Banks: Quit LARPing and build better products

Plus; Nubank passes 90m customers, SoFi adds and why the US debt matters.

Hey everyone 👋, welcome to Brainfood, the weekly read to go deeper into Fintech news, events, and analysis. Join the 35,467 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

It’s easy to get distracted by the markets noise.

SBF was found guilty, and now maybe Crypto can move on. The mighty Apple is treading water and will become a bank in all but name.

But Fintech is less fortunate.

Fintech public market comparisons have taken a beating this year. We’re reverting to a long-term mean of valuations and outcomes. And it feels mean.

There’s a real feeling of pressure inside Fintech companies to do more with less. That’s not fun. Hard times make strong companies and talent.

Fintech has gone from the darling to the dog. And yet, I couldn’t be more excited by it. It’s easy to let the bad news get to you, but great talent and companies exist in every vintage.

The bar is higher than ever.

As it should be.

Fintech is far from dead.

This week NuBank announced hitting 90m customers. SoFi had another strong set of results. Klarna might be about to IPO and just about every major US bank had an outage on Friday.

While the world is distracted by share prices, not enough are looking at the market share.

That's shifting from incumbents to challengers.

Year in. Year out.

Keep calm and carry on.

PS. I was a guest on a super different Fintech friends episode with Helen from This Week in Fintech. If you need some humans being raw and nerdy, check this out.

PPS. Goodbye to, perhaps the company that helped inspire open finance, PFM, and Neobanking to do more with data.

Here's this week's Brainfood in summary

📣 Rant: The Great Erosion of Banking Pt 2: Understanding Product

💸 4 Fintech Companies:

  1. Cloover - Embedded climate financing (EU)

  2. Apartool - Corporate Apartments for the Fintech age (EU)

  3. Cino - The multiplayer virtual debit card (EU)

  4. Flanks - Plaid for Wealth for Europe

👀 Things to Know:

If your email client clips some of this newsletter, click below to see the rest

Weekly Rant 📣

The Great Erosion of Banking Pt 2: Building better products

Most Banks haven't built new products in decades. They've mostly copied competitors. Following the person in front of you isn't a great way to navigate.

If you have no idea where you're going, how will you ever get there?

As the Cheshire Cat said in Alice in Wonderland:

"Would you tell me, please, which way I ought to go from here?" "That depends a good deal on where you want to get to," said the Cat. "I don't much care where-" said Alice. "Then it doesn't matter which way you go," said the Cat.

Last week, I argued that unless banks get great at product, they will continue to erode into irrelevance.

And you can see that in their stock performance

This week, I want to dive into what being great at product means to a Fintech. 

I often hear bankers say Fintech does well "because it has great UX."

That's not wrong; it just hides a massive amount of important detail. 

They then copy Fintech companies' features, build "digital" teams, procure Macbooks, and build mobile apps. But that's not "doing digital product." 

It's LARPing. 

LARP /lɑːp/ - noun

This is how I picture it.

Being great at digital is not Macbooks and a GenAI chatbot with laserbeams.

Great product is not “look-and-feel.” 

Great product is putting massive effort into making the product feel effortless. 

Great product is lining up the entire business behind a singular focus.

Customer obsession.

Unpacking how to line up the business that way is a mix of knowing what good looks like and changing how you do change. Forever.

Thesis: Despite spending billions on digital, most bank leadership can only copy the appearance of digital, not the reality. This is an information asymmetry. Solving it means knowing what good really looks like.

  1. Why can't banks do product innovation?

    1. Banks and institutions operate under more constraints than non-banks

    2. Most career bankers and executives don't use Fintech products daily

    3. They have a different starting point

    4. For institutions, getting to the finish line is a huge challenge

    5. And the measure of success is different

  2. What a great product looks like

    1. A non-finance example of a great product

    2. The metrics that drive the roadmap and feature prioritization

    3. Finance example of great products

    4. The importance of a "north star" metric

  3. Understanding users

    1. Finance isn't the destination; it's fuel to get there

    2. Being efficient isn't being invisible; it can build trust

    3. Behavioral design and customer outcomes

    4. Using design superpowers for good, not evil

    5. And avoid race-to-the-bottom-of-the-brainstem

  4. Doing product better

    1. Executives should always be beginners and always be learning

    2. Push budget to product and delivery teams and give them control of what features go-live

    3. Place risk and compliance staff in and alongside delivery teams and massively increase the communication speed

    4. Make modern tech architecture the #1 group priority

    5. Build design capability in-house and place staff alongside delivery and compliance

    6. Set the performance bar high

    7. So you can attract the right talent

  5. Quit LARPing, stop eroding, and start winning for customers.

1. Why can't banks do product innovation?

a) Banks and institutions operate under more constraints than non-banks. Banks with the highest regulatory responsibility burden must report to investors quarterly and carry legacy technology. They're also required to operate as a utility offering services to segments that might otherwise not be profitable. 

