Fintech 🧠 Food - 27th June 2021 - Revolut results, Blend IPO, Visa, Tink, Open Banking Wars & Why A2A Payments Matter

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Weekly Rant 📣

Visa, Tink, Open Banking Wars & Why A2A Payments Matter

This week Visa announced they will acquire European Open Banking provider Tink for 1.8bn Euros.  While the release and much of the commentary have centered on how Visa can use Tink's account data platform, it's hard to ignore the giant Plaid-shaped hole in the story.

As we know, the Visa / Plaid acquisition fell apart earlier in the year against the backdrop of a potential department of justice investigation into Visa for anti-trust. Visa, which has more than 70% market share of the debit card market in the US, was alleged to have acquired Plaid in part to prevent a competitive type of payments rail from emerging (complete with pictures of volcanoes, which we'll come back to). 

But first: 

Who's Tink?

Sweden-based Tink has been one of the leading open banking offerings in Europe for several years. It differentiates through its ability to pre-package things like KYC or personal finance management through its API and white-label apps. Before the acquisition, they had raised more than $300m. Visa invested in several rounds of Tink in the past (as well as competitor Truelayer).

What is Visa's Strategic Rationale for the acquisition?

The white-label apps provide some immediate short-term benefit to Visa's bank clients, who may be struggling to piece together their own PFM or open banking apps. Tink had historically done well with the mid-sized bank client base (it counts ABN Amro, Nordea, and BNP Paribas Fortis as its customers)

This plays directly into a core focus for Visa; the value-added offering to their banks around the core "cards and payments."  Both Visa and Mastercard bundle "free" consulting, software, or services as credits for signing with them exclusively as a bank. Tink has a ready-made offering for those mid-tier banks that might not have the budget to build their offerings.  

Right now, I imagine you're thinking, "Oh great, so this has nothing to do with payments or volcanoes then?"  Not so fast.  Let's unpack A2A payments, European open banking, and why the combination of data and payments could be a killer app.  

What are account-to-account (A2A) payments?

To grossly over-simplify, when you pay directly from your account to someone else's account automatically. In terms of "payments rail," you can do this manually via ACH, Wire, or RTP in the US. In Europe, we have local services like Faster Payments or European-wide services like SEPA.

As part of the PSD2 regulation, European banks must offer both account information and payment initiation. From here, we see the rise of AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers).

Tink is both an AISP and PISP. Using APIs from Tink, a fintech company or 3rd party could (with your consent) access account data and/or make payments on your behalf.  In effect, account-to-account payments are embeddable. The combination of data and payments can lead to some fascinating use cases too.

It's tempting to look at this deal and see a copy+paste of the Plaid acquisition. Maybe Visa (who also has a dominant market position in Europe) is attempting to limit the competition to its core payments business?

🤔 It's not that simple.

The European Open Banking Landscape is different.

The number of open banking providers in Europe dwarfs what we see in the US.  Where the US has maybe 10+, Europe has at least 30+ each with different specialisms and market coverage. If Visa is taking one PISP provider off the map, there are at least 29 others ready to take their place, representing more market share than Visa now has.

Account-to-account payments are also mandated; Visa couldn't prevent this type of payment from threatening their core business because it has to exist.

Europe isn't one market with many states; it's 27 countries with a loose set of standards and rules for interoperability.  The open banking market is, as a result, quite regional.

European regulators are even more sensitive to anti-trust than the US. In the home of PSD2 and GDPR, big tech companies have had a swathe of fines in the past decade.

Visa could, of course, roll up many of these providers by going on an acquisition spree. Although, that might be challenging given the European policy communities' already hostile posture towards large US-based corporations that dominate national infrastructure.

So what does this acquisition mean for European Fintech?

I see pros and cons.

Potential Pro's of the Visa acquisition for European Fintech 👍

• Far from killing A2A in Europe, Visa may actually be a massive accelerator. Getting merchants to adopt a new payments rail has been historically hard. Visa has enormous distribution, an existing ruleset, and experience in acquiring and everything that comes with that.

• A2A payments may then become the "killer app" for open banking. New use cases can be unlocked when you combine real-time account data access with real-time payment from an account.  For example, imagine BNPL, where you set up 4x installments, but it also does an actual credit underwriting check against your bank account in real-time.  With 1-click, you have 1) Verified who the user is (KYC against the bank account), 2) Viewed account data for potentially underwriting the risk 3) Setup installment payments directly from the bank account.

• KYC and identity are broken. A market actor like Visa could start to own or aggregate identify via open banking with a watermark, making "instant KYC" a thing (this could be huge)

Potential Con's of the Visa acquisition for European Fintech 👎

• When incumbents acquire innovators, it rarely works out well for innovation or the market. There are exceptions to the rule, but will Tink continue to innovate at the same pace without potentially aggravating its parent?

