Fintech 🧠 Food - Who can win at Fintech in this market? SEC Keeps up with a Kardashian and Railsr raises

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Hey Fintech Nerds 👋

The worst thing about trying to write a newsletter for your Sunday mornings is that everything happens on Saturday before you publish. I’ll come back to the Binance Smart chain hack next week.

But.

This week PayPal’s new acceptable use policy broke Twitter with language that appeared to give them the ability to freeze up to $2,500 if a user violated a vague “abuse” policy.

I won’t go into the weeds of how one person’s abuse is another person’s free speech, but what stood out is that getting terms and conditions wrong now has greater negative PR and reputation damage than any benefit from having those terms in the first place.

I should point out that this was a draft, and PayPal has since rescinded the policy, but the damage is done. The Twitter customer is scarier than the regulator these days.

On another note.

Last week I invited the audience to submit a pun or joke to win tickets to the Fintech formal. And Javier Fernandez won the week for me with this

"Pour one out for Partner Bank compliance teams."

Compliance is about to come into the spotlight hugely, but it was a business tax for so long. One of the most exciting changes I've seen in the past few years has been rethinking how we use data and organize and align risk, compliance, and fraud teams with the business. 

It turns out that if you understand risk and compliance, you start to grok Fintech.

PS. Thanks to those of you that reached out about connecting at M2020. The annual hoo-ha will be here before you know it. Make sure to hug the organizers and staff; these shows are incredibly tough to pull off. (Zac, Scarlett, I see you, working, killing it, nearly there!)

Weekly Rant 📣

Who wins at Fintech in this market?

This market is full of mixed signals. Some people preach revenue, others seek user growth, and others are profitability.

If you work as a product manager in Fintech or a bank, what features do you prioritize, and how do you allocate the budget?

Which Fintech infrastructure companies will last the test of time?

The key to all these things is 

1. Understand the market pressures

2. Understand the customer pressures

3. Create a hypothesis about how 1 & 2 create product opportunities

4. Understand your strengths and how to play to them

This Rant was partly inspired by the incredible monthly Fintech report the research team at Morgan Stanley put out. Shout out to those guys; you'll see a few screenshots from them.

The Fintech Market is reverting to the mean.

The pandemic skewed things.

We saw a massive run-up in values, followed by a sharp correction. But this correction has put us directly where we were before the pandemic (note the slight bounce at the end of the chart).

We are not out of the woods yet; in every correction, there are always steps on the way down. VCs have raised all-time high funding levels and will have to deploy that capital. And it can't all go to me-too Metaverse plays or Adam Neuman. 

Short term, that capital is backing the portfolio, but long term, it has to find new opportunities. 

And while VCs are a little timider in pricing growth, there's a huge opportunity for M&A among Fintech companies and for legacy providers to pick up amazing products that lacked distribution.

Hypothesis: The Fed neutral rate has to stay higher than the last decade, meaning investors don't go as heavily risk-on as they did through the pandemic in the next decade (it also means many VCs' next funds might not be as big as the last, putting further downward pressure on valuations).

In that scenario, growth companies continue to grow but don't attract crazy multiples. 

What is a realistic public market revenue multiple for Fintech companies?

This photo is a bit small, but here's what stood out to me.

• 🤕 Consumer Fintech trading at 2.2x revenue. For reference, PayPal is about 4.5x revenue and SoFi 3.9x (although both are not pure consumer plays). My takeaway is that the diversity of revenue streams wins. Consumer product creates brand trust and is part of the flywheel but not the whole thing, especially not if you rely on Interchange or meme stocks and Crypto.

• 🤕 Financial marketplaces & aggregators at 1.1x revenue. Oof. What does that mean for BaaS and Lending as a Service long term? Possibly nothing because I think they're genuinely novel, and financial "software and solutions" has a 5x multiple as a base case. They could be either or both. Also, are aggregators in a Fintech business not also "financial data and analytics?" 

• 👩‍⚕️ Financial data, B2B payments, and Financial software perform well at 8.7x, 6.2x, and 5x revenue. It's not surprising to see the B2B and infrastructure side of Fintech continue to do well, given this market data point. Data has always been a moat in finance (businesses like Refinativ run the world)

Caveats: Revenue multiples are not the same as market cap (Walmart trades at 0.6x revenue and has a $400bn market cap). Also, all of this could be wrong. Big wins come from contrarian, not consensus, bets. Conviction matters. But in the end, the market decides. I’m also very mindful of recency bias in all of this.

