🧠 Rates didn't save the banks, but they unleashed Fintech companies

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A ransomware attack at Evolve has exposed user data. Evolve partners with massive companies like Affirm, Mercury, and Stripe. Often banks are the weak link in IT security. (Many thoughts in this week’s edition — below)

Klarna is exiting its checkout business and choosing distribution over competition. This follows Apple’s branded checkout adding Affirm. BNPL & Branded checkouts are BFFs now.

Nubank acquired a seed-stage GenAI for a bank company (Hyperplane). It builds foundational models to personalize financial products. Nubank is a different animal from other banks. Incredible move.

What should incumbents do to catch up? That’s your Rant this week.

Here's this week's Brainfood in summary

📣 Rant: Rates didn’t save incumbents; now what?

💸 4 Fintech Companies:

1. Gynger - Payments financing for SaaS

2. Ramify - Modern digital wealth platform for France

3. Materia - Gen AI for enterprise accounting and auditors

4. Nana - Non Dilutive funding for SMBs

👀 Things to Know:

1. Evolve IT hack compromises user data

2. Klarna will exit its checkout business

3. Nubank acquires GenAI for banks company hyperplane

📚 Good Read: Aggregating the aggregators

Weekly Rant 📣

Rates didn't save the banks, but they unleashed Fintech companies

Banks look great on paper right now; stock prices and revenues are up. However, these results hide the truth: Most banks are treading water at best and eroding at worst. Meanwhile, Fintech companies are building the future.

Bank stocks look great at first glance.

If a bank CEO is judged by the performance of their stock, then the past 12 months have been pretty solid.

I looked at the UK banks for a recent talk; they all look good.

• Barlcays is up 42.87%

• HSBC is up 14.63%

• Natwest is up 43.01%

• Lloyds Bank is up 31.01%

My gut reaction was to ask the following questions

1. Is this genuine performance or a temporary boost from rates?

2. What happens if rates go back down?

3. How will these companies perform over the long run?

USA Readers: The UK is a great metaphor for the ghost of USA Fintech's future. While the markets are very different, general themes like RTP, open banking, and regulation emerge earlier, so it's instructive.

The Mirage of Bank Performance

Total income for all of the banks was up between 3% and 26% YoY. Even with inflation at 5%, most of them are growing. The issue is that most of this growth came from the "back-book."

Historic mortgages or lending products now deliver more revenue because interest rates are higher. You can see this by looking closely at the annual reports and what drives the growth. It's entirely net interest income (the revenue line item that benefits from lending).

So no. This is not new customer growth*.

Cost and fee performance tells an even uglier tale. I picked out a stat from the LBG report that says they intend to spend £1.3bn to make £1.5bn in revenue**.

I see this pattern playing out in most developed markets. The big banks are massive but become less important with each passing year. And now the competition has arrived.

* Remember, the UK has a concentrated banking sector, so there are limits to how much a bank can grow its domestic consumer book without it affecting regulators or its balance sheet. Still, their job is to figure out how to grow anyway.

** Sorry to pick on LBG here but that was the most clear and present "meh" I've ever seen in an annual report

The Fintech Threat: More Real Than Ever

Monzo, Starling, and Wise have delivered consistently solid growth. With millions of customers, profitable businesses, and a full banking license, Monzo and Starling, in particular, are becoming a meaningful threat to the incumbents.

Rate rises unleashed Fintech profitability. This core unit's economic performance was on track before interest rates began to rise but went into overdrive when rates did climb.

The "yeah, but" crowd usually chimes in: "Yeah, but they have way fewer deposits, and they don't collect as many salaries."

Cool story, finance bro.

Now, play that story forward for another decade.

If these companies can maintain anything like their current growth and profitability rates, they're on track to be one of the top 5 banks by any measure over that time frame.

But here's the hidden threat.

Who's first in line to cross-sell a new product? The bank I barely use for anything but putting the salary in and a few scheduled payments, or my daily driver, which is also my joint account, my savings, and a really cool subscription product?

Simply copy+pasting the roadmap of the competition is not good enough.

You must understand how and why they build the new features and why that drives such an incredible UX. If, as a CEO, you don't have a great answer to that, you have to wonder why.

The default isn't good enough.

Large institutions will continue to erode unless they are willing to invest and put in the work. Too many bank cultures have become places where the excuse not to do something carries more weight than the importance of finding the way, even though it's incredibly hard as a giant, global enterprise.

Left unchecked, this results in erosion. Like a giant mountain range, it's not an existential threat today or tomorrow; it's just erosion.

Consultants won't save you because they tell every other bank the same thing.

AI won't save you because most enabling investments are never made.

For Fintech companies, this stagnation by the big banks is a generational opportunity to win market share.

You can be big and deliver incredible performance.