• Open Banking competition is now limited, which means creativity is with it too. Tink had done exceptionally well at both geographic coverage and product innovation (like whitelabel apps)

• Card payments are generally considered a cost on commerce, and A2A payments were considered a much lower cost rail. By removing a PISP player, Visa could normalize higher fees.  I'm not sold on this one. I suspect A2A payments will differentiate on their data use cases rather than price. Remember, in Europe, the debit interchange is a mere 30bps (or 0.3%) compared to at least 150bps in the US.

The multi-rail future of payments 🚆

As I stand back and look at Visa, their strategy appears to be more accepting that there is life beyond cards. They're entering B2B payments, looking to play in account to account payments, and have been very active in embracing the stablecoin version of the dollar; USDC.

If we are heading towards a world where there are more payment types, consumers and businesses will likely want some sort of assurance that things can be put right if they go wrong. This is the role of the trusted actor or watermark provided by Visa. They're positioned to help provide account data, identity, and payments by entering open banking in Europe.

Finally. Congratulations to the founders; this will cycle angel investment back into the European fintech ecosystem, which I'm delighted to see.

ST.

4 Fintech Companies 💸

Tilled - Payfac-as-a-Service

• Tilled allows any company to become a mini-Stripe.  Vertical SaaS platforms want to offer their customers the ability to take payments (for example, Mindbody, a platform for gym owners and yoga studios, allows its customers to accept payments and schedule classes). Tilled handles "becoming a PayFac" on behalf of their SaaS platform client to have them running in a week without taking on the compliance costs.

• We know that embedded finance can 2x to 5x revenues for vertical SaaS businesses. Without Payfac-as-a-Service, platforms have to build much of this in-house and become mini Stripe competitors.  As a result, Payfac-as-a-Service is a hotly contested area with Finix, Payrix, and Inificepft all playing in parts of the market. Tilled may stand out, competing on price and time to market.

Pequity - The employee compensation platform

• Pequity automates payroll workflows such as offers, promotions, and transfers. Pequity manages compensation ranges, remote worker payment increases (or decreases), and pay benchmarking against industry peers.

• Figuring out what to pay people that is fair is hard; industry benchmarks exist but managing that through salary bandings, offers and promotions is still an emotionally charged minefield for employers. Pequity removes a massive amount of back-office legwork and spreadsheets that companies use today by bringing transparency and data to the platform.

Onfolk - Gusto for the UK (HR & Payroll)

• Onfolk is the all-in-one people system that manages everything from onboarding, payroll to pensions and time off.  

• The reality is in the UK, most companies are still stitching together systems like Bamboo HR, Xero, and pension providers with spreadsheets, Zapier, and possibly a bit of Airtable thrown in.  The Onfolk team are ex-Monzo and built a similar tool in-house to give the "single source of truth" for employee data.  The UK scene is now slowly being flooded with "ex-Monzo folks spinning out a thing they built internally."

Gotrade - Fractional shares of US stocks in 150 countries

• Gotrade allows users to quickly access stock fractions in companies like Apple, Tesla, and Nike regardless of their country.  This reduces the paperwork, fees, and complexity of buying US stocks in markets where buying 1 share of a stock like Facebook could cost the equivalent of 2 shares in fees.

• This is financial inclusion at its best. From $1, a farmer in Africa or APAC can invest in the same shares as a trader on Wall St.  Gotrade has a significant TAM, as "Robinhood for the long tail."

Things to know 👀

1.Revolut financial results released  👀

• Revolut financial results for FY20 showed revenues were up at £222m ($308m) from £166m the year earlier. Losses increased to £207m ($287m) from £107m in FY19.  More than 88% of revenue came from UK customers, with 1.3% from non-European customers as Revolut's global expansion slowed "due to the pandemic."

• Revolut holds more than £4.6bn ($6.4bn) in deposits for its claimed 15m customers. In FY20, Revolut opened to customers from Australia and Japan, growing headcount to 2,158.  Revolut intends to restart efforts to break the US market through 2022 and was valued at $5.5bn in its last round.

• 🤔 My Analysis: Revolut is an example of a fintech that is blitzscaling.  It is hard to think of a type of expansion Revolut hasn't yet done or thought about. They offer crypto, fractional stock trading, SMB accounts, SMB payments, market-leading FX rates, and presence in more than 30 markets.

• 🤔 My Analysis: Revolut is taking the Amazon approach to profitability.  Neither they nor their investors seem bothered about profitability, nor even the path to profitability. This suggests no IPO any time soon, but also that the ambition for scaling has the backing of investors. It makes sense too, there isn't yet a "bundled fintech" that's global; why not have a go at it?

• 🤔 My Analysis: Revolut is clearly still very much a UK-centric fintech.  While it has a footprint in an impressive number of global markets, it has yet to really hit scale outside the UK. Still, I think the playbook of "great FX and travel card rates" as a wedge product into everything else makes sense.  There is possibly more opportunity for Revolut in APAC than the USA, which is already hotly contested for Neobanks, rebundling fintech products.

