🧠🍝 12th June 2022 - Apple Pay Later, Affirm & Stripe, Plus Goldman "in talks" with FTX

Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 15,630 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

My FOMO for Money 2020 Europe was off the charts this week.

The European gang was there in a big way, but the US contingent also arrived en-masse. Watching on twitter felt like watching friend groups you know discover each other and get along at a party.

And that's the thing about the Fintech community. You guys keep filling my cup full of optimism. 

Just a heads up, I’m going to take next week as PTO (so no post on 19th June), but will be back soon!

Weekly Rant 📣

Why Apple Pay Later is not a BNPL killer (yet)

You start to recognize patterns when you've been in Fintech for a while. Perhaps the most consistent pattern I've observed is, "OMG, Apple just did a Fintech thing, that means X category is dead." 

Apple Card won't kill other credit cards. 

Apple Pay won't kill different payment types. 

And Apple Pay Later won't kill BNPL providers. 

But all of the above are great products that gained market share and created revenue for Apple and great customer experiences.

So let's unpack.

What is Apple Pay Later?

Apple announced at WWDC this week that it is launching "Apple Pay Later," a service that allows users to split the cost of an Apple Pay purchase into four equal payments over six weeks without interest or late fees. Apple hasn't said who its partners are beyond Mastercard. While many speculated it would be Goldman (given they supported the Apple Card), that may not be the case.

Later, Bloomberg reported that contrary to rumors, Goldman is not providing the credit for the Apple Pay Later product, but Apple has formed a wholly-owned subsidiary Apple Financing LLC to assess and issue the credit.

Let that sink in for a moment.

I had many immediate reactions like

• 🤔 Apple having a lending subsidiary/entity is a game-changer, I start to unpack that in this rant, but I suspect we’ll be seeing the ripples from this announcement for years to come.

• 🤔 The acquisition of UK-based open banking provider Credit Kudos now looks super strategic. Credit Kudos is not just a data aggregator but built specialist tools to use that data to construct alternative affordability and underwriting models for lenders. Apple Finance LLC could (maybe is?) use CK this way and certainly could for a UK market entry. (Credit Kudos acquisition news covered in March 24th edition)

• 🤔 Clever name. Apple Pay, but later. Get it? 👏

• 🤔 That's a weird time period. Why four installments in six weeks? One installment every 10 days? What?! Maybe that's a typo in the press release or something, but does anyone get the rationale here? (Other than, its a really short credit cycle).

• 🤔 What does "no integration for merchants" really mean? I assume a consumer chooses Apple Pay and is presented with several payment options. Therefore the merchant gets paid in full and doesn't have to do anything; it looks like a payment?

But a decent portion of my Fintech Twitter feed had one reaction. 

BNPL is dead. 💀

Headshot by Apple?

The Affirm share price was down 5.5% on the announcement, so the market sure thought its a possibility.

I'm not so sure.

I think we have to look at a few things here.

1. BNPL and Pay Later are different things

2. BNPL's value prop to the merchant is higher

3. Pay Later is more of a pure consumer value prop

4. That "no integration required" might change things

5. And Apple could do BNPL

6. But Apple isn't a data player

7. They do have one heck of an ecosystem though

8. And they're slowly claiming identity like a Boa constrictor

9. What the heck is Apple Financing LLC?

10. What other lending might Apple do?

11. Will this kill BNPL or even other lenders?

This isn't me making a case for BNPL. Nor is it a bull case for Apple or incumbents making a comeback. It's simply an attempt to view where value is created and how value gets captured by different players in the market.

BNPL and Pay Later are different animals.

On the surface, they have a lot of similarities, especially from a consumer perspective. Usually, a single transaction is split into installments over several weeks or months.

But to understand the difference, you have to understand who the customer is and what they're buying. 

BNPL provider's homepages look like a shopping app "where would you like to shop today" - it's a shopping discovery service for consumers. But the consumer isn't their real customer. They're the product being sold.

BNPL creates value for merchants.

