Fintech 🧠 Food - The Future of Payments

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 26,970 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

Could generative AI make a meaningful difference in Fintech? 

Also, if we use Bing for ChatGPT, does that mean we don't have to pay $20 now? 

Watch for a rant collab coming on AI and Fintech coming soon.

Speaking of amazing things you don't have to pay $20 for. Guess what? I did a podcast with the one and only Alex Johnson, and it was so fun to be doing audio again. We cover 4 Fintech companies that caught our eye over the past month. 

🎵 👉 Check it out here. 👈🎵

PS. No brainfood next week; I need a week to catch up on everything. But don't worry, I still love this stuff and will return on 26th Feb.

Here's this week's Brainfood in summary 📔

📣 Rant: The future of payments is multi-rail. In this one, we cover what a payments rail is, why there are more of them, and how will they shape the industry? There will never be one payment rail to rule them all; in fact, the amount of ways to pay continues to increase and expand. The way around this is with wallets capable of handling multiple rails. That's easier said than done, but it starts with identity.  ** I often say the Rant is where I think out loud; this week, that's really true. You might want two coffees for this one, Alex.

💸 4 Fintech Companies:

1. Passthrough - Fund workflow automaton

2. Cheqly - A Neobank for startups

3. SunFi - Solar energy financing platform

4. Earnie - Freelancer borderless account for APAC 

👀 Things to Know:

1. PayPal laying off 2,000 staff 7% of its staff to reduce costs and "focus on core strategic priorities," according to its CEO Dan Schulman. 🤔 Layoffs are sadly the new normal for a while longer. PayPal has an incredible opportunity to become a "wallet" of choice for consumers, but can it execute?

2. Crypto Exchange Kraken settles with the SEC over Staking. Kraken will pay $30m to resolve the SEC complaint that said 135,00 US investors had $2.7bn invested in the program, earning Kraken $147m in revenue. 🤔The SEC has increased its regulation via enforcement, but the industry also wants guidance. Kraken will be fine, and staking will be fine, but it's also complicated (see full text below for more).

📚 Good Read:  The wallet wars are about identity not payments. Apple has moved beyond Apple Pay into Apple ID, becoming an identity wallet. Can banks build on the vast amounts they spend on KYC and compliance to be a competitor in this race? 🤔 This is a fantastic "what could be" glimpse at the future of wallets. The future is more payment rails, not less, and wallets will become the center of that.

Weekly Rant 📣

The future of payments is multi-rail

Payments are the core primitive of the economy.

Everything around you was paid for, bought, or sold with a payment. Every financial service or complex contract usually starts or ends with a payment. 

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.

And the landscape is about to get flipped upside down.

Payments buzzwords like open banking, embedded, CBDC, BNPL, cross-border wallets, and CBDCs hide a bigger picture. 

Payments have become a key strategic focus for every business, moving out of the back office and into the boardroom. As that happens, payment innovation has also exploded. 

And as that happens, the already complicated topic of payments becomes more complex. 

More rails, more wallets, more realtime, and more international. 

Just; more.

So lets unpack

1. What is a payments rail?

2. Why are they becoming mission-critical?

3. What are the new rails?

4. How will they compete for space?

5. And who wins in this new world?

What the heck is a payments rail?

The term payments "rail" generally refers to a payment method. You'll hear people in financial services say things like "card rails" when referring to a payment happening using a credit or debit card. There are also push payment rails (like Fedwire, ACH, Faster Payments, SEPA), international (like SWIFT), and a long tail of other payment types.

A payment rail allows a consumer or business to move money from one location to another.

It's important to remember the context of the time a rail was built often shapes its features and limitations. Payments rails are usually created for a specific a purpose or to solve a problem.

• Fedwire was built to allow banks to transfer money between each other.

• ACH was built to reduce the volume of paper checks

• Card rails were built to aggregate the volume of one-off bank cards used to pay in incompatible bricks and mortar stores.

• RTP payment systems (like Faster Payments) were built to allow consumers to move money instantly instead of waiting 3 days

These rails that operate at scale are miracles of the 20th century that have enabled global commerce and trillions of dollars in daily volume. But the legacy they have created continues to shape them and becomes a limitation.

Despite decades of upgrades, changes, and technology evolutions, each payment rail has relative strengths and weaknesses. 

• Cards are great for consumer payments, widely accepted but considered expensive. They have strong consumer protections, but those protections can also add friction.

