ūü߆ Top 10 Fintech Innovations; Chime IPO Ready?

As Chime looks to prep its IPO, Coinbase delivers $1bn in profit and Ad spend is up 40% YoY growth is back. Fintech is back. The perfect time to look at the innovations that got us here & where next

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Hey Fintech Nerds ūüĎč

Growth is back

Chime looks IPO-ready, with $1.5bn in ARR, and is about to launch lending and ETFs.

Coinbase delivered $1bn in profit (adj EBITDA) in Q1, and according to Ramp, advertising is the fastest-growing spend category in 2024.

Perhaps this is a good time to look back at the top 10 Fintech Innovations and see what they predict about the next decade. That‚Äôs your Rant this week ūüďĘ

Here's this week's Brainfood in summary

ūüď£¬†Rant: The Top 10 Fintech Innovations

ūüíł 4 Fintech Companies:

  1. Baselayer - KYB + Fraud prevention AI

  2. Brixely - AI Analysis for Real Estate Docs 

  3. Finmid - Embedded lending for European Marketplaces

  4. Lemfi - A remittance app because everything is cross-border

ūüĎÄ Things to Know:

ūüďö Good Read:¬†Decentralizability

Weekly Rant ūüď£

The Top 10 Fintech Innovations

I asked Twitter what they thought the biggest innovation in Fintech had been

It spurred some brilliant suggestions, surprises, and moments of ‚ÄúOMG, yeah, of course.‚ÄĚ

It made me realize how much we take for granted. By the time Fintech gets big, it will be priced into people’s thinking. It doesn’t seem that innovative anymore, but when you step back, not only has it changed the game, it’s just getting started.

More than that, when you tilt your head, you start to spot the similarities in all of these trends.

  • Consistent themes appear.¬†Such as using more data for underwriting, disrupting the cost base, and removing friction.

  • If you remix trends, you spot opportunities.¬†They suggest areas of unexplored territory and growth.

  • Innovation isn't evenly distributed.¬†Most banks, geographies, and companies haven't adopted many of these yet.

The 10 biggest innovations that Fintech has delivered are, in my view:

  1. Mobile-only banking (Digital / Neobanks)

  2. Cashflow / Alternative data underwriting

  3. Digital onboarding

  4. Open banking / Open finance

  5. Real-time payments

  6. Low-cost FX

  7. The PayFac

  8. Merchant cash advances

  9. Tap to pay

  10. Commission-free trading

So, without further waffle. Here are my takes on the top 10 Fintech innovations.

1. Mobile-only banking (Digital / Neobanks)

Why? On average, 60% of all large bank customers are mobile-first. It is the default way to do consumer finance. 

What is it? A digital bank or payments company that has a checking account-like offering but is (or was at launch) mobile-only. Examples include Chime, Monzo, and Nubank. Insert your favorite here. The innovations created new defaults for the industry.

They had no choice but to 

  • Onboard and KYC customers with mobile

  • Service customers 100% with mobile

  • Do something¬†new¬†to stand out vs big banks

For Nubank, that meant being good and available compared to the big banks. For Chime, that meant helping customers get paid early, and for Monzo, it meant creating a payments hub account.

If you look at any large bank mobile app roadmap, it's mostly a copy-and-paste of what the Fintech companies already did.

2. Cashflow / Alternative data underwriting

Why? Genuine financial inclusion and lending innovation is unlocked when we can lend to consumers with lower credit scores who are likely to repay a loan.

What is it? Using transaction, sales, or other data to create new underwriting models allows low-credit-score consumers or non-traditional businesses to get credit that doesn't fit the traditional lending profile.

Advancing consumers small amounts of cash based on recent open banking data to begin to slowly build a credit history can be an on-ramp into the wider economy for immigrants or consumers from excluded backgrounds. Earned Wage Access (EWA) and Chime's "Spot Me" are examples of how creating a route is powerful.

