Fintech 🧠 Food - 17th Oct 2021 - Moonpay raises $400m, Bolt $389m and why open banking is bigger in the US than Europe
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 8,655 others by clicking below, and to the regular readers, thank you. 🙏
ICYMI, I've spent much of this week in the US, first in Atlanta, where the fine folks at Jack Henry hosted me at their annual conference. Then I headed to the bay area, where I had the pleasure to meet some readers of Brainfood. It's been a blast. What wasn't a blast was trying to do a keynote with wifi on a plane. Thankfully it was saved by 11:FS Pulse.
🔌: I was pulling together a keynote and thought to myself, "I'm sure Robinhood uses Plaid during its onboarding. But I'm not a US citizen; I don't have a Robinhood account. So I logged into 11:FS Pulse, searched for Robinhood, and there it was, a full video of the entire user journey. I then picked a couple of screenshots and dropped them into the keynote pack. It's an 11:FS product (so I would say this), but damn, Pulse is handy if you're in Fintech. I was surprised this week how few of you had heard of it, so why not go ahead and get yourself a demo.
Weekly Rant 📣
Open banking is bigger in the US than in Europe.
I've had countless conversations in the past week where people tell me "Open Banking is a European thing" or "We don't have Open Banking in the US." I disagree.
You don't have regulated Open Banking in the US. Yet. But the real live customer use cases are at a much larger scale.
The definition 📑
Is Open Banking a regulatory thing? There's plenty of regulation out there, and its wording has a lot of nuances. But I think Open Banking (and Open Finance) is more about the consumer and customer use case and impact than regulation.
If a customer can access their account(s) data, to do something new, for me, that's "open banking." If they can access accounts not provided by a bank (e.g., lenders, investments, insurers), that's "open finance."
We should look at the regulatory definitions, too, because they create a lot of confusion.
PSD2 (Payment Service Directive 2), Open Banking in Europe, was defined as "consumers have the right to use any third-party provider for their online banking services." It perhaps took on more life in the UK when the competition markets authority ruled all banks must share current (checking) account data and payments capabilities and set a deadline. So in effect, in Europe, all banks have enabled you as a consumer to allow a 3rd party to access your checking account securely, to see transaction history, or make payments on your behalf.
Dodd-Frank had section 1033 "requires covered financial services providers to make available to a consumer, upon request, information in the financial services provider's control concerning the consumer financial product or service obtained by the consumer." This ruling has been open to interpretation, leading to many FIs making sure they have a process to send a customer their data if they request it. But change is coming. The CFPB has published an advanced notice of rulemaking, meaning that regulated "open banking" is coming to the US.
In fact, it's more likely to be regulated "open finance" since the underlying legislation speaks of financial services providers, not banks.
Open banking and open finance have regulations but can't be defined by them alone. If we're to compare the US and Europe, what does the data say?
The data 📈📊
Finding data to compare Europe and the US directly is challenging. These are probably the two best data points I could point to
The UK: The Open Banking entity in the UK reported 2.5m consumer users in January of 2021. That's against an adult population of ~35m.
The USA: The Financial Data Exchange says it has 22m accounts linked to its APIs.
The USA: When the DoJ filled the Visa / Plaid complaint, it noted Plaid had connections with more than 11,000 banks and 200m bank accounts.
It's hard to read too much into accounts linked vs. actual end-users. In theory, every account in the UK is linked to open banking, but is anyone actually using it? Clearly, some are (entire businesses with 100s of thousands of customers rely on Open Banking).
So if the data doesn't make my argument that open banking is bigger in the US than in Europe, I will look at use cases and impact.
The Use Cases 📱
Personal Finance Management (PFM): PFM got a bad wrap in the early 2010s for mostly pie charts of how customers spend money but not being actually useful. Since then, apps like Snoop or Plum in Europe or Copilot.Money in the US has carved out a space as a financial overlay that helps customers save more. "Help me build up a savings pot" is consistently one of the top consumer Jobs-to-be-Done and apps that deliver on that win.
By connecting to bank account consumers, can round up their everyday spending, sweep into savings account on payday, or even make a one-off saving because the apps AI figured out it would be a good time to do so. These apps are relatively popular in Europe and the US and justify either a monthly subscription or cross-sell into savings and investment products.