Often, making a change too rapidly could have massive consequences, if 1/3rd of the payment systems in a country fell over or 10s of millions of consumers and businesses can't access their money. 

The old joke goes:

Why could God create the earth in 6 days? Because she didn’t have legacy tech and millions of customers

Nubank has 90m customers. But they definitely do not have legacy tech.

(See 👀 Things to Know for more)

All of that said, there are still issues holding them back that they are in control of.

The following is a series of generalizations; there are and will always be exceptions.

b) Most career bankers and executives don't use Fintech products daily. CEOs and the C-suite tend not to download and muck around with the latest consumer app. It's easy for a bank employee to use a consumer Fintech product in their personal life, but they must use their internal tools professionally. 

This means most people who work at a large institution have never used the latest spend management tools, the new wave of Fintech providers, Open Finance APIs, or treasury management solutions. 

When you don't use something every day or are not the target user, it's often hard to feel why a new product is better.

I often joke that bankers can't be told what the future is; they have to see a competitor do it first.

c) They have a different starting point. Institutions start with the regulation and work up to the user. Fintech begins with the user and works back to the regulation. By nature, banks start at the business case, risk, and spreadsheet and work up to the "look at feel." The product is defined by its regulatory category like being a credit card, deposit account

When starting out, fintech companies often don't have that heft of process and complexity. Their survival depends on one thing. Solving a problem for customers so well that they're willing to spread the product with word of mouth. An example of this viral loop was real-time peer-to-peer payment apps like Venmo and CashApp. That sense of "OMG, it works!" is powerful for the payer, but it naturally helps acquire another user.

A primary use case is what gets a user to join.

A secondary use case is what gets a user to stay.

CashApp and Venmo have expanded into cards, in-person payments, online payments, savings, and investments, becoming an alternative to checking accounts.

For a bank, often the primary use case is the product

d) For institutions, shipping the product is much harder because of the processes they use. Institutions have an annual funding cycle where projects are submitted. Assuming the projects and programs are funded, they spend months planning roadmap and "interlocking." With 1000s of systems, teams, and dependencies, the paperwork that goes into understanding those dates and deliverables is astonishing. 

From here, the product design process begins, from UX to technology and security. Often, this is driven by the technical design document (with design either outsourced or performed outside of delivery). This becomes the basis for compliance, fraud, security, and legal reviews. If this goes to plan, the proposed feature will make it to a new product approval (or similar) governance forum.

It's scheduled for "go-live" and pushed into production if approved. This is a huge win; cue celebratory drinks. 

e) And the measure of success is different. The measure of success is typically revenue. Everything is a game of politics for what feature can make it live with limited resources and capacity constraints. So, user-facing and revenue-generating features get priority. Usage is a secondary consideration, and quality is third.

Digital product teams measure and monitor active use daily, weekly, and monthly. But often, the data product teams need either doesn't exist or isn't prioritized. Product teams may have focus groups they run, but often, that's by a 3rd party agency. The amount of direct customer interaction and video is very limited in the rank and file.

Most Fintech companies I know record customer sales, success, and product scoping calls. Stripe still has one customer present or video at their 7,000-person all-hands every time. Fundamentally, the voice of the customer is not something a team or agency does; it's something the whole company orients around for survival, differentiation, and as a part of their culture.

Products built this way look and feel different. 

2. What great product looks like

a) A non-finance example of a great product. Superhuman is an email client that users will voluntarily pay $30 a month to use despite Google and Microsoft offering free alternatives. They're a case study on building products that drive user obsession.

I love this line: "If this feature had been ROI tested, no product team would have built it."

Building these tiny details can only come from customer obsession.