It takes courage.

If you're willing to tell the market what they don't want to hear. You can deliver. One example I overuse constantly is JP Morgan, who, relative to its peers is consistently outperforming.

But here's a fun fact Jevgenis of popular fintech helped me validate: In 8 out of the last 12 quarterly results cycles, the JPMC stock went down (compared to usually going up for peers and competitors).

My hypothesis is that JPMC is one of the few banks pouring an avalanche of cash on technology spending on a relative basis. It is the most aggressive in branch openings, not closures.

Turns out if you try to cut costs, you'll also cut revenue.

Banks have significant advantages - scale, trust, and deep pockets. How can they leverage these advantages to compete?

If you invest the right way you can grow revenue. Most banks need a little Keynesian spending if they want to grow.

The trick is to avoid throwing good money after bad.

How?

Get good.

5 ways to get good.

1. Change the talent mix

2. Change the KPIs

3. Change the processes

4. Invest in partnerships

5. With multi-year funding

Talent mix: 3% of bank executives have a background in technology or entrepreneurship, and 95% of CIOs say they struggle to get value from digital investment.

The answer here isn't hiring one exec from a technology company and expecting them to fix everything (they won't; they'll get bored and frustrated after 6 months).

The market has changed. First, Fintech and tech companies did a wave of layoffs through 2022 and 2023, and there's more rank-and-file talent looking for a home that gets finance. Second, it's about unleashing the talent you have in the company (which is often frustrated by the process). The big unlock there is from the next few points.

Change the KPIs: Classic example, I've seen most major banks measure "active" customers by "has digitally interacted in the last 120 days" vs Nubank, which defines it as "has generated revenue in the past 30 days."

How you align and reward all teams from product tech must focus on product and customer outcomes. This is objectively hard and not something you can turn into a project for a governance team to run.

Cancel the next re-org and focus on this instead.

Change the processes: I've never met an at-scale Fintech company (even with a full banking license) that has a project management office. They have their own problems and idiosyncracies, but there is no PMO. Instead, most of the time, every revenue, customer, and regulatory outcome is owned by the product teams closest to the customer.

There's no perfect or right answer here, but the wrong answer is applying OKRs and "squads and pods" with an army of agile coaches while also retaining a legal and compliance function that operates with a 2-week SLA for resource allocation.

Invest in partnerships: This is the ultimate low-hanging fruit. We see it already with Gusto and JP Morgan or Navan and Citi; Fintech companies can deliver 5 years of R&D in 5 months of effort. Usually at a much higher quality.

In areas like operations, there are now 100s of Fintech providers that cut their teeth serving at-scale enterprise Fintech companies (e.g., Payments, Fraud, or Compliance).

With multi-year funding: This is the real unlock. Most banks (and enterprises) fight over the FY25 budget from about now until October to February. So much effort goes into that budget fight that it's hard to know what is even funded.

There are two obvious fixes.

1. Push budget to the product teams, they get a cash allocation and a 360 degree set of KPIs to deliver against

2. Fund the long-term infrastructure projects for multiple years up-front (assuming there's a high confidence of a sound investment)

The problem with that second point is I've seen so many bank CEOs willing to bet big on something that looks like good tech in their eyes. But the reality is it's like me buying equipment for a Nuclear power plant. I know so little about the tech, so I'm throwing money at my best guess.

The next decade presents different challenges Banks and Fintech companies.

The banks aren't delivering genuine performance but benefitting from rate-driven growth. They're not winning new customers. Instead, they're standing still and focused on cost-cutting.

The solution is to invest in growth, but that has to be the right kind of growth, driven by new talent, KPIs, processes, partners, and funding structures.

Banks have all the money, customer trust, and crucially battle-hardened experience in fraud and compliance, the Achilles heel of many Fintech companies.

Fintech has never had so much regulatory scrutiny, and if there was ever a time to compete, now is it.

All of this is easy to say, hard to execute.

But life is hard.

The Fintech companies, meanwhile, need to run a gauntlet of proving they can sustain their revenue growth, manage regulation, and keep their culture and product velocity intact.

The thing I've learned working directly with and for Fintech companies and founders is they don't let that stop them. Life is constantly uncomfortable, but it's also 1000x more rewarding.

Of course, every company I give is a good example; you can also throw a bad example out there.

Every successful company looks like a lion from the outside and a mess from the inside.

This stuff is hard.

How will you take advantage?

ST.

4 Fintech Companies 💸

1. Gynger - Payments financing for SaaS

Gynger provides credit to help growth companies manage tech and SaaS spend. It helps software buyers gain visibility into expenses and combine their software purchases into a single payment. It also helps software sellers embed contract financing as a way to "BNPL for B2B." The core product is the underwriting model on the buyer.

