10th April 2022 - Disclosure DAOs, Jamie Dimon's annual letter, Fast closes its doors and why Lightning Network Matters.
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Hey Fintech Nerds 👋
It's been a week that has filled my lungs. Despite everything happening in the world, watching the entire Fintech community reach out to former Fast employees to offer them jobs has been a joy to watch. When a company fails, its talent doesn't. There aren't many industries where you'd see that. My Twitter timeline was full of various people posting openings, and it appears Fintech company Affirm has offered jobs to a high percentage of fast employees.
Speaking of Twitter. It looks like Twitter may get an edit button. As Elon Musk bought 9.2% of Twitter, I took that as proof we're living in a simulation. The world is getting weirder.
I got most excited by this week, though, a conversation with Chris Brummer (On a Blockchain Insider that drops next week) about how we could change disclosures in DeFi and all of finance. Why does that matter? Because Financial inclusion matters.
Regulators historically "protect" consumers from losses in the stock market by deeming them "unsophisticated." This means most people can't access risky financial products that could lose all of their money. It also means they can't access the growth in stock markets available to rich people or financial institutions.
Chris has an alternative idea, disclosure of NFTs, DAOs, and DIDs. Using the Web 3 stack and ethos of transparency to build credentials for consumers that demonstrating their sophistication over time. This would be a massive upgrade to today's system, and it's something we could actually build. For more on this, scroll down to the good reads section below 👇 (and yes, as it says there, get in touch if you want to build this).
Weekly Rant 📣
Jamie Dimon's annual shareholder letter
I remember speaking to an old school teacher long after I left school and asking, "what's the worst thing about your job," assuming it would be dealing with high school drama, shouting kids, or just the sheer noise. But his answer surprised me.
He said, "you can try to help a kid see what's holding them back, but they might not get it." He went on to say, "they'll even parrot the right words at you, to try and sound like they get it, but you know they don't, and you can see if in their behavior."
I think about this conversation every time I meet senior leadership at banks. They say all the right things, hire all the right consultants, and yet the behavior and results just don't scream WE GET IT.
If anything, the opposite.
No matter how much they tell you, they get it. For the most part, they don't.
And why bother?
Banks and their leaders get to be successful by just showing up.*
(* Look, clearly, that's a generalization, and I'm not suggesting every banker is bad, but therapy is the art of realizing how we hold ourselves back. So consider this therapy :)
As interest rates rise and lending becomes a thing again, banks might be quite well placed to grow. But most banks are on the back foot, beaten up, just trying to manage change and managing decline while telling themselves and others everything will be ok.
But what if it's not?
Perhaps it will be Fintech companies that swallow the new lending opportunity? Square has a bank charter to lend to SMBs. PayPal Credit performs strongly, and don't forget BNPL. Now as Brex and Ramp push into SMBs and Corporate banking, the ivory tower and the real profit center of banks look open to threat.
A banker that just might get it.
I like Jamie Dimon's annual letter because he's under no illusions about the threat of Fintech. He's not a C-suite banker who dismisses Fintech companies as small or bad for consumers. But Jamie takes the threat seriously and positions JPMC accordingly. And I think we can all learn from that.
Last year I noted after reading JP Morgan CEO Jamie Dimon's annual letter that JPMC is a bank that gets it.
Having spent two hours reading this year (so you don't have to), I stand by that point. While I don't agree with everything, there are so many lessons for everyone who works in Finance or Fintech.
Firstly, the TL;DR of what he says in this year's letter because it really is long.
JPMC has outperformed competitors and the market for two decades. Lots "of up and to the right" charts here, but the stock consistently outperformed the S&P and competitors for two decades. Other useful insights include 1) Corporate lending making up the majority of the group lending. 2) Only Goldman outperforms on costs and RoE.
The Geopolitics of the world has shifted as inflation is rising. The US economy has been strong but faces headwinds that will require "strong American leadership." Regulation has to focus on outcomes, not process. American leaders have to actually be bi-partisan and focus government on genuine R&D.