• FedWire or CHAPS is expensive but has high limits and will be in the account on the same day

• ACH or BACS is more affordable for companies that payout high values at scale but less in realtime. These payment types may have fewer consumer protections (although this is changing).

Who builds them also becomes a strength and a weakness. These payment rails can be built: 

1. Directly by a government agency, e.g., FedWire is operated by the Federal Reserve. These services have the widest level of support but are often the slowest to change.

2. In partnership with a government, e.g., UPI is a partnership between the central bank and banks association in India. These services can move faster but come with other challenges, such as capped fee structures limiting profitability for the private sector.

3. A consortium of banks, e.g., ACH, is operated by NACHA and elects a board from member banks with wide adoption and low fees but can be bureaucratic and slow to adapt.

4. An open-loop payment system, e.g., Visa and Mastercard, allows almost any merchant, bank, or Fintech company to join the network provided the company can meet its rules and compliance requirements. But these networks may be seen as adversarial by key banks or non-competitive by Governments (e.g., Visa's acquisition of Plaid was blocked by the DoJ, and the European Union has long considered the lack of a European alternative card rail a major geopolitical risk).

5. A closed-loop payment system like AMEX, PayPal, or AliPay is operated by a single company that directly connects all merchants and consumers to their network. This can be efficient and innovative but might never achieve full market penetration. 

The reality is all payment rails have some relationship with the governments of the countries they operate in to obey the law and manage financial crime risks. But the level of government involvement can vary widely.

(I used "e.g." a lot in the paragraph above, and each of those examples warrants a rant of its own, but we need to get to the core point)

In the past two decades, we've seen the internet native payment rails rise like PayPal, Venmo, or Crypto, some that aim to compete with domestic or international rails, others that are another layer on top of them.

Each system is built in isolation by groups who set out to solve a specific problem. As such, very few payment rails are made with consideration for how they interact with each other. They might be compatible on some level. But they exist in isolation to serve the needs of their stakeholders, creators, or parent.

These payment rails are starting to overlap.

Because consumers and businesses don't care about how money moves; they just want it to happen fast and cheaply.

This creates a challenge as we witness two trends. 

1. Payments are becoming much more critical to every business

2. Ever more payments rails emerging and fighting for space

Payments are becoming mission-critical for every business.

Payments used to be a cost of doing business. The inevitable consequence of selling a product was handing over the cash and getting your goods in return. As such, payments become a cost to be managed, especially in retail, where profit margins can be razor-thin.

But now. 

Payments are a key way to improve business performance. 

Payments are also a product generating revenue in their own right.

Payments performance: Conversion. Companies spend incredible energy getting people to the point where they're willing to buy a product or service. As I covered a few weeks ago in the future of loyalty.

The problem is conversion. 70% of customers will not complete a purchase and abandon the checkout before completing a payment. Any increase in conversion can lead to a meaningful increase in sales. In the physical world, we didn't track all of the customers who walked in, browsed, and left so closely; with digital, we see the missed opportunity.

Where businesses had focussed on reducing the cost of payments to improve margins, more are realizing improving payment performance grows revenue. 

It's the difference between basis points and percentage points.

Payments the revenue generator: Shopify makes more than 50% of its revenue from payments. That stat launched 1000 cliches and reports as companies realized they could drive significant revenue by re-selling the ability to make or accept payments. Even if they don't do that as a core competency.

This spawned a wave of embedded payments companies, which essentially repackage payments in the context of the service they offer. Shopify lets merchants accept payments for their e-commerce store, and Mindbody allows gyms or yoga instructors to accept payments and manage their business. Now we also see companies like Uber issue debit cards to their drivers, and Tech companies become payment rails. 

Apple, Google, and of course, the Chinese giants all prioritize payments. Apple Pay is a layer over existing card rails, but it's a payment brand in its own right. It's a rail on top of another rail, generating substantial revenue.

Payment is moving from a cost center to revenue generating and from the back office to the boardroom.

Payments are becoming a core competency for every business.

But they're also getting more complicated.

The new payment rails

The last two decades have seen an explosion in payment types from closed-loop wallets like Alipay, Venmo, and CashApp to BNPL operators like Klarna and Affirm. That's before we mention open banking, CBDCs, or Stablecoins.

The EY report (referenced above) had a decent graphic to show these as "7 forces" shaping payments. 

