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Fintech 🧠 Food - 27th March 2022 - Why adding value in payments wins, Apple acquires UK Open Banking provider & Investors Ape into Bored Ape creator.
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 12,346 others by clicking below, and to the regular readers, thank you. 🙏
Hey Fintech nerds 👋
It has been a week for corporate card spend raises, with Ramp raising at $8.1bn, Jeeves at $2.1bn, and Digits raised at a $565m valuation to help companies with spend and payments.
No question that managing the spending of growth companies is the hottest segment in Fintech.
Or should I say orchestrating the spend? 😇
And Crypto refuses to die. The "bull run" might be over, but Eth L2 scaling solution Optimism just raised at $1.6bn, and the Bored Apes NFT creator Yuga Labs raised at $4bn. Maybe it’s here to stay after all.
I could have covered all of those in-depth, happily, but perhaps the week's most important story is Apple Acquiring the UK Open Banking startup Credit Kudos. Apple never does things by accident, so you have to wonder if this is the first of many such moves.
It's a crazy world out there, but watching this industry gives me much hope. Maybe that makes me a nerd. Or maybe, if we change how money and value work, we have a genuine impact.
Now to pay the bills 👇
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Weekly Rant 📣
Value add in Payments.
The most successful business model in Fintech is owning the payment and adding value around it. Chime’s get paid early, CashApps real-time payments, Brex’s paying merchants instantly, Ramp; well Ramp doing everything.
All of these features fix payments because payments are broken.
Payments don't work the way they should.
A million different networks, formats, and edge cases around the payment create friction and opportunity.
Payments have always been a great business model.
Payments have always been a great business, whether it's owning a network (like Visa or Mastercard), a brand (like Amex or Chase), or a provider in the middle (like Marqeta or Galileo); everyone involved historically does well. Taking a cut or fee of transaction activity is essentially indexing the economy. If transactions happen, revenue happens.
This takes several forms. The simplest is in the cards industry, where the parties who make payments take between 0.3% and 3% of a transaction value. The merchant pays this "interchange" fee to take card payments from their customers. Domestic payment rails (e.g., Wire, ACH, Faster Payments)
Now, the key battleground in payments has become how seamless you can make everything around the payment because you own the transaction.
Owning the transaction can mean different things to different people. Where you fit in the payments layer cake may mean owning the merchant relationship, facilitating the payment, directly moving the money between one bank and another, or helping the customer make a payment.
When I talk to bankers, they're often baffled that companies will pay so much to providers like Stripe for cards or ACH when the bank would offer it so much cheaper. It used to be the case that simply providing the ability to pay (or accept payments) was the business, and the competition was on price, distribution, and scale.
Ultimately payments are a tax on customers.
The way to win is to create value.
Competing on Value Created.
How much value you can create for your customer?
We've seen this on the merchant side for several years.
Square creates value for merchants by letting them get paid in real-time. It then broadened its offering into payroll and inventory.
Stripe creates value for merchants by preventing errors and increasing conversion rates. Stripe then broadened its offering into fraud prevention, carbon offsetting, auto tax reporting, etc.
They can do this because they have the payment.
We see it now, too, on the D2B side.
Ramp helps companies save money from suppliers or capture expenses automatically.
Brex helps companies get paid early, regardless of their source of revenue.
(Everyone I didn't name here does awesome things too).
They can do this because they have the payment.
Ways to create value with payments.
You can create so much more value when you capture the payment than simply processing that payment. There's a hierarchy of awesomeness (value add).
Payments that just work. Payments fail between 2 and 4% of the time, and historically it was on the merchant or customer to figure out why or retry. I spoke to one payments COO who said, "the whole industry is building waterfalls." For example, if an ACH payment fails, retry the payment with another bank, fix the file, and send it again. The best payment companies do this for their merchants, businesses, or consumers to hide the pain.
Risk-free payments. The responsibility to manage fraud, AML, and, yes, sanctions historically fall on the merchant or Fintech company. Fintech infrastructure companies have stepped in to manage Fraud-as-a-Service or bake that capability into payments. With the recent Zelle fraud scandal, this issue is still a long way from being fixed. And if you want instant payments, you first need risk-free payments.
Payments that happen faster. This is US-specific, but the 3-day settlement delay is a major drag on consumer and company revenue. This made Chime's get paid early or CashApp's real-time payments incredibly popular and functioned as growth hacks for those companies.
Admin-free payments. Consumers and businesses have mountains of admin related to a payment that could be automated. Tax season probably brings this home for people. So many economic activities start with payments. So some smart Fintech companies are helping SMBs automate taxes, receipt reconciliation, and even accounting.
Payment orchestration. This week, two companies in Brainfood are doing payment orchestration for e-commerce. As companies scale, payments become much more complex to manage, and having an operating system can prevent R+D spending, reduce OPEX, and improve companies' sales.