The role of banks in financial services is diminishing. Banks' share of mortgage originations has gone from 91% to 32%. Banks' share of the leveraged loan market has decreased over the last 20 years from 46% to 13%. "Neobanks" have at least 50m users in the US. Expect much more M&A for America's 4000+ small banks. "Banks need to acknowledge the dramatically changing competitive landscape." 🎯
A surge in investment is required. An extra $2.5bn is to be spent on hiring new skills and "the competitive job market" (AKA, paying big salaries for talent). JPMC has spent $5bn on acquisitions in 18 months and opening a "global retail footprint." They've bitten the bullet on cloud migration and started to execute. They've built new products in their payments business (a significant engine of revenue for JPMC and attraction for the corporate customer base). They've also "developed over 1,000 application programming interfaces."
Strong and consistent leadership is the key to success. Leaders need to figure out what inspires their team, nurture genuine trust and drive high performance, not with metrics or fear, but with trust and open conversations.
There are many lessons hidden in detail here, so let's unpack.
Lessons for banks and people in Fintech
First up, the basics that everyone says they do, like the kid to the school teacher.
1. The importance of a big-ass balance sheet. JP Morgan has a diversified balance sheet across retail, capital markets, corporates, payments, lending, treasury management, etc. That diversity and scale have allowed JPMC to grind out results. When lending is down, maybe equities are up?
This isn't something small banks can fix, and other big banks benefit from diversified balance sheets, but JPMC more than others because of #2.
2. Getting the basics right and delivering. Global cash management (GCM), or banking for large companies, is a massive segment that banks like Wells, Citi, and JPMC have had at the heart of their business for decades. But where others stand still, JPMC has grown market share, investing in the bank's less sexy but ultra-important bits. Improving the performance of its payments, its currency availability, and its internal systems' quality. Other banks spend money on this, but often without the same outcomes. For example.
For example, JPMC built Liink a bank network to share information about international wires (SWIFT). This means payments can happen faster and with fewer failures. And while 5 years ago, every bank was patenting its own "coin," JPMC is the only one still building it, trialing it, and rolling it out. This might not be the most headline-grabbing stuff, but it's why they've consistently grown while their competition stands still or, worse, slowly erodes market share.
And some contrarian bets that other banks won't take.
3. Naming Fintech and Non-banks as the biggest competitive threat. I'm yet to see another big bank come out and say this (I'm sure you'll correct me if I'm wrong here). Most banks fight for market share with each other and have yielded segments like low-income consumers, commercial cards, and BNPL to Fintech companies. They also happily embraced Apple Pay and the high % of the revenue they had to give away for the privilege.
JPMC doesn't always win when it tries to compete with Fintech companies (does anyone remember Finn by Chase?), but it's learning and acknowledging the threat. The UK launch of the Chase checking account is going well by all accounts. Where other banks would spend as much on similar initiatives and continue to support them (even with limited customer adoption), JPMC has 1) Closed a clear failure 2) Learned lessons and tried again with more success.
4. Investing in people and skills. Of the net new $6bn JPM is spending for growth, $2.5bn is on people. Not just new hires but retention. For too long, tech has been a second-class profession in banking, to be outsourced, offshored, and ignored. To bankers, the real heroes in banking wear suits and deal with spreadsheets (even if their job title says technology).
The same reverence Jamie writes about in the letter is also shared with highly paid people with technical skills. These people want to use the best tools and equipment and have the autonomy to actually make changes that impact the world and society. Otherwise, no amount of money will retain them. The talent war is as much about the autonomy you give people to get shit done as the cash. If Fintech company options look less exciting in the next 5 years, why wouldn't talent take a high salary from a bank? Especially if they genuinely believe that bank could execute.
The fact that the letter talks about the tooling is a tiny detail many will miss, but it shows the bank may just get it.
4. Investing in Acquisitions and regional expansion. Major competitors like Citi are pulling out of markets, while JPMC is entering new markets at great expense. Perhaps they see other banks as having a moment of weakness. There aren't many others (outside of Goldman) trying to expand beyond the US. Most are in managed decline, which isn't a particularly inspiring narrative for talent.
The Fintech acquisitions could also reflect a confidence that the diversified balance sheet allows JPMC to do things Fintech companies might struggle to do alone. With a lower cost of funds to lend or instant access to global payments and treasury infrastructure, businesses that need balance sheets or scale can get more efficient. Fintech still looks cheap in public markets, and perhaps some private Fintech companies are looking for a buyer. Opportune timing.