Europe got there first and arguably has more traction, but the US is catching fast.
Low-key KYC: When you sign up for a new Fintech App after providing some basic personal information and account information, it has become common in the US to "connect your account with Plaid" during the enrollment process. You see this in everything from Robinhood's onboarding to the earliest stage Fintech apps. Consumers benefit from a much faster enrollment process, and the Fintech company can validate that "you are who you say you are" in the same way as if you used your bank statement as proof of address and identity.
This streamlined onboarding has, in my view, dramatically increased the conversion and sign-ups for Fintech Apps in the US. While services like Alloy and Socure have been crucial to wider onboarding, quickly validating with low-key KYC has been transformational.
You don't really get this in Europe.
Alternative Underwriting: For decades, a large part of whether someone could get a loan depended on their previous loan performance. Banks and lenders rely on credit data agencies (e.g., Transunion, Equifax) to report credit scores as a proxy for a consumer's creditworthiness. One number can make such a difference to your ability to get a car or a mortgage.
Credit underwriting is made of two elements: affordability (can someone afford to repay a monthly loan amount) and creditworthiness (is someone likely to repay). The implication is someone with a low income who pays their bills on time may actually be at lower risk than someone with a high income that never pays their bills.
In the past couple of years, it has been increasingly common for a Fintech company to ask consumers to link their bank account to apply for a credit product, even if they don't have a credit score. For example, Tomo credit will advance a consumer $100 if they link their bank account. It then reports the successful repayment to the credit rating agency to allow them to build the score. We now see companies like Petal in the US and Credit Kudos in the UK spinning out Open Banking-based underwriting as a service.
Arguably the US got here first, and it's much more mainstream to see "credit builder" products in the US; we don't really get them in Europe.
The Impact 🥊
If you look at the actual end-consumer products available, open banking has already had much more impact in the US than in Europe. That's not to say the US model is perfect, far from it. Around 25% of open banking transactions use screen scraping in the US, and some banks and FIs are actively trying to resist the change. This quote from Michael Bilski, CEO of North American Banking Co sums up the attitude for some in the banking industry:
"I truly believe it is my data, and I don't have to share it, and I don't have to give it to my customers if I don't want to."
As I look at Europe, I see creativity, with apps like CoGo, allowing consumers to see the carbon impact of their everyday spend across multiple bank accounts.
But Europe's feather in the cap is payments. European banks are mandated to allow 3rd parties to instruct payments on behalf of a consumer, and this has essentially made open banking a new, low-cost payments rail. It hasn't been used at scale yet, but you can pay your taxes via Open Banking in the UK or fund your favorite fintech stock trading app. There's also much more competition between providers and much more regional variation.
What comes next? 👀
In the US, there's a whole "Plaid for X" category. When Visa tried to acquire Plaid, they validated the market to VCs. Genies don't go quietly back into bottles. So I think we'll see much more in open finance, from MX, Finicity, Plaid, and now the Payroll APIs and other providers. Consumer data is being unlocked, first by screen scraping, then with tokenized APIs.
The big open opportunity is payments; if the industry can create another rail that dramatically improves UX or alters the economics, that could be a game-changer. I love open banking payments as a rail because it is potentially much more programmable than the existing card rails. When you combine the ability to fetch a user's account history with a payment, exciting things could happen.
I've written before about "one-click underwriting and BNPL." In essence, you'd combine the alternative underwriting capability of open banking with a one-click checkout experience. I also think about what it could mean for advertising and loyalty. The checkout buttons and BNPL providers have done wonders for driving conversion at checkout and repeat purchases, but what happens if I see more data about transaction history? The most exciting thing is the unknown here.
Another thing I like open banking (and finance) for is the on / off ramp between Crypto and Traditional Finance. Cards are an imperfect route between the two worlds. Cards are old-school and can't easily carry data payloads. Because open finance combines data and payments, if you wanted to build a bridge between DeFi and TradFi, open banking would be a better way to do that. You get a more complete financial picture of a consumer or business's TradFi life.
