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Rumors of Fintech's Demise Were Over Stated
Plus; Wise posts 280% pre-tax profit growth & Zelle builds a scam refunds mechanism
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WeWork is bankrupt.
Fintech companies lost 50 to 80% of their value in public markets.
Is it game over?
Not so fast.
Rumors of Fintechs demise were overstated
Adyen stock up 30% in a day.
Bitcoin over 37k.
Affirm stock bouncing on strong results
Wise just reported a 280% jump in pre-tax profits (More in things to know 👀)
Narratives are powerful, but the crowd chases consensus.
Rates didn’t kill growth.
The crowd got crushed.
It’s easy to be a cynic because you get to sound smart. It’s much harder to have conviction, and almost nobody has conviction anymore.
This week, I wanted to offer some counter-narratives.
It's a shorter Rant than usual, so I'd love your feedback. And if you want more, Alex, Jason, and I did a results season special, and you can check it out here.
Here's this week's Brainfood in summary
📣 Rant: The Fintech Counter narrative.
💸 4 Fintech Companies:
Loop - Modern Treasury for Logistics
Earlybird - Investment gifting for families
Final Offer - Home buying negotiation platform
Finkargo - Embedded Trade Financing for LATAM
👀 Things to Know:
📚 Good Read: Private credit: The growth of an asset class.
Weekly Rant 📣
The fintech counter-narrative.
The Adyen stock drop, Wordline, and almost every CNBC headline or market commentary about flagship Fintech companies.
The consensus crowd wants to hear about how bad Fintech and Crypto are.
But here's the twist.
Fintech companies are struggling. Big Tech is sluggish. Banks are struggling.
Winners are the asset managers selling private credit.
Winners are those who saw Crypto as cheap instead of dead, and now it's up 68% YoY.
Winners are those who are non-consensus.
(Except in early-stage, where everything is still wildly expensive).
Thesis: Fintech is finally cheap. Not dead. We're not witnessing the end of Fintech, nor is this simply a reversion to the mean. We're seeing a reshaping of what finance is. Manufacturing finance is shifting to asset managers. Distribution is shifting to new players.
The bear case
Public comps are down bad
Private valuations are correcting
Crypto was a fraud and the peak of the everything bubble
Regulators are finally putting all of this right
The interchange-only business model didn't work
Profitability is everything but illusive
Late stage is frozen
Fintech is finally "cheap"
Quality Fintech companies are still raising
Crypto is increasingly regulated and legitimate
Regulatory push back can be a good thing if done right
Companies are expanding way beyond interchange, reshaping the landscape permanently
Profit is sanity and sanity is prevailing
Not all late stage is frozen
1. The bear case for Fintech
a) Public comps are down bad. Fintech companies like Robinhood, Block, and PayPal have lost anywhere from 50 to 90% of market value since 2021. The average revenue multiple has dropped from 7x to 3.7x. Whether its headlines about Adyen or Worldline, "Fintech" has become the least attractive trade to the consensus crowd. The feeling summed up by Chamath that "the jig is up."
b) Private valuations are correcting. The Notice platform provides similar data for private companies based on public comparisons, internal valuations, and recent private funding transactions. If we take big names and compare them against Nasdaq, a similar pattern emerges. While the NASDAQ index is down 7%, Fintech companies are down 70%
(Image from Notice.co)
c) Crypto was a fraud and the peak of the everything bubble. Celcius, Voyager, FTX, and Terra/Luna were frauds or massive breaches of responsibility, leading to consumer harm. The founder of FTX has been sentenced, and to date, operators I talk to still cite Crypto as the beginning and end point for most fraud, scam, and money laundering activities. I'm an advocate of technology, but we have to acknowledge there is no smoke without fire.
d) Regulators pushback. Fintech has gone from championing competition and financial inclusion to a world that sounds like risk in Washington circles. The Banking-as-a-Service world has seen pushback from federal and state agencies over 3rd party management, and partner banks are much more risk-averse. It's harder to grow quickly and deliver new products when you also have to win the trust of regulators and partners.
e) The interchange is everything business model didn't work. The swipe fees or revenue given to a Fintech company or non-bank when issuing a card is a great new income source. But for Fintech, it became the only source. In Europe, where most debit card issuers would make 0.3% on a transaction, we've seen Banking-as-a-Service companies go bankrupt. In the US, where the Durbin Amendment made interchange more profitable, consumer Neobanks had a better run. But they, too, must cross-sell and do more with less.
f) Profitability is everything. In search of profitability, almost no organization has been immune to job cuts and limiting their roadmap ambitions. This makes the talent proposition less enticing and positions Fintech as just another actor in financial services. A cynic might even say that Fintech took VC dollars to build "more of the same" but with worse fraud and compliance controls to boost growth.
g) Late stage is frozen. The choices for late-stage Fintech companies aren't fantastic. Down round, extension, or IPO at a potentially huge discount?