Revenue-based finance connects company sales, bank accounts, and account data to give a loan against future sales. For example, borrow $10,000, spend it on ads for your e-commerce business, and then pay 7% of sales until the loan is repaid. Hopefully, your revenue is higher overall when the loan is repaid than when you started. 

Fintech has democratized access to finance for consumers and businesses who were not well served historically.

3. Digital Onboarding

Why? Reducing the cost of acquiring customers by at least 10x, it became a lifeline during the pandemic when branches were forced to close.

What is it? Mobile phones can capture consumer identity information to open bank and wallet accounts without talking to an agent or staff at a financial institution. Mobile-only banking and wallet apps like Chime, CashApp, Nubank, and Monzo made this a default that is now widely accepted across the industry. This is also now true for SMBs and business onboarding.

No question this has reshaped the industry, and it would be #1 if it weren't for the hidden drawbacks. During the Fintech boom and from the pandemic, the levels of fraud and money laundering have exploded in part because digital onboarding is a leaky bucket.

I wrote recently about how this isn't an issue with the idea or any particular vendor, but that users can sign up from anywhere in the world, which means fraudsters can attack from anywhere in the world.

Still, on balance, this changed the default. 

4. Open Banking / Open Finance.

Why? Transaction data has many use cases for fraud prevention, payment initiation, and driving workflows (like tax filing). Access to the data is a huge platform for innovation.

What is it? Consumer and customer-permissioned access to transactional data at checking, lending, brokerage, and payroll accounts. "Plaid" is now practically a verb in tech and a default way to onboard to new products. 

Connecting your bank accounts when signing up for a product is common in the US. This is a quick way to check your transaction history and see if you're a fraudster, giving insight into your payment history. That insight can be useful for determining whether you pay your bills on time or regularly spend more than you save (or vice versa).

The more advanced use cases we now see integrate your entire financial life to file taxes, cancel subscriptions, or optimize savings quickly. 2024 is now the year of "Pay by Bank." Companies like Stripe, Plaid, and Trustly enable instant payments, often triggered with discounts and incentives to use this payment rail instead of costly credit or debit cards. 

Globally, the picture is mixed. European Open finance is asthmatic at best, and while open banking is available in many LATAM and APAC markets, it's not a default in the way it has become in the US. In LATAM, I think that's a matter of time; in APAC, bank data isn't as crucial as wallets, and in Europe, the regulation actually limits innovation.

Still, on balance, I think the concept of open banking made people pay attention to what's possible with financial data triggering actions. Which is everything in finance.

5. Real-time payments

Why? Zero-cost, instant domestic payments have brought tens and hundreds of millions of people into the mobile-first, digital economy. 

What is it? Instead of waiting days for a payment to appear in an account, a real-time payment is instant. This is often via a banking app or wallet in developed payment markets like the UK, Australia, and Singapore, and "RTP" in the US. That's a nice upgrade and generally displaces checks and cash.

The picture is very different in global south markets with an emerging middle class. UPI has become the dominant form of payment in India, much more so than cards and competing with cash. In 2016, there were 1m payments, exploding to 83.7bn by 2023, becoming 75% of all digital payments.

With 260 million of 1.4 billion people using UPI, it has been transformative for financial inclusion. It's now compatible with global RTP systems like the UAE and Singapore, becoming an entirely new global rail. The Pix story in Brazil is distinct but every bit as transformative in its own right.

6. Low-cost Foreign Exchange and payments.

Why? Making an international business or payment as a consumer for 10x less than was normal a decade ago.

What is it? Foreign exchange and cross-border payments have always been the biggest hidden expense in finance (and a great money maker). Just 10 years ago, it was common to pay at least $40 for an international wire and a high % on the conversion rate. The market lacked transparency, and the big incumbents like Western Union had little to gain from massively cutting their prices. 

Consumer Wise and Revolut pushed fees to zero or near zero, offering ultra-competitive market rates. In SMB, dLocal and Airwallex made operating international businesses more affordable. Infrastructure companies like dLocal, NIUM, Routefusion, CurrencyCloud (acq. by Visa) make that available to wider audiences.