At the base layer, I'd re-articulate "cross border" and "realtime" to default global and default realtime. Both of these trends are macro and impact everything else. Both trends create massive value for users and significant risks for anyone in the flow of funds, so I can see why they're foundational. But let's go one by one.

Open Banking has the biggest potential to disrupt payments but has underwhelmed. It has several challenges. People can't agree on what open banking is, never mind how it impacts payments. 

In Europe, Open Banking is a regulated activity that allows 3rd parties to access checking account data or use the checking account to make payments. That's it, that's all, no more. No savings, no lending accounts, or investment accounts. However, it works consistently. 

Because it works consistently, we are seeing account-to-account (A2A) payments start to generate some traction. I've lost track of the number of companies trying to do this in e-commerce, but I don't think that's the play here. There's a whole conversation about whether the data/loyalty feedback loop can be figured out, but that could be a ways off because, in e-commerce, A2A has a cold start problem. The first-time user that wants to pay-by-bank app has a bunch of other low-friction options they could use instead that are in muscle memory.

A2A payments are cheaper for merchants, but are they better for first-time users?

Behavior change is hard if the service isn't 10x better.

The best use case I've seen is funding a Fintech wallet or paying a credit card bill. If you use Freetrade (the UK's Robinhood), Amex's mobile app, or Blockchain.com, open banking is an account funding option, and it's slick. 

1. Click pay

2. Your banking app appears 

3. Authenticate with biometrics 

4. DONE

It helps that Europe has regulated open banking and strong customer authentication (a standard for how apps and services can verify a payment). 

If open banking is disruptive in Europe, it's in wallet funding and bill payment use cases. In other words, it competes with SEPA and Faster Payments rails. In theory, because these payments are all authenticated, they should be secure and low-risk. But they're another form of authorized push payment, and fraudsters will find a way to create scams. 

The volumes are still low (26.6M payments since inception is a fraction of a fraction of daily push payment volume). 

In the US, open banking (or open finance) has much more consumer utility but is starting to suffer from a lack of standardization. For various use cases, consumers can connect investments, savings, checking, and even payroll via APIs. 

The explosion of private sector innovation this created is astonishing, but its also threatened by poor performance. Every Fintech operator today is cursed by the poor conversion rates the major open banking and finance platforms operate. Under the hood, a lot of this is banks pushing back against screen scraping for "security reasons" but also looking to get paid. 

Attempts to solve this get lost in a myriad of standard conversations that lack full-throated support from all corners. While the regulator the CFPB, has said it intends to push regulation (Dodd Frank 1033), talk is cheap. As such, the payments use case hasn't taken off in the US. The A2A players like Link are coming, and every major aggregator has been trying to nail payments for half a decade.

But payments are easy; user behavior change is hard.

So the impact of open banking as a payments rail has so far been limited.

Canada, LATAM, APAC, and Africa are all uniquely beautiful open banking markets that warrant individual rants in their own right. But I have 6 more payment trends to cover, and we'd be here all day.

As an aside, India, the home of UPI and digital identity, doesn't yet have an open banking standard, which suggests identity is the proper foundation of payments if you were to start again. No?

In the short term, if you fund a Fintech wallet, open banking is a method to look at. Long term, it could repeat BNPL's trick.

BNPL shows us how to change user behavior but needs to find its long-term equilibrium. Where A2A payments sell lower costs and have limited user utility, BNPL is the exact opposite. It is more expensive than a regular payment and lets users spread the price of a purchase over multiple months. 

BNPL providers don't sell cost reduction; they sell more revenue. 

They also wrap a shopping experience around the consumer and bring them to new merchants and purchases. BNPL shows us several things at once. 

1. It is the easiest "embedded finance" example to explain. Finance shows up at checkout and is in the context of what you want to buy. 

2. It also shows us what wallets could become if they connect consumers, merchants, and purchase behavior into a feedback loop

But the wedge they use to create behavior change (credit) is now facing regulatory backlash and a market where consumers might be more distressed than they used to be. We're also seeing competition emerge as "pay later" becomes a standard feature in consumer banking and Fintech apps.

BNPL was the pandemic darling as consumers hit e-commerce, redecorated their homes, and got a Peleton. The inverse is now happening, and consumers want to travel, eat out and do things in the physical world. The impact of this shift is businesses that won big in the e-commerce boom are now struggling vs. ones with exposure to bricks and mortar.