Klarna took a down round from ~$46bn to $6.7bn, Stripe from $95bn to $55bn. If Stripe went public today, based on public comparisons, it would be closer to ~$25bn to $30bn. Instacart and ARM showed the public markets aren't hot on tech companies. Will Plaid ever IPO? What about all those Fintech mega-rounds from 2021 for Series C and beyond?
Whenever I speak to VCs, one key narrative emerges. "We're backing our portco's but not doing new in mid to late stage."
So we'll see many more companies hit the end of runway, looking for M&A, fire sales, or going bankrupt like WeWork.
2. The counter-narratives
a) Fintech is finally cheap. Fintech may have been one of the most overpriced sectors in the market. I don't have a crystal ball, and I've never run an investment fund. But as a market commentator, I can't help but look at companies growing rapidly, becoming leaner, and taking market share from incumbents. Chime and PayPal open more DDA accounts than all other banks combined, and this pattern is repeating across Fintech segments.
Fear is finally leaving the markets. After Adyen’s 50% stock drop, it popped 30% last week. The move follows their publishing plans to continue headcount discipline, return to 55% margins, and grow revenues by at least 20% YoY. This company got dinged for delivering a mere 43% margin and 13% revenue growth.
Perhaps they were over priced at one stage.
Perhaps all of Fintech was.
But not anymore.
b) Quality Fintech companies are still raising. Klarna's down round took them from $45.6bn to $6.7bn, but the rumor is they will IPO at $15bn based on comparisons to Affirm. Ramp raised at a $5.8bn (post-money) valuation, down from $8.1bn, but that's super solid performance. Growing companies are driving a flight to quality.
(Image from notice.co)
c) Crypto is increasingly regulated and legitimate. The UK just published proposed regulations for Stablecoins, and Europe passed the MiCA law, which comes into force in 2024. The world's largest asset manager, Blackrock, is leading the charge for a Bitcoin ETF, and the price is up on major assets between 50 and 70% YoY. Far from being dead, the bifurcation of quality vs crap is taking place. Major financial institutions are now wrestling with how they use permissionless blockchains to unlock the massive benefits available. This is no longer a controversial idea.
Crypto still has issues. Namely, it needs Congress to act and create regulatory clarity, and it is still a swamp of fraud and sanctions risks. The best way to solve that is with major, regulated market actors entering the space.
d) Regulatory pushback is a net positive if done right. I have no beef with regulation. My biggest beef is with how it's often enforced and unintended consequences. Actions from the CFPB on open finance and Big Tech wallets are a good thing. If it creates clarity, it will give the smaller banks that enable the new wallets a lifeline and the consumer a proper set of protections.
There's a lot of talk in Silicon Valley about "regulatory capture," Don't get me wrong, that is a thing. But the issue is more about how much it costs and how paper-based and manual it has been historically. A lot can go wrong when dealing with people's money. We should be thoughtful about how to be better.
e) Companies are expanding way beyond interchange, reshaping the landscape permanently. SoFi was always a lender, and now it's a bank with a breadth of consumer product offerings rivaling Chase. It is growing deposits rapidly, and its not alone; Monzo, Wise, and Bunq have all cited deposit growth as a major source of new income in recent results.
The B2B Neobanks have gone super wide into accounting, treasuries, and multiple types of lending. Navan (nee TripActions) has even pivoted away from its card offering to focus more on partnerships. Mercury and Arc are going deeper into deposits, too.
It was always the case that interchange wouldn't be enough, but it was also a great wedge while it lasted. That source of revenue and traction helped build the Titans of tomorrow.
f) Profit is sanity. Zombie companies, business models, and regulatory arbitrage are being found out. This is good for the ecosystem. Nubank keeps crushing. LATAM, India, and APAC are firing on all cylinders, and we're seeing the rise of Insuretech and fixed income.
Growth companies aren't supposed to be profitable in their growth phase. In the same way, a teenager isn't supposed to make a salary and pay a mortgage. They're busy growing.
g) Not all late stage is frozen. This week, a Brazilian BaaS company raised $200m, A BNPL provider raised a $1.5bn valuation, and an Insuretech raised $265.
Don't get me wrong, there are many investments underwater, and Fintech was the most crowded trade in private markets at one point.
But that wasn't because Fintech is silly.
It was because Fintech is disrupting the world's largest profit pool.
And it's just getting started.
Consensus says Fintech is done. But is popular opinion ever right when predicting the future?"
