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Hey Fintech Nerds 👋

Life is full of contradictions.

In a single week, Meta partnered with Polygon, and a DeFi company got a credit rating from Standard and Poors (arguably a sign of legitimacy).

But.

Coinbase has done $700k of NFT sales since its launch a month ago (lol). And Stablecoin UST lost its peg against the dollar, dropping to $0.33 and still in crisis (covered in things to know). And with prices down across the board, the mood music is negative.

The level of despair on my Twitter timeline suggests the swarm is capitulating. And sure, Crypto prices were down 50% from their all-time high in 2021. But if you were only here for the price and the hype, good riddance. If your investments are down, sorry for your loss but also, please never invest money, you can't afford to lose in a speculative early-stage asset class.

A good chunk of people could now rage-quit web3. And that's healthy.

Long term, the prospects for web3 are really exciting if you can look away from the price tickers for a second.

Because between 2018 and 2020, some fantastic things got built quietly on the back of the hype and investment from 2017 (Alt L1s, L2s, DeFi, NFT marketplaces, and more). I'm excited about what will be built in '23 and '24 with the capital and talent injection from 2021.

And I think we could cross the chasm next go around.

The book crossing the chasm shows an adoption cycle for new technologies, where some sections of the population adopt new technologies at different times. Innovators (2.5% of people jump in first), followed by early adopters (13.5%). The 16% of "people who want new things" are separated by a chasm from everyone else who wants "complete solutions and convenience."

In the US, Crypto adoption stands at around 22%, and in the UK, it is 20%. By these statistics (cited from NYDIG and Coinbase), we've crossed the chasm for Crypto as a speculative asset class. Crypto was in 2017 for the early adopters and in 2021, for everyone else, a speculative asset.

But web3, the next frontier of the internet that users own with wallets and tokens, is still very much in the early adopter stage. It has horrible UX and is slow and expensive. It has negative ESG credentials, and the regulatory environment lacks certainty. Give that 5 years and see what happens.

The next version of web3 won't look like web3 at all. It will look like useful products that just happen to use web3 infrastructure. And we saw this movie with Web 2.0. Cloud, mobile, and particularly social were "all hype" in 2007 but taken much more seriously in 2010.

But by the time you're watching Netflix or Youtube on your TV while sending memes to your friends on your iPhone, you're not sitting there thinking, "Oh, I'm so glad cloud, mobile, and social enabled this experience."

Because when it is ready, the tech disappears.

But by then, the early winners already exist.

And they survived winter.

There are lots of Crypto projects with a big old war chest ready for winter.

Here's to 2025 🥂

(Long one again, click here for the website version if GMail clips the content)

Weekly Rant 📣

Fintech in the great reset - How's your business model?

Fintech was the hottest category in the everything bubble. Investors piled $168bn into Fintech in 2021, representing 1 in 5 VC dollars. Mega rounds of over $100m 2x'd to a record 343 deals.

The FOMO was real; the deals were happening at an alarming pace, and companies could raise $100m+ with $600k of ARR. In retrospect, a correction was inevitable.

And just about everyone agreed we were living in a bubble.

I remember running a debate for Empire Startups in NY in October of 21; the two arguments were "yes, we are in a bubble," and "no, we're not." And "team no" had a tough job contorting themselves into reasons why they were in anything other than a bubble, focussing on the long-term value of Fintech.

There's also a good deal of consensus about how we got here.

Long-term low-interest rates created a ton of cash looking for yield. Central banks had consistently cut interest rates in response to recessions through the 90s, 2000s, and 2010s, and those rates had not recovered to historical norms. This meant investors couldn't make a return in low-risk investments and had to seek a return in higher-risk assets (like stocks, private companies, and even Crypto).
This meant VC as an asset class expanded. VCs had successfully raised, moving from a niche asset class to raising multi-billion dollar funds looking for the next unicorn and home run. Massive Silicon Valley companies like Google, Amazon, and Facebook have shown that tech as a sector can disrupt industries and create enormous opportunities for investors.
And we saw companies go public later because they could afford to. Historically companies would IPO when it became clear their growth phase was slowing, and it was time to find profitability. Stripe still hasn't gone to IPO, and its last valuation was $95bn. By the time Nubank went to IPO, it was valued at over $40bn. Most of the growth in companies happened before the general public or stock market investors could buy-in.
This led to funds that invested in public markets entering private markets. The "crossover funds" like Coatue and Tiger realized they could get higher valuation gains in the private markets than when the stock went public. This added to the already competitive VC sector (and investors who might not be looking for returns quite as high as those required by VCs in some cases).
Big Fintech IPOs and exits validated the category. Visa's attempted acquisition of Plaid for $5.3bn showed there were buyers for Fintech businesses that would create home-run economics for investors (A really, really good return).
Then the accelerated Fintech usage massively. Services like Cash App and Chime became a lifeline for consumers and helped distribute stimulus checks. The suppliers to this ecosystem also benefitted as their customers grew, and every company became a Fintech company (Galileo and Marqeta, for instance).