This will even out for two reasons. 

1. Long-term e-commerce is still growing as a share of overall spending; it's just normalizing towards the trend line (meaning slower growth short term)

2. The BNPL players are launching and moving toward physical retail.

They're also rebalancing their cost structures and will be in decent shape in 2 to 3 years, just not growing at pandemic levels.

Embedded Payments are critical for businesses to get better performance and generate meaningful revenue from payments as a service. By 2030 70% of all payments are expected to be "embedded" (conducted on a platform operated by a company that is not primarily in financial services).

This broad definition would include massive growth in payments brands (like Apple and Google Pay) and a payment experience woven into the product experience (e.g., Uber's invisible payment, Shopify monetizing payments). 

The largest tech companies are the obvious examples, but the second-tier "big tech" companies represent the next wave (those with 10s to 100s of millions of users vs. billions). They're dealing with multiple payment types as they go global and new complexity as they start to monetize payments.

As they do that, they need to build payments as a capability internally, which means building a Fintech set of capabilities (from onboarding to compliance).

Over time every company that wants to embed payments will need some balance of internal payments expertise or providers who can abstract that. If Stripe is the payments team you hire as an API, but Stripe covers ~40% of the markets you operate in, what else do you need?

Faster payments mean merchants and consumers get paid sooner but also faster fraud and more vulnerability to scams. Most payments that feel realtime aren't actually realtime. A card swipe feels instant, but the money doesn't move until days later. Services like "get paid early" by Neobanks feel instant, but it's really pre-funding the consumer before receiving funds. These are forms of risk management.

RTP is moving the money. Not faking it with risk management.

When merchants get paid sooner, they have more cash for inventory and less of a risk that they won't get paid in two days. That certainty of cash flow is gold. For consumers, realtime feels like how things should work and is sometimes worth paying a premium. If a friend is in need, sending them the money right now is much better than it getting there days later.

Mastercard estimates RTP can add 1.1% to GDP (in that same EY report linked above).

The explosion in RTP rails like PIX, UPI, SEPA, and FedNow brings significant benefits but changes the payments' operating model. Payments with a delay can be reversed, but with RTP, once the money is gone, it's gone. That forces the industry participants to figure out what to do in those scenarios. Faster payments mean faster fraud.

Everyone must upgrade their risk and fraud operating model, especially in a market with multiple rails. The security and risk model for cards works for cards, but isn't designed to catch something that starts with a card, moves to RTP, then to a stablecoin.

The US has a particular challenge with mo' rails, mo' problems. 

You can add the new RTP wallet networks like Zelle, Venmo, and CashApp to the alphabet soup like TCH, FedNow, and the non-real-time rails like cards and ACH, to emerging rails like Stablecoins and CBDCs.

Confusing for businesses and consumers, and arbitrage risk for anyone in the flow of funds.

Speaking of risk. 

Cross Border is becoming a must-have and a default but multiplies risk by order of magnitude. Cross-border payments will reach $200trn by 2027, the vast majority of which are B2B. But cross-border payments tend to be slow and expensive and multiply the compliance requirements companies have to operate with. (If you've ever applied for a payments license in more than one country, you'll know what I mean!).

If RTP in a single country can add 1% to GDP, imagine what it could do globally. Imagine the unlock for commerce, opportunity, work from anywhere, and entrepreneurship. The opportunity is staggering. But so is the risk.

Fintech companies like Wise, PPro, and Nium have abstracted a good deal of this pain for various consumer and business use cases. The rails and regulatory frameworks are major blockers at the infrastructure level. 

Domestic rails are not interoperable on the global stage; they were designed to solve for their home market. We have started to see countries look to link up their RTP rails (e.g., IXB is a project to link SWIFT, SEPA, and The Clearing House in the US for realtime Euro and USD settlement). But the direct linking of these RTP rails is still early stage and unreliable.

The fallback is always SWIFT, which is not a payment system but a messaging service. In SWIFT, banks send each other messages and then decide to move money when all compliance checks have been completed. It's often expensive because it handles everything from consumer remittances to clearing billion-dollar payments.

As the Fintech and payment companies get better at abstracting this pain, global becomes a default, but the risk surface area multiplies.

More regulators to register with increases costs. Each national regulator might look for bespoke regulatory reporting, think about AML differently, and have unique tax or foreign exchange controls to manage. For most corridors and use cases, the new Fintech payments companies can help abstract this pain, but complexity increases as companies bring payments ever closer in-house.