The business marketing pages are much more insightful. By glancing at Affirm, they talk about an 85% increase in AOV (Average Order Value), a 20% higher repeat purchase rate, and a network of 12.7m shoppers. Klarna says 147m shoppers, 70% increases in revenue, and 25% better return on ad spend. And so on.

Merchants are buying more revenue.

But the vital thing to understand is how the BNPL providers deliver these results. It's not as simple as "by offering installments" or even the great UX. It's the shopping ecosystem, the UX, and the use of data. 

The BNPL provider apps allow consumers to manage their installments but have also become remarkable at cross-selling and re-activating consumers. 

In effect, BNPL is as much ad-tech as it is Fintech.

And that's such a critical concept to bear in mind as we look at pay later products.

Pay Later is consumer convenience.

Pay Later appears inside the Bank, Fintech (or in this case) Apple Pay experience for consumers. When a consumer is either making a payment (Apple Pay) or after they made a payment (most Fintech Apps), they can select "pay later" to set up the installments. 

The installment offer is made without explicitly clicking on a BNPL button and will capture some market share because it's very convenient. A segment of consumers is not signing up for BNPL just because they never would. But they might find this convenient. 

But there are two things Pay Later is not doing.

1. It is not creating a sales increase for merchants because they promoted that button at checkout.

2. It is not creating a data flywheel of shoppers and re-engaging them through a shopping experience.

Apple could be doing more for merchants than meets the eye.

Everything with Apple is vague and shrouded in scary NDAs until they're launched, so we don't know if there's more going on for Merchants with this Pay Later launch.

The key sentence is "no integration for merchants" - the lack of integration for merchants that already support Apple Pay could mean that Apple does intend to build the data and ad-tech flywheel the other BNPL providers offer. But so much of the "integration" that BNPL providers do goes deeper into the merchant's ad-targeting, CRM, and checkout funnel and stack. 

Apple Could also do BNPL for some segments.

Apple is building much more in its payment acceptance stack since its acquisition of Mobeewave and turning iPhones into payment terminals. You have to imagine a slick Pay Later experience for smaller merchants could make sense. There is a world in which Apple is a bona fide Square and PayPal competitor for this market segment. 

For larger merchants, integration can be a feature, not a bug.

Apple also doesn't have a great history as an ad-tech business. If anything, it has made its name doing the opposite, the guardian of data privacy.

So my sense is this is pure "pay later," - but I could be wrong, of course.

Pay Later could also be a bad deal for merchants if the Apple Pay launch is any indication.

When Apple introduced Apple Pay, the card issuers (banks and Fintech companies who support Apple Pay) had to share a heavy % of transaction revenue (interchange) with Apple. I have no doubt Apple could have looked at "Pay Later" as a way to drive revenue from merchants (famously, their take rate on App Store purchases is 30%). 

That Apple Ecosystem tho.

Everything Apple does weaves its customers tighter into their ecosystem. Consumers that can afford the devices, the accessories, and the subscriptions get some of the best app experiences. 

This Pay later product likely deals with one of its customers' biggest use cases of credit cards and BNPL: buying Apple Devices.

And everything Apple does is ultimately about supporting that core business.

Apple has made the most progress of any big tech firm pushing into Fintech, with Apple Pay usage being far higher than Google Pay (or whatever it's called today). Apple has also started to move into the merchant ecosystem and is making a real play at being a secure way to verify identity. 

The rumored "project breakout" involves Apple building internal payments issuing stack too. While it still partners with Goldman Sachs for its Apple Card (and BIN sponsorship), you could imagine this being different outside the US and giving Apple much more control over the user experience.

Residents of Arizona can now have their driver's license issued into their Apple Wallet and present it via their phone or watch. Colorado, Hawaii, Mississippi, and Ohio will follow soon, with seven other states announced. 

And the importance of identity. 

