Fintech Lending 3.0

Plus; Klarna partners with Adyen & Nubank does US Dollar Stablecoins

Hey everyone 👋, welcome to Brainfood, the weekly read to go deeper into Fintech news, events, and analysis. Join the 36,267 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

Everyone forgets Adyen is a bank. An acquiring bank

This week, when Klarna selected Adyen, they got a payment company that accepts cards in Europe, North America, and Asia. This gives Adyen a structural unit economics advantage over competitors that many still miss.

 Everyone who says Stablecoins and Crypto doesn't have a use case needs to look at LATAM. Nubank users can hold digital dollars as Stablecoins from Circle (USDC).

These big Fintech on Fintech partnerships demonstrate the second phase of growth for the industry as it becomes default global. (Covered in Things to Know)

Fintech companies haven't had a great history when it comes to lending.

Lending is easy; getting paid back is hard.

Lending across the economic cycle, surviving pandemics and banking crises is even harder.

Yet, in this market, some Fintech companies are not only surviving but thriving much more than the regional banks. Our Guest Rant this week gives an operator insight and perspective on the current state of lending in Fintech. I think you'll love it.

Here's this week's Brainfood in summary

📣 Rant: Guest Rant: Everyone is becoming a lender… again?

💸 4 Fintech Companies:

  1. Omniful - Supply Chain logistics platform

  2. Carbon Maps - Carbon accounting for the food industry

  3. Sunsave - Solar Subscription 

👀 Things to Know:

📚 Good Read:

  1. My Techno Optimism by Vitalik Buterin (I LOVED THIS, PLEASE READ IT)

Weekly Rant 📣

Guest Rant: Everyone is becoming a lender… again?

Disclaimer: this one sounds different. This is me, Basile Senesi, and not your usual Simon, who is a bit occupied with the latest addition to the Taylor family. 

Thankfully, I'm choosing a topic I know well: Lending. 

In 2023. Who knew this would be a hot topic again? 

I, for one, have to admit I didn't see this coming.

But it's everywhere.

At Money 2020, Unit launched an embedded credit product to offer in-app loans with a single line of code. Loanpro, normally focused on helping fintechs manage their loan book, hinted at a transaction-level credit product. Highnote moved from card products to consumer credit. (Insert every other announcement I forgot here, lol!) 

This is a story we've heard and a trend the market punished severely in the past few years. The first wave of fintech lenders - Kabbage, Affirm, Fundbox, etc. - started by gray labeling their credit offers to software companies in an online store checkout, accounting workflows, etc. They convinced the market for a long time by talking up the revenue opportunity and downplaying the risks until they couldn't keep the charade up any longer and saw valuations come crashing down.

1. Lending 101

Giving out money is easy. Getting paid back is hard.

a) The business model: Lending for fintechs is simple: 

  1. Find a large lender to give you money at some baseline cost. 

  2. Use that large credit line to book smaller loans and mark them up. 

  3. Collect the difference between your cost of capital and what your clients repay you. 

That's your gross revenue.

Unfortunately, not everyone will pay you back. Defaults are your losses. 

Defaults are less of an issue in good times. When the consumer and businesses are healthy, you'll get paid back. But in a recession, default rates start to spike. 

And those losses add up quickly. The art of a good lending business then lies in getting paid back enough interest on your loans to cover principal defaults and still come out ahead. 

You have two ways to be profitable

  1. Charge more

  2. Get better at managing default risk

Charging more seems obvious, but it's a competitive market. Your pricing needs to accommodate the risk in good times and in bad. Lending nerds call this "the cycle" or the economic cycle. But it also needs to be competitive, or else nobody will buy from you in the first place.

When assessing default risk, fintech companies generally have a big edge: they use technology to build a better picture of the customer and decide which ones fit. 

Usually, the past predicts the future decently well. 

(Although not in the past two years!) 

b) How do you grow? Growing means booking more or better loans. You want the lowest default risk and to offer the best pricing. The lowest default-risk borrowers are highly sought after in a competitive market. The pool of top borrowers is limited, and it's tempting to grow by moving into lower-quality segments.

Winning the best customer also means offering the best: lower interest rates, bigger loan sizes, longer repayment terms… Unfortunately, the inherent structure of fintechs means they often don't win in this category for two reasons:

  1. Banks always win on rates. Because they borrow from large players to lend and monetize the spread, banks, on the other hand, lend out their customers' deposits - effectively free. 

