, the bank and airline make a % of the overall transaction (e.g., 1%).

This became so popular that the largest banks now buy Airmiles (as an asset) to win the Airmiles programs.

Say that louder for the people at the back.

Banks PAY airlines, for Airmiles, for the privilege of operating a credit card program for them. Oh, and then they share some of the revenue.

Airlines also control how customers spend points. While customers earn miles for each dollar spent. Airlines control entirely the exchange rate of those points for what customers buy. If $0.01 = 1 mile, then most "reward items" cost 5x to 10x what they might in cash.

Right now, you're thinking. WTF?

But the customer isn't the ultimate loser here. Most reward members are business travelers, and the employer pays for their ticket. However, the traveler gets the points and rewards to their personal account. Employers see this as a perk of business travel (which is far less glamorous than it appears.)

For this reason, travel is a hotbed of rewards programs.

Retailer programs Retailer-owned programs like Target, Walgreens, Tesco, Carrefour, and Spar give their users cards and apps and may offer their members cash back, coupons or discounts. 

Target gives shoppers an extra 5% discount on items and free 30-day returns, and Tesco has special prices "only for Clubcard members" that may be the best in the market. The customer sets up an account and in return, is given a card (physical or mobile) that allows the retailer to track the user at checkout.

When the user makes a purchase, the data that would historically get dropped (about the items the user bought) is then pushed into their loyalty database. So they know "Simon bought FIJI water at Walmart," and should that item be on offer, I'd be an excellent target for that ad.

A couple of notable examples stick out.

Amazon Prime has 200 million subscribers, and for ~$13 a month, users get faster shipping, access to the music and video streaming service, and discounts at Whole Foods stores. 

Starbucks Rewards is a case study in its own right. Users get a star for each purchase, and if users load the app with cash, they get two stars, double the rewards. Starbucks then holds that cash until a customer is ready to spend it (which, at today's interest rates, is no doubt yielding a nice return). And like Airmiles, the only way to cash out for users is to spend at a Starbucks location.

Partnerships and programs. Across all types of programs, success comes from building a loop of users who make purchases and come back often. A way to do that is to extend the loyalty program across multiple merchants. 

Payback in India, Nectar in the UK, and the (now-closed) Plenti in the US allowed customers to collect rewards at multiple brands. Airmiles can be redeemed at hotels (or converted), and credit cards like Amex differentiate on the perks and experience they offer users.

These programs often involve a complex series of partnership agreements and technical integrations, but they create more retention in most cases.

Everything else. The above scratches the surface; we haven't discussed cashback, fuel cards, coupons, employee discounts, or promotions like Mcdonald's Monopoly. 

As we look at these examples, one thing stood out to me. Where is the Google, Apple, or Meta loyalty program? These giant data and device aggregators are in such a good place to have a dominant role in the ecosystem. 

(I'm sure in some markets, somewhere they do some; thing, but it's far from being the difference maker that it is to say, airlines).

A note on Trialpay. Trialpay was an alternative payment system acquired by Visa in 2015. The user would get an item for free if they tried a product or service from an advertiser. It was ad tech meets Fintech meets loyalty. 

What made Trialpay interesting as it was an attempt to bring users from many merchants by connecting the advertising data with the payment. Today we see some chrome extensions (like Honey, acquired by PayPal) that attempt to do something similar, and I'd argue that BNPL is probably the closest successor to TrialPay. (More on that in the Fintech companies section later).

Loyalty infrastructure. 🌉

The landscape is so varied it's almost impossible to map comprehensively. Some large companies have built their own infrastructure directly, others use a mix of CRM and ERPs, and there are specialist providers of loyalty software.

So to try and simplify, I think about

1. How points or loyalty is earned

2. How is that recorded

3. How points are loyalty are redeemed

Loyalty earning infrastructure: The user activity rewarded is nearly always a purchase. One way to capture this for the merchant is in their EFTPOS or e-commerce checkout (the payment terminal or stock management software, think Block, Paypal, etc.) This puts the merchant at the center of gravity, so long as the merchant can correctly identify the user (via a mobile app or barcode), they can reward the purchase.

Another way to capture the activity is directly on the user's debit or credit card. This puts the user at the center and allows them to earn regardless of where they spend (although they may earn extra points for spending with the merchant). These card programs are often operated by an underlying bank (e.g., Barclays, FNBO, Chase), but BaaS providers or specialists like Tandym are increasingly elbowing into this market space.