But like with RTP, a lot of this experience is created by pre-funding a customer and managing risk.

There isn't yet a truly global payments rail that's fast, affordable and abstracts compliance. 

But maybe Stablecoins and CBDCs offer a long term hope?

CBDCs are half a decade away from scale but could be the most significant addition to the landscape since the invention of cards. Stablecoins and CBDCs will merge into each other and are a blurred line.

Declaring this right up front. CBDCs and Stablecoins are the same things in most practical senses. Both offer instant settlement across currency pairs, increased transparency, and increased automation. What differs is who offers them, who can access them, and how they're managed.

A Central Bank Digital Currency is issued and operated by the central bank and is either wholesale or retail focussed. 

Today banks hold various forms of an asset with central banks, but wholesale CBDCs would make this digital exchange of currency realtime. This would be the safest, most secure, and most robust asset in global financial markets, and it would be digital. If this was open to Fintech companies (like the Bank of England offers), the knock-on effect would be a wickedly efficient realtime cross-border settlement.

Retail CBDC, designed to replace cash and sit in a digital wallet, captures people's imagination. It would be issued by the central bank and accepted anywhere bank notes are accepted. The Bank of England model would aim to ensure privacy (the government wouldn't be able to see who holds what cash). But the private sector wallet operators would be expected to perform KYC to prevent money laundering. This is a pragmatic model for CBDC, but I also wonder why. 

Cash is effective for the most vulnerable because its physical; there's very little user upside to retail CBDC if it relies on digital wallets. The only goal it achieves is removing paper cash.

Stablecoins that are 1:1 and backed by bank deposits (or equivalents) are the same as money in the bank, except it has superpowers. Stablecoins are global, instant, and programmable. By adopting and co-opting Stablecoins into a regulatory framework, we get instant cross-border settlement of that particular currency.

Stablecoins are live in the private sector today but lack regulatory clarity. CBDCs have been underwhelmed and lacked adoption and remain in central bank labs. That could change, but I think we'll see central banks offer access to their realtime rails for Stablecoins.

Let that sink in.

That's why I get so excited by Project Guardian that the Singaporean regulator did with JPMC and DBS. There are issues around privacy and KYC to resolve before the banking industry can adopt Stablecoins at scale, but as soon as they could, that would be a huge unlock.

The programmable nature of Stablecoins also allows us to bake in compliance with the token. 

The vast majority of tokens in Blockchain land use standard audited smart contracts. The code that runs these tokens could be standardized in partnership with regulatory jurisdiction. This "co-regulation" through standardization is a massive opportunity.

Instead of central banks trying to build their CBDCs, why don't they set technical requirements for existing ones?

(Notable exception is Wholesale CBDC, which is a massive unlock for the capital markets world)

Wallets that can be truly multi-rail can inherit a substantial portion of the benefit from the changing payment landscape, but only if they nail identity.

In the good reads section below, Dave Birch notes that digital wallets are used by 56% of consumers in the top 13 markets by GDP. Where Apple is headed is redefining the wallet from a money thing into an identity thing. It holds your driver's license, loyalty cards, and bank accounts and lets you pay.

But of course, typical Apple, it's all closed and vertically integrated.

Venmo, CashApp, Zelle (if they do a wallet), Grab, Alipay, BharatPe, Whatsapp, and even Klarna can make a reasonable claim as a digital wallet. Most of the growth in internet commerce will come from mobile-first wallets. 

While this is often seen as a LATAM, Africa, APAC, and India phenomenon, the path for some Neobanks and the bigger US-based Fintech companies like PayPal, CashApp, and Apple is to become a wallet of a similar style. The major difference is each of those wallets is closed-loop. 

A Venmo wallet can checkout using the Venmo button on Amazon, but a CashApp wallet can't. Both support cards, but both are trying to be an alternative to cards.

I get the temptation for closed-loop wallets. A payment made by a CashApp wallet user to a CashApp merchant without card rails is cheaper for all involved. Lower fees for the merchant and Block keeps all of the revenue.

But if we're heading into a world of more rails and digital identity, something needs to catch all of that.

And that something is the opportunity for a wallet.

(From the good reads section below)

Where this leaves us 

Everything starts and ends with a payment. 

Those payments are happening on more rails, becoming realtime and cross-border, and the old rails are still here.