Lastly, I loved this slide. Two types of "Fintech" companies are achieving "Rule of 40" growth in Fintech.

1. Profitable legacy providers (bottom right Temenos, FIS, Global Payments). If we wind the clock forward, would we find Marqeta or Galileo (SoFi) in that bottom right corner? And other Fintech infrastructure companies? How many Fintech infrastructure co's can the market sustain if consumer Fintech loses luster? Growth companies that get their M&A right can be big winners.

2. Growth Fintech companies with a superpower (Wise, Bill.com Nubank). Every one of those businesses has diversified from its core wedge, but their wedge drove growth. The art of growth products is knowing when to expand and avoiding features because they might drive revenue. User permission comes from user trust. CashApp is an excellent case study of a product with a wedge (real-time payments) and used to become so much more to its users.

The market has pressures. 

But great businesses are being built.

And that VC dry powder 👀. The funding stalemate will end. But my sense is growth rounds for M&A will be the unlock. Don't hate; consolidate.

Consumer is hard; those who diversify win. 

Interchange as the only source of income won't last forever.

But then there's this.

Consumer exits at IPO since 1995 have outperformed.

There's life in the monster yet.

So if we're looking at customer pressures, let's do consumer because the data there is easier to find, and the use cases are #relateable.

Pressures on consumers.

(I'm using a consumer lens today to look for market opportunities, but you could apply the same idea to B2B and infrastructure)

Consumer financial health is about to collapse.

Consumer savings have dropped to their lowest levels since 2008, and consumer debt is at an all-time high relative to income as essential costs like rent, commuting, and food spike due to inflation.

As consumers run out of savings, they're missing payments on their debt, and you can see this in the rise of delinquencies.

What happens in 6 or 12 months if they're missing payments now? What happens to BNPL providers in this market? Or earned wage access?

Consumer Fintech is about to get a test.

Side note: I was talking to a chap earlier in the week who'd spent a lot of time in the credit scoring and data world, and he shared an interesting data point with me. When consumers start to miss payments, they either go wrong all at once (rare) or slowly (more common). When they're struggling, often the debt line they're likely to continue paying on is the one they have the most affinity with (their sports team or rewards points card). 

Opportunities for Fintech to serve consumers.

If the winning Fintech companies in the consumer category built a wedge, they did it by solving a significant problem. I'd argue the three biggest problems to solve for consumers are to

1. Help make debt more manageable

2. Reduce everyday costs

3. Help consumers save more

These wedges can help companies diversify.

(PS. substitute consumer for "business" in the below, and it more or less stacks up)

1. Helping consumers manage debt.

Paying debt according to your favorite card isn't the best strategy. 

We can help consumers manage their payments and help lenders get better at collecting.

Managing debt payments: Fintech apps like Incredible use open banking to connect all of a consumer's debt and calculate the best payment strategy. This is not debt consolidation; it's the same debts just paid in the most effective way to reduce the time in debt. It deals with the fact that paying multiple debts can overwhelm many people.

This is one example; there will be many others. The point is, managing debt should be a default.

Should a consumer using a service to manage their debt be a positive data signal to credit rating agencies? I'd say so.

Making collections better: TrueAccord is a service that focuses on creating better relationships with consumers to improve the amount collected. Why any lender wouldn't use something like TrueAccord is beyond me. Banks, Fintech companies, whomever. For too long, collecting debt was an operational department that didn't get love. But it's a crucial opportunity to impact business and people's lives.

If being overwhelmed by debt is the problem, attack it from all sides consumer, data, infrastructure, all of it.

2. Helping consumers reduce everyday costs.

Personal Finance Management, or PFM, was a dirty word in financial services 10 years ago. It meant pie charts and spending analytics. The measure of a Fintech app now does it actually help consumers reduce costs. We're seeing some things emerge.

• Subscription managers: Helps you find those subscriptions you forgot about and cancel them (this is now becoming a standard feature, but how many users use it, and how well designed is it?)