🧠 In lending, you're as good as your underwriting model. Pipe and Capchase do very similar lending, and most B2B Fintech companies offer similar features. Worst case, Gynger is another software-focused lending business. The best case might be that their workflows for finding the right financing for the right customer (per this TechCrunch piece). I don't know what their secret sauce is, but this space is competitive. Would you bet against everyone else in the category speed-running that feature once it's popular?

2. Ramify - Modern digital wealth platform for France

Ramify helps high-net-worth and mass-affluent French consumers access more assets than stocks and bonds. Users fill out a questionnaire, meet with advisors 1:1, and receive a personalized investment plan. Users can then access assets like private equity, credit, and life insurance normally reserved for the family offices.

🧠 This is well-timed for the mass wealth transition. As $trillions of wealth begin to transfer to millennials, they'll look for a platform that suits their digital tastes. This isn't guaranteed to be with the parent's provider.

3. Materia - Gen AI for enterprise accounting and auditors

Materia helps accountants analyze client documents, understand regulatory guidance's impact on clients, search through common audit issues, and standardize workflows. It adds a document workspace to pull on existing internal knowledge bases and create new client-facing materials from templates.

🧠 The audit firm's growth in the past decade came from consulting; in the next decade, it might come from AI. Taking masses of unstructured data like internal knowledge and client documents to do something useful with them is the perfect use case for an LLM. Materia has combined this with the toolbox to manage the audit process. This is SaaS with an LLM baked in.

4. Nana - Non Dilutive funding for SMBs

Nana helps SMBs identify debt solutions by inputting an amount they want. It guides users through the right financing solutions and helps them with the application form. It provides a dashboard to identify current funding and tracks progress against any milestones required.

🧠 This is clearly SUPER early stage (the website is about grant funding, the LinkedIn page is different, and the founder description is SMB-focussed). But when a founder pops up in Fintech places, I see them and look for what's coming next.

Things to know 👀

1. Evolve IT hack compromises user data

Things go from bad to worse for Evolve Bank and Trust as an IT hack compromises user data. The scary part is this is the tip of the iceberg 🏔

📰 Evolve Bank and Trust has suffered a ransomware attack exposing customer data. The release of Evolve Bank's parent directories, torrents, and compressed archive files containing clear text files with end-user PII, including SSNs, card PANs, wires, and settlement files, comes after Lockbit's ransomware demands were unmet. The group claims to have compromised over 33 Terrabytes from the US Federal Reserve in what could be the most significant scale attack ever. (Source: PYMNTS and Jason Mikula)

🧠 It's been a bad month for Evolve. On June 14, the Federal Reserve Board issued a "cease and desist" order. It remains locked in an ugly bankruptcy case with Synapse, where consumers remain locked out of their accounts. Now they may be culpable for the worst personal data leak to hit the US in the past decade or ever.

🧠 The general quality of data security in financial services is poorer than we want to believe. A hack like this was a matter of time. Smaller banks often don't have the IT budget to build the security you'd see at Amazon or Google. The idea of "bank grade" security is a myth, except for some of the world's largest.

🧠 In my consulting days, I've seen the top 50 global banks regularly send customer personal information (PII) in plain text via email or USB. Mainframes often output plain text; this gets sent internally. I've even seen it sent externally when banks have to collaborate on suspected money laundering. The whole industry has to raise the bar here. This is one area where the banks, not the Fintech companies, are often the weak link.

🧠 This is the tip of an iceberg. 33 TBs have been exposed; it could get 100x worse from here. Stay vigilant. And pour one out for everyone working in cybersecurity, fraud, and AML teams right now.

🧠 It has been a summer of hacks and cyberattacks. Santander and the UK National Health Service both suffered ransomware attacks linked to improperly set up Snowflake database 2-factor authentication. Patients are missing surgery due to the inability to access systems.

🧠 Ransomware proceeds linked to states like Russia create a forced way to launder money. In many ways, the Second Cold War is really a cybersecurity war.

🧠 Ransomware is a real issue. I remember listening to a talk by one of the EU's top cybersecurity advisors who said that most of the time, the best thing a company can do is pay the ransom. Isn't that wild?

🧠 Fintech fixes this: Generally, Fintech companies are not the issue here. They’re impacted but not the cause. Their data hygiene is good.

🧠 PSA Regulators: This set of policy recommendations from Soups is super actionable and could be issued as guidance. He suggests re-issuing SSNs, freezing EINs, and requiring banks and regulators to encrypt or vault all PII.

🧠 PSA Bankers: For the love of all that is holy PLEASE enable 2FA on every system admin account, and hold all data at rest or in a vault service like VGS, basis theory or one of the cloud platforms 🙏🙏🙏 . Bank CEOs reading this (I see you), please get every CSO, CRO, CIO, and CTO together and make sure this happens ASAP.