The CEO of Nvidia, Jensen Huang, talks about positioning towards "zero billion dollar markets." Getting closer to things that will be big and staying close so that when the apple falls from the tree, you're ready to catch it.

Bank labs often dabble but rarely commit unless the ROI model makes sense. But how do you know what to stay close to?

Metrics help.

b) Metrics that drive the roadmap. The CEO, Rahul Vohra, has given countless interviews on measuring product market fit and focusing on their highest advocacy users. For example, they ask questions like "How would you feel if you can no longer use the product." One survey found that if less than 40% of users would not be "very disappointed," data showed that the company did not have a product market fit over time.

This allows the company to find its "high-expectation customers." These early adopters will crawl through barbed wire to get your product. What these users have in common is likely a persona or problem space. 

This is the user who urgently wants the product. If you understand why they love it and what's holding them back, you have a framework for improving the product. If you ask them about the main benefit, you understand your USP. That USP gives you a north-star metric and roadmap focus. 

For Superhuman, this meant more speed, shortcuts, and automation. One example of speed and automation is automatically importing color coding from Gmail directly into Superhuman's calendar view. Other tiny details include turning - -> into → or letting users find all shortcuts with a shortcut (cmd+k).

Side note: Many early bank apps trying to build PFM got stuck in gamification, not game design. Game design isn't gamification. Designing things to be fun or playful in a business app doesn't mean adding badges or points. It means making the experience intrinsically rewarding. Candy Crush is popular because it feels good to play. People love Wordle for the challenge. Inbox Zero in Superhuman feels like a game. 

c) Finance example of great products. The modern generation of spend management tools are magic. Auto-matching receipts is a world away from using SAP or Oracle. Two examples from Ramp. 

  1. You bought something online, and the receipt went to a personal email account. If you forward that receipt to the work account and from there to [email protected], not only will it work, you'll get a reply. "Hey, we saw you forwarded this from your personal account; you can send those directly to [email protected]; we know it's you NAME."

  2. You're setting up a recurring expense. If you subscribe to ChatGPT, most expense cards will want a memo. Ramp includes a little button to add the same memo to future transactions if it is recurring. (Pictured below)

I could call out 1000s of companies in various categories here, but these resonate with bankers. Another favorite is to compare Plaid or Unit's API portal with the banks. 

d) The north star metric matters. In their latest fundraising announcement, Ramp noted:

We've saved our customers over $600 million and 8.5 million hours, and the average customer spends 3.5% less after adopting Ramp.

For SpaceX, Elon Musk devised the $ per kilogram placed in orbit. The old management saying is if you can measure it, you can manage it. Goodhart's law says when a measure becomes a target, it ceases to become a good measure.

A North Star metric perfectly balances customer outcomes and aligns incentives. There may be millions of ways to achieve that outcome and metric, and each feature is viewed in that context. 

3. Understanding users

a) Finance isn't the destination; it's fuel to get there. Nobody wants to think about money. It's admin. Finance is a means to an end for most people. It helps them go about their daily lives personally and professionally. It is fuel to get to the destination, not the destination itself.

Attempts to make finance into a game always risk racing to the bottom of the brainstem. We saw this with the meme stock and Crypto, where finance apps almost became like gambling. 

This makes speed a great north star and engagement a surprisingly flawed metric. Not all products should have daily active use. Most people's retirement accounts should be one they never touch or think about. 

b) Being efficient isn't being invisible; it can build trust. I remember speaking to Tom Blomfield, former CEO and Founder of Monzo, back in 2016 and asking, "What is your user's favorite feature?" The answer surprised me. "Real-time notifications of a card payment."

Users didn't have to log in to the app to see recent transactions; it would just pop up immediately. Efficient.

Today, this is a standard feature. But it is surprisingly powerful when you consider the context. Imagine you're standing in line for a coffee, it's busy, and you're trying a new Fintech card. You want this thing to work and to know it all went okay. The real-time notification confirms that instantly. It works even better online when a website hangs, but your app pings that a payment has been completed. 

You might not think about it because you do it every day. But paying is a surprisingly anxiety-ridden experience, especially with a new card.

A real-time notification builds trust. Bit by bit.

c) Behavioral design and outcomes. The peak of consumer finance is a private banker who understands your goals and priorities. They'll drive out tax efficiencies, higher returns, and most of all, give you a sense of comfort that everything is okay and you did a good job with money. Solving that anxiety is surprisingly powerful.