The future is default global, and every Fintech company will monetize FX.

7. Better online payments, AKA: The PayFac

Why? Transaction data has many use cases for fraud prevention, payment initiation, and driving workflows (like tax filing). Access to the data is a huge platform for innovation.

What is it? A payment facilitator (PayFac) was a new category of payments company that Stripe can reasonably claim credit for popularizing in the early 2010s. The many payment companies who began to offer this as a default for developers helped drive an explosion in e-commerce, marketplaces, and online-first business models through the following decade.

Instead of each business needing to set up its own merchant account, PayFac's "rents out" merchant account functionality under its larger master merchant account. The PayFac is responsible for underwriting, risk assessment, settling funds with sub-merchants, dealing with chargebacks and disputes, and ensuring compliance with regulations.

"Accept payments online with 9 lines of code" unleashed developers to build new businesses faster and cheaper than ever.

8. SMB Payment terminals + Merchant cash advances

Why? Micro businesses like boutique coffee brands or food trucks easily accepting cards grew a new commerce category. 

What is it? Square, Toast, SumUp and the countless micro-merchant-focussed terminals created a new category of payment acceptance. This allowed companies that would have been cash-only or never existed to accept cards and get paid instantly. 

Companies with little or no trading history might not have gotten a loan from a bank, so getting paid instantly is critical to their ability to acquire new inventory and sell more products. Today, the software behind the payment acceptance manages everything from inventory to payroll. 

They've become operating systems for mid-sized businesses in physical retail. Would your favorite new coffee or food truck exist in the way it does without this tech? I'm not convinced. 

9. Tap to pay (And mobile NFC)

Why? Mobile wallets can now be used for ticketing, payments, and identity, and the convenience and security benefits are significant.

What is it? Using a mobile phone or contactless card to "tap-to-pay" makes payments instant, secure, and compatible with mobile phones. When you unlock instant, you increase the turnover at busy periods in physical retail, which often means more sales (because fewer customers rage-quit).

When you make payments mobile-first, you bring them into the wallet ecosystem. This puts identity, payments, and tickets next to each other. We've barely scratched the surface of the new products and services, which will unlock over time.

So far, tap-to-pay is a major convenience win for consumers and a revenue boost for merchants, but in 10 years, it will be how the wallet wars are won.

10. Commission-free trading

Why? A generation of people discovered investing and may yet change their financial outcomes. 

What is it? Buying a stock using a simple mobile app interface with a clean "Buy" or " Sell" button, backed with education and the sense that its "zero fee" removed the cognitive friction to buying stocks. During the pandemic, tech and memestocks (like Hertz) hit crazy heights. 

Since then the hype has subsided, and companies like Robinhood and Public are broadening their offering. Competitors like E*Trade and Schwaab have been forced to offer competitive offerings. But more than anything, this was the trigger that got people who wouldn't have considered stock investing to consider doing so.

Don't get me wrong; not everyone won; some lost big. Making complex options trading (or CFDs in the UK) available to consumers still gives me heartburn. But, on balance, I believe we still have more people thinking about long-term investing due to the commission-free trading boom. 

That's a good thing.

Mobile-first trading with 0 commission on trades attracted 10s-of-millions of consumers to buy stocks for the first time in the late 2010s. 

Honorable mentions

  • 1-Click Payments:¬†If I¬†were¬†making this list in another decade, the "1-click payment" buttons like Apple Pay and Shop Pay would probably edge this category for the¬†biggest¬†payment innovation, but we're not there yet.

  • B2B Neobanks:¬†Ramp, Brex, Arc, and their brethren have changed the default experience for growth companies.

  • Fintech infrastructure:¬†There's an API for every bank department. The Fintech boom is built on infrastructure companies that made digital onboarding, payments, tokenization, and much more possible. The¬†big¬†shift will come when banks adopt this stuff (which has started).

