🧠Fintech Brain Food - August 23 2020
Hey fintech nerdarati 👋. A few headlines this week that made me do a spit take. Railsbank buys Wirecard, Robinhood raises again and possibly my fav open source project ever raises Seed.
If you zoom out fintech is having it's moment, and like much of tech, it's a trend that's really just beginning. As always 4 Fintech's you should know, good reads and things you should know.
4 Fintech's 🤑
1. Moov.io - Fintech's Linux - Open source nerd heaven in a git repo
🚆Moov has built Open source financial services infrastructure that does all the non differentiated things, everyone fintech and finance company has to do but better. Moov can do things like, connect to US based ACH, wire transfer or even check credit reports. The team have been doing things that the deep banking infrastructure has had to do for years.
This collection of non differentiated stuff everyone has to do anyway is super valuable, mostly because almost nobody does it well. This isn't the bit of code for a finance company that generates more revenue, or gets more customers.
The world of 1970s financial infrastructure is full of quirks. File types based on ISO standards (e.g. 8053 and 20022) that are all implemented a little differently and have fun behavior quirks. These files weren't built to be easy to use by developers, they were built to reduce costs for big finance in the 70s. The Moov team almost get a sense of glee when talking about these quirks, and that in itself for me as a fintech nerd is the ultimate credibility dog whistle. I know you know finance if you've battled strange text based responses from a mainframe 🤓
Open source hadn't really been a thing in financial services, but this feels like a moment. Don't get me wrong, the open bank project is an OG, and Europe has PSD2 and in theory a bunch of standards to connect between banks and consumers. But there wasn't that project where you go, aha, that's MongoDB but for fintech. With Moov, that's sort of the first thought that comes to mind.
It's no surprise then to see them get their $5.5m seed with some serious investors in their cap table 👏, or that Square, Bank of America and other globally significant financial institutions use Moov for mission critical infrastructure connectivity. What are you waiting for, head over to the Git repo :)
2. iexcloud.io - If Stripe did financial markets data
🏹Robinhood but for every other country is absolutely a trend. So for example in the UK we have freetrade (think Robinhood with way less derivatives and outages). In the past month I've worked with or spoken to at least 4 similar early stage efforts outside the USA
💽Bloomberg level data but for everyone is the ultimate democratization of information. These folks aren't quite there, but are the API providers behind atom.finance (who you should check out), which is incredible and built on iexcloud. When I first used atom I wondered how the heck they got all of that data into one sleek app. Now I know.
The aggregation of hard to find, harder to work with APIs is required in financial services. If you wanted to get stocks, forex and economic data, you'd have to connect to countless exchanges and data providers, each which have long sales cycles and some (not all) have fairly poor APIs. The time and cost involved is non trivial.
Watch for "APIs for investing" as a category too. For example alpaca.markets is a more execution focused set of APIs. What I like about iexcloud is it's not early, it's former institutional folks skating to where the puck is going (YAS). More of this 🙏
3. Storkcard.com - The Neobank for parents 👩👩👦
Babies and growing children require so. much. stuff! 👶 This is a baby budgeting app with all kinds of goodness packed in around it. 30% discount and baby goods stores, family savings pots, and more. This isn't just a joint account, it's a joint account in context.
The trend here is the brand and the context. We're seeing a flood of Neo banks come to the market (because new fintech infrastructure made it cheaper and faster than ever to do). A brand that is in context to a consumer problem has a way higher conversion for customer acquisition, and permission to cross sell around that context. Perhaps a good example here is Caura, that is embedding all kinds of finance (tax, servicing, licencing, tolls, insurance, leasing) in the car ownership context. Context is queen 👑.
Neo's that start as a card have struggled to monetize. Just look at the ballyhoo around Monzo, Revolut and Starling lately to see how generating revenue can be tough, especially in Europe where interchange revenues are much much lower.
There's a lot of cross sell potential from this one context. Child savings accounts, lending around big events, stuff I can't even think of. Whether this company can do it I don't know. But talk to any parent about how they managed their finances around baby, I'll bet you there was either spreadsheets or some sort of hackery. The question for me is which micro brands will own which context, and is the business model scale, cross sell or both?
4. Streeva.com - Wrapping payments in context
We know payments are a pretty dumb instrument. 🔨 Most payment infrastructure is designed to carry just enough information to successfully complete payment. Most payment files have hard character limits (seriously) from when every bit of data counted in the 80s.
This creates all kinds of admin around payments. Businesses have to figure out their tax rebates, or reconcile which payment is for which product. It's simply so hard to know what payments are doing most of the time without some sort of clever AI like Orum figuring it all out for you.
💾The data about the payment is more valuable than the payments themselves. Payments fees face increasing downward pressure, whether through regulation or simple merchant lobbying. A fee is a price to pay.