Fun times.

Then inflation came, then the Ukraine war made inflation even worse, and interest rates started rising. The first thing to take a hit has been tech, particularly* Fintech. Whether we like it or not, VCs and investors do somewhat index valuation from what is happening in public markets or the latest exit activity.

*(Side note: I find it so funny how Americans say particular (PAR-tic-u-LAR, you crazy yanks).

And it's probably fair to say things got a little silly, didn't they?

But where does that leave us, and where are we headed?

Fintech stocks look dead but are they?

It depends on your time horizon and conviction in macro trends.

Robinhood is down more than 80% from its high, Affirm has dropped from $163 to $20 per share, and Block from $273 to $83. Things look ugly for folks who invested 12 months ago near the highs. And it's not clear this inflation will go away any time soon. Things could still get worse before they get better.

But if you zoom out on the older companies, many are trading in their pre-pandemic range. If you zoom way out, you'll see tech always takes a hit when markets correct.

In the .com bubble, it was e-commerce. Amazon got as high as $85 in 1999 before dropping to $10 in 2000. Sure, not every Fintech business in public markets has the potential Amazon had, and Amazon wasn't a sure thing by any stretch, but the macro trends were.

Do I believe Fintech companies can get as big as the big tech? Possibly but probably not. Fintech companies have a ton of regulation and friction, making international expansion much harder. That said, who knows, the Fintech infrastructure space is starting to really become global lately.

Every cycle has this moment.

In the global financial crisis, social, mobile, and cloud looked dubious. The Blackberry was a serious business machine, and the iPhone was a toy. Social was never going to generate real earnings, and no enterprise would ever use the cloud because it was not secure.

In Q1 '22 Meta did $27.9bn of revenue and a net income of $7.5bn. AWS did $18.6bn of sales and $6.5bn in earnings. Again, I'm not saying Fintech can hit these highs, just that everything looks bad when the market turns against growth companies.

In 2012 when Facebook went to IPO, I worked for an old school Fintech infrastructure company. It was an incredible learning experience on the fundamentals of finance infrastructure, sales, business, and more. Like many payments companies, this one delivered solid growth and margins and mainly sold to banks.

Being the bold young (ish) "head of innovation," I confidently exclaimed that I was buying Facebook shares to a chorus of laughter and anticipation that it was a sure money loser. I'd send around things like Stripe or Square to the M&A team, but it always felt like we spoke different languages.

For the M&A team buying businesses to augment what you do differs from betting on growth. For the sales teams, unless they could sell it to a bank as a buyer, the business model didn’t make sense because their time horizon was this year. (I’m being slightly unfair, there were some longer-term thinkers in the team of course, but the prevailing corporate culture is the point here).

During that time I learned incumbents often won’t understand innovation, and will line up to cheer when tech takes a hit.

But I also learned another crucial lesson.

My boss at the time told me the old maxim revenue is vanity, and profit is reality.

In a world where valuation has been vanity and revenue is scarce, maybe a return to the true fundamentals and a focus on the business model is a good thing.

Fintech has some great business models.

Payments can be a great business model. Long term, companies take a % cut of their customer's payment volume as revenue (e.g., interchange) essentially grows with their customers or the economy. This works for incumbent providers and new entrants.

The question in payments has now become, how many problems can you solve adjacent to the payment to gain the transaction revenue. Chime allowed customers to get paid early, Ramp and Brex built expenses cards that just work, and Revolut and Wise created travel cards that didn't have insane fees and spread.

These businesses are attacking the TAM of incumbents and creating new categories. In 2021, Wise did £421m ($519m) in revenue and £109m ($134m) in earnings (with a 54% CAGR on top-line revenues). It is currently trading at a £3.5bn valuation in this market.