5. A bank that's willing to go properly big on tech. Every bank announces how much they spend on tech; few pen a 30 thousand word letter outlining their rationale for why they're adding another 25% to Capex. Where most banks manage only to next quarter's bottom line, JPMC thinks longer-term about the consistent things that deliver those results over time.
6. The importance of long-term leadership. Perhaps the track record Dimon built gives them the license to do this more than most. Much of this comes back to getting the basics right, winning corporate customers, and using that as a platform to put the tooling, talent, and M&A to go get the opportunities in the market.
Think about the major competitor banks. Is there one clear Jobs, Zuckerberg, or even Nadella character who so clearly sets the company's direction? Businesses like sports franchises benefit from a coach who has the buy-in of their management (the board) to build a team and a system for the long term.
6. The importance of detail and long-form writing. How many other CEOs pen a letter with this many words in it? How many could? Dimon is predicting future interest rate rises and the impact of geopolitics. Many CEOs grapple with these issues, but how many could go justify the impact to their strategy in this level of detail?
7. The management lessons are more than bumper stickers. So often, "management lessons" sound like bumper stickers from some CEO drowning in their privilege and mediocrity, but not these. I love the idea of trust as a force multiplier. The ability to have hard conversations comes from trust. Not the kind of trust that says, "we trust you while your KPIs are good." But the kind that says, "I've got your back, I believe in you." The kind that doesn't take someone choosing to leave personally but fights hard to retain, not when someone says they want to go, but 24/7.
There's a really nice nod to Ted Lasso and making people feel actually appreciated that has Dimon's voice all over it. Undoubtedly, this letter went through countless committees and reviews, but I honestly believe Dimon bought his team biscuits in a little pink box. Details.
Bonus insight: I really like the idea of a Marshall plan for energy. Not sure who came up with that, but highlighting it in this annual letter is brilliant. Europe needs to become energy independent from Russia. The world needs to transition to low or zero-carbon energy. Banks have all announced the $trillion they're willing to spend on this. But where does it go? What happens now? We need a plan.
However, everything is not awesome.
Unlike the catchy song from the Lego movie would suggest, not everything is awesome. While there are clearly many brilliant people at JPMC (who may even quietly agree with some of these points), this letter is doing a couple of things I disagree with.
Things I disagree with
1. Arguing the state of regulation unfairly benefits Fintech companies. I get it; banks have a higher regulatory burden than most Fintech companies. I also get that banks have much more stringent capital controls compared to shadow banks (like hedge funds, private equity, and asset managers), which means that a lot of lending has shifted into the shadow banking sector. The banks have the ultimate compliance responsibility and aren't allowed to be as capital efficient as their new competitors.
I don't fully disagree with that point. But I think JPMC has benefited from the capital-constrained world, as other banks have faltered, and JPMC has filled the gaps they left. And when markets falter, investors want to put their assets in the safest possible place. Outside of the Fed, JPMC just might be it. JPMC is also one of the largest suppliers to Fintech companies as customers.
But it's the criticism of the Durbin Amendment that triggered me. The Durbin Amendment was intended to allow smaller banks (sub $10bn in assets) to be competitive as we came out of the financial crisis. They would receive more interchange revenue from every transaction than the big banks.
What actually happened is companies like Chime, Current, and Varo were able to bootstrap a Neobank business with that revenue. This meant low-income consumers had a much better product than the big banks offered. We're seeing financially excluded groups get their own digital community banks because of the infrastructure and ecosystem that arose.
Neobanks have been good for consumers and the economy, and I'd argue that if they position themselves right, they'll be good for JPMC as customers.
Regulation is a mess and needs to be re-thought, starting with the outcomes we're trying to achieve. On that, we can agree. But it doesn't unfairly benefit Fintech companies.
2. Having 1,000 APIs isn't cool. Having great APIs is cool. Banks and bankers that tell me how many APIs they have are a red flag 🚩. Can you imagine Stripe or Twilio telling you how many APIs they have? Sure, that's a lot of APIs (I know banks of similar asset size with less than 5% of that number), but it's also a missed opportunity.
This was an opportunity to do something most banks never dream of. Launching an API portal that the developers actually love. This is something Goldman did a while back for its transaction banking APIs. With APIs, it is show don't tell. But then, given all the messaging about talent and tooling, perhaps we see that next year 🤷♂️
If you're in a Fintech company, study this letter to see where your market opportunities are. JPMC could be a partner, but also their diagnosis of markets they struggle to compete in shows you where the gaps are. The world sorely needs outstanding transaction banking APIs and platforms. Could Brex or Ramp get there eventually?