Streeva links payments data to payments. 💾⛓💳 This could do just about anything you can think of, but their first use case is adding something called Gift Aid to a charity payment in the UK. The UK government matches 25% of any contribution to charity, but charities get this benefit in less than 10% of giving. By automating all of that Streeva gets the number closer to 90%.
Whether they can go beyond the charity sector, especially with the heat around PISP payment providers in Europe is a great question. Although, European B2B tech is massively discounted relative to US imo.
Good Reads 📚
1. Katrina Lake - The Next Wave of E-commerce
(🎙 Invest Like the Best Podcast)
Stitch Fix has scaled human / AI relationship in a way many can learn from.🤖🤝 In the early days of stitch fix, stylists would have a more or less 1 on 1 relationship with each customer, helping select and recommend each clothing item for that customer. The criticism was rightly "that will never scale" and stitch fix was a bit of a bet on AI.
As a female founder, it took 100s of meetings until Bill Gurley of Benchmark was willing to take that bet. Whilst it's a sad indictment of our culture that it took so much effort, Stitch Fix has continued to grow in a way that wasn't heavily capitalized. In other words, the AI + human model had to work.
Stitch Fix made a couple of critical hires to make this work. 🤝 On the distribution side, Mike Smith the COO, was the COO of Walmart, and was able to bring scale to the back office. Then Eric Colson as head of algorithms, who was the former VP of Data Science at Netflix. A very manual distribution business, combined with a very modern data recommendation engine has been built.
🔑KEY POINT: Now humans focus on empathy, problem solving and reassurance, whilst the AI takes care of most of the recommendations. Whatever your view of this model, it has been growing 20% YoY (pictured)
🤔My Analysis: Every human heavy financials services business has no idea how to do digital and humans together and could learn from Stitch Fix. Financial services requires empathy and problem solving for clients, especially with bigger more complex life or business decisions. Financial services companies instinctively know this, but can't make AI and digital work alongside that. Stitch Fix is an interesting model. Imagine if I could do wealth advice at scale. The AI recommends the product and the human does the empathy.
🤔My analysis:Incumbents like Schwaab now have zero fee trading, but are still stuck with what to do for the advisory business. For non wealthy clients there's a huge "advice gap" on how you make that work. Advisors are expensive, highly skilled workers. Scaling that is hard. Ultimately though, those advisors just hand hold the clients into a product. Everyone else needs that too. What if the AI recommended the product, and the human did the empathy? Is that possible in this industry? I look at UK start-ups like AgeWage and see people at least trying.
🤔My Analysis: Millennials love a subscription and hate a fee. If you're "fee free" but cost $49 a month that's a pretty decent revenue line. Stitch Fix has a subscription of $49 a month up front. This commits users to getting something that month but at a discount. Subscriptions, auto product recommendation and humans doing empathy and creativity. That right there is how you do wealth management for everyone else.
2. CBDC From Iteration to Implementation
(🧾The Block Research Report)
Central Bank Digital Currency (CBDC) is gaining real traction in finance circles 💱. The establishment used to hate crypto as a currency but love the idea of the blockchain technology stack. But that's changing as you can see in the tone of CBDC speeches
The reasons central banks are doing this include. 1. The decline of cash usage and the need for alternatives. 2. The view that CBDCs could create more efficient and transparent markets (e.g. make it easier to detect and prevent criminality). 3. Payments infrastructure creates economic cost. 4. There are opportunities to support fintech and GDP growth through CBDCs.
🤔My Analysis: Payments Infrastructure is due for an upgrade in much of the world. In the USA the push for real time payments has been around for quite some time, but always lobbied against by the banks, for fear of the high upgrade costs to their infrastructure. In Europe, where real time payments are more common, the goal is to open up access to payments infrastructure, and make it a much more effective instrument in the economy. But the pressures on governments and central bankers has changed.
🤔My Analysis:Payments are a critical instrument of policy, and you cannot separate them from geopolitics. Payments networks like SWIFT, Visa and Mastercard help to enforce US based sanctions screening (from the OFAC list).
🤔My Analysis: But when Facebook came along with Libra, and China announced their effort DECP, the geopolitics shifted. Governmetns and central banks don't want to lose control of monetary policy, so they're now forced to compete. Hence all of the interest in CBDC.
Things you should know 👀
1. Robinhood did another giant raise
(📰 CNBC Article)
💰Their 3rd raise in 5 months, this $200m brings their valuation from $8.2bn to $11.2bn. Robinhood said it saw 4.3 million daily average revenue trades, or DARTs, in June, outperforming all of the publicly traded, incumbent brokers. Robinhood’s DARTs in the second quarter more than doubled compared to the prior three months, according to the company. It also added 3 million new customer accounts in the beginning of 2020.