Behavioral design is a systematic understanding of how people think and make decisions. Humans live in a world of complexity and try to avoid fully informed decisions and take a path of least resistance. On the surface, this sounds lazy, but most of the time, 90% is good enough. Do you need the perfect breakfast or a good one? The thinking time required to optimize every outcome in our busy and complex world would cause paralysis. So, we use shorthand. 

  • The cognitive effort required to manage finances is astonishing. Our hopes, dreams, and worries are wrapped up in money.

  • We experience loss aversion when thinking about money we haven't saved, earned, or spent, creating anxiety.

  • Moving financial products has a high perceived switching cost.

This often gets lumped together in design as "removing user friction." Or in banks, "making a product easy to use." But that's a low-resolution way of thinking.

Here are some examples

  • Notifications as Nudges: Savings apps often send little reminders to users to save a little more today or when they just bought a coffee. The notification removes cognitive effort.

  • Retirement savings as a Default: In the UK, offering a workplace pension to any full-time employee is now required. This has lifted millions of people into retirement savings that hadn't previously. The default has no switching cost.

  • Variable rewards: Layup combines a savings account with a game of sports prediction. Users never risk their funds (it's a savings account), but they can win points and sweepstakes to increase their savings based on their ability to predict results. This is intrinsically rewarding

d) Using design superpowers for good, not evil. Designers will add friction to get you to do something in the company's interests but not yours. One example is dark patterns.

  • Cookie consent forms. They pop up and make it super hard to do anything other than accept all cookies. 

  • Cancelling subscriptions. Services will give 10 windows, hide links in the corner, and offer discounts to try and add friction to a subscription cancelation flow. 

This is especially risky in financial services where trust is critical and the space is regulated. Unfair, deceptive, abusive acts or practices (UDAAP) are expressly prohibited in marketing and product design. A dark pattern or design that gets a user to take on debt or "tipping" a lending company is deceptive. 

How things are framed and positioned matters for trust, too. If an app is constantly deceiving users, they'll stop using it.

e) Design for trust and avoid the race to the bottom of the brainstem. The best Fintech apps, banks, and services are those that win the trust of users. It's an oversimplification to say that Neobanks innovated on UX alone. They also innovated in pricing communication and distinguished between primary and secondary features. 

  • Pricing: Fees are lower by default; pricing tends to be simpler, up-front, and transparent. The classic examples are Wise and Revolut, who charge much less for the cross-border payment experience than banks had historically. 

  • Communication: Terms and conditions are often in "plain English" and easier to understand. Outages or issues are communicated rapidly and in a more human tone instead of corporate speak.

  • The hook: The primary hook for many Chime users might have been "get paid 2 days early," but that's not what made them stay or become active users.

These factors aren't true for every Fintech company, with some making basic errors in regulatory disclosure, for example. But the best examples are the ones to learn from.

4. Doing product better

a) Executives should always be beginners and always be learning. Everyone wants to squat 500lb; nobody wants to warm up. A beginner's mindset is crucial, especially in large organizations where politics and positioning can easily replace focusing on customer outcomes. You can hire the best personal trainers in the world, but you're destined to repeat history unless you humble yourself and embrace change as an organization. 

Ask yourself a question: With 30 years in the industry, a C-suite title, and living in a world of governance and spreadsheets, when was the last time you felt humbled? When was the last time you could push a new feature into production in days based on critical customer feedback? 

That's your new reality. The world is complex and changes fast. Adapt or die.

b) Push budget to product and delivery teams and give them control of what features go-live. This has to be able to change in-year and based on customer or market changes. The theatre of annual budget cycles doesn't help anyone but the giant organizations and suppliers who know how to game the RFP process. Imagine trusting product teams with a pot of money to make decisions based on customer feedback and data.

This implies they don't have to deal with the air traffic control issues of getting to production. Which means two more things are required. Baking in compliance and becoming incredibly modular

c) Place risk and compliance staff in delivery teams and massively increase the communication speed. It shouldn't require a form and a 2 week SLA to get someone from compliance to look at a new product feature. It also should never be that a feature request from compliance is never prioritized by "the business." The relationship between risk, product, and tech teams in most large organizations could be so much better.