If you're in a bank, learn from this.
Small banks, do you get it? Does your leadership? Investing over the long term, getting the details, and focussing on not just who to hire, but creating the autonomy and environment for that talent to thrive. Sometimes that means partnering well and recognizing what you're not good at instead of being a tribute act to a tech company.
Big banks, do you really get it, or are you just saying you do?
Because the big banks do have the opportunity to be the platform that powers the embedded finance and Fintech future we all want.
Well, it's not obvious to me what role a large bank could have in DeFi (beyond being a trusted brand and capital allocator).
Maybe that's why they lobby so hard against it.
4 Fintech Companies 💸
1. Dapio - Tap to pay for Android
Dapio allows merchants to turn Android devices into a payments terminal. Merchants pay 1.5% of the transaction as a fee and can use the service globally, and Dapio is deployed into merchants existing apps using their SDK or with ready-made "tap to pay" apps. Dapio works through partners to sell to merchants and provides a merchant dashboard and payment gateway.
🤔 Square just did this with Apple and the iPhone, but Dapio is enabling it for Android suits global south markets where Android penetration is much higher. Dapio recently raised, and African payments giant Flutterwave co-led the round. So while they're initially focused on the UK, you can see their potential in much larger markets.
2. Yonder card - The Gen Y Rewards Credit Card (UK)
Yonder is a credit card aimed at professionals in the UK, with no foreign exchange fees and a video game-like reward points mechanism. The card also supports consumers with low or limited credit scores and costs £15 ($19.70) per month.
🤔 This is the credit card for Monzo customers in the UK. 30 something who grew up with video games probably had a credit card but have no affinity for it and never really used the reward points. If Monzo is a great product without a business model, then credit cards are a great business model. Yonder could fill a significant gap in the UK market if they can get the traction engine working. Most credit cards in the UK are aimed at boomers (or Gen X). Something about the design of Yonder is just right. Where point.app feels like it's aimed at the folks who vape indoors; Yonder is much more approachable.
3. Churpy - Accounts Receivable Automation (Kenya)
Churpy allows businesses to automatically reconcile their bank transactions against invoices. Churpy has partnered with some of the largest banks in the region to access this data via API. Customers can see their current cash position, outstanding invoices, and how efficient they are at collecting via a dashboard. Churpy will look to roll out a working capital and financing product to SMBs in the coming year.
🤔 SMBs are hot, Africa is white-hot, and this is clearly a category win. But why Churpy? Churpy has a shot at becoming the Modern Treasury for at least Kenya and maybe several other massive markets. This will quickly become a crowded category, but building bank-led partnerships more play to an existing business customer than the informal SMBs that make up much of the African economy.
4. Fuel - Shopify for NFTs (Germany)
Fuel allows creators to build their own custom branded NFT shop without technical knowledge. Creators can launch, manage and grow their NFT collection with various tools Fuel has aggregated under the hood. Creators get paid in Euros and can control their revenue and royalty models (e.g., Auction, fixed price, secondary sales percentage).
🤔 Shopify is also Shopify for NFTs. But the Shopify NFT plugin is still in beta and not as focussed on European creators for the time being. There are countless other tools in this category (from NFT creation platforms like Foundation, Opensea's "lazy mint" option, to no-code tools like Niftykit. But most focus on creating the NFTs, not the brand and wrapper that supports the launch, auction, and ongoing management. My sense is we're still early, and this space has a lot of room to grow.
Things to know 👀
One-click payments company Fast has announced it is closing its doors. Fast had raised more than $102m, led by Stripe in 2021 but had a burn rate of nearly $10m per month. Techcrunch cites Pitchbook data valuing the company at more than $580m. This follows
🤔 Fast will go down as a cautionary tale to founders that traction matters. No matter how much you raise, how great your marketing is, and how incredible the talent you can hire, there is no business without traction.
🤔 Would Fast have raised quite so much if Fintech wasn't so hot? I don't think so, but the positive lesson to take is that they were terrific at getting attention and marketing. The founder has an almost Elon Musk-like ability to grow brand awareness.