• Price comparison: Helps you compare utility providers and, in some cases, switch. Monzo piloted this, but it's not yet the norm. This is a massive opportunity, with energy prices skyrocketing (especially in Europe).

• Tax automation: If you've followed Fintech Brainfood's "4 Fintech companies," you'll have noticed several this year doing this (for consumers and businesses). Why can't taxes be completely automated now we have open finance? (Especially in the UK since we have tax APIs from the government). It's a data problem.

• Discounters: Acorns Found Money, but for everyone. Merchant-funded offers linked to a card is an idea that has been around forever, but can we make this much more autopilot. The experience has been clunky historically. Make it delightful. Getting this flywheel of merchants and consumers right is tricky, but with the right wedge, it could be done.

• Refund finders: Helps you claim refunds (e.g., if your flight is delayed like Airhelp, interestingly, I haven't seen this baked into a travel card yet. One to aim at if you have B2B travel customers)

3. Helping consumers build a savings buffer.

Selling a savings product is not the same as helping to build a savings buffer.

The basics: Roundups and sweeping any excess salary at the end of the month are slowly becoming default features (heck, my legacy bank does roundups now). There's no excuse for not having this in an app these days. 

Extra credit: I spent half my life showing people Monzo (still the goat UX for me) and the other half showing people Plum or Digit. Plum has nailed using notifications to get users to save more. They also incorporated moods into saving without it being a bit weird. Digit analyses your spending to figure out how much to save and moves a little bit on your behalf daily. Having a Neobank or bank app that doesn't at least offer this to users seems silly. Again this will become table stakes.

High honor: Most savings apps focus on people who think about saving. But side hustles are a reality for 45% of Americans and 20% of Brits. In r/financialindepdence on Reddit, side hustles are a common topic (and if you're in consumer Fintech product, spend more time in that subreddit).

Building the next great consumer Fintech product.

There's a ton of value left on the table because consumers (especially low-income) often don't know or take advantage of what they're entitled to. Because it's hard, overwhelming, and frankly, a schlep when you're trying to juggle 100 other things.

Each feature in isolation is hard to justify and wouldn't move the needle on 1 month MAUs or revenues for an existing business.

But combined and beautifully designed?

These are the kinds of services that build trust.

And trust grants permission to expand into other services. Like CashApp did with payments.

The revenue model might not be interchange-as-the-answer-to-everything, but it’s still a good way to bootstrap.

And there's still a huge opportunity for the next great consumer Fintech company.

Game on.

ST.

4 Fintech Companies 💸

1. Meow - Treasury management for Crypto and Fintech

• Meow allows companies to earn a yield on their cash, either by holding US Treasuries (4%) or "high yield strategies" (~5%) in DeFi. Meow uses a single dashboard to manage cash, US treasuries, and DeFi holdings. Crypto-exposed businesses can also manage USDC, trade Crypto and generate a yield from those holdings.

• 🤔 Companies that raised plenty of cash in the VC bull market of 2021 now risk seeing their cash erode over time. It is not surprising to see companies that help manage inflation succeed. 4% on a $10m raise is $400k. That could be a whole month of runway. Treasure Financial and Fortris have both been around a little longer. Treasury management was the ugly part of banking until the market turned. Long term, I sense it might fit better in a modern digital bank (e.g., Mercury or Rho) than it does standalone. But it's a great wedge product for now.

2. Blowfish - Web3 native fraud prevention API

• Blowfish is an API security engine for DeFi and NFT wallets that helps prevent scams, hacks, and fraud in web3. If a transaction is suspicious, Blowfish enables wallets to provide a warning to users not to click. Wallets can also block a transaction entirely on behalf of users if they have high confidence it is a scam. The API supports Ethereum, Polygon, and Solana and will "add more soon." 

• 🤔 This feels like a missing piece of the web3 jigsaw puzzle. The sheer scale of scams in web3 in 2021 made it a pariah to regulators and a nightmare for many users. Unlike email spam, losing your life savings to a hack has real consequences. Web3 attacks can be sophisticated and drain your entire wallet, and displaying warnings is one of the most effective controls. We still need to blend TradFi and DeFi data to reduce this risk, but Blowfish is a step in the right direction. PS, it feels like we need a certificate authority/oracle for smart contracts no? Most contracts are audited, but where's the oracle that proves that to the wallet?