Rails don't die; they join the party.

So we need to shift the center of gravity of the discussion.

The whole payments industry is built around the payments rail. The start of the conversation is usually moving the money.

Multi-rail, identity-first wallets flip that if they're wallets as I define them. 

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 need to be interoperable with as many rails as possible, manage identity and privacy and gain wide adoption.

We need the equivalent of a Visa or Mastercard for wallets. An open loop "standard" that the private sector can use to connect to multiple networks (or as Visa would call it, a "network of networks.")

The problem with Visa themselves doing it is the DoJ didn't like the attempt to acquire Plaid and get into Open Banking payments.

But what if CashApp, Apple Wallet, and MetaMask had a baby.

The future of payments is multi-rail

The future of consumer services is wallets.

But damn, the execution is gonna be tough.

Anyways, I'm over 6,000 words and need to stop typing.

If you read all of this, well done 👏

Now let's go build the wallet of wallets on the network of networks.

ST.

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4 Fintech Companies 💸

1. Passthrough - Fund workflow automaton

Passthrough gives fund managers tools to KYC their investors and manages tax documents through a simple UI. They aim to help close funds investments faster and save on legal fees stemming from bog-standard due diligence.

🤔 Where fund platforms like Carta and Angelist hide the pain of paperwork through their services and back office, Passthrough gives the fund the tools to manage this themselves. Most funds still don't have an onboarding or document management solution, and platforms like Angelist trap data in a silo. If payroll automation was hot, imagine the money available for fund automation 😅

2. Cheqly - A Neobank for startups

Cheqly is an SMB-focused Neobank for the high-growth tech sector. Like many others, it offers online account opening, "transparent pricing." and a personal touch to customer support.

🤔 At first glance, it's hard to tell what will make Cheqly more than a "me too" player in a market saturated with B2B Fintech companies like the US. But their backers include Hong Kong based company formation experts and a cap table management software provider. There's a world where putting everything together into a neat experience could be compelling. Time will tell.

3. SunFi - Solar energy financing platform

With SunFi, consumers and businesses can enter their energy requirements to finance solar equipment. Equipment is typically expensive and requires up-front purchase, but SunFi changes this building with personalized payment plans and support with maintenance.

🤔 Nigeria is a growing economy with surging demand for energy and plenty of sunshine. Its bottleneck is being able to finance the capital outlays for that energy. By combining Fintech and Cleantech, energy providers can now deliver much more equipment, with SunFi helping to aggregate demand. This is the kind fo embedded finance I love to see.

4. Earnie - Freelancer borderless account for APAC 

Earnie allows freelancers and remote workers to invoice and get paid by US clients. Users can retrieve dollars in less than 24 hours, save, manage every spend, and create invoices.

🤔 Combining a bank partner in the US with one in the Philippines gives a freelancer the ability to have a US-issued debit card and pay for services or software without FX fees. As I wrote for Sardine* last week, non-residents can open a bank account in the US; it's just difficult and expensive. Anything that makes that easier is a good thing.

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Things to know 👀

1. PayPal laying off 2,000 staff as tech sector adjustment continues

PayPal will lay off 7% of its staff to reduce costs and "focus on core strategic priorities," according to its CEO Dan Schulman. This follows IBM and SAP announcing over 3,000 job losses. Fintech company Upstart is letting 20% of their workforce (365 people) go. But bucking this trend is Revolut, which has announced 1,700 new jobs to fuel its growth and expansion.

🤔 Layoffs are sadly the new normal for a while longer. The market is rewarding CEOs that announce job cuts and a focus on profitability. Efficiency is the new growth, especially in tech, and with interest rates likely to stay high for a while, this will continue.

🤔 Wallets could become the center of consumers' digital identity (see Good Reads below). If PayPal can make Venmo an alternative payments brand and rail, they have a shot at aggregating identity too. But they've not made much noise about that as an approach, and as a company, it seems to still be in follower rather than leader mode.

🤔 PayPal has an incredible opportunity, but can it execute? PayPal is a strong player in consumer wallets (Venmo), credit, and online payments (via Braintree). And while it has made massive strides, these businesses feel disconnected from its legacy global wallet (PayPal). 

🤔 As an aside, what the heck is happening at Revolut? They haven't published their 2021 accounts (a legal requirement in the UK for all private companies). And when everyone else is cutting jobs, they're expanding them massively. This could be great timing as their SMB offerings expand deeper into Europe, but it suggests they're not planning an exit soon. 