This leads to value capture.
To the bankers saying, "but we charge less for ACH!" Ask yourself, do your payments just work? Does your software handle much of the risk and fraud on your customer's behalf?
Payments that just work are a price worth paying, especially if it leads to higher conversion at checkout for merchants or DAU for Fintech Companies.
There is also so much value in payments data. If you can see what your customer's incoming and outgoings look like, you can see the lifeblood of their business. You can see where the pain is and spot new opportunities to add value and capture value.
This is why payments businesses will do fine during inflation.
The public markets have given Fintech companies a beating, but the payments business typically takes a % of payments as its revenue. If prices go up by 8%, then the revenue of payments companies will rise accordingly.
Payments companies index against their customer's growth.
And lending will become a thing again.
I spoke to a Fintech infrastructure company CEO yesterday, who said, "rising interest rates will make lending a thing again."
That's a great way to put it.
The higher the base rate, the higher the available margin for lending (if you have a low enough cost of capital).
Historically D2C Fintech companies have monetized primarily through interchange and payments revenue. But now, those companies that own the payment, and are great with data, are very well positioned to become effective lenders.
Again Block (that's still weird to me, they'll always be Square) is showing the way with its Utah-based Industrial Loan Charter, allowing it to lend to SMBs.
But the core primitive is the payment.
Get the payment, and you get the data.
Get the data, and you get to add value.
Add the most value and capture the most value.
Capture the most value, and you win.
4 Fintech Companies 💸
1. Payrails - The Global Payments Operating System :)
Payrails simplifies payment integration and orchestration for e-commerce merchants. The team is ex Delivery Hero (think Doordash for 50+ markets) and has felt firsthand the difficulty of integrating and managing countless domestic and regional payments rails.
🤔 There are so many payment operating systems, ledger companies, and orchestration plays rn! There are many payment orchestration platforms, but they're increasingly regional, making this category a geographic land grab. Europe and especially MENA become complex to navigate, and this is likely where Payrails will have an edge. I'm also noticing that people are emphasizing different parts of the platform in this category. Some are more ledger first (e.g., Fragment), some are workflow first (e.g., Primer). I'm curious to see which client wants which level of control vs. opinion in the providers offering over time.
2. OwnProp - Buy and sell fractions of real estate.
OwnProp allows investors to buy into a specific commercial property instead of REIT, stock, or mutual fund. Any accredited investor can own a fraction of a real-world property via their mobile-first platform. OwnProp also allows property owners to fractionalize the portion of a property, maintain control, and retain a cash flow.
🤔 OwnProp's mobile-first design and experience are aimed at the pro-sumer real-estate investor. There are other "alternative investment" Fintech companies out there, but OwnProp is using "Blockchain." Again they're not the only player here, but access to potential properties and investors in a two-sided market will be key to success. How much appetite is there for pro-sumer investments in Real Estate? Perhaps in a high inflation environment, quite a bit 🤷♂️
3. Glean AI - Helping startups save money
Glean AI analyzes deal terms, line-item data, and negotiation opportunities with suppliers to the startup customer base. Glean counts major Fintech companies like Alloy and Orum as customers already. Gean also provides insights and context around spend.
🤔 Saving money for startups is the key battleground in B2B spending. Ramp and Brex use the card as the wedge, but there are countless "CFO tools" in this space like Digit that is well funded and growing. This is a crowded space; how many massive, venture-backed companies can exist in this category? The TAM for B2B spend is enormous, so maybe several companies can get scale here.
4. Yuno - LATAM e-commerce payment orchestration
Accepting payments across LATAM for e-commerce is still highly fragmented. Yuno provides a single API for many payments providers. Yuno also provides fraud prevention intelligence over the top of these providers. Approval rates remain low, and merchants can wait longer to get paid than you'd expect in many markets.
🤔 Post pandemic when VCs spot a category they're now executing on that globally. LATAM is white-hot, as is e-commerce payment orchestration. Yuno is still early, so I'm curious if they lean more into integration/orchestration or ledgering.
Things to know 👀
The Block is reporting that Apple will acquire Credit Kudos for $150m, a massive uplift in their last known valuation (when they raised $6.5m, the valuation wasn't published, but I'm sure you can do the math there). Credit Kudos provides both access to account data and underwriting scores for loans via its APIs. This follows Visa acquiring Tink for $2.1bn in June 2021 and Mastercard acquiring Aiia, the Danish Open Banking startup.
🤔 Apple BNPL? I've been convinced that Open Banking is the key to BNPL. Instead of forcing consumers to do a full credit pull just to buy a $50 jacket, why not quickly check their affordability and credit worthiness directly from their bank account? Credit Kudos immediately provides that capability to Apple. If Apple did do BNPL, how much would that impact Visa? Klarna?
