How to spot the next big thing in Fintech: A framework.

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Hey Fintech Nerds 👋

The Fifth Third and Stripe partnership is old meets new and perfect timing. As embedded finance is in a storm, the bigger Fintech names are finding shelter with larger banks entering the market.

Does Block want to be a consumer bank? CashApp has 24 million monthly activities, with transactions and deposits driving growth. Their strategy is to “bank the base.” I don’t know if they want a full charter, but they could do something special with a leaner, more product-focused organization (More in Things to Know).

Rant this week was a blast, triggered by the new Tokenized podcast I’m hosting with Visa’s Cuy Sheffield (which you can find here). How to spot the next big thing in Fintech.

Here's this week's Brainfood in summary

📣 Rant: How to spot the next big thing in Fintech: A framework.

💸 4 Fintech Companies:

1. Carry - If Schwab was built by the Superhuman product team.

2. Fondo - Tax and bookkeeping for founders.

3. Jeff - FICO for the Global South

4. Wamo - European-wide SMB accounts

👀 Things to Know:

1. Stripe is partnering with Fifth Third for Embedded Finance

2. Does Block want to be a bank?

📚 Good Read: The ideal small business lender (Alex Johnson)

Weekly Rant 📣

How to spot the next big thing in Fintech: A framework.

What do mobile banking, BNPL, and embedded finance have in common? They were all once "too small to matter." That's because innovators tend to sell new products to new customers. These markets start small, too small to be profitable for incumbents until they're not.

Market share is cheap when markets are small. Some markets hit hypergrowth.

I think it's possible to spot the tipping point in these markets. When they go from high potential to the next big thing.

First, we have to identify which products are disruptive. Below is a framework I riffed on in a recent podcast.

There are four possible ways to sell things.

1. New products to new customers (innovation)

2. New products to existing customers (cross-sell)

3. Existing products to existing customers (retention)

4. Existing products to new customers (sales)

Pictured as a framework it looks like this:

• The blue box on the left shows when innovators sell new products to a new customer segment (e.g., BNPL selling to people without a credit score).

• The blue on the right is retention .

• The pink line from existing customers to new products is a cross-sell, something Neobanks like Nubank and Revolut have been doing frequently lately.

• The pink line from new customers to existing products makes me think of embedded finance. Deposits, payments, and lending existed, but now they're showing up for SaaS or growth businesses.

Any one of these could be optimal, depending on the business's age, technology, and customer base.

Depending where you start in this grid, the business case for any new technology is also different.

Take mobile banking as a metaphor.

Most incumbents (Citi, HSBC, Chase) start by serving existing customers with existing products. Want to see your checking account statement anywhere, 24/7, even on the go? Now you can! The primary business case for the incument is cost reduction. Having a customer use a mobile app is far less costly than visiting a branch or calling the contact center. Mobile is a lower-cost servicing (CTS) channel.

Incumbents have now started to sell existing products to new customers. The #1 priority for all incumbents is "digital account opening." They want new customers to be able to open accounts in the digital channel without having to build more expensive branches. Mobile is a lower-cost acquisition (CAC) channel.

Neobanks started by selling new products to new customers. Revolut sold a low-cost F.X. travel card to financially savvy travelers. Monzo created the everyday spending card, and Chime served lower-income populations with a zero-fee product and 2-day early wage access. Mobile was the low-cost acquisition and servicing channel that unlocked products incumbents wouldn't previously touch because it didn't make business sense.

Neobanks have started cross-selling new products to existing customers. Their #1 priority is revenue growth and profitability. Many have a large customer base but need to grow that revenue. That's why Monzo, Revolut, Nubank, and Chime are doing more Lending, stock trading, and even subscription offerings. Mobile is the way to grow lifetime value (LTV).

Incumbents usually see new technology as a way to reduce the cost of what they do today. Innovators see it as a way to do something new, that nobody else would.

The fun part is when these worldviews start to collide.

Today, you can see that happening in embedded finance and even in the institutional adoption of digital assets. The balancing act for everyone is trying to get the timing right.

Timing is hard because the market plays a trick on you. Existing markets always look large, but they're incredibly hard to disrupt. It will be incredibly costly to dislodge AWS in the cloud computing market from scratch today.

Smaller markets are much easier to get into but are not as lucrative.