Robinhood’s revenue has surged alongside trading volume. It roughly doubled the money it makes from customer trades from the prior quarter, according to a recent SEC regulatory filing. The majority of that total came from options trading. 👎
Robinhood said the latest round of funding would go towards investing in its core product, and “customer experience.” This is against the backdrop of multiple outages this year.
🤔My Analysis: Sure the outages were bad news, but there's no way you need $800m for extra AWS credit 👀
🤔My Analysis: I can't see why Robinhood needs this cash unless it's expecting litigation and to stay private for a while. You may be familiar with the tragic story of Alexander Kerns who committed suicide after he saw what he thought was a $730,000 negative balance in his Robinhood account. This and the fact that the SEC has absolutely clocked the uptick in retail investor activity (the same agency that was setup after main street got wiped out in the 30s), makes me think Revolut can see lawsuits and regulatory pressure headwinds for the forseeable. When their massive increases in revenue come from complex (arguably dangerous) financial products, they may be caught between trying to make those products safe whilst holding the regulators at bay while they do.
🤔My Analysis: Companies like Robinhood have a tightrope to walk between democratizing access to growth and preventing harm to their users. The "fee free" trading has absolutely brought benefits to main street, who previously found broker platforms expensive and hard to use. Consider too, that savings accounts often yield less than inflation and there is a real need for getting people safely into higher yielding products. Also why shouldn't someone who's got the smarts be able to access more complex financial products just because they weren't born rich?
🤔My Analysis: Customers don't want financial education they want a better future and to see their investments grow. The "customer experience" that Robinhood talks about is crucial in this context. If you try and educate a consumer, they will get bored quickly. Great design has to build a game. A game has goals, controls and toys. It helps you towards your goal and makes the process fun.
2. Railsbank "set to acquire" Wirecard UK
🤔My Analysis: If you haven't been following along at home, the Wirecard Saga has been nothing short of epic. 🤯 (Quick recap here from the FT). Wirecard AG was the German tech darling. In the mid 2010s, the FT reported on what looked like accounting fraud, only to be accused by Germany's regulators (BaFin) of misdeeds. Now there are rumors of links to the Russian security forces and I'm aware of at least one Netflix documentary in the making.
🤔My Analysis: The Wirecard fallout deeply impacted UK fintech because Wirecard UK (formerly Newcastle Building Society) was a pillar of the UK fintech scene. 🚀 Simply put, Monzo, Revolut, Curve and Soldo all got their start with Wirecard as BIN Sponsor. By partnering with Wirecard, they were able to quickly and cheaply get cards into market without the expense and time involved with getting licenced directly. You could argue the UK owes much of it's Neobank success to Wirecard UK.
🤔My Analysis:Railsbank has been overlooked. Yes they've quietly raise at least a $10m Series A and further funding from the likes of Visa. But if this was a US company they'd be worth much more. I grant you, the USA is a much bigger market but, I often find engineers fight to use Railsbank over any other API provider in the UK. What's more, Nigel has track. Currency cloud his previous startup is quietly providing international payments infrastructure for fintech heavyweights (e.g. Revolut).
🤔My Analysis: If Railsbank could get it's own "Galileo Instant" style product across Europe, they're set to be the Marqeta of the region. They also quietly entered the US recently providing credit card as a service for Unifimoney.
🤔My Analysis: Folks who know their way around regulation and the quirks of the financial system have an edge in fintech. Folks who have that + track in building companies. That's rare.
3. Payments API Provider Form 3 Raises $33m
💳Form 3 provides BACS, Faster Payments and CHAPS access in the UK to banks, fintechs. Founded by former payments bankers from Barclays, Deutche and SWIFT, their recent raise includes investment from the UK's biggest banks Lloyds, Nationwide join Barclays as investors.
UK banks will have to upgrade all of their internal payments systems soon under the "New Payments Architecture (NPA)", and these banks are looking at Form 3 to provide that base infrastructure.
🤔My Analysis: Banks don't like expensive infrastructure upgrades, especially those mandated by regulation like NPA. Form 3 takes the pain away, by being essentially the ready to go payments platform for those banks in the coming decades. If they can pull that off, they'll take a ton of cost out of the banks who have been sprinting to keep complex, aging systems alive for decades.
🤔My Analysis: There's lessons for the USA here, since the UK has quite modern payments infrastructure but has mandated a complete overhaul and replacement of many of those systems. This model essentially says, industry insiders create a newco, partner with their former bank and get all of the banks to abstract that problem away. (On a personal note, many former colleagues and industry friends over at Form 3, well done to all 👏)
Tweets of the Week 🕊
The one and only Eric Stromberg here says that the 🍎 tax is doomed ☠
This from Christoper Mims is 🐐 thread 👇
That's all for this week.
Let me know, what did I miss? What fintech's should I know about that haven't been covered?
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