Something I've observed Fintech companies do is embed these capabilities much closer to the product and customer. It helps that these teams emerge from smaller companies, so there are personal relationships. But they share tooling, workflows, and documents. (There's a whole Rant on the operating model of consumer or SMB-facing Fintech companies, and it's surprisingly different.)

d) Make modern tech architecture the #1 group priority. If you made me a bank CEO tomorrow, I would first build an infrastructure program funded for multiple years (not annually). I'd run this in the shadow of live environments and transition services to the new infrastructure. This would be costly af, but it's also mission-critical

Many programs try to do this, but the devil is in the priority and consistency. It's usually a CIO-led program driven by countless consultants and outsourcing shops. It's not something the CEO groks and understands like they understand, say, net interest margin.

In 2023, that's not good enough. 

e) Build design capability in-house and place staff alongside delivery and compliance. It shouldn't take 2 weeks for an agency to return a design. No matter how good that agency is. Compliance people they will never meet will kill much of what that agency wants to do. Not because they're evil, but probably because it could be viewed as unfair or deceptive. Collaborating in real-time with shared tooling is the best way to find compromise. 

In-house designers and teams with agency backgrounds have a better shot here but often end up as a "digital team." And not part of a customer or feature team.

Communicate faster. Collaborate more. Problem solve together.


Iterate faster.

The pace of change is a power law. Those who ship faster grow and retain new customers faster.

f) Setting the bar of performance high. Great work should be an expectation. Corporations are a great place to hide and a class of people who get very good at blaming the process for not being followed. That's not good enough. High-performing teams feel better and are more engaging in work environments.

People have families, and I'm not a find of the hustle and grind worship that sometimes goes on in the startup world. But doing great work is about playing to your strengths, not to someone else. Startups with small teams have to work lots of hours.

g) Getting the talent proposition right. Any company can hire from tech or Fintech companies; very few can give them an environment to flourish. Talent will only stick around if you get these factors right.

Nubank had its engineers present how they built an entirely new double-entry accounting system 6 years ago. It’s more common now for bank engineering talent to do this sort of thing. What’s not more common is that they’d see such a task as engineering-led.

You’re not an engineering-led organization if the talent has to wait for the annual budget cycle, compliance sign-off, and committees before collaborating directly with other teams.

5. Summary

Banks will continue to erode at 1 to 2% per year unless they offer more compelling products. Trying to copy and paste Fintech features is too little and too late. 

Like all change, it's about building new habits and being consistent.

The opportunity is massive. The market is now flooded with Fintech talent looking for a new home. Banks spend plenty on tech every year. It's spending it right that matters.

Institutions with millions of customers can improve economies with thoughtful, well-crafted products. 

That's a game of persistence, patience, and passion.

No amount of "target operating model" projects by a consultancy will fix the issue of not knowing where to go. If anything, it will just make the problem worse.

The only way to win a race is to get good.

Change starts with you.

Quit LARPing

Quit outsourcing

And get better at partnerships.


PS. Bonus insights in the Nubank hits 90m customers story below.

4 Fintech Companies 💸

1. Cloover - Embedded climate financing (EU)

Cloover provides a one-click solution to finance solar, battery, heat pump, and EV charging equipment in homes. The BNPL-like experience enables merchants to increase sales by "up to" 30% and increases customer LTV. Cloover positions it as a "subscription," but the process involves a credit check and full KYC before installing equipment. 

🧠 Climate financing is hard and expensive at the last mile. Europe has an energy price crisis and sorely lacks renewable energy infrastructure. Typically, installers are local tradespeople, and the whole ecosystem is disjointed. The consumer incentive is strong (save 60% on your energy bill), but the high upfront cost is a huge barrier to adoption. Providing a BNPL or subscription feel could help with the supply and demand problem, a perfect spot for a platform. 

2. Apartool - Corporate Apartments for the Fintech age (EU)

Apartool aggregates 100s of serviced apartment providers, with 120,000 apartments in 85 countries. Companies like Netflix, Oracle, and Santander use the service to help book medium-term stays for their staff. Using the platform, they can search through all providers, centralize billing, and extend stays if needed. 