In the past decade, we've also seen "card-linked offers" gain popularity, with several companies operating in the space. They take data about the transaction and help companies serve offers. One of the pioneers in this was Cardlytics, which serves offers directly in a bank's mobile app. More recently, companies like Fidel made this a more pure API experience, allowing merchants to view user card transaction data as an API and link that to a rewards program.

Lastly, there are the captive merchant payment app experiences (e.g., Starbucks). Many brands have apps, but Starbucks specifically created a wallet and payment network and rewards users extra for using that. This allows them to avoid swipe fees and get cash from users upfront long before the purchase. Companies like Lynk are now doing the Starbucks app as a service for merchants.

(There are thousands of other examples too, but that's a good start 😅)

Loyalty recording infrastructure: Points get recorded in a myriad of different ways. 

Retailers and airlines might record in their ERP (like SAP or Oracle), their CRM (like Salesforce, Hubspot, or Epison), or BPM tools like Tibco and Mulesoft. Card issuers (banks and tech providers like TSYS) can also record points and rewards in their mainframes and card systems. There are also literally hundreds of specialist loyalty program operators and software providers. The major software providers (like Comarch) also have massive loyalty solutions and offerings.

You could drive a VC analyst team nuts by trying to be comprehensive on all the ways points get recorded.

The most important part is how they're redeemed and how we drive the retention merchants, and brands crave. 

Loyalty redemption: This is where the magic happens. Users might have an app or online website to see points earned and spend those points. An airline will allow them to "spend with miles" at checkout, and Starbucks allows users to pay for the free item via the app. 

Fintech companies and loyalty. 🎰

A word on the banks: The banks have been in this game for decades. In APAC, the cashback and points rates are nuts (e.g., 10% cashback) and airline cards are a massive prize for banks in the US. In Europe, we see fewer cashback or rewards cards partly due to lower interchange and partly culturally. There is less business travel, and consumers aren't as points nuts.

Travel: I was impressed to see JP Morgan getting into building a travel agent that also does a spending card. It's like they're building TripActions competitor. And in travel, that's the next obvious phase. Starting at the context (booking travel) and finishing with the payment makes re-engaging users much simpler.

Super apps: In APAC, Fintech super-apps like Grab bake merchant offer a broader experience with banking, insurance, travel booking, and ride-hailing. This "all-in-one" experience might not work as well for US consumers, but it is an example of Fintech and loyalty baked into the same ecosystem.

BNPL: The best example of a data ecosystem is BNPL. BNPL providers are shopping apps that happen to feature payments and credit. The core value they provide to merchants is to increase the likelihood a transaction will happen and then increase the retention of that user. They re-engage users through the shopping app, with many choosing to shop via Klarna or Affirm instead of going directly to Google or the merchant. The BNPL provider then uses this data for retargeting users to merchants better.

Payments brands: like PayPal and Block have a data opportunity for loyalty. Square allows merchants to create a digital loyalty program in their software quickly. With the acquisition of AfterPay and CashApp, they have the pieces to create an ecosystem of shoppers and merchants. 

Fintech credit cards: We're only just starting to see Fintech companies move into credit cards and rewards like the buzzy X1 card, the Gen Z answer to Amex, or Yondercard in the UK aimed at foodies. 

Credit cards as an option for Neobanks struggling for profit? 🤔

(I know this is European-centric, but I’d bet the pattern repeats for some non-European unlisted Neobanks)

They're a logical step for existing consumer Fintech companies (Chime, Current, Monzo, Chipper, etc.). Larger companies searching for profitability with a strong brand would benefit from much stronger unit economics. Not only is interchange (the swipe fee) the Fintech company earns on each transaction typically higher with credit cards, but there's also the credit line. 

Now interest rates are rising, net interest income (payment made from the APY) is a significant opportunity. 

Credit card customers typically have two types, transactors and revolvers. 

Transactors pay their credit card bills monthly and are typically higher income. Because they're higher income, their average transaction amount might be higher, and so is interchange revenue. 

Revolvers let their balance revolve monthly and pay some amount less than the entire balance. This is fine for the consumer on a 0% APY card, but lower-income segments tend not to qualify for these offers. Some lower-income consumers use higher APY cards effectively to cover patchy incomes, but many will carry this debt built at college or their younger years for 5 or 10 years. 

This segment is exceptionally profitable for larger credit card companies. Ideally, they want customers to revolve without going into problem debt. If they get customers into too much debt, they end up booking a substantial loss.