🤔 Will Apple try to acquire a US Open Banking company? There are fewer at-scale Open Banking companies in the US, but there are a few. Some that sit on top of Plaid and clean up the data and add context (like underwriting scores). Others like MX have more API access into banks and do some of the cleansing themselves. It's weird to me to see Apple do something in the UK first vs. the home market of the US. Apple doesn't dabble, it's very deliberate, but my sense is any move in the US is either years away or super quiet and enormous. (Block acquired Afterpay, publicly listed Fintech looks cheap)
🤔 Everyone is trying to build the Apple Watch for Money. What if Apple made the Apple Watch for money? The design pattern of step counts, streaks, and closing the rings is hugely effective at getting people motivated. We need the same for personal finances, and who better to do it than Apple, on top of the accounts we already have?
🤔 Apple has a habit of acquiring something and then going silent for two years. Expect the same here. The acquisition of Mobeewave now allows Apple to accept payments via iPhones without a separate terminal. Go look at the gap between the acquisition and product launch.
🤔 A few folks have suggested this could be a way to launch Apple Card (or path to Apple Card) in the UK. The idea being lower-income segments would be worthy of an Apple Card. This is no doubt a possibility, but it's also an expensive market entry for what could have just been a partnership with an issuer like they did in the US 🤷♂️
🤔 The European Open Banking landscape lends itself to acquisitions much more than the US. When Visa tried to acquire Plaid, the dominant market player acquired the largest Open Banking provider. There are so many Open Banking companies in Europe (and the UK), and there isn't one that dominates the continent. Some are stronger with banks, some in the Nordics, some in the UK, etc.
Yuga Labs, the maker of major NFT properties (that many love to hate), has raised more than $450m, led by a16z. This follows the acquisition of Larva Labs, maker of Cryptopunks and Meebits, making Yuga the dominant player in NFT intellectual property. Yuga Labs intends to take this momentum and build its own Metaverse called "Otherside."
🤔 The unique thing about Yuga Labs is allowing the Bored Ape NFT holder to also hold the IP rights to that Ape. For example, Universal Music Group just acquired an Ape for $360k. The Ape will front a "Metaverse Band" called Kingship (if that doesn't win the 2022 bingo card, nothing will).
🤔 This is a business model change for the entertainment industry, but it works best with net new IP. It would be much harder for Marvel or Disney to take existing IPs and have their users own them. Can you imagine someone "owning" Iron Man or Elsa from Frozen?
🤔 According to a report from The Block, Yuga will build a "MetaRPG" that will use ApeCoin as its currency and sell virtual land. Each plot of land will contain resources built up from NFTs and perhaps rare characters. Any owner of a Bored Ape can claim ApeCoin, which will also be available for purchase at exchanges. ApeCoin gives governance in ApeCoin DAO, which will govern how the coin works in the future. The amount of partnerships in the works for Yuga is staggering and includes real-world and digital brands and experiences. The real question for me is, will their RPG be any good, or is this another coin for the sake of having a coin (AKA, status)?
Ramp raises at $8.1bn and Jeeves at $2.1bn. Corporate spend management platforms are killing it. PackyM did an incredible write-up of the Ramp raise. Ramp did $100m in revenue (10x YoY growth) on $5bn of card spend. Veteran VC Keith Rabois described the growth as the fastest he'd ever seen. 🤔 In a world of frothy Fintech valuations, revenue and traction are reality. Incumbents barely scratched the surface of this opportunity.
Ethereum L2 scaling solution Optimism raised $150m at $1.65bn valuation led by a16z and Paradigm. Optimism aims to make Ethereum efficient and cheaper by batching together transactions and settling many of them against Ethereum in a single L1 transaction. 🤔 It seems like every major VC firm has picked an Eth L2 scaling solution, but a16z is indexing them (having invested in both zkSync and Optimism). In banking, batching and netting have been concepts for decades; as an observer, I find it interesting to apply this to data and compute. Different L2 solutions make security vs. speed trade-offs. It's impossible to say who wins, but it's exciting so many are trying.
Good Reads 📚
Sometimes the reads say more than I could alone. So this week I'm trying something different.
Here's what I've enjoyed reading this week, and if you have a reading list, add these to your backlog.
The fascinating science of the dollar. 🤔 This is a phenomenal first principles breakdown of what money is and how that impacts CBDCs and Stablecoins.
Multicoin Capital: The outsiders. 🤔 Multicoin's fund #1 is one of the GOAT venture returns, and Mario breaks this down as only he can. But he gets under the skin of Multicoin's thinking in Public. They weren't the first to say "Web 3" or publish a stack, but they gave the clearest early picture of what that could be. That conviction has delivered home runs like Solana, Graph, and Helium.
Tweets of the week 🕊
That's all, folks. 👋
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