🧠 Despite the massive improvement in travel and spending management, corporate apartments are stuck in the 90s. There's this interesting phase when a company shifts from booking an AirBnB on an expense card for a project to many team members working abroad. 100s of individual serviced apartment providers exist with their own platform, and no simple way to aggregate that. Europe is the global center of corporate serviced apartments with London, particularly a huge hub. 53% of corporates use serviced apartments, and the length of stay is increasing. 

3. Cino - The multiplayer debit card (EU)

Users of Cino connect their bank account or debit card, set up a group of friends, and then lets them add a "shared card" to Google or Apple Pay. Targeted at 20-somethings and Gen Z, the app is fun and focuses on travel, couple, or housemate use cases. The kind of use case where opening an account is too much, and opening a new app is often a schlep.

🧠 Shared virtual cards are an elegant way to split consumer expense, but is it a feature or a product? Doing this with a virtual card that just shows up in Apple Pay is clever. One person is always the organizer; they use the app. This is the kind of feature that every Neobank should have, but they're often hiding in paid or subscription tiers. If you think about the long game, it's a great way to win students and consumers with high LTV. It's just front-loaded on cost, back-loaded on ROI.

4. Flanks - Plaid for Wealth for Europe

Wealth management advisors often have to connect to multiple custodian banks and brokerages to fully understand client portfolios. Managers can then pull this into reporting dashboards and solutions they use internally. This helps streamline dividend issuing, tax reporting, and simple use cases like Open Banking initiated payments and funds transfers.  

🧠 It's a misunderstanding that Europe has "Open Banking." We have Open Checking. PSD3 will widen the available consumer and SMB banking data, but MiFID III will help high net worth and wealth managers get more data through APIs. Open data through the whole stack could be super interesting. Instead of screen-scraping brokerages, this would be permissioned secure access for advisors through a complex and often opaque market structure.

Things to know 👀

Nubank has more than 90m customers in Brazil, Colombia, and Mexico. It is the primary banking relationship for more than 60% of its customers and, in the past 12 months, has launched more than 40 products.

🧠 That's more than Venmo, CashApp, or Chase. 

🧠 Most impressively, they have an 82% active rate. As you get bigger, keeping that active rate gets harder. That's good for a Fintech company; it's exceptional for a bank. Large banks that report millions of customers would kill for that active rate. As a consultant, I saw active rates around 40 to 50%, and "active" was defined as "having interacted with the account in the last 120 days."

🧠 Honest metrics = honest results. Nubank uses "has generated revenue in 30 days" as the measure of an active client.

🧠 This Bank is definitely not LARPing. Show me any global peer that has the product velocity that Nubank has. They enabled this with an incredible technology stack. From the outside, that's clear, but what's not obvious is what that looks like when you get up close. From a distance, it's "doing digital." Up close it's being engineering and product-led. Like building your own double entry ledger system and then talking about it on youtube (!!!).

🧠 The market doesn't like Fintech, but this is a great digital finance business in any era. The great normalization of valuation doesn't make this any less seismic. Nearly every stock has been humbled, but the market landscape has shifted. 

🧠 Don't get me wrong, we know Brazil is a cheat code. A 200m population and limited local competition, when they were founded, made Nubank's home field advantage massive. But it's not like they're the only bank or Fintech company operating there today.

SoFi reported new members were up 47% YoY, adding 717,000 in the most recent quarter. Galileo accounts hit 137m (up 10%). Student loans were up 101% to $919m. SoFi noted that 90% of deposits are direct deposits, and 98% are fully insured. SoFi has 7m customers, delivered 34% revenue growth, and an "adjusted" EBITDA margin of 19%. (They carry a lot of debt owing to M&A costs and must fund their lending in capital markets).

🧠 Rule of 40 growth in public markets as a Bank is no joke. Add the adjusted EBITDA to the revenue growth, which should be greater than 40. 19 + 34 = 53. But that’s adjusted EBITDA that hides a lot of sins.

🧠 Beware of recession risk (!!). Bootstrapping with lending can be dangerous if we get into a recession. SoFi's average loan is $20k to users on ~$180k salaries re-financing debts. They have a 3.4% delinquency rating and currently make 7 to 11% on a loan. If that delinquency rating shoots up, they become very cashflow negative quickly. Moreover, they're funding most of these loans from capital markets. If capital markets funding dries up, so does their ability to lend. That would mean less money coming in and less profit from existing customers. Ruh roh.