The key to this is data, and the master of data from the 90s is (and was) Capital One. As an organization Capital One is such an interesting case study in being evidence and data-driven as a culture. (If you've ever chatted to the team at QED, you'll get what I mean, they're aggressively thoughtful)

As debit card interchange is dwindling with consumers under pressure, and Neobank brands look for profit, they could start to do more brand partnerships and loyalty programs via a credit card. The sub-prime focussed brands (like Chime) will have to do so in a way congruent with their values of helping consumers in trouble. But there's a huge opportunity here.

B2B Fintech: We're seeing B2B payment cards like Ramp, Airbase, and Brex dabble in rewards. Watching what happens with these and things like TripActions will be compelling because that could eat into bank profit margins. They're also well placed to go after business travel rewards programs (although I doubt they'd outbid the big banks pre-buying Airmiles). 

The future of loyalty. 🔮

Loyalty is an onion. I could peel back layers of this thing forever, but at over 3,000 words, one thing stuck out. (Shout out to Cuy Sheffield for inspo on the first three points here).

Much greater customization: So many loyalty programs are the same thing. Cashback, points, and discounts. Just as Fintech gave us much richer niche experiences for communities or whole industries, could we do the same with loyalty?

Multiplayer loyalty: Why can’t friends or family create a squad and unlock benefits for each other? Why can’t brands collaborate for one-offs more easily? They do this today, but it’s highly bespoke and high effort. New infrastructure might help the consumer and the brand side.

Fans, not consumers: Being a fan and deeply engaged is a different feeling to being a consumer of a product. Advocacy is so much more powerful for brands than simple loyalty. Fans are often communities who get value from being around each other and sharing their passion. Nike, Reddit, and Starbucks have started down this path, but could airlines? Where does Fintech fit here or digital collectibles? How would you make a community out of folks traveling to the Olympics or a sports stadium?

I always thought ticketing was the no-brainer here. Ticketmaster sadly has a monopoly over most live events, but imagine being able to target offers to people who were there live for the world cup final. Or at a live show 2 years ago when your new album launched. That would seriously help with the marketing costs and customer retention.

Much of this comes from what we reward the user for.

Rewarding engagement, not purchases: Nike made more than $180m from NFT sales (of which half was on secondary), but as the NFT hype fades, we see the ground shift. Starbucks Odyssey is like if Pokemon Go and Amex Platinum had a baby. Exclusive access to experiences and higher rewards for completing tasks or trying new products. 

We're just scratching the surface of authentic fan engagement, where the purchase is not what the brand is chasing, but engagement is. Fashion brands have done this for decades, and it's not new. What is new is using web3 or digital infrastructure for that and seeing it as large-scale loyalty plays instead of small-scale events or marketing activations.

Most successful loyalty programs are closed-loop, or they're enterprise partnerships. The infrastructure for the largest programs is decades old, and it's a space that doesn't make headlines.

With that insight, there are a few thoughts that came to mind.

New closed-loop programs: Closed-loop programs are captive. Anything involving Amazon must involve Amazon in the flow of data. Starbucks brings you into its app and ecosystem, as does Grab or Payback.

But many haven't done this that could.

What if Shopify did a rewards program across all merchants? Emerging merchants and marketplaces could create further engagement for their clients with a multi-merchant program. Shopify integrates with 5 or 6 loyalty platform apps through its app store, but it's in a spot to do an Amazon Prime equivalent. 

I'm sure this has been thought of, worked on, and disqualified by smart people at Shopify, but my broader point is. Who has that ecosystem? 

And better yet, how could Fintech companies, credit cards, or new payment types change the economics?

Imagine it this way, what if Klarna had a credit card that gave extra discounts or rewards at any Klarna merchant?

Plaid for loyalty: We haven't seen a "Plaid for Loyalty." Journera allows travelers to view all their points in a single place, but it is travel-centric. It doesn't consider Starbucks, Amex, or even the smaller loyalty programs inside of Square. If we aggregate more of that, new use cases may emerge, just as we saw with open finance.

Open loop loyalty: A true open loop loyalty program would be permissionless. Any merchant could join it without a complex pre-existing relationship with other parties in the network. While this could have network effects, it would struggle to win over existing points programs in the first instance. Airlines are unlikely to give up their cash cow, and loyalty programs are often designed to drive outcomes for its operator.

But if you go back to the purchase loop and we add more merchants and more data, we start to build a much better picture of consumer preferences and habits. 