Revenue is reality, and profit is sanity.

But not all business models are created equal.

Sticking with cards to keep things simple. Interchange revenue varies by customer type and geography significantly. European businesses get a meager 0.3% of domestic transactions, while the rate can range from 1.5% to 2.5% in the US. Credit is also higher than debit, and corporate card interchange is higher than consumer.

So a corporate credit card is a high revenue place to be. But customer acquisition costs are higher, and fewer customers are in the market. But solve problems, get the payment, win.

Lending can be a good business model, but it's much more challenging. Growth is easy with a lending business; you're giving people money. So long as you can fund that lending, you'll keep getting new customers, and some will even pay you back. Everything is "up and to the right" until it's not.

The question with lending isn't will I get paid back by my customers when times are good. It is. Will I get paid back when times are bad? Private equity always understood lending businesses well, and the returns are often in the % range rather than multiples (like 2x to 10x).

In this Fintech cycle, we've seen BNPL, "Lending-as-a-Service," and even "tips" emerge as a form of lending but that isn't really lending. Each of these categories commanded venture multiples. And heck, it may have re-invented financial physics. But I doubt it.

Lending-as-a-Service is really a SaaS business, and if it can be an infrastructure provider, that's a slightly different thing. But if it's selling debt, I wonder about its long-term viability. Lending marketplaces have existed for a long time, but they never seem to hit the scale of true marketplaces in the consumer/tech company sense. Maybe that's an opportunity, though.

BNPL is attacking credit cards, and being used correctly is a miracle for consumers and merchants. The issue is, what happens when people rely on it? How do we know how many BNPL accounts a customer has and their exposure? In theory, reporting all of this to rating agencies might help, but BNPL could lose a lot of its shine if we do head for a recession. I still think it's a major upgrade vs. credit cards in many cases.

Jason Mikula wrote a great case study on "tips" and how one company has been issued a cease and desist by regulators in Connecticut. The idea of paying for lending with a "tip" is the kind of dodgy shit that makes all of Fintech look bad. Stop it, people.

Some business models are good, some bad, and some ugly.

So what’s yours?

Running counter to the business model point, there’s still a ton of dry powder out there in VC land.

VCs and investors don't lack cash.

Data from pitchbook NVCA venture monitor showed VCs had $230bn to invest in December 2021. All of that cash has to go somewhere. It might get deployed slower or for better valuations, but very few investors will turn around to their LPs and say, "here have your cash back." (And the sincere, great humans who do often end up not being celebrated for it).

But now more than ever, there's a focus on traction. Can a Fintech company consistently show revenue growth month on month? Can they show positive unit economics? Yes. But not all of them.

No doubt there are companies with enough market share that can show significant revenue growth and currently have a high valuation. Those companies may also have a lot of cash in the back to focus on growth without worrying about runway.

And then some will fold, sell or die slowly.

But the talent that works at them won't.

But the TAM of Fintech is still utterly staggering. ACH volumes are still in the hundreds of trillions of dollars and barely touched by cards. International payments are still broken, and we're only just scratching the surface of banking for corporates and capital markets.

Instead of looking overpriced, Fintech is already starting to look cheap in public markets.

What happens when we build new infrastructure, new rails, and internet native Fintech (like web3)?

There will always be great opportunities for those willing to bet on innovation.

Buying market share is cheap when markets are small and expensive when they're big.

A lot of things that look silly today might be category winners tomorrow.

Fintech is dead.

Long live Fintech.

ST.

4 Fintech Companies 💸

1. Raincards - The corporate card for web3 startups

Rain wants to build a multi-chain, multi-wallet spending card to "support projects wherever their treasuries are." Rain is initially targetting DAOs with the corporate card and spend management tools you'd expect in Ramp or Brex.

🤔 This is already a competitive category, with Multis and Starlight coming to mind as competitors. Then there are all Payroll and dashboard companies like Utopia or Riseworks. Given Crypto tokens are down at the moment, I'd imagine DAO treasuries are being conservative and not spending heavily. The market may yet come back the other way, and DAOs will grow massively again, but if not, these companies need to appeal over the long term. My sense there is pragmatism wins. Folks who can manage traction, compliance, and web 3 native rails have the best shot.

2. Streamlined - Stripe for B2B payments

Streamlined allows companies who sell to other businesses to offer online payment acceptance against invoices. Instead of being card-based, Streamlined supports ACH, check, and card. Payment providers often miss the link between the invoice and payment schedules. Streamlined links them at the sale.