🤔 The founder Dom has left a trail now of two failures, one in Australia and one massive one in the US. While the US has a culture of it's ok to fail, go ahead and try again, I hope lessons are learned here. You could see Dom becoming a Jordan Belfort of Fintech or the ultimate marketing consultant.
🤔 The real story here is the talent and the Fintech community open their arms to them. My Twitter timeline is filled with founders, companies, and VCs swarming around Fast talent to give them job offers. God, I love the Fintech community, you nerds rock 🤓. Ex-Fast employee is a mark of quality, which you'd not expect for a public trainwreck like burning $10m a month and getting to $50k MRR. But great ML, UX, and marketing talent is great talent, and it's a talent-hungry market in Fintech.
Of all of the Fintech and Crypto stories this week, I suspect this is the one we might look back on as one of the more significant.
Lightning Labs is building an L2 scaling solution on top of Bitcoin that can achieve 100s of thousands of transactions per second vs. the 5 per second of Bitcoin. With this raise, LL intends to build a new product (Taro) that will allow users to send Stablecoins over the new rail. Users without bank accounts will be able to send and receive their domestic currency with just a wallet app.
🤔 Cash App supporting Lightning is a huge signal. It might be a case of "Jack just deciding," but it's also (potentially) taking 30m monthly active unique users along that ride. Just this week, Robinhood announced it will also support Lightning Network.
🤔 For the past few years Bitcoin has done nothing, while Eth and alt L1s had the spotlight, but what if Lightning becomes the network and international payments rail? But Bitcoin's slowness could be the feature, not the bug. It's committed to being maximally decentralized, and when Eth goes through the merge, we'll really see if Proof of Stake or energy-intensive Proof of Work networks are what wins over time.
🤔 Crypto has the ultimate format wars problem. It's not VHS vs. Betamax or Blueray vs. HD-DVD. It's Bitcoin vs. Eth, vs. Solana, vs. L2s vs. the world. Maybe things like Layer Zero and cross-chain bridges will start to solve that in time as different chains specialize in different things? But we risk recreating the maze of the financial system we had, and patching it together with interoperability.
🤔 If widely adopted, Lightning could be transformational for the global south. A single, open-source, near-free payments rail that could be supported by telcos, wallets or any software could open up regional trade that today is often flowing through expensive bank networks (or in many cases not happening at all because its too expensive).
Quick hit 🥊
One-click payments startup Bolt will acquire Crypto on-ramp payments company Wyre in an all-stock deal. To date Bolt is valued at about $11bn having raised $1.3bn. 🤔 WSJ notes Bolt has hundreds of merchant customers vs Paypal’s millions. Could this be Bolt buying revenue? I mean holy timing. Wyre has quietly powered a lot of Crypto infrastructure but has started to fall behind vs. the likes of MoonPay.
Good Reads 📚
It's a longer summary than usual, but there's a lot to unpack before reacting to it.
Regulators worry about DeFi, and DeFi users demand transparency, so what if there was a solution that actually leveraged the Web 3 stack to solve those challenges? Most consumers don't read public market fillings in the EDGAR database (financial disclosures for stocks). But could we do better with DeFi and Web 3?
Disclosure NFTs act as credentials that show a user has read and understood the disclosure (much like how Rabbithole is building on-chain credentials). These NFTs would also gate what tokens are available to that consumer's wallet. The NFTs would also compound; the more disclosures a consumer has read (and interacted with to prove they understand), the more confidence a regulator could have in the investor's sophistication.
Disclosure DAOs build frameworks for disclosures that consumers can understand, how this gets standardized into a token, and how DeFi protocols can consume those tokens from wallets.
🤔 Crypto as an industry has gotten good at lobbying, but now it's time to build answers to the questions regulators are asking and the rules they're about to set. We can see in Europe that if we don't get ahead of regulation, it will get delivered anyway. Yet the nature of Crypto is to reward transparency and the use of the technology itself. So why don't we build disclosure credentials?
🤔 Let's f*cking build this! Seriously, why not? This is the thing the regulators want, but there's an opportunity to seriously upgrade financial literacy, inclusion, and how financial markets work with disclosures. If Gary Gensler and the SEC are so worried about consumers, let's massively boost consumer protection.
🤔 Chris Brummer (the author) is up for working with some folks to get this done. So reach out if you're working on something already or ready to build.
Tweets of the week 🕊
That's all, folks. 👋
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