The problem with open loops is always the cold start problem. Promising wedge areas might be creators, Fintech companies, and challenger brands.

Loyalty points as an asset class: I've seen several web3 projects attempt to tokenize loyalty points, which is super logical on one level. Points in any compatible wallet that can easily be traded or exchanged make a ton of sense for consumers. They also break the business model of historic rewards programs.

It’s an interesting thought experiment to ask what you could do if all loyalty data was open-sourced and available on-chain as a public, permissionless, pseudonymous CRM.

That's why I think what Polygon is doing with Starbucks and Nike is so interesting moving into engagement-first. 

We're heading to a world where every marketing dollar matters.

Loyalty is seen as a way to generate revenue, but payments were a cost of doing business.

I think they're the same thing.

If we get the flywheel humming properly.

ST.

4 Fintech Companies 💸

1. Tome - AI lawyer for venture contracts

• Tome quickly summarizes an investment or venture contract, analyzes the terms, and provides a view of how common a clause is and what alternatives might exist. Today Tome supports SAFEs and management letters but plans to expand in the future.

• 🤔 Smaller angel investors often rely on the due diligence of others to avoid lawyer fees which can be expensive but take some risk in doing so. As we saw with FTX, relying on someone else for due diligence doesn't mean you're protected from risk as an investor. Tome is a good tool to spot red flags, but like a lot of AI tools, I doubt it is perfect. For example, I use and rely on Grammar.ly for Brainfood but spend a ton of time correcting it

2. Syncfy - Plaid + Mini Stripe for LATAM

• Syncfy allows developers to access data from 125 financial institutions in 15 countries across LATAM through a single API. They also allow organizations to accept payments across multiple rails, including Crypto. The product can also connect with the tax authorities for tax filing and validation for lenders during underwriting.

• 🤔 This combination of features is powerful, and their marketing is aimed at financial institutions. There are almost two worlds of "open finance" or BaaS, those seen by FIs as adversaries vs. those seen as partners. Everyone will tell you they're a good partner for banks, but they don't all bring a ton of value to the banks (in terms of new revenue). That's why I find this positioning so interesting. It's a sort of hybrid Open Finance meets BaaS.

3. ntropy - The ML Nerds Transaction Categorization engine

• ntropy is a transaction enrichment and cleansing API that is multi-lingual and multi-geo. The goal is to turn a transaction from incomprehensible text strings to something a human can understand in their Fintech or bank app. 

• 🤔 While many solutions from incumbents and new market entrants enrich transactions, they typically work best in a limited number of Geos or with the top 1000 merchants. I noticed a lot of ntropy's customer references were from clients in LATAM. Where Pave is more use case focussed, and Henron is more US focussed, ntropy has a combination of market presence and general purpose utility that could be an edge. 

4. RevOS - Revenue Operations as a Service

• RevOS fills the gap between CRM and the various touch points for revenue ops like customer success, invoicing, pricing and marketing. They help identify the gaps between departments and build a more effective overall process driven by a single view of the data, billing, and actuals.

• 🤔 So much of good growth is good revenue operations (RevOps). At a scale-up, that's a team of ~1 or 2 people focussing full time on pulling finance data together to allow management to identify gaps. The reality of that data pull is often immense Google sheets and Zapier integrations. Just as payment automation has value in time saved and tech debt avoided, so does revenue ops automation. As the tech sector focuses on profitability, this could be a well-timed play.

Things to know 👀

1. FTC Orders Mastercard to Open Debit Transactions to competing networks

The Dodd-Frank act requires merchants to be able to route transactions over at least two competing payment networks. The idea is to create price competition and choice for small merchants who often complain about the cost of interchange (swipe fees). However, when using x-pays (e.g., Google Pay or Apple Pay), merchants do not have a choice of network. The payment "token" that securely conceals the card number and data could only be sent to Mastercard. Mastercard said this was for security, but the FTC now requires those tokens to be available for competing networks.

🤔 Slowly, then suddenly, mobile payments will become a new default. Mobile payments are accepted by 70% of retailers and used by nearly 100m Americans. Behavior change takes a long time, and cards will be with us for decades (at least), but this ruling only happens if mobile payment volumes are becoming significant.

🤔 Is it me, or have regulators found their teeth in the past 12 months? We're seeing a wave of enforcement actions on Fintech, Crypto, and TradFi from the US and European regulators. India and Brazil have also worked to contain Crypto and big tech in particular. 