🤔 Many Fintech companies are shifting ACH payments to spend management cards, growing incredibly, but ACH is still massive. A whole category of buyer-side tools helps solve these issues (CFO tools, spend management, and more). But the payment acceptance and invoice linking are perhaps still under explored. (Streamlined also reminds me of balance that also does something similar.)

3. Spruce - Decentralized Identity and Data Storage

Spruce has two products. SpruceID is a set of open-source tools to allow users to control their identity anywhere. Kepler is a decentralized storage system putting users in control of where data is stored and who can access it. Spruce works across Polygon, Ethereum, Solana, Celo, and Tezos.

🤔 Spruce is already showing some momentum. Spruce built "sign in with Ethereum," aiming to compete with centralized services like "sign in with Google" to make web3 backwardly compatible with web 2.0. They're also partnering to build Verite, a product offered by Circle and Coinbase that allows individuals and institutions to have "compliant DeFi." I'm really enjoying their developer blog series and how much is on github to take a look at. They're essentially repackaging lots of tools and frameworks into something useful.

4. Cheq - User-friendly Crypto payment acceptance

Cheq is a very simple stablecoin and Crypto acceptance integration for e-commerce merchants. Merchants can either create a payment link or embed in their website. A user simply connects their wallet and clicks pay, which can set up one-time or recurring payments. Cheq does not charge a transaction fee (although users may incur gas or network fees). Cheq is aimed primarily at businesses in the global south who find it hard to collect US dollars and sell to a global audience.

🤔 Plenty of businesses focus on "collect in Crypto, payout in dollars" (e.g., Bitstamp) or checkout for NFTs (Moonpay) or in-app conversion (Ramp Network). But what about just collecting Stablecoins as a merchant, super simply? Stripe now does this, but alongside everything else, it does. The simplicity of Cheq is, for the time being, a feature. Long term, they may have to start to think about compliance and risk. They're early, but things like this always have a "what about if someone uses you to buy nuclear weapons" compliance risk.

Things to know 👀

1. Stablecoin TerraUSD (UST) is losing its peg against the dollar.

UST hit $0.65 on Monday, and its sister token LUNA has lost 30% of its value. UST is an algorithmic stablecoin that mints or burns tokens that should, in theory, hold against $1. The LUNA foundation has been on a public journey to build Bitcoin reserves to help back the stablecoin. Commentators like the Swan Bitcoin CEO have called Terra a "confidence game" owing to the outspoken nature of the Do Kwon, the CEO of Terraform labs.

🤔 UST worked on a mint and burn mechanism using its sister token LUNA. LUNA token is tradeable for UST. If someone sells UST for LUNA, then LUNA is “burned.” This means there is less LUNA, and LUNA is more scarce, so the price should go up. In a case where UST would fall below $1 users are guaranteed by the network they could always exchange their UST for the sister token LUNA. In a market where LUNA is scarce, this means users get a profit. But what happens if everyone suddenly sells both UST and LUNA? Well, that’s what happened.
🤔 Investors looking to pull out their UST and Luna will drive the price down and create a vicious cycle. The problem with “mint and burn” is it struggles with big market moves. This is why tokens like DAI are over collateralized (to get 1$USD, you need at least $1.3 worth of ETH as collateral).
🤔 The confidence game is losing confidence. UST offered incredibly high rewards for investors (in the 10 to 20% range), but if something looks too good to be true, it often is. Some are speculating there is hostile capital (read: a big investor trying to crash the prices to make a profit on the way down). But Luna only worked when prices went up. It wasn’t ready for shocks and now it looks a lot like a run on an emerging market country.

🤔 It is critical to separate UST from other types of Stablecoin. Dollar-backed Stablecoins like BUSD, USDC, and USDT all have dollar reserves held somewhere, so a $1 Stablecoin is always redeemable for $1. Asset-backed Stablecoins like DAI hold more than $1 worth of assets like Bitcoin, Ethereum, and other Stablecoins to maintain their US Dollar peg and deal with volatility. This is not how UST has worked, but that might be changing.

🤔 Terraform labs and the Luna Foundation Guard (LFG) are attempting to do this by buying Bitcoin and actively trading to maintain UST's dollar peg. But this is not linked to UST's "mint and burn mechanism." In other words, UST now has to switch from an algorithmic stablecoin to an asset-backed stablecoin. If UST doesn’t completely vanish, then what happens? Obscurity or something stronger emerges?