  • QR Codes:¬†In APAC, wallets are everything, and the QR code is the NFC alternative; that's often true with UPI¬†too. Post-pandemic, paying with a QR code, even on Apple Pay, became¬†a thing.

Summary: Consistent themes emerge.

Across all of these, I think the big lessons are:

  1. Order of magnitude cost reduction. Mobile meant finance became 24/7 and could happen anywhere; it also dramatically reduced the cost of acquiring and servicing customers. Repeat this for FX, payment acceptance, etc.

  2. Using data for better risk management. Better data and more data lead to better fraud prevention and underwriting for lending. It takes some crazy innovator to do it before the market copies it. New things happen if we move away from the line in the sand that says no to anything below a 700 FICO score or use revenue to finance growth.

  3. Friction removal is powerful. There's a meme that Fintech just made a better UX, and while that's true, friction removal also has many other benefits. Like cost, conversion and creating new categories (like combining account data for a payment to make pay by the bank a thing)

It still happens that people want to write off Fintech, say it's not that big of a deal, or say the banks will do it all anyway.

But here's the thing.

Market share is cheap when markets are small. Market share is expensive when those markets are big. 

It takes a pioneer to get into markets like mobile banking or open banking way before anyone else. 

By the time the big folks copy, it will cost them 10 to 100x more to catch up. 

And when they get there, they'll have a new, much lower operating cost, much faster iterating competitor to deal with.

Now, think about what happens when you remix the top 10 innovations. 

What if commission-free stock trading also had low-cost FX? What if real-time payments were default global? What if identity and wallets were the same thing?

There's so much left to build.

ST.

4 Fintech Companies ūüíł

1. Baselayer - KYB + Fraud prevention AI

Baselayer provides Know Your Business (KYB) customer onboarding, with built-in risk and fraud management. The service checks business registration, OFAC/Sanctions, IRS, and fraud risks like legal history and web presence. The goal is to reduce manual work, and provide ongoing monitoring of business online presence and registration updates.

ūü߆ Real-time KYB is table stakes. Good businesses go bad for AML reasons; ongoing monitoring fixes this. Bad actors open a business, make it look legit, and then suddenly go bad because they know the trick is to get past onboarding, where all the checks are. The product builds a knowledge graph around a particular business that is updated in real time (or at least daily). The market needed a Middesk competitor, and Baselayer already has good traction. My prediction? We‚Äôll start seeing KYB used by non Fintech companies (I see this in the $day_job).

2. Brixely - AI Analysis for Real Estate Docs 

Brixely analyses property inspections and disclosures to generate reports that include safety concerns and repair estimates. Users upload their documents, and the AI analyzes them and summarizes potential construction cost estimates and decisions to be made. The makers estimate its 10x faster than manual review.

ūü߆¬†This feels like the real estate agent's dream.¬†"Hey, if you're going to buy this house, here's what you could do with solar and the roof improvements you'd want." There are so many of these niche vertical AI companies that I wonder if they should be venture-backed or bootstrapped? They work best when serving a niche but have almost zero capex requirements. The hardest thing for them is their API fees. It really feels like a high-margin cash flow type of business.

3. Finmid - Embedded lending for European Marketplaces

Finmid works with marketplaces like food delivery company Wolt to offer cash advances to restaurants. Wolt has access to restaurant sales history, which Finmid can use to inform an underwriting decision. Finmid then partners with large banks to help provide financing to Wolt to distribute to its lenders. Wolt gets more revenue by offering lending

ūü߆¬†This is anything but mid.¬†Europe doesn't have a mature embedded lending proposition.¬†Finmid is in Germany now, and next¬†is Italy; they could do very well if they¬†can¬†execute cross-border expansion without¬†some¬†regulatory disaster.¬†Stripe Capital isn't mature in Europe yet, and there's a window of opportunity to grow something of its size.