🤔 It's important not to get too disheartened by layoff news. It makes for a negative headline and mood, but a leaner, more focused Fintech sector can attack incumbents and the market much more effectively. Revenue is vanity, profit is sanity, and cash is king. And there are Fintech businesses out there printing cash. High-interest rates aren't bad for everyone.

2. Crypto Exchange Kraken settles with the SEC over Staking

Kraken has agreed to pay the SEC a $30m settlement for failing to register its crypto asset staking-as-a-service program. According to the SEC complaint, 135,00 US investors had $2.7bn invested in the program, earning Kraken $147m in revenue. The Kraken service was alleged to be marketed as an investment opportunity. 

🤔 The SEC has increased its regulation via enforcement, but the industry also wants guidance. It has been over 4 years since the SEC issued guidance to the industry on how to treat cryptoassets. We can learn a lot from the complaints against companies, celebrities, and consistently in the media. We sorely need regulatory clarity.

🤔 We need regulatory clarity on staking because staking is core to Ethereum, and Ethereum is becoming core to the global financial system. Ethereum validates transactions using a technology called Proof of Stake (as opposed to bitcoin, which uses Proof of Work). Proof of Stake is much less energy-intensive but allows a network to operate consistently without any centralized intermediary. Users can "stake" their Eth by locking it with a validator. If the validator successfully validates transactions, they receive a reward from the network (Ethereum), some of which is automatically paid to the user who staked the Eth. 

🤔 I suspect other centralized exchanges will learn from this and offer more decentralized services where the consumer uses a decentralized tool via a centralized interface. The metaphor here would be that centralized exchanges sell the tools to mine precious metals. The consumer then receives and manages the profits of any precious metals they find. The exchange could even "rent" the mining materials. Now switch the word mining for "staking" and precious metals for "Eth staking rewards." Validators act like mining equipment contractors, getting paid for a service. 

🤔 The tokenization of real-world assets and the massive unlock it provides for the global financial services industry can't happen without regulatory clarity. In reality, most traditional financial services projects are now using public blockchain networks like Ethereum in some of their projects. This number will trend higher over time. Staking is a core part of Ethereum, and without clarity on staking, we hold back the entire industry. 

🤔 The way Kraken offered staking does look like a security, but it is done in DeFi looks more like someone buying their own equipment to mine for precious metals. They used their money to claim something (in this case, from a network instead of the ground) that no one person or management team operates. Kraken packaged that and sold it to US persons expecting a profit. Which is a different thing. 

Good Reads 📚

1. The wallet wars are about identity not payments.

Digital wallets are used by 56% of consumers in the top 13 markets, according to Accenture, which Dave says explains why major US banks are now building their own via EWS. Merchants like Amazon are already implementing Venmo and looking to reduce card fees; a "Zelle" brand could do well alongside, given consumers have some familiarity. 

Apple has moved beyond Apple Pay into Apple ID, becoming an identity wallet. Can banks build on the vast amounts they spend on KYC and compliance to be a competitor in this race? Dave suggests that if a wallet can tell I'm over 18, it can then decide if a payment should proceed. And if CBDCs become a thing, they might live in that wallet.

🤔 This is a fantastic "what could be" glimpse at the future of wallets. The term "wallet" is popular in web3 as a source of identity and ownership, but it could also become central to traditional finance. Apple shows what's possible with a wallet containing multiple payment and identity types. Why shouldn't there be more competition here?

🤔 Are Wallets as important as autonomous vehicles or AI? In its "big ideas 2023" report ARK says closed-loop wallets like Block are a macro technology trend. This is putting huge significance on sleepy Fintech vs AI or the future of gene sequencing. This is because "wallets like AliPay, Block, or Venmo's closed loops offer better unit economics to the merchant and wallet provider." 

🤔 The future is more payment rails, not less, and wallets will become the center of that. CBDCs and Stablecoins will displace cash, and open banking and Realtime Payments will become a default. ARK says "closed loop" will be 50% of global payments by 2030. If that's true, wallet providers are the new banks.

🤔 But 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 problem with closed-loop wallets is they're only programmable by their owners (e.g., Apple or EWS). Open loop and web3 wallets have so much space for innovation here.

Tweets of the week 🕊

That's all, folks. 👋

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Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a * (3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only.