🤔 You can see why central banks like the Fed and Bank of England are recommending Stablecoins hold enough capital to manage the risk of a "bank run." But the takeaway is not all Stablecoins are the same. Some are riskier than others.

🤔 Market sentiment is that UST is death-spiraling. Maybe it is, but you have to say that it is holding up better than some banks during the Global Financial Crisis. It is in crisis, but it still functions. Crypto has risky edges, but so does all of finance. Bear markets teach lessons and make more robust ecosystems. This is a great lesson.

2. Stripe built a "plaid competitor."

Stripe connections will allow its customers to link to their bank accounts to access financial data or speed up certain transactions. Things like checking account ownership or pre-payment checks, and accounting integration can all be managed with this data.

🤔 The DRAMA seems to have cooled down, but whoa, was that a fun one to watch 🍿. In case you missed it, Plaid CEO Zach Perret took to Twitter to accuse the Stripe PM of having interviewed with Plaid, taken notes, and then built a competitive product. Although Zach later deleted this tweet and is now assuming positive intent.

🤔 My sense is that this is more about powering Stripe's core business (like ACH and loans) than getting into a war with Plaid. Long term, will they potentially displace some customers who otherwise would have gone to Plaid? Perhaps, but in finance infrastructure, everyone is a frenemy (this warrants a rant someday). The reality is Fintech operators are mobile, and Plaid stands on the shoulders of those who came before, like Yodlee. Stripe entering the space is validation for Plaid more than anything.

🤔 Although nothing is stopping Stripe from launching an account-to-account payment rail over open banking. Open banking as a payments rail has long been mooted as the long-term revenue engine for Open banking. In Europe, it is already a regulated requirement, and Plaid has now started to increase its payment capabilities. There are also new companies launching specifically for account-to-account payments. Stripe may offer the best product for Stripe customers, but there's a ton of room for everyone else.

🤔 The new use cases when you mix data and payment are the exciting future of open banking. The whole category of startups linking being paid to money movement is built on the back of being able to access account data. For Stripe customers, having all of this in one ecosystem may be simpler and easier to use. Having an infrastructure, they can use as they see fit may be better (like Plaid or MX) for everyone else.

Good Reads 📚

1. The IMF Financial Stability Report, April 2022.

The IMF financial stability report covers the war in Ukraine, Central banks in emerging markets, the rapid growth of Fintech, and the challenges to financial stability. Inflation was already high and hard to control, but combined, Russian and Ukraine produce 30% of the world's wheat exports and 60% of the world's sunflower oil. This is going to get worse before it gets better.

Of Fintech, the report says that Fintech companies can reduce cost and friction for consumers and businesses while increasing competition and efficiency. The downside is that Neobanks can take risks they are not fully regulated for and put added pressure on incumbent banks. But, policies must target both incumbents and Fintech companies proportionately are needed.

The report says that DeFi is clearly lower cost and more efficient than traditional finance (!!!!), but it also has a much lower liquidity buffer than traditional finance, making it riskier. DeFi lives in a world of legal uncertainty, but regulation should focus on Stablecoin issuers and centralized exchanges. DeFi platforms should create robust governance and embrace industry codes and self-regulatory organizations.

🤔 I literally punched the air when I read that last sentence on DeFi self-regulating. This is a quiet recognition that DeFi projects with no central management do not easily fit in any jurisdiction. But DeFi projects still have risks to manage. The best way to do this is with strong governance and self-regulatory organizations. What does the self-regulatory DeFi DAO look like? I want to build this on top of Global Digital Finance's codes of conduct. Get in touch if you do too.

🤔 Regular readers will know that I object to the term "level playing field" thrown around by bankers and policy people, but it seems to have stuck. Again, the IMF essentially says that Fintech companies have risks, but banks have to upgrade their infrastructure and support Fintech companies. In other words, get your act together, banks, the Fintech companies are here to stay, and you're still on the hook ultimately for the financial system.

🤔 There has never been a more critical time to pay attention to financial stability. "Financial stability" sounds boring but is incredibly important in times like those we live in today. Don't forget that China is in the middle of a real estate crisis and COVID lockdowns. Commodity prices are spiking, inflation is out of control, emerging market central banks are creaking, and we're still trying to deliver on COP26 and climate change against all of this.