🧠 PSA if you’re worried about ACH debit pulls. If a business has authorized ACH pulls, bad actors may have the information to drain accounts. This guide from Mercury shows how to prevent that from happening. This post from the CTO also explains account security details.

🧠 PSA if you're worried about personal data. Services like Lifelock can help prevent risk from spreading and you can put a freeze on account opening with the credit agencies.

2. Klarna will exit its checkout business

Klarna will sell its checkout business finding that it created a conflict of interest with key partners like Stripe and Adyen. An investor consortium led by Kamjar Hajabdolahi will buy the division for 5.4bn Kroner ($508m).

🧠 Klarna chose partnership over competition. The distribution Adyen, Stripe, and others can offer will far outweigh the direct revenue Klarna can generate from its own checkout product. In Fintech, everyone is your frenemy.

🧠 You can be BNPL or checkout; it is hard to be both. If you're BNPL, your best route is to partner (e.g., Apple and Affirm) because those partners bring distribution you couldn't achieve alone. If you're a checkout, your best route is to partner because BNPL providers have pricing power in their products you couldn't match alone. It's a win-win.

🧠 Unless you're PayPal, which is all things to nobody. PayPal is a branded checkout, wallet, BNPL provider, unbranded checkout, and basket case all in one. Its bright spot is Europe, where the only real competition in PSP land (at PayPal scale) is Adyen. In the US, it's getting crushed on branded and unbranded. There's a new CEO who's going to have to work hard to turn that around. But PayPal doing a thing, is not evidence that it's the right thing to do.

3. Nubank acquires AI for banks startup Hyperplane

Hyperplane builds custom foundation models for banks based on their first-party (owned) data.

🧠 Nubank is built different. They can actually take advantage of AI because they have a good tech infrastructure. It's not "digital" because it uses buzzwords from consultants. It's digital because engineers who know what they're talking about built it. This is such an unfair advantage that it’s hard to overstate.

🧠 Nubank acquires smart. The other company acquiring cool little GenAI startups is Ramp, and they're often buying them early, you'd imagine relatively affordably, but leapfrogging what's possible in R&D.

🧠 GenAI as product is mainstream in Tech and Fintech. Small and open-source models can be incredibly powerful (you can see this show up as features in most good tech products like Notion, Figma, or my day job at Sardine*). Simple things like how Klarna does customer support or how Sardine can automatically dispute a chargeback with a scheme are becoming the norm.

🧠 The myth of “only big AI models win” is dead. 6 months ago the talk was of how ChatGPT quickly blew away Bloomberg GPT, so foundation models for finance seemed like a bad idea. The reality is that well-tuned smaller models, in well-packaged products and customer experience, often far outperform a user trying to prompt a generic LLM. Nubank is great at product, and Hyperplane seems great at AI.

🧠 Hyperplane helps solve many of the risks (perceived or real) with generic LLMs like ChatGPT or Claude. Bringing the model in-house and only acting on first-party data lets Nubank lock down the data security and avoid exposing the raw LLM to things like prompt injection attacks.

Good Reads 📚

1. Aggregating the aggregators

Alex's story of a software company aggregating the credit bureaus is a helpful metaphor for where we are with open finance. At the time, banks loved it because they had automatic failover and the best possible data. The credit bureaus hated it.

The problem open finance has today is that connectivity and coverage are never 100%. It often breaks. The solution is clear. Aggregate the aggregators! This is what almost every giant Fintech company has already done, and now there are providers that do just this (e.g. Quiltt, Moneykit, Meld and Fuse).

This is an interesting dynamic because the US market isn't winner take most; 1033 is helping drive yet more competition, and the banks are still throwing sand in the gears of the major aggregators (yes, we see you banks).

🧠 I always wonder, with super-aggregation, does it lean too close to orchestration to be valuable? There are 100s payment orchestration companies stuck at the $5m to $15m revenue valley of death, unable to grow faster. In Payments, the mighty stripe is now getting into PSP routing (even though it's a PSP).

🧠 Market dynamics matter. As Alex points out, the fact that 1033 limits the coverage and the banks aren't playing ball means it's very hard for one aggregator to rule them all—unless, of course, they become super-aggregators themselves.

🧠 Why would an aggregator send volume to a competitor, you ask? Because conversion matters, and everyone in finance is your frenemy. That's a lesson every generation learns. They start out stupidly competitive and eventually figure out the truth.

Tweets of the week 🕊

That's all, folks. 👋

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(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 *. None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.

(3) Any companies mentioned are top of mind and used for illustrative purposes only.

(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held

(5) Citations may be missing, and I've done my best to cite, but I will always aim to update and correct the live version where possible. If I cited you and got the referencing wrong, please reach out