Fintech 🧠 Food - 21st Nov 2021 - Amazon Vs Visa, Constitution DAO'nt & How to do stuff that doesn't suck as an incumbent.
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 9,410 others by clicking below, and to the regular readers, thank you. 🙏
☀ gm. Hey everyone, hope you had a great week? Mine has been absolutely stacked. We're firmly in the "use up the budget before the end of the year" season, and it shows. Still, super excited to have some very large (and smaller but exciting) clients and prospects to work with, changing the fabric of finance.
I enjoyed this week on Twitter watching countless Fintech OG's like Frank Rotman and Matt Janiga get involved in Crypto because of the Constitution DAO (📜,📜). It felt like Crypto passed another moment of mainstreaming, and watching incredible, tenured talent come into the space with humility was frankly a joy.
My sense is that in 10 years, Fintech will be a subset of Crypto, whereas for now, it's still the case that you guys give me more clicks if I talk Fintech than Crypto. But maybe that's audience bias. Who knows. 🤷♂️
Weekly Rant 📣
Do stuff that doesn't suck
In a conversation earlier this week, someone asked me how a bank could be relevant in the 21st century. My answer was playful but also intentional.
Most incumbents do three things consistently.
Copy innovators slowly enough to not lose all of their customers immediately
Great innovation projects that never make the light of day
Terrible innovation projects that get launched (and probably started as a great idea)
Despite spending billions on McConsultants advising them on Spotify governance models and customer-centricity, there are no game-changing product launches or real turnaround moments. The best things happening in consumer finance from the incumbents are IMO:
Mox by Standard Chartered redefines banking in Hong Kong and makes a meaningful dent in the consumer banking landscape.
Tinkoff Bank is actually low-key a Fintech super app (and a challenger, not an incumbent).
The Chase Sapphire launch in the UK may actually work because it's a model we've not had in the UK for an underserved segment, and they can spend enough to brute force it to market.
The APIs created by Goldman's Transaction Banking team are 😻
And that's it, that's all I've got. Before you @ me, yes some lesser-known examples are also super interesting, but those are my go-to's for mainstream consumption. Not a great return for all of that annual "digital transformation budget," is it?
So often think this comes down to hiring the same old suppliers, who create the same strategy, to make the same product with the same 3rd parties. Combined with organizational politics and innovation by committee, it's tough for an incumbent to do something that doesn't suck (or at least looks like a copy+paste of a good product with their brand).
There are some exceptionally talented and willing individuals in these companies, but the culture, process, and way things get done are massive barriers to change. But change always starts with recognizing the bad before implementing the good.
How to do stuff that doesn't suck: Part 1. Recognize the bad behaviors.
⛳ - Red flag "What will this cost to get to production." It is always the wrong question. The right question is, "will anybody care if we do take this to production." Followed by how quickly we can find out what customers actually care about and how we can validate that hypothesis.
⛳ - Red flag "Strat house recommended these product features." Strategy consultancies often tell you what features other businesses have, not what your opportunity is. Also, the level of copy+paste deck formats is astonishing.
⛳ - Red flag "Who should all of our suppliers be?" This assumes there is a correct answer to this question. It varies by what you're optimizing for and when. The temptation is to hire "production-grade" suppliers to produce a product against a feature set that a strat house recommended. The odds of that actually solving for a gap in the market or a major customer job-to-be-done is vanishingly small.
I've seen incumbents get this so incredibly backward. They've asked one organization to start picking suppliers, another to recommend product features, and a 3rd to do some customer research in the interests of "doing things in parallel to go faster."
How to do stuff that doesn't suck: Part 2. Good behaviors.
There is another way, but it requires a dramatic shift in so many of the things that make a project credible inside a bank. Credibility comes from getting something funded; getting something funded requires almost certainty (or certainty theatre via spreadsheet and business case) in the outcome. But there is another way.
Start with a hypothesis: What is the market missing, and why do you believe it? So much early investment in VC and from entrepreneurs comes from one word, conviction. Nearly everything a bank does is about demonstrating something in spreadsheets instead of conviction. But those two could be self re-inforcing over time.
Do things that don't scale: Find the lowest cost way to test a hypothesis. Often this might even mean using a 3rd party BaaS service to test out an idea🤯. Understand what drives engagement, DAU and build conviction in the market opportunity.