  2. Not all debt is created equal. The so-called capital stack dictates in what order investors and lenders in a company get repaid. Senior debt is first. Then junior debt. Then equity. The lower in the stack you are, the less likely you are to get your money out, so the more of a premium you charge to make up for it. Fintechs generally issue junior debt - mostly because it's simpler and the only real option available for them.

2 Recent Lending history.

a) Fintech lending 1.0. Back in 2015, Fundbox partnered with Intuit to offer invoice financing, and Bluevine did it with Xero. 

There was early interest from software companies seeing revenue opportunities in lending and a shift in how consumers and businesses wanted to transact with lenders. But that market was still immature: integrations required a lot of product investment, and risk appetite was not yet as aggressive, leading to high rejection rates and low customer satisfaction. 

SaaS cos pulled back, and lenders returned to directly winning customers the way they knew how.

b) Fintech lending 2.0. Then came 2019, the golden era for fintech lending that lasted through 2021. The technology had improved, lessons had been learned, and it wasn't just early adopters paying attention anymore. Everyone got excited about adding Lending revenue to SaaS through embedded lending.

Source: PitchBook | Geography: Global | *As of September 30, 2022

The idea of embedded lending is simple: your SaaS customers are running key parts of their business in your app. Offering them credit at the point of transaction makes sense: you are more likely to finance payroll when running payroll, so why not embed it into Gusto? 

Embedded lending allows SaaS cos to have their cake and eat it too: they can grow revenue without taking on the cost and complexity of being a direct lender. Because lending is hard – the risk of losing money is real, credit declines can frustrate customers and impact retention, and managing a loan book requires real investment. 

In an embedded lending arrangement, a SaaS company partners with a lender to refer customers to them via API and splits the interest revenue. The lender runs all loan underwriting, origination, and servicing. The SaaS company sells a new product to existing customers and expands ARPU without managing that product actively; Lender wins new customers without investing in acquisition. 


Those few years between 2019 and early 2022 were really good to lenders: the fear of COVID-related credit risk and quick rebound coupled with balance sheets padded with stimulus dollars (PPP, etc) gave lenders a false sense of confidence. Add in cheap money, all-time low interest rates, and things we look good for embedded lending.

At the same time, an explosion in new tech made it easy to bolt on new loan revenue to your current customer base. Lendflow enabled it for SMBs. Paraffin did it for Mindbody, then Doordash. 

Everyone was happy, unit economics went up up up for SaaS cos who played along, and distribution exploded for lenders participating.

But then.

3. Higher rates, higher defaults.

It was all going so well.

Stupid Jerome Powell and his rates.

The rising rates that started in early 2022 wreaked havoc on riskier lender's portfolios, especially fintechs. Clearco laid off 30% of their staff. Fundbox and Bluevine took a similar hit. Klarna was gutted. Affirm stock is down nearly 90% from its 2021 peak. But why?

a) Delinquency rates are rising quickly. First off, borrowers found themselves struggling to repay. On the business lending side, sales slowed as the economy slowed, and revenue couldn't keep pace with the required debt repayments. On the consumer side, discretionary spending shrank as inflation squeezed household budgets, putting pressure on debt repayments.

Source: Board of Governors of the Federal Reserve System (US)

b) Debt got more expensive. Rising rates flow directly to borrowing costs, driving up the average loan interest rate. That made repaying even harder and eliminated an already narrow lending margin: as Fintech's borrowing costs rose, they were forced to raise prices and keep margins fixed or accept narrower margins to stay competitive. 

Source: Board of Governors of the Federal Reserve System (US)

The net effect: 2022 was brutal for fintech lenders. 

They simply pulled back and tried to survive. 

They stopped originating new loans and focused on managing existing risk. But in the face of slow growth, high cash burn due to mounting losses, and worsening unit economics, VCs also pulled back and soured on fintech lenders. Those same names I just mentioned? In 2022, Fundbox laid off 40% and was rumored to be exploring a sale. Bluevine fired 20% of its staff, and Klarna raised the valuation at an 85% lower than its last-round valuation.

Thankfully, in my day job, we saw the writing on the wall in early 2022 and pulled back on originations ahead of the market, so our exposure was minimal. That meant slowing the lending business while reallocating our resources to building high-yield cash management software and other asset-lite products (more on that later). 

Many of our peers weren't so lucky.