Payments are the core primitive of Fintech, but identity is the core primitive of the economy. Ultimately, any payment must be matched to an identity, but creating a true digital identity has always been incredibly difficult to solve in markets like the US. (Vs. Nordic, APAC, India, and some European countries that have digital identity schemes)

There are now great Fintech platforms that will help you verify your bank account information or payroll information. There are also great e-KYC tools to identify a consumer on a mobile device. But all of these are aggregating the data a consumer already had; none of them can capture "identity" in the way Apple is if it has your actual government-issued identity in its wallet. 

Apple can now make countless economic and legal interactions "just work" and more secure. Everything from boarding a plane to proving your identity at a hotel to getting a loan can be vertically integrated into one experience. 

Biometrics + Device + official credential = core economic primitive. 

And that's super handy if you're going to do lending.

What the heck is Apple Financing LLC?

This entity has acquired state lending licenses to allow it to underwrite consumers and then extend the credit for its pay later product. 

I speculate Apple Financing makes a credit assessment, extends credit, and then sells those loans or has a very large credit facility with several banks to fund the lending. This is similar to what most non-bank lenders do, funding their lending with 3rd party capital.

The next question is the more interesting one for me.

What other lending might Apple do?

Zero-interest "pay later" loans are arguably the most straightforward product to get started with in lending. The 6-week time horizon means Apple is quickly getting data about good and bad customers (vs. a 1-year term loan, for example). 

Apple technically has revolving credit with the Apple Card (supported by Goldman), but I wonder if the new payment stack they are rumored to be building could lead to launches in other markets?

I doubt we see Apple get into the mortgage business any time soon, but they’re effectively in equipment financing already (e.g. buy your new Macbook pro with pay later).

So.

Will Apple Kill BNPL?

Apple's Pay Later product might initially move some volume from BNPL providers for buying Apple products. 

However, it's not a shopping ecosystem with a value proposition for merchants.

It's a consumer convenience designed to sell more Apple devices.

For now.

But Apple has all of the pieces to be much more than that.

If you add the merchant acceptance, the consumer payment, and the ability to lend, you start to get an ecosystem that could look like Square or PayPal.

And maybe it will in time.

Anyone with a consumer merchant ecosystem would then have another competitor, and that’s a far broader set than the BNPL providers.

Zooming out further. If Apple does lending, you'd think maybe the banks have more to worry about?

Indeed, the long-time fear of "Big tech is coming for banking" is slowly being validated, especially if "project breakout" builds an internal payment and bank-like infrastructure. 

Apple customers (in general) are some of the most sought after in financial services. Apple has more data about them than most and will soon potentially have their digital identities.

They could do a lot.

But without a banking license, this is a long way from being a bank.

However.

Apple is patient, moving slowly with purpose.

Would you put it past them in the long run?

Apple's master plan

Everything is about feeding the ecosystem.

In the US Apple has ~50% smartphone marketshare and it is similar in Europe.

They don't need 100% market share to be one of the world's biggest and most successful companies.

The same is true in payments and lending. But for the 50% of the US market that has an iPhone (and similar shares in Europe), then what could their market share be of lending?

Especially if they “own” identity.

Would you put it past them to get a charter one day?

I wouldn't.

Just not for a while yet.

A final thought on BNPL.

Is BNPL evil?

I have no doubt that BNPL providers will be taken to task by regulators, and rightly so. The most vulnerable in society struggle with inflation, and BNPL is often the most convenient option. The financial responsibility of anyone performing lending is massive. And I hope lessons are learned in the process.

But I also have no doubt that the incumbents are lobbying the press and regulators to be harsh on the BNPL providers because they've seen their credit card divisions lose out. And credit cards for "sub-prime" haven't exactly been the flag bearer for morality and responsible lending in the past two decades.

For me, the "BNPL bad" debate is a red herring.

We, as an industry, have a common enemy.

Irresponsible lending.

ST.

4 Fintech Companies 💸

1. Pattern - The mobile wealth manager (RIA)

• Pattern is a mobile-first wealth manager that aims to blend the best of Robo advisory with the best of wealth managers (RIAs). Like Robo, it offers traditional stocks and a slick UI but supports that with human advice, on-demand chat, and "end to end wealth management."