3. Tactic - Web3 accounting for businesses 

• Tactic unifies data from exchanges, wallets, and decentralized applications and makes it available to accounting tools like Quickbooks. The goal is to save time and effort, making complex transactions simple and breaking out gas fees vs. transaction fees (which have different tax rules). They're backed by Founders fund, FTX, Coinbase, and Ramp.com. 

• 🤔 Web3 Turbotax for business is becoming a crowded category, but Tactic has some early signs of credibility. Winning in this space will need partnerships, and their Cap Table gives them the fastest-growing expenses card for SMBs and two of the biggest institutional exchanges in the US. The value here is normalizing the data and landing it in Quickbooks in a way ready to "push send." Now think about every big corporate dabbling in NFTs; what will their accounting teams use? (Likely SAP Hana, so they'll need a spreadsheet output)

4. Solvo - Crypto for Normies

• Solvo will offer vaults earning "up to 8%" on Crypto, "bundles" of asset holdings (like DeFi, Metaverse, or Blue Chip), as well as the ability to pay in Crypto from a debit card. The team believes Crypto is still too confusing, and by pre-packing the offering, they will make this simpler for users across Europe.

• 🤔 Tons of businesses that do this in the US ran into trouble (thinking BlockFi and Voyager), and with markets down, I'm curious about the demand for this product in Europe. There could be a market gap for this focused type of Crypto product, though. The alternative example to Voyager is Juno, quietly building an everyday account for bridging Web 2.0 and web3. Solvo is headquartered in Lithuania, which suggests they're borrowing from Revolut's move-fast-and annoy the regulator's playbook. This could be interesting. I mean, "bundles" look an awful lot like a fund, don't they? 

Things to know 👀

1. The SEC is keeping up with the Kardashians

Kim Kardashian has agreed to pay $1.26m in fines to the SEC for promoting EthereumMax without disclosing the payment she received for the promotion. The SEC says Kardashian was paid $250k to promote EMAX, a "crypto asset security" asset offered by EthereumMax.

• 🤔 The word disclosure is the key in that sentence. Any asset sold to consumers must disclose any relevant information about that company. The idea is to reduce information asymmetry so investors can make a fully informed decision. (Although, you have to wonder if "disclosures" as they work today with public stocks like Gamestop did anything to prevent the memestock mania there. Perhaps we need to upgrade disclosures).

• 🤔 Plenty of other celebs promoted Crypto; how many more will we see? The wording in this release also says that this settlement "serves as a reminder" that when celebrities endorse "crypto asset securities," the law requires them to disclose any payment. How many stars fell foul of this and are privately settling? 

• 🤔 Plenty of companies and projects advertised to consumers and made far more than $250k from advertising, but outright scams. The focus on celebrities suggests that the SEC's Gary Gensler appears to be grabbing attention and profile building more than serving the public here. I hope that's not the case, but there are reports his own staff believes this is a play to become treasury secretary. 

• 🤔 The choice of "Crypto asset security" is also intentional language that the SEC has been using lately. Through enforcement, the SEC appears to be suggesting that almost anything could be a security (outside of perhaps Bitcoin). The big market problem is regulatory uncertainty and knowing what is and is not a security. There is as yet no standing law for it (although there are many draft bills, they could take a long time to pass).

• 🤔 We need an open-source, simple disclosure regimen for Crypto. Regulatory uncertainty will only continue; bills will take a long time to pass. The chair of the Federal Reserve said there was no real need for DeFi regulation because the recent drop in Crypto prices had washed out leverage with no major impact on the real economy.

2. FTX partners with Visa to launch a debit card in 40 markets.

Visa and FTX will launch a debit card in 40 countries focusing on LATAM, Europe, and Asia. The cards (already available in the US) will link directly to a user’s FTX Crypto account to allow customers to spend Crypto without moving assets off the exchange. In an interview, FTX CEO noted that Argentina and Turkey (where inflation has been 83% and 78%, respectively) are ripe for this product.