4. Lemfi - A remittance app because everything is cross-border

Lemfi is a remittance app for migrants in the US, Canada, and UK who want to send money to Nigeria, Kenya, Ghana, Pakistan, Rwanda, and 21 other markets. Lemfi is acquiring other small apps to open up new markets.

ūü߆¬†Remittance is won on fees and retained on performance.¬†It's rare to see remittance companies expand through acquisition; that wasn't the route for Wise, Revolut, Remitly, NALA*, etc. While FX is a great way to make money, many markets haven't been opened up because of their relatively high fraud risk and poor local infrastructure. The fact payments would fail a high % of times means user cohorts would churn out and lose trust in their app. Lemfi has already seen issues with local regulators in Ghana. Slow and steady could win the remittance race in longer-tail markets. Interesting, then, that Lemfi is going more after European and MENA, which is a little less competitive.¬†

Things to know ūüĎÄ

Advertising, airlines, professional services, and cloud computing are all up. According to the spend report, spending on AI tools like Open AI and mid-journey is higher, and Databricks is the big vendor winner.

ūü߆ There are two tech markets: those still unwinding from the 2022 storm and chaos and everyone else getting on with growth. Public Fintech stocks continue to outperform their peers, and this is finally showing in the private markets again.

Coinbase delivered $1.6bn in revenue and $1bn of Adj EBITDA. Consumer transactions were $935m (up 100% QoQ) as the price of Bitcoin rose throughout the period. Bitcoin peaked at over $73,000 (and has since fallen), and the period also saw large inflows to new Bitcoin ETFs

ūü߆ The two biggest Coinbase competitors ‚Äô CEOs are in jail. How‚Äôs that for a market advantage? Coinbase stuck it out, has gone public, and is doing impressive things both on the institutional side and with its Ethereum L2 Base, which has real momentum.

In an exclusive with Jeff Kauflin of Forbes, Chime CEO Chris Britt said they have 7m active users, $1.5bn annual revenue, 1/3rd cost to serve of a traditional bank Launching unsecured loans, and will ‚Äúdo ETFs soon.‚ÄĚ

ūü߆ This is the pre-IPO press tour, and those numbers aren‚Äôt terrible. They‚Äôre aware that interchange revenue isn‚Äôt enough, but they are playing to the low service cost. If they can get lending working and cross-selling, this is a major new player in the public markets. The path there won‚Äôt be easy, as companies like Dave and MoneyLion have shown.

NBC News reports that the Southern District of NY is investigating Square's parent company, Block, for alleged widespread compliance lapses. Accusations from a former employee cite thousands of pages of documents include failing to gather enough customer evidence to assess risks and whether Square processed transactions across Iran, Russia, and other sanctioned countries.

ūü߆¬†The SDNY rarely takes cases it doesn't have a high % chance to win.¬†You have to imagine there's something in these documents that is¬†a clear¬†failing.

ūü߆ De-risking creates financial exclusion. We can't have financial inclusion and frictionless experiences without some AML risk, which is why this job is so hard. We need more data at onboarding and to get that in the most frictionless way possible.

This quote stuck out to me

"Block's voluntary self-disclosure to OFAC led the agency to issue a no-action letter, indicating the closure of the investigation with no administrative action."

ūü߆¬†Welcome to the grown-up table.¬†My favorite link is the¬†violations tracker, and you'll consistently see the largest banks top the league table of all companies fined by governments.

Good Reads ūüďö

Why should you read this?

ūü߆¬†Decentralization is gaining popularity in tech circles‚ÄĒnot for "crypto" reasons but for¬†a host of¬†good¬†technical¬†reasons.¬†Defaulting to using user-controlled keys, universal identifiers, and immutable data builds more resilient networks and products. In the age where everything is being hacked, we need that.

ūü߆¬†Decentralization and tokens for real-world assets are two topics that get conflated because Bitcoin happens to use both.¬†They will co-exist for different reasons and with¬†different design patterns. The future of decentralization won't look like a Crypto utopia, nor will the future of assets.

That's all, folks. ūüĎč

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‚ÄĒstrong 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