4 Fintech Companies 💸
1. Loop - Modern Treasury for Logistics
Loop helps buyers, sellers, and logistics companies who trade goods across borders to manage and automate their workflows. Today's cross-border trade involves countless PDFs, spreadsheets, and CSVs from multiple carriers and systems. Loop solves this by pulling documents together, identifying invoice issues, and optimizing payouts, claiming to reduce reconciliation time from 30 days to 24 hours.
🧠 Trade finance is the end boss for Fintech. It's just so messy. So many documents, jurisdictions, and different carriers. It is custom-made for an age of LLMs and SaaS platforms that automate everything. Loop is at Series B (so they're not exactly new), but the lesson here is the timing. Supply chains are being fragmented by geopolitics and "de-risking," creating a ton of new admin for banks, carriers, and import/export companies. Atoms are becoming bits in Fintech.
2. Earlybird - Investment gifting for families
Earlybird is an app that helps families save for their child's future, including contributions from loved ones. The service helps build portfolios, automates investing, and creates a social experience for $2.95 per month for one child or $4.95 for multiple children. The service has 70k families onboard today and is an SEC-registered investment advisor.
🧠 Is this a feature or a business? If the 70k users are paying $4.95, that's 346k MRR or $4.1m ARR (assuming 100% retention). They're likely also monetizing the advisor side (as an introducer to brokers). What is not obvious to me is what takes them from 70k to 700k to 7m users? If the goal is to be a nice boutique advisory app, awesome. But imagine if this was a feature in Vanguard or Schwab brokerage services? Feels like a great M&A target or something that everyone should copy. Because my GOD running child accounts via traditional brokerage is a schlep for parents. The pain is real but solve that closer to where the user is already trying to solve it, or in a Neobank.
3. Final Offer - Home buying negotiation platform
Final Offer creates a digital platform for real estate agents to help facilitate negotiation between buyer and seller. They have a "final offer" price, which is the one at which the seller will sell, allowing buyers to ensure they win the house they want. Like an eBay auction, it shows the current high seller's committed price to anyone browsing.
🧠 Transparency and negotiation is a key pain point being attacked. While much of the mortgage market is frozen due to high rates, there's inevitably some turnover as sellers need to move or change life circumstances. The market is also crowded at the high-value end of the spectrum, with buyers often struggling to get that dream house. So I buy that the pain is real. What I don't understand well enough is if this delivers enough net new sales to be more than a feature that Redfin copies.
4. Finkargo - Embedded Trade Financing for LATAM
Finkargo helps importers in Mexico and Colombia source, finance, and pay for goods. The service vets suppliers and shipments and offers cargo insurance. Their USP is proprietary data they use to analyze suppliers and supply chains. They intend to grow into offering FX and more trade and supply chain data intelligence over time.
🧠 Trade Finance is the end boss of Fintech. I love LATAM as a net importer of products that have worked well in the G7 economies like the US and UK. Trade finance and the insurance and data ecosystem that exists around it is proven inefficient in G7 markets. Mexico's SMBs are increasingly operating internationally and are overcharged and under-served. This is where data and a platform play well as the world of rising economies begins to trade directly with each other.
Things to know 👀
Revenue at Wise is up 25% in the full year, and including interest, it's up 58%. The customer base continues to increase c. 30% YoY, and the interim CEO remarked that higher interest rates have benefitted the company. Wise announced it had integrated directly with Canada's Interac, Australia's New Payment Platform (NPP) and SWIFT.
🧠 Interest rates benefit Fintech, not banks. Interest rate "normalization" was supposed to make life easy for banks and crush risk assets like Fintech. The opposite has happened. Bank profits are up, but they're losing deposits and market share. Wise is gaining deposits, market share, and growing profitability. The interest rate rise is the icing on the cake, making those deposits more profitable.
🧠 Rumors of Fintech's demise were overstated. As a sector, bank stocks are performing poorly. Banks still trade 70% below the average book value vs other sectors. Wise is more like a tech stock, trading at 7x revenue and delivering "rule of 40" growth (revenue growth + EBITDA growth = 40%). The market is rewarding growth.
🧠 What's their secret? Wise operates a single global treasury platform. Investors do not get this. Banks might operate in 70 markets but have 70 mainframes and 70x the operating cost. Wise now has better payment connectivity than many tier-1 "money center" banks and operates at a much lower unit cost. With just 800 engineers, Wise has a cutting-edge platform that can use Machine Learning without a McKinsey consultant in sight.
🧠 Market share erosion. Many bank CEOs will quietly admit that Wise and Revolut have taken most of their consumer and SMB FX business.