• 🤔 A digital dollar is a major upgrade if you live in a country with high inflation. But it has been difficult and expensive to do in many markets (sometimes outright banned). With currencies collapsing, demand for the dollar is at an all-time high. If consumers in these markets can hold USD stablecoins and spend them, their purchasing power is dramatically improved.

• 🤔 The dollar being the default choice of the global consumer has benefits for the USA. As we see today, in times of stress, investors fly to the currency seen as the most stable (in this case, the dollar). In financial markets, that also means dollar policies (like sanctioning Russia and Iran) must be upheld by any banks holding dollars.

• 🤔 The historical form of the off-shore dollar (the Eurodollar) came from foreign banks holding dollars after world war 2. Initially, the US and foreign countries tried to discourage the rise of the Eurodollar, but over time both came to accept and work with it. I sense this will also happen to the consumer off-shore dollar, AKA stablecoins. Stablecoins are also programmable, making them an upgrade over other currencies. The USA could out-compete China and other forms of value by having the free-enterprise (but policy-controlled) currency of choice for the global south and entrepreneurs.

• 🤔 How will local central banks feel about this? Central banks like South Africa, China, and in LATAM often limit the amount of US Dollars a resident can move in and out of the country. If another currency invades, it further weakens its ability to achieve goals like lowering inflation. But there are too many countries worldwide, and it’s too easy to make a wallet that can accept Stablecoins for currency controls to be the answer. Countries like China will succeed because it will limit internet + currency access. But the entire global south?

• 🤔 Can FTX execute on so many dimensions without imploding? FTX is acquiring, building, and doing everything. Move-fast-and-break-with-tradition usually has regulatory consequences down the line. Can it grow revenues, keep regulators on-side and keep its people together?

3. Railsr (AKA Railsbank) raises $46m

Railsr has announced a $46m funding round ($26m in equity, $20m in debt). The equity is an all-inside round, with only existing investors participating, and the debt came from Mars capital. The company now has 300 customers (mainly in Europe) across retail, sports, and Fintech companies.

• 🤔 Are there too many BaaS companies? Across the UK and Europe, companies like Modulr and a new generation like Swan and Weavr. But as is often the case, most BaaS companies are quite different. An issuer processor with APIs differs from an API layer with a network of partnerships and licenses. Folks like Weavr are closer to the use case. They might all have a buyer, but are they all venture exits, or are some acquisitions?

• 🤔 Is embedded finance as massive as the projection? Bain put out a report projecting a 7$trn transaction volume by 2026. Napkin math time. Let's assume the BaaS companies do well and get an interchange rate of 50bps; that's a $35bn revenue pool.

• 🤔  And if so, what will be the winning dynamics? Perhaps non-finance customers value breadth and simplicity and are ok with sharing unit economics. As Fintech companies scale and look for profitability, they too will value cross-sell but might look to own more of the infrastructure. Every market has its enterprise vs. growth player (Stripe vs. Adyen). I think BaaS could go the same way.

Good Reads 📚

1. The value of doing hard things

In this piece, Alex talks about the virtue of solving 100% of a customer problem and gives several examples. 

Like TripActions, who built an entire expense management platform for five years before adding a card, pre-dating the now crowded expense management platform, its USP and right to win is solving all travel problems. He also mentions Nova Credit, which does permissioned data sharing across countries, allowing them to be the only registered credit reporting agency that can provide factual histories on migrants. 

• 🤔 Fintech companies have found their wedge, but this market correction disrupted them during growth and expansion, so what now? New product lines take a long time to show positive unit economics and may not get traction. Key strategy questions are how quickly do ideas that don't drive growth get killed, and how much of a problem do you solve for your core audience today?

• 🤔 Advice for companies is a bit like advice to individuals, play to your strengths and know your audience. Willingness to solve all of your core customers' problems vs. expanding just to have another product line is key in a market where there are always 4 or 5 well-funded growth companies per category.

• 🤔 Market dynamics matter, VCs have dry powder, but public markets suggest the multiples in private markets are unsustainable. The next VC round is unlikely to be at the same multiple as the last if a company took funding in '21.

• 🤔 Growth solves everything, especially if you can show positive unit economics. The rule of 40 still matters. Every vintage has great businesses, and great growth businesses tend to live up to the rule of 40. 

Tweets of the week 🕊

That's all, folks. 👋

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