Yet disruption focuses on small markets. Why?

Market share is cheap when markets are small.

Everyone wants in on the next big thing when it's big and looks like a sure thing. Nobody cares when it's a weird nerd hobby. Fintech as a category was once that nerd hobby. Now, you can't move for some new podcast 👀 or happy hour 👀.

Online advertising was small in 2003, and market entry was cheap.

Alphabet's 2023 revenue was $307.3 billion.

Social media wasn't ever going to make any money in 2008.

In 2023 Meta generated $134.902 billion in revenues, a 16.7% increase YoY.

BNPL providers were high-risk and niche and would be curtailed by regulation.

However, in 2019, the market size of BNPL was around $3bn by market cap; today, that's $37bn and projected to be $167bn by 2032 [2]. An estimated 3 out of 5 people in the U.S. have used BNPL.

Affirm, Klarna, and AfterPay were founded well before 2019, and they were grinding it out for market share of a new product long before incumbents paid attention.

My point is.

If your criticism of the new thing, is that the market size is small. That may be true today, but it may not be tomorrow. New customers demand new products.

There's a chasm between "that will never be a thing" and "of course, it was always that way." It's infuriatingly difficult to pinpoint the moment in time when that happens, but I think two main subjects are going through that transition right now.

1. Embedded Finance

2. The Tokenization of assets

This plays out for embedded finance.

According to BCG, the market size for embedded finance is around $70bn and is projected to be $320bn by 2030. It's a market at an inflection point and heading towards maturity.

The interesting thing about embedded finance is how most of the innovation is in the distribution. The products may have existed for decades or more, but their re-packaging unlocks them for new customer segments.

Embedded deposits are existing products for new customers for many larger financial institutions. When a platform like Shopify or a Neobank like Ramp offers deposit products with yield behind the scenes, a bank powers that capability (see: Fifth Third partnering with Stripe in this week's Things to Know later in the newsletter).

Embedded Lending is also becoming an existing product, and new customer play is needed. For example, if you're on Shopify using payment acceptance, you might be cross-sold Shopify capital (Lending). Just as every digital company has started to accept payments, they can also lend (via services like Pipe).

The wide availability of U.S. treasuries in Neobanks is an example of an existing product for new customers and growth companies. These brokerage services have always existed, but they were not sold to early-stage or growth companies.

Buy Now Pay Later was a new product sold to a new customer. The ideal client is one who either doesn't want or cannot get traditional credit cards.

Tokenization is much more interesting.

This plays out for Tokenization and Crypto too.

A parallel financial markets infrastructure now has its own institutions like Coinbase, Fireblocks, and dedicated hedge funds. Incumbent institutions like Blackrock and Franklin Templeton are beginning to sell ETFs or Money Market funds.

Natively, digital assets are the classic new customer and new product. There's a customer who sees Bitcoin and its ilk as an inflation hedge and store of value. There's also a customer for Stablecoins, Ethereum, and Solana, which are building new products on new rails.

They've also become a new product for existing customers of Neobanks like Revolut and Nubank.

Native digital institutions have also arisen that use global, 24/7, and programmable financial market infrastructure. They are new customers who would like some of the features of existing products like U.S. Treasuries. So we're beginning to see companies like Superstate tokenize U.S. Treasuries so they're compatible with the rest of this parallel Tokenized financial infrastructure.

Today, this market is small, but multiple $100bn + treasuries could potentially be buyers.

Conversely, companies like Blackrock and Invesco are also selling new products to their existing customers. ETFs are like tokens for TradFi; they make a product compatible with the legacy infrastructure and market actors. So a traditional institution or customer can easily offer a natively digital product to its existing base.

Blackrock, in particular, is playing both sides by tokenizing existing products (like the BUIDL money market fund) and making new products like Bitcoin and ETH available as ETFs. The smart money is smart.

The one area that has yet to catch fire is existing products being sold to existing customers. We don't yet have tokenized $TSLA shares being widely traded by the Crypto or non-crypto world. But scratching beneath the surface makes things much more interesting.

Private credit and equity are asset classes that are being tokenized because these markets want global, instant, and programmable margin calls and collateral management. Asset managers in private credit today rely on banks for some of the custody, clearing, and settlement of funds. Imagine if they could do that with entirely new infrastructure?