• 🤔 The fee structure isn't disclosed, but "on-demand chat" will need world-class AI or be very expensive to staff and serve. Making that back at 0.5% of AUM growth, or $10 per trade, could take a while (as we saw with Gen 1 Robo). If they aggregated all of the assets and solved all of the problems (like tax, stock options, Crypto), then I honestly believe they could justify anything up to $25 a month for a power user segment. They could also try launching a debit card (I wonder how that's going for Robinhood and Acorns?) There's a crowded debit card market out there, to say the least.

2. Debite - Brex for the UK

• Debite helps early-stage startups access instant cash and offers "up to 10x" higher limits than major corporate card brands. Debite aims to provide approvals within 24 hours and claims to help companies save up to 30% on SaaS subscriptions. 

• 🤔 This messaging reminds me of Brex, focussing on speed to cash and higher limits for startups than incumbents would offer. The corporate spend management card for startups hasn't quite taken off in the way it has in the US. That might present an opportunity for a company like Debite. 

3. Ansible Labs - Web3-first payments platform

• Ansible labs provide payouts to and from web3 and blockchain accounts. Building a payment platform called "Beam" will bake in KYC / AML compliance and directly access layer 1 and layer 2 blockchain networks like Ethereum, and Starknet and Arbitrum. 

• 🤔 The market needs this, the ultimate connective tissue between chains as payment rails. There will be other connective transaction types like compute and wallets, and lots is happening there, but payments are an essential primitive for commerce that needs to "just work." Interestingly, the team is ex-Visa; they know a thing or two about making payments work across many underlying rails that all look like the same thing.

4. Merge - Banking and Payments for Web3 organizations

• Merge is building an API-first banking and payments platform to bridge fiat and Crypto. Despite being massive web3 businesses and projects are perceived as "too risky" by big banks in Europe and lack basic access to payments and banking. 

• 🤔 Banks in Europe often de-risk all of Crypto as a sector. Essentially it's a blanket "no" for transacting accounts or lending. For big banks, it's often easier to say no than to understand which customers have good compliance setups and work with those. Their fear is the regulatory mood music (which has been incredibly sour until recently) in the UK. But also, there are genuine compliance challenges, and not all Crypto projects and businesses are great at it. Merge will have to convince banks it has a grip on compliance of its downstream companies and then partner with banks directly. BCB Group is the most mature in this category, and former OpenPayd folks are building Fiat Republic with similar aims.

Things to know 👀

1. Affirm and Stripe partner on BNPL

• Affirm and Stripe have announced a partnership allowing Stripe merchants to offer Affirm's "Adaptive Checkout experience." This experience allows consumers to choose to "split pay" or pay in installments with a simple, unified experience.

• 🤔 Stripe always supported BNPL, but a preferred partner can be powerful. As a Stripe customer, it was always possible to integrate any major BNPL providers into a Stripe checkout. But, it meant signing up directly with that provider. Under this model, customers can switch on Affirm via their Dashboard and add pre-built UI elements to their checkout. Affirm gets its own "Affirm with Stripe" marketing page.

• 🤔 But Affirm isn't the only Stripe "strategic partner." Klarna has that too. Afterpay? Yep, you guessed it, them too. The more you dig, the more it looks like Affirm got a lot of press for being late to the party.

• 🤔 Affirm has done well with more traditional / bigger partnerships. Add this to Amazon and Walmart, and you've gotta look at the head of partnerships at Affirm and say well done. Afterpay has native support with Square merchants, making them an exciting prospect in the US. The question mark is, does Klarna pick a buddy to get tighter with?

• 🤔 The power of partnership is a theme for 2022. Fintech companies with less public stock value for M&A can get growth via alliances. Fintech companies that saw each other as competitors may quickly realize they have less overlap than they thought, and partnering makes more sense. And incumbents looking to transform now have an ecosystem of mature Fintech infrastructure startups with the scale that makes them viable suppliers.