Then optimize for feature velocity: Whether building infrastructure, B2B or B2C, feature velocity matters. If you have conviction, empowering that team to move without the organizational overhead is the key to generating momentum behind a new project or business. It needs to be able to iterate 100x faster than the core product team can. If this works, the engagement will skyrocket, and everyone in the business will suddenly want in on this project.
With staggeringly beautiful APIs: If you are building infrastructure for the love of God, please treat the APIs as a product. For so long, the culture in banking has been that economics and spreadsheet matter most, and the product follows. The reality in infrastructure and API-led products is the quality of those APIs increase the margin. It's not enough to have a transactional API; it should be clean, self-healing, manage errors and "just work."
Play to your strengths: Big banks, you have all of the customers already. Small banks, you know the market or geography super well.
Know the game you're actually playing: Fintech has already arrived. The incumbents could just give up and let someone else own the front end, doing just enough to not erode too fast, or they could become truly tech-forward in this new world. Some will, many won't.
There are countless more examples like this I'm sure. My point is, there's so much opportunity for those giant organizations.
If you're at a VC or Fintech firm and never worked in an incumbent, you're probably wondering, why should I care?
One word: Impact.
The majority of paychecks still get deposited at megabanks. The majority of corporates still rely on banks because of their global reach and diversified balance sheet. The role of the lender with a giant balance sheet needs to exist, and for the foreseeable future, that means folks with a license to do so will have a lot of business.
If those incumbents could solve for customers like Fintech companies have, we'd have a much better set of outcomes for the entire global economy.
If those incumbents could buy from the new Fintech infrastructure and B2B providers, that impact would be unlocked much faster.
So how do we make that happen?
4 Fintech Companies 💸
1. Alice - The Terra Ce-DeFi Wallet
Alice provides a simple wallet to allow users to earn up to 20% yield on their USDT, quickly send money to friends and use a debit card for easy access. It's similar to many Eth-based DeFi yield wallets (Juno, Donut, Linus, etc.), but it runs on the Anchor savings protocol and the Terra blockchain.
🤔 Unpacking this for Crypto noobs: By Total Value Locked (TVL), Terra is the 3rd largest "layer 1" blockchain. A layer 1 blockchain is something like Ethereum, Bitcoin, or Solana, on which other applications (Dapps) or protocols can be built. Layer 2's include Polygon for Eth or Lightning for BTC designed to make the underlying blockchain faster or cheaper. Anchor is a savings protocol based on the Terra blockchain, and Alice is an app that uses that protocol. TVL is a measure of funds deposited and generating yield, and in DeFi this is generally seen as a measure of how widely used the service is. Terra is faster and cheaper than Eth and (for now) delivers a higher return for deposits. Alice may have a good niche while that lasts. (Oh, and USDT its stablecoin is super interesting, but that's a whole other blog)
2. Enzo - The Financial Control Center
Enzo offers a debit card, money management, savings, active investments, and up to 10% cashback (on Uber). Enzo is a bit like if Copilot Money and Point.app had a baby. The high cashback is offered with Gen Y and Z friendly merchants like uber (10%), Doordash (5%), rent (1.5%), and everything else (1.25%). This is laser-guided at the cash and savings poor younger generations; they're even giving equity to early joiners. Enzo partnered with Unit, Apex, and Blue Ridge to bring all of their features together.
🤔 It looks like throwing all of the features at this, but each of them makes sense. Enzo essentially gives the interchange revenue they would have made from debit card fees back to their customers. They're then (I'm guessing) aiming to monetize more through the share-dealing and investments side of the offering (which longer-term aligns their incentives with their customers). Details like the "FIRE calculator" suggest a real understanding of the generation thinking differently about money. Enzo has partnered with Blue Ridge to deliver the debit card and likely others for the investing features, but bringing all of this together into a coherent and consistent experience that drives traction will be critical. Still, this is now one of the case studies I send to clients for "what does Gen Z want?"
3. Atomic Invest - "Investing as a Service."
Atomic provides a simple API to allow any Fintech app to offer investing services. Atomic has also focussed on creating "turnkey" UI experiences that can be dropped into the Fintech app's existing design system. If everyone is adding investing, arguably Atomic could be the fastest way to do that.
🤔 Unlike Drivewealth or Embed, Atomic is not registered as a broker-dealer with the SEC. Perhaps they will make that move in time, but this is a layer over a layer that provides APIs already. It reminds me of how the BaaS market looks with debit cards, where you have payments processors who provide APIs (e.g., Marqeta and Galileo). Then there are API providers who partner with payments processors (e.g., Treasury Prime, Synapse, etc.). These API first providers can aggregate more of the underlying infrastructure providers and get closer to solving the developer job-to-be-done. But they do so at the cost of unit economics, which over time, as companies scale, they may look to overcome (or may not, as many businesses still rely on Stripe, for example).