(For a deep dive into this topic the latest episode of the Tokenized Podcast I hosted with Cuy Sheffield from Visa with Rob Leshner from Superstate was an absolute banger)

Some of today's small markets are tomorrow's $trn markets.

Depending on who you believe, the market size of Tokenization will either be $2 trillion (Mck) or $16 trillion by 2030 (BCG). If you're bearish on embedded finance, well, frankly, I don't know what to say at this point.

The core insight here is that market share is cheap when markets are small. The question is when should you get involved?

If you get in early, your costs are low, but you'll likely lose money. That's bad for incumbents but good for VC-backed start-ups. If you get in late, it's likely to cost more and the upside might not be worth the investment.

As the market matures, the curve of potential revenue increases, but your cost to get in remains somewhat static. That growth is upside for shareholders.

There's a sweet spot for incumbents to enter once a market is proven by its new customers to be worth entering. The trick is doing so in a way that gives you a right to win.

Examples:

• Neobanks are entering digital assets because they're seeing increased regulatory clarity.

• Larger financial institutions are entering embedded finance because they need their scale and security.

• The world of big finance is adopting tokenization because it sees market demand and efficiency.

The danger when addressing opportunity is we let our preconceptions about a subject damage the opportunity.

Hate Crypto? You'll miss Tokenization.

Think embedded finance is too risky?

You'll miss the biggest growth opportunity in finance.

You're getting left behind if you're not updating your understanding of how the market shifts regularly

If you want to take advantage of embedded finance as an incumbent bank, now is a great time to get in. There's a flight to quality and scale.

If you want to get into tokenization, a ton of value is being created and overlooked because it's a parallel financial infrastructure (and weirdly becomes a partisan issue, which both saddens and infuriates me). Now is a great time to pick your spot.

Never bet against innovation in aggregate.

ST.

4 Fintech Companies 💸

1. Carry - If Schwab was built by the Superhuman product team.

Carry is an SEC-registered investment advisor that provides tax-advantaged accounts for higher earners and solopreneurs. Users can open a Roth IRA, or Solo 401k and offset taxes with estate planning trusts. The fee structure is flat (not based on AUM), starting at $29/month.

🧠 Great name, great proposition. I would give my soul for something like this to exist in the U.K. It's almost impossible to fathom how to make the most of the tax code. With the rise of the successful solopreneur, the need for this is snowballing. Accountants talk in jibberish and never give a straight answer. The tax code is a game historically only won by the ultra-rich. Carry brings that to the striving and successful upper middle class. The website is GORGEOUS. Shout out to whoever designed this. Well done.

2. Fondo - Tax and bookkeeping for founders.

Fondo sets up simple "runway dashboards" for early-stage startups, helps apply for tax credits, file taxes (Federal and State), and manages weekly, monthly, and quarterly bookkeeping reports. The service integrates with tools like Carta, Stripe, Quickbooks, and Mercury to be the finance-team-as-a-service.

🧠 Founders drown in admin and miss opportunities. The stress of dealing with finances before hiring a financial controller or CFO is nuts. Anything that saves time and money is incredibly popular with founders. This is so well executed that it feels like the missing bit of Ramp for early-stage companies. But in a way, its power is it supports other banks and expense companies.The business model is interesting; they scale pricing with levels of expenses for bookkeeping and tax filing. They also take a percentage of any tax credits they help a company receive.

3. Jeff - FICO for the Global South

Jeff uses nontraditional data sources to provide credit to the unbanked populations of Asia and the Global South. The service needs a user email address or phone number and uses signals like user behavior, device details, and I.P. address patterns to create in-depth client profiles. They then match these user details with potential lenders who can serve the user. They have a marketplace of banks, Telcos, wallets, and insurance companies that can share this data.

🧠 This is a really clever and nuanced positioning as a data marketplace. A phone number or email address can link a person to their social, e-commerce and even Github accounts. Jeff found a user who has a LinkedIn account is 15% more likely to repay a loan that one who does not. The more social accounts they find, the more accurate they can make underwriting and fraud prevention. They're about to expand into India, and their model as a data marketplace will be fascinating to watch.

4. Wamo - European-wide SMB accounts

Wamo provides debit cards, international payment methods, team accounts, Xero integration, invoicing, and multi-currency accounts. There's not much here that's novel; it's just packaged all together in one place.