In Europe, we're already seeing the beginning of open banking payments. The recent launch of alternative underwriting from Credit Kudos is a big step, and the use cases are slowly gaining traction. The infrastructure is there, but something about the last mile execution by Fintech (and non-finance) companies just doesn't feel quite right. The UK (outside of payments and B2B Fintech) has lost a bit of its Fintech mojo.
I'm curious to see what happens in France, Germany, and especially the Nordics in the coming years, though. The Swedes especially have a track record for sleeper hits that become Unicorns.
If you're a bank or FI in either market, ignoring open finance and hoping it will go away isn't an option. If you're an entrepreneur, the time to build is now, so have a play with the APIs. And if you're following along with popcorn, me too. Fun, isn't it?
4 Fintech Companies 💸
1. Parcel - Treasury and Payroll for Crypto (DAOs)
Parcel allows Crypto native groups (like DAOs) to manage payroll, regular payouts, and their Crypto treasury and assets. It already counts some of its customers' largest and most well-known DAOs (like AAVE Grants and Friends With Benefits).
One of the biggest challenges for the new Crypto native businesses is managing to do things we would take for granted, like pay contributors and everyday items. The Crypto tools (like gnosis safe) allow stablecoins and tokens to be held and managed, but they're not built for the back office of a DAO. If your entire business is Crypto native, Parcel is a great solution. However, I suspect we will see more businesses that want to straddle the old world and new and will wrestle with things like W2 employees, 1099s, and the paperwork that comes with that.
2. Utopia - Treasury and Payroll for Crypto (DAOs)
Following the trend, Utopia is a service that allows DAOs and Crypto natives to manage payroll, expense reporting, and even receive and manage invoices from contributors. They intend to add fiat currencies and "real-world compliance." Services like this allow DAOs to remain truly Crypto native.
I imagine both Parcel and Utopia will add more "real world" backward compatibility with compliance rules and regs in time. The next step would be for some of the "Web 2.0" businesses in Crypto (like wallet providers or exchanges) to begin to adopt this type of toolset. A "modern treasury meets Brex.com" for Crypto, and real-world assets is an exciting opportunity for whoever can execute.
3. The Guarantors - Renters Underwriting and Deposit release
The Guarantors has two core products, firstly it provides a "least guarantee" to allow renters who need a guarantor to successfully rent a property. Secondly, it lets renters unlock their security deposit for a small fee.
The security deposit can be the most financially challenging part of moving to a new property for renters. Often it can take weeks or longer to get the old security deposit from the previous property unlocked before moving into the new one. That's on top of the cost of moving, furnishing, and all of the new bills to take on. The advance becomes a real unlock for renters. It's a slightly different model to the UK's fronted, which essentially helps customers raise a new deposit and pay it back monthly (which may be more elegant for those who don't have the cash in the first place).
4. NayaOne - The UK Fintech API Marketplace
NayaOne is a collection of APIs and synthetic data from UK Fintech providers and challenger banks. The idea is that if you're a Fintech company looking to prove your new AI widget can prevent fraud or remove costs for financial services companies, you can use the APIs and data in NayaOne to do just that.
One of the hardest things to do as a Fintech company is to access the scale of data required to train an AI model. A new credit underwriting engine that uses "AI" might use a fancy algorithm, but it needs a massive data set to really prove its worth vs traditional underwriting. NayaOne, formerly known as Fintech Sandpit, has partnered with the UK regulator and several large banks and Fintech companies to make large synthetic data sets available. Imagine if the CFPB did something like this around Open Banking in the US 🤔.
Things to know 👀
At just 3 years old, MoonPay has raised $400m from Tiger Global and Coatue. Moonpay allows users to pay by credit or debit card (or digital assets) on marketplaces such as Opensea. Launched in 2019, Moonpay supports more than 80 asset types.
🤔 Moonpay is on other markets, but no doubt Opensea is the majority of their volume. Opensea and Moonpay remind me of how eBay bootstrapped online payments with PayPal. I doubt we'll see Opensea look to acquire Moonpay, but placing the "fiat onramp" right next to the current consumer obsession (NFTs) makes complete sense.
🤔 Tech valuations are nuts right now (especially when you add Fintech x Crypto into that). Still, something like Moonpay as an "onramp" into Crypto feels directionally correct over the long term.