🧠 Is there some regulatory arbitrage going around banks for FX? It is true that going around banks and connecting directly to local payment systems does create some risk. The receiving banks and wallets, say ACH, aren't screening for cross-border payment risk. I've heard global tier 1 banks complaining to regulators about this issue. It is real, but its an issue of outdated local payment systems and banks not doing DD. We can't lay that at the door of Fintech companies.
Scams where a user is tricked into sending money result in huge consumer losses. This has been a hot political issue in Washington with pressure for consumers to be refunded. In the event of a scam, Zelle has implemented a solution that allows financial institutions to claw back funds from a recipient's account and return them to the sender. Banks who operate on the Zelle network must now reimburse customers for "qualifying" imposter scams.
🧠 This issue is growing exponentially as new wallets and RTP come online. This subject is important to me because it's happened in my family multiple times. Pensioners have lost their *entire life savings* with no recourse. It's a big reason I care so much about the day job. Last year, consumers reported losing $2.6bn to scams, and most victims don't report losses because they're embarrassed or don't know how.
🧠 Imagine losing your life savings and having your financial institution say it's your fault. Regulation E only required financial institutions to cover "unauthorized transactions." Scams are a massive issue because the consumer or business is tricked into authorizing a payment. The industry said, "The consumer authorized it!." But that didn't wash.
🧠 The story frames this as Zelle and banks bowing to Washington, but it's a clever new feature by EWS. The clawback mechanism means banks aren't refunding consumers out of pocket. They're just reversing the transaction. Without this mechanism, FI's could have been on the hook for huge losses. If there's a refund mechanism, people (and fraudsters) will game it.
🧠 Scams are not a one-network issue, and refunds aren't the only solution. If Zelle doesn't work, a scammer might try ACH, CashApp, Venmo, prepaid cards, or Crypto. Clawing back on Zelle is good, but the issue is much bigger. The CFPB will continue to focus here until the scam rates come down.
🧠 Scams and "APP fraud" are the biggest consumer banking issues in the UK because of a new liability model. The UK regulator has mandated a 50/50 liability split between sending bank and receiving. So if a giant bank and a tiny Fintech are both in a transaction, they split that loss, no matter who's at fault. Many are trying to close this gap with data sharing, but like the US, it's fragmented between big banks and Fintech's. Don't hate; collaborate.
🧠 Transaction data isn't the most useful for scam prevention. Most scams start on the phone, with users being called, asked to sign up for accounts or take screenshots. That's all happening long before a payment. Before that, the user might be targeted on social media (80%+ of scams start there).
🧠 All risk problems are data science problems. This is much bigger than a banking or Fintech thing. It's multi-vertical. We need more data from more sources and to run machine learning and AI models across as much as possible to detect scams before they happen.
Good Reads 📚
The seeds of the private credit boom were sown after the 2008 financial crisis. We didn't notice then because the money printing (QE) created an "everything boom" that made everything go up and to the the right. The rules on capital also meant it was expensive for banks to hold loans.
Private credit solves this by contracting directly between the borrower and the lender. Unlike listed bonds, no third-party investor can buy or short the bond to change the dynamics, and there's no need to "mark-to-market" the current value of the credit. Volatility-adjusted returns in private credit outperformed public asset classes in 9 out of the last 10 years. Every asset manager is chasing this asset boom, and now it appears JP Morgan is, too.
Marc cites data that the private credit loss rate is 0.7% vs 1.8% in syndicated loans. Unlike bank loans that are leveraged 10:1 ($10 of lending for $1 deposit backing), private credit is 100% funded by investors. But where there's rapid growth, there's rapid risk. If this market did downturn, who would intervene and how?
🤔 This is a creeping yet existential threat to banks. Bank credit is more expensive (because of their capital requirements) and more complex (because it's openly traded). Today, it's large corporate lending that has gone to private credit, but why wouldn't all lending?
🤔 What do we need banks for if tech companies can distribute finance and investors can fund lending? Whenever something looks too good to be true, it usually is.
🤔 How is the regulator reacting to this boom? The Fed appears more sour on banks than private credit in the wake of SVB and First Republic. Wealthy investors who lose out versus banks getting bailed out seems like a better outcome.
🤔 Will consumers buy private credit? In the 1980s, when "alternative" asset managers like Blackstone appeared, less than 1% of institutional capital went into assets like private credit. Today, that's 25%, and the founder of Blackstone, speaking at a recent event, said he anticipates the same in retail.
🤔 Who's gonna get there first, Fintech or Finance? We're already seeing companies like Moment build APIs for private credit. We've seen companies shift from savings to accessing treasuries as an asset class en masse in the past 18 months. It's not hard to imagine the same with private credit.
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.