🧠 Galileo is a beast. People know Galileo as the card-issuing processor underneath Chime. People forget that they have a substantial business in LATAM, offer credit, investments, and "core banking." They're setting up as an alternative to monsters like FIS or Fiserv but with more of a regional presence.

🧠 But SoFI (and Galileo) is starting to look like a roll-up. While most of the body parts of SoFi are new, it's also a bit of a Frankenstein through M&A. Consider how different that approach is to Nubank, Monzo, Adyen, or Stripe. There's a lot of be said for owning your own tech stack. It's not always the fastest way to grow, but it can yield a sustainable R&D advantage.

🧠 Should SoFi be valued as a bank or a growth stock? This is a bank, but it is growing astonishingly. Conventional wisdom is that banks should be valued on return on equity (ROE), but when you're growing customers this fast the market is still rewarding that. SoFi carries debt expenses related to M&A and securitization that kill its ROE. But it's delivering revenue growth at a ~20% margin. Can it grow its deposit base fast enough to survive a recession as a "growth stock?" Or will it get re-valued as a lender or a tech-forward bank? If we avoid a recession and the consumer is fine, perhaps SoFi is, too.

Good Reads 📚

The dominant view is that the Fed needs to keep rates higher for longer to tame inflation. But what if that makes inflation worse? In the 1940s, the Fed printed money to fund the war effort much like it has in the past decade to recover from the financial crisis, COVID, and conflict in Ukraine. When money printing stopped, inflation stopped as supply chains returned to normal. If interest rates stay below inflation, it has the effect of printing money (creating money). If inflation is 2% and rates are 1%, it's no different from inflation being 6% and rates being 5%. 

Raising rates works better when public debt is low because it increases the currency's strength, reduces import costs, and pushes down asset prices. If inflation is caused by money printing, higher rates have a short-term impact, taking demand out of the economy for borrowing. However, it also makes government deficits worse. Now, the government (central bank) has to print money to pay the cost of servicing the debt to the T-bill holders. Effectively, printing more money, creating more inflation 🤦‍♂️. This is what's happened in both Turkey and Argentina. 

In the 1940s, inflation was caused by high debt to GDP, so keeping rates a little lower than inflation made sense. In the 1970s, the inflation was caused by an energy price spike with a low debt to GDP, so rate hiking made sense. In the 2020s, we have high debt to GDP and an energy price spike. The only way out of the cycle of stagnation or inflation is to fix the US Government's structural deficit, which is a political issue, not an economic one.

🧠 The new world is growing with inflation or stagnation and high rates. Plan accordingly. The world of lots of low-cost debt probably won't return soon. That probably means fewer mega VC funds and fewer mega growth rounds for startups. The market may also stagnate as asset owners (like homeowners) have little incentive to sell. Anything that can generate above-market returns has a premium. Finding that will be key.

🧠 Today, more than energy, inflation is driven by services, but energy prices are spiking again. In these markets, governments tend to place currency controls in place. The US might not do this, but with the sanctions regime, the world is already looking for a "better Eurodollar" or way to transact globally without US Government intervention. 

🧠 If politics doesn't fix it, the risk is a Japan situation. Japan was the world's second-largest economy from 1968 until 2010. But Japan now has the worst birth rate and aging population problem globally. With fewer young workers to pay social security and more older people, the national income is lower as the national cost spirals higher. Japan has almost no immigration, a shrinking labor force, and a higher cost of healthcare. 

🧠 The way out is immigration. I find it crazy that immigration is such a hot-button political issue for so many. I get it; there are some security issues, but there isn't a single example of an effective "merit-based" immigration policy worldwide. Countries with the highest net migration benefit from high GDP growth. The USA itself is a stunning example of mass immigration driving growth. The Statue of Liberty says, "Bring me your sick and your poor." It is the mongrel nation, made of immigrants. 

🧠 There's a non-zero chance Bitcoin is your inflation hedge, after all. The rumors of a Bitcoin ETF are getting hotter, and Blackrock's CEO just called it a "flight to quality." Let me say that again. The world's largest asset manager just called buying BITCOIN a flight to QUALITY. Say that out loud in 2013 and see if someone's jaw remains closed.

Tweets of the week 🕊

I guess the future of bits is selling to atoms.

That's all, folks. 👋

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