🤔 I don't think Crypto wholly replaces fiat payment types any time soon, but I do think Crypto is where a majority of payment growth will move in the coming decades. Old payment types don't die; they erode. Cards have slowly made their way to about 50% of consumer payments, and they'll get there on B2B too. Crypto will solve for new payment types, new asset types, and cross border in ways the current infrastructure can'.
🤔 In the same week, competitor Ramp raised $30m at a $300m valuation, four months after a $9m seed led by Galaxy Digital. Ramp's HQ is in London, but the majority of its operation is in Poland. These guys are often overlooked, and they're focused on growth and network effects. Something about the eastern European work ethic I like here. If we are in a bubble, those heads down, focus on building a business may last the cycle. (I have no relationship to Ramp, FWIW).
Bolt is a "one-click" checkout button for consumers that competes with Shopify's Shop Pay and Amazon's one-click checkout. Bolt currently has 10m shoppers and believes that its current partnerships can be 100m shortly. Bolt takes a 2% fee from all purchases using its button.
🤔 Checkout in e-commerce has become a bit of a nightmare. There are so many payment buttons and janky experiences that cart abandonment remains a problem. The BNPL providers were the first to help merchants solve abandonment. But Bolt makes me wonder if the innovation was adding BNPL or just massively streamlining the experience. If you've never used Shop Pay or Bolt, you should; it's like magic. Click, enter a quick code done.
🤔 Whatever happened to Fast? Fast.co was all the rage about 6 months ago. Their marketing was everywhere, everyone had a hoodie, but I haven't seen it at a checkout yet, have you? Great marketing will always get attention, but traction always wins in the end. Maybe they're heads down building, which is a good thing.
Good Reads 📚
If the selves in your local supermarket look bare, it's not just you. Ships are stuck waiting to get into ports, we have a shortage of truckers, and retail outlets are low on staff because stores have a policy of vaccination that not everyone is following. Supply chains depend on ports, ships, and trucks, all delivering the same amount of stuff at the same speed. But like a highway with an accident, it can take a while for the traffic to clear if something disrupts it.
As a result, the price of everything is going up, day by day, drip by drip. A consequence of this short-term price increase might be that we see more locally-grown food, more locally manufactured parts. Or this may just be a temporary blip, and we go back to ordering everything from China to be shipped to your door, pushing the real cost of production into the atmosphere in the form of C02.
🤔Workers are becoming more expensive, stuff is becoming more expensive, increasing prices. Prices often go up but rarely come back down. Typically, the FED and central banks will raise interest rates to cool the economy when inflation hits. But the FED has resisted this change for fear of setting the economy into a deep recession at a time when supply chains are vulnerable.
🤔 Central banks believe inflation is temporary and will go away when supply chain issues are resolved, but the bankers think inflation could be here to stay. Morgan Stanley's CEO wants us to "prick the bubble" by raising rates sooner. Suggesting that we are in a stock market and asset price bubble.
🤔 If interest rates rise, risky assets like tech stocks would probably decrease in value. We'd also see in an "everything shortage" raw materials like metals, lumber, and food increase in value. From here, one of two things happens, the recession is deep, and there is a long rebalancing, or the central banks quickly lower rates again to get the economy moving again. Historically that second thing happens. For this reason, I think central banks can't "hike" rates or prick the bubble; there's too much leverage in the system.
🤔 Even if you discount every tech company by half, the earnings trend is fascinating if you zoom out. Public companies like Square and PayPal keep crushing earnings. No doubt things are being funded in this Fintech bubble that isn't really driving revenue. Do we need 35 BaaS providers who do debit cards? Probably not. But there will be category winners and likely several of them. Valuation is vanity, revenue is reality, profit is sanity. If you look at the public markets, the winners in Fintech can produce incredible earnings and profit growth.
🤔 Increasingly, institutions are seeing Bitcoin, not gold, as an inflation hedge. Everyone has their own story or belief for why Bitcoin has value, but the "inflation hedge" argument is a hot one right now. Arguably, Bitcoin could also be rising because too much capital and low-interest rates in the market are pushing investors to speculate. We'll learn a lot when interest rates do rise.
Tweets of the week 🕊
That's all, folks. 👋
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