2. Goldman Sachs is "in talks" with FTX on a derivatives trading deal

• Barrons cites sources familiar with the matter that "Goldman Sachs is in talks with FTX" to integrate some aspects of their derivatives businesses. FTX is the owner of FTX.US, which recently acquired a regulated derivatives exchange, and FTX is now seeking a license modification from the regulator, the CFTC, to allow it to handle client margins.

• 🤔 FTX's proposal, in theory, competes with institutional brokers like Goldman. Today's market buy-side participants (asset managers like Blackrock, Vanguard, Fidelity, hedge funds, pension providers, etc.) post margin with their broker (i.e., big banks). The brokers lend money to buy-side participants and handle margin (how much an institution must have as security before they can borrow to trade). The brokers are potentially losing a revenue line if buyers could get this borrowing directly from FTX.

• 🤔 But FTX is also offering a tech upgrade for traders. FTX's heritage is "by traders for traders," One area they innovated is how they handle margin. It is normal for margin (borrowing) to update overnight in the industry. For example, if a trader does really well at 9am on Monday, they often can't use those gains to take advantage until 9am on Tuesday, potentially missing out on massive gains. FTX updates the margin every 30 seconds, allowing almost any asset to be used as margin. This and thousands of other "trader quality of life" improvements would be massive for regulated financial markets traders. 

• 🤔 Goldman could win market share being an early adopter. Brokers that provided liquidity (i.e., Their balance sheet) via the FTX platform would benefit from more efficient margin allocation. Today's market data is imperfect, and trading venues (exchanges) and 3rd parties don't always allow this sophisticated margin usage. Traders will want this, and the broker that can help their clients with this type of innovation has something new and exciting to take to their clients.

• 🤔 But it's unclear if the regulator would sign off. So far, the CFTC has said the FTX proposal "warrants scrutiny." Historically, they are one of the more innovative regulators (given that just about everyone they regulate is institutional, not consumer). But this is a significant change in the industry norms. Probably sensible to take a little time to perfect the beat.

• 🤔 In effect, FTX has used Crypto as a petri-dish to build the future of financial markets infrastructure. That live case study can then move into traditional asset classes. It's another 4D chess move to back this into TradFi over time. IMO: With institutional Crypto and DeFi, it's when not if. And how messy will the regulators make it in the process? 

Good Reads 📚

1. Designing and building compliant credit products

• Fintech Credit products are so much more complex than debit or stored value products because so many more variables and regulations apply. Is the product for a consumer? Is that consumer vulnerable? And does the product go on forever (revolve) or have a firm end date (like installments)? Before you get into fees, APRs, how often customers can repay, and if you require security to get the lending product. Phew 😅

• Rohit gives several examples of regulatory pitfalls to watch out for in this post; e.g., if you're applying a fee in advance of the lending, it starts to look like payday lending (remind you of tips?). Rohit suggests using the mental model "what if this fee was an APR?" in everything you do because that's how a regulator could view it.

• 🤔 Messing up a debit product has regulatory consequences; messing up a lending product is a different world of pain. In the late stage Fintech boom, we've seen plenty of "embedded lending" and "cash advance" Fintech companies arrive, and while some may have deep lending experience, not everyone does. With the rise of Fintech infrastructure APIs, it has never been easier to get credit products to market. But with great APIs comes great responsibility. Heed Rohit's words if you're building or investing in lending and Fintech.

• 🤔 The ~2010 Fintech cycle lenders were valued by public markets like lending businesses, and I suspect many of the embedded lenders could go that way unless their primary revenue source is SaaS revenue. If you're a marketplace for lenders (i.e., a headless Credit Karma), that's different. But lending always flows to the lowest cost of capital. And the lowest cost of capital belongs to the organizations with a license to take deposits (also known as banks).  

Tweets of the week 🕊

That's all, folks. 👋

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