• 🤔 My Analysis: Revolut has hired many former bankers after run-ins with the regulator in the past couple of years. I suspect this means they will deepen their hooks into the global correspondent banking network.  This will help them get even better economics on FX and potentially move upwards towards the UK's "Brex" / Transaction Banking customer base.

• 🤔 My Analysis: While Revolut claims 15m customers, I'm dubious about the monthly active and daily active users.  The downsize of blitzscaling is churn. No doubt the Revolut product is good (in fact, excellent to the point of being a case study in UX), but have you ever tried to close a Revolut account? It's impossible.

2. Blend filing for IPO 👀

• Blend labs, the mortgage and consumer lending software company, filed for IPO with estimates for a $3.3bn valuation. Blend lists Wells Fargo, US Bank, and M&T Bank among its customers. In the filling, Blend claims to handle more than $5bn of loan originations per day. FY20 revenues topped $96m (89% YoY growth), with a net loss of $76.4m.

• Blend provides an all-in-one platform for mortgage origination. Blend manages everything from customer acquisition to document collection and even has a "lender co-pilot" that allows the bank staff to help prospective customers through their applications.

• 🤔 My Analysis: Blend is SaaS for incumbents with licenses who can't do tech. Post pandemic, that's a big TAM. When the pandemic hit, every bank that relied on branches for account opening suddenly couldn't do business. For lenders, Blend includes pre-built integrations, digital KYC, and pre-built workflows that all lenders have to build.  

• 🤔 My Analysis: Something is interesting about an incumbent essentially giving up on their own tech and relying wholly on an outsourced platform to keep the lights on.  On the one hand, it's probably best to let the specialists do their thing; on the other, my goodness, that's a lot of vendor lock-in. Short term, the value of operating 100% digitally is greater than the risk of lock-in, but long term?

• 🤔 My Analysis: Blend's model is success-based (i.e., per successful loan originated). This is a natural win/win that may ease some of the vendor lock-in fears.  Over time it could also be massive value capture for Blend. If they hit mass scale, they essentially become an index stock on the rise and fall of the US lending market (except with software unit economics).

Good Reads 📚

1. Designing internet native economies: A guide to crypto tokens

• At their most simple, Tokens are just lines of code that live on a peer-to-peer network (called a blockchain).  Unlike other forms of value or money, they're digitally native, programmable, and managed through your crypto wallet. Cryptocurrencies are just one kind of token; there are many others. 

• Take Fornite, which has fungible tokens (V-Bucks, where 1 V-Buck is the same as any other), or non-fungible tokens (like emotes, skins, or cosmetics). In 2020, consumers spent more than $54bn on in-game purchases in games like Fornite or Candy Crush.

• Analog economies were not designed for the internet from first principles.  As such, they are costly, in-efficient, exclusionary, and non-transparent.  

• Cryptotokens enable a series of use cases like lending, access to communities, or even governance/voting. For example, with large live networks like Uniswap, the admins do not control the network; it can only be changed if the Governance token holders vote.

• 🤔 My Analysis: $54bn is more than the US film industry made in 2019 ($44bn).  Yet, Boomers will still argue NFTs are a fad, crypto is a bubble.

• 🤔 My Analysis: In 2011, IBM's market cap was $129bn; in 2021, it is closer to $145bn. In essence, it has stood still. Comparatively, companies born for Web 2.0 like Facebook have exploded in value and revenue. This is a metaphor for what will continue to happen as crypto continues to rise in the coming decade.  The analog economy won't disappear; it just won't grow at nearly the same pace. The future is here; it is just not evenly distributed. Those who don't live in it don't take it seriously.

• 🤔 My Analysis: NFTs, creators, and the metaverse are all megatrends that will converge in the coming decade. In 2009, your boomer friend would rag on social media, saying things like "who cares what you ate for lunch" and "how will those companies ever make money." The next decade is going to be interesting.

• 🤔 My Analysis: This is a super readable, simple explanation of different token types, use cases, and benefits. Well worth the read (and not nearly as long or as scary as it seems when you first click).

2. IMF - Digital and Private Money can co-exist

• In finance, the private sector can provide innovation and diversity, leading to better outcomes for the economy. The role of the public sector is stability, efficiency, and fairness. These objectives often clash and present policymakers with trade-offs.

• Central Bank Digital Currency is like "being both the smartphone and the operating system." To operate them well, central banks have to become more like Apple or Microsoft. This is a role they may not be suited to as user experience and economic demands for innovation increase. Therefore some Central Banks may deliver a tech solution built on by innovators; other Central Banks may even allow private alternatives to Central Bank Digital Currencies to exist.

• 🤔 My Analysis: Stablecoins aren't the enemy; risk is. Therefore we need a sensible conversation about the dangers in Stablecoins, and if 20th century, analog notions of risk management (e.g., KYC / AML) are the right way to mitigate that (hint: no, they're not).

Tweets of the week 🕊

That's all, folks. 👋

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