🤔 Being better at compliance is all upside. A generation of new Fintech and Crypto companies is learning that doing KYC at onboarding is not compliance. Compliance is a spider web of complexity, but understanding it is a competitive advantage. It takes a lot of effort to make finance feel effortless. Most of that effort goes into understanding the complexity of removing as much as possible for users while still delivering exceptional protection.

2. The UN sends cash to displaced Ukrainians via Stablecoins

Recipients will be sent the Stablecoin USDC to a digital wallet they can install on their smartphone. The USDC can then be exchanged at the 4,500 MoneyGram locations in Ukraine. After extensive testing, the UN aims to expand this program in Ukraine in 2023 and globally.

🤔 Stablecoin cash transfers require almost no local infrastructure, making them unique. Cards require the local infrastructure, banks, and payments companies to participate and KYC the end user. 

🤔 International disbursements are becoming a killer use case for Stablecoins. The UN experience shows cash is the best assistance for displaced people. Cards and local payment methods may have restrictions (occupied by occupying forces or unavailable due to the conflict). Cash always works. 

🤔 Stellar has a ton of earned credibility with global development agencies. Stellar was not discussed in recent years as bigger names like Eth, Solana, and Polygon gained mindshare. But they have been grinding with international development agencies since I worked with them at a bank in 2015. This is important for an industry amid a credibility crisis post-FTX.

🤔 We'll see much more from the UN in web3. While most of the world hates web3, the UN just published a report showing how it believes web3 can solve some of the world's biggest development challenges. Like providing documented identity to displaced people and creating "inclusive economic participation" for people subject to poor local economic conditions.

3. Crypto on-ramp Wyre rumored to be shutting down

Wyre is a Crypto "on-ramp" allowing users to directly buy Crypto from wallets, NFT marketplaces, or in Fintech apps founded in 2013. It was subject to an acquisition attempt by payments company Bolt for $1.5bn in all stock (which later fell through). Wyre had apparently "told staff it is shutting down," according to Axios.

🤔 Stablecoins and digital assets present a parallel global financial system that could be a massive upgrade. Moving money cross-border is slow, expensive, or a closed network (like PayPal). Having an accessible, global payment rail could give wider adoption and force a reduction in fees because it is a utility. The payments rail is open and programmable, so money could become smarter. That's really cool. There are a ton of caveats and challenges before we get to that dream, but I believe in the potential.

🤔 We need on-ramps to this new infrastructure to get adoption. Having a parallel system is great, but that's not what we use today; we need to get in and out of that system for it to work. On- and off-ramps like Wyre are crucial in building user trust and adoption. I should be able to use my bank account in the UK on-ramp to a stablecoin and have that arrive in a telco wallet in Nigeria. But those endpoints need to connect to the new internet of money. 

🤔 But on-ramps need to be built to last. User trust is everything; if brand names they trust keep vanishing, that task gets harder. It takes a long time to build trust and seconds to lose it.

🤔 Being excited about Crypto is contrarian now, and I think that's a good thing. In the reader survey, many of you said you're sick of me constantly talking about Crypto, which is an interesting signal. It says consensus has shifted away from it. Betting on new tech when it is the consensus doesn't yield the best long-term results for VCs. You'd rather be contrarian correct than consensus correct. Digital asset technology and infrastructure are inevitable. It will get more compliant, it will be co-opted by TradFi, it will be regulated, and it will get a lot less risky. But it's not gonna disappear.

🤔 This rumor is sad if true. Wyre is the OG on-ramp, and for many consumers having a simple experience and trusted logo is the key to trying something new. 

Good Reads 📚

1. A data-driven approach to Customer Segmentation

Customer segmentation categorizes customers according to different strategies based on their preferences or attributes. The goal is to drive more revenue or engagement by serving these customers better. Business leaders bucket customers by obvious things like income or credit score, but those simplistic data points don't allow for detailed personalization. 

The problem with using algorithms to cluster customers is explaining what they mean and what to do about it. Creating a decision tree solves this by neatly separating the clusters, allowing the business to work back from those clusters and treat them as segments. 

• 🤔 There are a ton of folks in TradFi still segmenting their customers using classic business terms. But if algorithmic segmentation is more accurate, this could become a new normal. There's a ton to learn here.

• 🤔 I wonder how accurate the data-driven segments will be in the new high-interest-rate economy? Or if the data from the past decade's bull market makes this approach path-dependent?

Tweets of the week 🕊

That's all, folks. 👋

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Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a *