4. Flexbase - Ramp for Construction
Flexbase offers 0% for 60 days on any purchases, with receipt tracking by project, invoice tracking, and a credit line based on the business's cash flow, not the individuals. The card includes no personal liability and prevents construction business owners from taking out complex loans or invoice financing products from their bank.
🤔 Construction is an industry with a cash flow problem. The tradesperson often only gets paid when a job is completed but still has to source parts and labor. This cash flow problem is made worse by the complex loans and invoice financing products offered by banks. Meaning many construction workers and business owners rely on their own personal credit cards to complete jobs. The personal credit limit is usually much smaller, which limits how many jobs the business can take on at once. Fewer jobs, less work, less income. This is the perfect example of a product targetted at a scaled niche that a bank would never build alone, that only exists since Fintech became a thing.
Things to know 👀
One monster story this week shows the battle for the future of payments is just getting started.
From January 19th, Amazon will no longer support Visa Credit Cards for UK customers blaming high fees. The move follows similar skirmishes between Amazon and Visa in Australia and Singapore.
🤔 Amazon is price sensitive because it operates at scale and with razor-thin margins. Post-Brexit Visa (and Mastercard) raised the interchange fee it charges to merchants for UK cards buying goods in Europe from 0.3% to 1.5%. This doesn't impact UK merchants, but Amazon's European headquarters are in Luxembourg (the tiny city-state with ultra-low corporation tax). Based on UK revenues of £20.6bn ($27.7bn), that's an increase in fees paid from £61.8m ($83.m) to £309m ($415m).
🤔 Amazon vs. Visa is a global battle. Customers in Singapore and Australia face a 0.5% fee for using Visa cards. It is also threatening to switch its popular co-brand credit card from Mastercard to Visa in the USA. I'm hard-pressed to think of another global merchant that is so openly hostile to one of the card networks in the press.
🤔 Amazon still accepts Amex, which is widely considered to have the highest fees in the industry (and generally, Mastercard fees are also considered more expensive). This comes down to unit economics. Visa has about an 80% share of the UK cards market, and its interchange fee move is much more impactful to Amazon than the equivalent move by Mastercard (who also raised their UK to European payment interchange to 1.5%).
🤔 I'd be shocked if Visa actually goes through with banning Visa Credit cards; I smell a negotiation tactic. Amazon likely doesn't want to turn away such a significant portion of its customer base (or at least not for any length of time). It's much more likely they're using the PR to give a black eye to a very PR-sensitive company (Visa).
🤔 The merchant vs. card network wars will get worse before they get better. Visa is valued at nearly half a trillion dollars, and its revenues rose by 10% YoY in Q3 (owing some to the rebound from the pandemic). Historically Visa has gained market share, grown revenues, and remains wildly profitable, with Mastercard a distant second that doesn't look likely to change any time soon. But I sense there could be a pincer movement, more merchants may now feel emboldened to follow Amazon's leads, and other payments rails are emerging.
🤔 There's an emerging industry narrative that either the Open Banking players (e.g., Plaid, MX, Finicity) or the BNPL providers could build the competitive payments rail to Visa. There are even rumors that the BNPL providers are shifting significant payment volumes away from those card networks. If true, that certainly puts the Square / Afterpay acquisition in some context. Square (like Paypal) has an opportunity to create an ecosystem of buyers and sellers and its own payments rail. But the road there is long, and many had tried before and failed. As a slight aside, it's interesting to me that Mastercard is already investing in and acquiring open banking players, but the DOJ stepped in when Visa tried. Visa may be prevented from defending itself by anti-trust rulings.
The second story this week is beautifully tragic
A hedge fund billionaire has beaten a global collective (calling themselves Constitution DAO) to win a rare copy of the US Constitution at a Sotheby's auction. A DAO is an online community often with a specific shared interest or purpose. A core contributing team set up the DAO and a crowdfunding page that let anyone with an Ethereum wallet contribute to a fund that would bid for the copy of the constitution at auction.