🧠 The fragmentation of Europe creates opportunities for new entrants. Markets like Finland, Malta, and the Baltic region have a thriving tech and startup ecosystem but have lacked some of the Fintech solutions you'd expect in a developed market. Wamo looks like Novo or Relay in the U.S. A really good account directly for SMBs. Unlike Payhawk or Capital On Tap it's not aimed squarely at the growth company and growing with them.

Things to know 👀

1. Stripe is partnering with Fifth Third for Embedded Finance

Newline by Fifth Third will power Stripe Treasury, the service that offers embedded accounts and deposits to Stripe customers. A software platform can then offer these accounts to their customers (e.g. Shopify Balance allows merchants to having bank-like services on the platform).

🧠 Fifth Third is a net beneficiary of the regulatory shitstorm we see from BaaS. While Evolve, Choice, Synapse, and the latest consent order, the big platforms are quietly partnering with bigger banks to deliver embedded finance at scale. Fifth Third's timing is perfect. They're big enough to be stable but small enough to be nimble. The market is mature enough to be lucrative but still has most of its growth ahead.

🧠 Deposits are the new hotness in embedded finance. Since rates began to rise, the emphasis has shifted from payments to deposits. This is one area where banks have a right to win. If rates remain elevated for the coming years, expect to see the biggest banks play much more of a role in embedded finance. The game may be over for smaller banks who aren't yet in.

🧠 Don't sleep on Stripe's embedded finance offerings. Stripe has all the A.I. companies, most platforms and marketplaces, and dominates vertical SaaS. If finance is going to be embedded they're the default choice. There is plenty of room for competition, but Stripe is the 700lb Gorilla. This opportunity is generally not what the market sees when they look at Stripe's IPO prospects but pay attention.

🧠 Wind the clock forward five years, and embedded finance will be massive. The BCG estimates that $320bn in revenue will be available by 2030, which suggests enormous growth from the $70bn today (which mostly skews BNPL and payments).

🧠 If you're going to do embedded finance, now is the time to get in. It's no longer an option to sit back and wait. The big partnerships have started. You're either doing that multi-year, 7-figure (or more likely 8-figure) deal, or you're not.

2. Does Block want to be a bank?

Does Block want to be a consumer bank? In its Q2 earnings, Block said it believes it can become the primary financial app for families earning unswe $150,000. This "bank the base" strategy is designed to win the entire paycheck for its 24m monthly active users. Overall revenues were up to $2.23 billion, up 20% YoY, with CashApp driving the lion's share at $1.3bn

🧠 They want to be a full bank in all but name. Block has gone to great lengths to not quite be a bank. While they have an Industrial Loan Charter in Utah, most of their lending is via other banks. Their music service, Tidal, and subscription revenue make them a very different business to most banks.

🧠 This is becoming the CashApp company, and CashApp is a meaningful threat to consumer banks. If CashApp were a Neobank, it would be by far the biggest, with 24m monthly activities. CashApp is driving the growth for Block, and deposits + transactions are driving that. No wonder they want more deposits with rates so high.

🧠 Putting product at the top of the company is smart. CashApp has a ton of opportunities that they haven't captured. With a product focus and a bit more execution pace, the talent there could deliver something really special. The US doesn't have a Nubank scale competitor to big banks, CashApp is the closest thing so far.

🧠 The original Square business is doing OK but not great. 9% YoY growth in processed volume is very meh. Lots of competition in the SMB terminal and software space now; it feels like it needs a refresh.

Good Reads 📚

1. The ideal small business lender

Small business formation is booming, employing half of all U.S. workers, but 77% of business owners are concerned about their access to capital. Small business lending is hard because small businesses fail often, and lenders lack data or context (information asymmetry). If you can get the UX right, have unique first-party data, focus on a niche then it is possible to build a sustainable business model. Companies like Toast, Mindbody or ServiceTitan have that unique first party data, specialize, build great UX and have a sustainable business already (given they're SaaS).

🧠 Embedded Lending is the new community banking. That's the ballgame.

🧠 Embedded Lending naturally lives in the Vertical SaaS platform. Shopify capital is just the start.

🧠 Pipe's pivot to becoming "Shopify Capital for everyone else" is timely. Embedded Lending is how Fintech goes from being mostly a payments play to an everything else play.

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 :)

(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