4. Fintech Lending 3.0 

So why are many players dabbling in fintech lending again after all of this pain and this about-face from venture capital?

a) For starters, the technology is in a better place. Unit's announcement - incredibly easy access to lending products native in your app, with no risk to you - is a testament to that change. It's simply never been easier to flip the switch and offer credit, and building it is not a resource tradeoff question the same way it used to be: one line code gets you loan application rails, credit facilities, and servicing all in one place. This is a game changer for companies curious about adding lending but couldn't quite justify the engineering lift. I'm closely monitoring this because it's the first one-stop-shop option.

b) Second, as bad as the macro is, there's a feeling it's tough but stable - and arguably more predictable. Lenders are playing in this space again, albeit cautiously. Even though rates are very high and risk is very real, lenders are coming out of a long winter on the sidelines. 

For example, Atalaya and Goldman Sachs joined forces to give Ampla another $258M credit warehouse to extend lending in September. I80 issued Cardless a $75M revolvers to expand loan operations. Uncertainty is the enemy of credit risk underwriting. A good macro is great, but predictability is even better - even if the outlook is bleak.

c) Finally, there is real innovation in credit products that we haven't seen in some time. On the junior debt side, a new payable financing movement is underway. Companies like TwelveGrow enable "Grow Now, Pay Later" and allow companies to borrow against their paid marketing performance. Capchase rolled out BNPL for B2B SaaS, something that had been traditionally reserved for B2C transactions. Ramp launched Flex to allow customers to get extended repayment terms on select invoices that are otherwise due upfront.

5. The case for Senior Debt

But I'm even more excited about what is happening in Senior Debt - arguably the last "new" frontier in fintech lending.

Unlike Junior Debt - which is generally priced wider, expected to be available faster, and generally more flexible for fintechs to work with - Senior Debt has been an old-school, offline process. Mostly because the holders of capital are old school and offline themselves.

The most modern tech companies building the best products around borrow venture debt from old-school banks like SVB. The process is painful, but the cost of capital and repayment terms are best in class. What's a 4-month closing process when closing on $250M? 

There's been very little incentive to modernize. 

Of course, SVB and the like weren't the only players - credit funds of every type, venture funds raising debt capital from LPs, and others were always looking for a (highly lucrative) piece. But a bank's deposit base meant they could never be beaten on cost - and, by extension, on risk: if you have the best money, you get the best clients. 

You can take risks and give the best terms if you have the best clients. 

The rest fight for the scraps.

Except the regional bank crisis in March shook things up. The usual suspects like SVB and FRB pulled back. Sensing blood in the water, new banks like HSBC and JPM moved in. More importantly, those credit funds I mentioned went all in.

Stiefel, Upper90, and others rolled out the welcome mat to SVB's former customers and courted new ones. But still, no deposit revenue and free deposit dollars to lend from meant prices were too high. So they indexed on delivering faster applications, more flexible terms, and other innovations on the margin to compete.

And that's where Fintech comes in: by partnering with fintech neobanks and sharing on deposit revenue, those players can drive down their blended cost of capital and compete head to head with banks for the best business. More importantly, they can do it while offering their customers digitally native banking experiences they hadn't been able to tack on to their facilities before.

To me, this is the part of the lending landscape that is both the least penetrated by technology and the most ripe for the rise of Fintech. Watch this space in the coming months. 


4 Fintech Companies 💸

1. Omniful - Supply Chain logistics platform

Omniful provides a single platform for merchants to manage their orders, warehouses, inventory, and shipping. The platform integrates with payments, billing, and accounting platforms and claims to make order fulfillment 75% faster.

🧠 Bringing Amazon's competitive advantage to smaller merchants and suppliers. Amazon is the master of warehousing and rapid fulfillment. This scale helps them drive out costs and compete on delivery speed, which is much harder if you're small. Omniful is taking the "unsexy" back office and bringing modern design and tech to the world of atoms.

2. Carbon Maps - Carbon accounting for the food industry

Carbon Maps creates per-product carbon accounting specifically for food and agriculture. Most carbon accounting platforms focus on the company level and lack detail at the product level. It tracks the inputs (like water, energy, production), transportation, use, and end of life.

🧠 Data wins arguments. In the shadow of COP28, the age of "greenwashing", and ESG losing credibility, I'm pleased to see a company focussing on the data. This leans into key trends like supply chain resilience and security and enables brands in Europe, which need to comply with these rules by law, to bring data to the table in their accounting.

3. Sunsave - Solar Subscription 

Sunsave removes the barrier of the upfront cost of solar panels and battery installation. Users can pay £8000 upfront or a £69 monthly "subscription" over 20 years to amortize the cost. Sunsave will identify parts and help with installation, tariffs, refunds, and replacements over that period. Sunsave also helps users secure the best rates for their excess energy. 