🤔 This is a how-to guide for creating online movements. The DAO (community) was created in 3 days within a week amassed $42m+, coming from individual contributions as little as ~$200. The core narrative that we're going to buy a document representing freedom, with Web 3 technology (that represents freedom), resonated with many. The DAO had talent, governance, technology, and endless Nicholas Cage memes.
🤔 Thousands of people signed up for their first Crypto wallets because of the hype around this project, and this was the perfect welcome. The energy and optimism that we can come together and achieve an ambitious goal combined with bumping into the friction of using Web 3 as it exists today. Clunky wallets, high gas fees, a feeling of being a part of something, and crushing disappointment. All of that is par for the course in Crypto, and all of it is worthwhile.
🤔 Is this the death rattle of TradFi, or the new end boss? The old power structures often get dismissed as being stupid and slow by Crypto advocates, which is a mistake. Yes, some hedge funds are positioned against the world of the retail investor, tech stocks, and Crypto. But also, Crypto, tech, and the retail investor are massively leveraged and probably overvalued. When the market corrects, tech and Crypto may crash, but over 20 years, the significance of what is happening now will be really seen. Ignore the hype and find the signal in the noise.
🤔 Crypto isn't mature, but it hasn't finished growing yet, not even close. In retrospect, going into an auction with a public buzz around your exact budget and a complex technology to manage to potentially increase that budget was probably naive. I think Crypto will learn from this. The biggest lesson is that there exists a latent demand to be a part of something and govern ourselves in different ways. The significance of that point cannot be understated. The middle class, the risk-averse, thoughtful crowd, has joined Crypto in the fight against the TradFi end boss.
🥊 Quick hit: Jiko will partner with Euphoria to launch a banking app for the transgender community to launch a banking app called Bliss. 🤔 As a BaaS partner Jiko is unique, its tech stack is modern, and it doesn't carry a balance sheet the same way a partner bank would. Jiko provides many of the same features (e.g., debit card) and compliance benefits (like building bespoke KYC processes for services like Bliss) but can handle unlimited deposits, something many partner banks struggle with (because of the Durbin amendment, among other things). Jiko is quietly doing exciting things, and it's so good to see a service joining Daylight solving for gender inclusion in finance.
Good Reads 📚
The team at a16z produced an astonishingly good post on the challenges of just moving money in the 21st century. They point out that businesses like Uber and Airbnb have teams of over 200 staff to keep track of payables and receivables. Payins are everything from cards, wallets, gift cards, bank transfers and differ by region and use case. Payouts require a complex series of approvals before they can go. Often all of this has to be reconciled between internal systems and banks that don't talk to each other using CSV files and manual workarounds.
The post introduces 4 primitives, moving payments (programmatic movement of money), reconciliation (recording on the ERP / accounting engine), dashboard (one view of all payments globally), intelligence (prices, benchmarking, and reducing error rates). Companies like Modern Treasury and Primer are making a dent in this market but only in some Geos and customer segments. The opportunity here is global, complex, and just getting started.
🤔 I love a mental model, and this is a great organizing principle for financial services ops (FinOps). Start by making the money movement automatic and then bake in reconciliation. If you can just achieve that for businesses, that's a massive uplift. But once you've achieved that, you get a dashboard and intelligence due to seeing all the payments. That's a copy+paste playbook if ever I saw one.
🤔 This problem is across sectors, and especially in Neobanks and Fintech companies. Like any blitz scaling business, very few Neobanks set out to build a super slick back-office payments function. But Fintech companies have a double-sided reconciliation (recs) problem, their own ledgering to the customer, and then back down to the banks. Historically the way to handle this was 1) Rely on the payments processor, then 2) Build or acquire core banking software later. The recs issue never gets solved in that process. Because even the most modern core banking software (in most cases) is just a more developer-friendly version of old core banking software, it rarely solves for new use cases.
🤔 The banks often view this software as competitive (or at least value diluting), but it's not clear a bank could really compete (nor should they). Banks Global Transaction or Cash Management divisions fight to be the key partner to large corporates, especially "big tech" and Fintech companies with high volumes. But they're selling a 20th-century product to a 21st-century buyer. Smart banks would pre-integrate with these modern APIs and become the easiest to work with rather than worrying about commoditization. Unless they could build really slick recs APIs... Which... I'm not betting will happen any time soon.
Honorable mentions 🗣
Marc Ruby breaks down Prime Brokerage coming to Crypto and why that matters for institutional adoption.
Samora Kariuki gives us 42 Predictions for African Fintech
Tweets of the Week 🕊
That’s all folks. 👋
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