🧠 Amortizing solar costs feels like a no-brainer, but this is a lending, not a subscription. I love this product and immediately sent it to my wife to think about having it for our house. Finding £8,000 for solar isn't simple, but a £69 per month "subscription" that pays for itself feels like the world's best ROI. It's clever positioning, but the reality is this is a loan at 5.9%, and I wonder if the regulator will one day say a word about that.

4. Baselayer - SMB lending workflow and AI.

Baselayer helps lenders manage KYB, onboarding, underwriting, and overseeing their entire lending portfolio with their platform. They aim to save time for underwriters and analysts and increase revenue by identifying more good lending opportunities than manual processes alone. The dashboard and API layers over an existing loan origination system and aim to “enhance existing teams” with new tools.

🧠 These products always have the “will this take my job” problem to solve. When your value proposition saves analysts time, that could mean you need fewer analysts. No matter how much the CEO might want that, the team might hit a go slow during implementation. To their credit, they also talk about increasing revenue by identifying more credit-worthy SMBs to lend to, which everyone wants. This product looks complete but I’m curious to see how big this market is for incumbents vs new Fintech lenders.

Things to know 👀

Everyone forgets Adyen* is an acquiring bank. Klarna, one of the world's largest Fintech companies (also a bank), has selected them for all their card acceptance needs in Asia, North America, and Europe.

🧠 Being an acquiring bank globally gives Adyen* a structural economics advantage. Competitors to Adyen who process payments still need a bank to store and move the money between the underlying bank accounts. Adyen is that bank.

🧠 This is especially valuable to merchants looking to go global, at scale, offline, and online. Klarna would have to partner with multiple banks and a processor for an alternative. 

* I have a tiny position in Adyen stock.

Stablecoins are not for you but for non-US consumers and small businesses. Nubank will offer USDC initially to its existing "Nubank Cripto" users to allow them to hold a digital dollar. The companies noted they intend this to expand into the "full set of offerings from USDC."

🧠 Stablecoins can make a US dollar-based payment rail for global south consumers. The full offerings of USDC could be anything. With USDC, we can instantly send programmable digital dollars anywhere in the world. This could open up international borrowing, savings, or even insurance markets. The default global future of Fintech starts with a default global dollar.

🧠 If I were a US policy maker, I would lean in SO HARD to how to ensure the dollar is globally competitive. In principle, a government official couldn't advocate its use ahead of a local currency. But as a cross-border default, there's a huge competitive advantage to the dollarization of consumer financial services activity. 

🧠 Brazil is a super interesting case because it has PIX and a thoughtful local regulator. If any country could reasonably "defend" itself from consumer demand for dollars. Nubank wouldn't launch this feature if they didn't believe there was demand (they're too well run imo). Argentina, Nigeria, and other large populations also make interesting potential markets. Could USDC help Nubank expand there?

Good Reads 📚

Vitalik takes a long-form and thoughtful walk through the ea vs e/acc debate. In case you missed it, there are two schools of thought. To grossly oversimplify:

  1. (E/A) Effective altruism: We should prioritize human benefit above all else. This would include slowing down technology and its development, where it benefits the species and improves living standards. Less carbon, less waste, less data centers. Less existential risk from AI.

  2. (e/acc) Effective acceleration: Acceleration is inevitable; therefore, we should use it to solve as many problems as possible and as quickly as possible. As Elon Musk puts it, "expanding the scope and scale of human consciousness." 

Recently, these two internet religions have been at war. As the e/acc crew pushes for AI to not be regulated, lean into "defense" spending and push for deregulation. Vitalik notes that e/acc has the effect of centralizing power to billionaires and governments. It creates weak supply chains and doesn't solve the problems it sets out to. It weaponizes technology instead of using it to defend and create resilience. 

d/acc Decentralized or Defensive acceleration is an alternative proposed by Vitalik. Building redundant supply chains, using crowds' wisdom to unite rather than divide, and using Cryptography to defend privacy. When we defend privacy, we mitigate cyber security risk.

🧠 Vitalik is incredibly thoughtful. The reality for the rest of us is outside the "arena" of billionaire man-boys shouting at each other on X and lurching hard to the right. One with high inflation, poor energy security, no privacy, and a horrible state of media and social media built to engage by making us enraged. We need to defend against that. 

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a (3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only. (4) I'm not an expert at everything you read here. Some of it is me thinking out loud and learning as I go; please don't take it as gospel—strong opinions, weakly held.