Fintech 🧠 Food - 30 Jan 2022 - Acorns cancels SPAC, CashApp will use Lightning for Bitcoin Payments & Why Plaid could be the identity layer for Finance
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☀️ gm Fintech frens. Never a dull week in Fintech, I had wanted to talk about the Fed CBDC paper, but then Plaid went and made an acquisition, and it just fired off so many thoughts. So that's your Rant this week.
Perhaps we could start to see Fintech mega-platforms emerge via M&A if they have the available dry powder for it? 🤔
Meanwhile, my Twitter feed was full of amazing Web 2 talent leaving for Web 3. We're at an inflection point for so many different issues and industries. I certainly don't think we've seen the end of talent moving. UK pension provider Pensionbee published research suggesting 63% of talent are currently looking to move. That's two out of every three people. Perhaps someone you never thought you could work with is open to working with you? Maybe in Web 3? Maybe in Fintech?
It's a talent market and a great time to slide into someone's DM's.
PS. Massive shout out to Mr. This Week in Fintech Nik Milanovic on the launch of his Fintech seed fund. Nik is one of the smartest and most insightful people in Fintech, with an incredible network and amazing founder feedback.
PPS. Congrats to NALA on their seed round 🥳. Fantastic team, incredible community-led traction, and great humans. (Disclosure, I'm a v small check angel investor)
Weekly Rant 📣
Plaid could become the identity layer for finance (and more).
Plaid buying an ID+V provider in the same week they announce their Plaid dashboard is probably a coincidence and it’s a massive opportunity. Plaid could slowly become an identity layer for finance between many financial institutions. There's a long way to go before we get there, but this would be a game-changer.
(Note, I haven't spoken to anyone at Plaid about this stuff, I could be wrong, and a lot of this is me reading market opportunity more than anything)
The Privacy Hub
In the privacy hub, users can see which apps they're connected to, browse apps, and disconnect apps they're no longer interested in. This design pattern is interesting and one that only an actor who can see all of the connections can do for users. No single bank or Fintech company can see everywhere you're connected with Plaid. Plaid can.
(In the same week, Plaid also settled a suit for "collecting too much user data," so the launch of the privacy portal is well-timed).
This experience is quite different from how things work in Europe (home of GDPR and Open Banking), which requires users to reauthenticate every 90 days. The user problem of knowing where my data is and then managing it is surprisingly hard to solve. Europe's open banking market is much more fragmented, so it's unlikely a portal from a single provider could offer the kind of value Plaid does with its privacy hub.
When you combine the privacy hub with their acquisition of Cognito, things could start to get interesting.
Cognito is used by companies like Brex, Coinbase, and Affirm to perform identity and verification checks on potential customers. Customers enter personal information and forms of ID (like a driver's license), and Cognito then screens this for anti-money laundering and other risks. This "KYC data provider" category has several players like Persona and Socure, but why is having this capability useful for Plaid?
Neobanks and Fintech companies have used Plaid alongside ID+V solutions like Cognito as part of their onboarding flow for a long time. The account data provides several useful signals like
They have a bank account somewhere else ✅
They're regularly transacting in normal ways ✅
They do (or don't) regularly pay their bills on time ✅
I call this "low-key KYC" because it's not replacing the role of the ID+V checks, but it's simplifying them and providing better risk data. In turn, that better data increases a Fintech companies conversion speed (and therefore, percentage).
Owning ID+V is a natural extension. Most Plaid customers are doing ID+V at some point, so why not buy it from the same place they're getting account data? That part is logical.
An identity hub?
What if KYC'ing myself once with a Cognito ID+V service was stored in my identity hub? What if I could then "permission" those documents to a licensed entity (like a Neobank) during onboarding, rather than having to go through the whole data entry thing?
As a Neobank through a single provider, I'd be able to much more rapidly onboard users, and it might even reduce my overall risk. An aggregator like Plaid can certify that the information submitted to the new Neobank matches that submitted to other places (or has been updated by an authenticated user).
An identity hub would also dramatically improve things like a change of address. Imagine changing your address inside the identity hub and being able to "push" that to any compatible Neobank (or big bank).
"Owning" identity isn't easy.
Identity utilities have been tried in banking for decades and consistently failed with a lack of industry adoption because of the worries about liability. To unpack that, imagine Neobank A KYC'd you, and then Neobank B relied on the work done by Neobank A, and started to lend to you and let you make payments. Sounds convenient? Sure, everything does in the happy path.
Now, what happens if you're a fraudster and cause significant losses (and in a worse case, a regulatory investigation and fine) for Neobank B? Would Neobank B now go and sue Neobank A for damages? You bet they would. This "liability issue" has held back countless attempts at digital identity utilities (and SSI crowd, before you @ me, yes, I know).
Interestingly, the identity hub from someone like Plaid + Cognito is that if you used the same data and tooling to KYC an individual or business, there's a much higher likelihood you can rely on that data. (Sure, each bank can tweak rules behind the scenes in those tools, but often that stuff drops into case management and exceptions).
Plaid is also in a great place to benchmark past user behavior. Neobank B can request previous transaction data while onboarding the customer, and if they spot anything suspicious at Neobank A, reject the onboarding. (To some extent, many folks are doing this sort of thing already).
Plaid isn't the only one trying to own identity.
Apple is working with US states to add driver's licenses to Apple passbook, "log in with Google" is semi ubiquitous, and Meta is trying to own your whole damn life. Platforms with billions of users can make life much more convenient when logging into a 3rd party service, but KYC is a lot more complicated.
The problem with having an owned ecosystem is that even with billions of users, that's still not all users. An aggregator, however, could eventually reach all of the users.
There are also countless efforts to decentralize identity, become something you own and get permission to any service with a Web 3 wallet. Companies like Civic and platforms like Sovrin have been around for ~5 years, building standards for decentralized identities (DIDs).
Burrata (BF 2nd Jan 2022) is also taking a more pragmatic approach by issuing a non-transferable NFT to any Web 3 wallet that has been successfully KYC'd. I like that this blends privacy (I can take the fact I was KYC'd anywhere, without revealing my identity everywhere) and pragmatism. Nobody has to adopt a new standard; just support the already wildly popular NFTs.
My sense is inevitably, these worlds collide. An aggregator like Plaid can be the on/off ramp for real-world identities between Fintech Companies and Web 3.
The role of the aggregator can extend beyond identity.
It's Fintech M&A season. UBS just acquired Wealthfront, Walmart acquired two Fintech companies, JP Morgan bought a Greek Fintech wallet, and I guess now the SPAC door is closed, the M&A door has opened. So who else could Plaid (or the aggregators) acquire?
What if Plaid acquired an RTP (real-time payment) provider? Payments are the next big thing for open banking. With Visa's attempted acquisition payments, we saw that companies view access to banking data as hugely strategic. In Europe, open banking effectively becomes "another rail" that competes with cards or local clearing (the catch-all term for things like ACH).
Several companies today provide a real-time payment experience over ACH rails (like Orum or Sardine). They do this by having a debt facility and sophisticated risk/fraud management. They're an exciting and growing category, but they're still early (compared to Plaid anyways).
What happens when any customer of Plaid can offer RTP? This could be interesting to e-commerce companies, Neobanks, non-banks. It opens the entire payments world up massively. And the payments business is consistently a great business.
What if Plaid acquired a BaaS provider? Hear me out. Modern payments processor valuations tend to run into the 10s of billions (even in this market), so that might be a stretch too far. But BaaS providers are aggregating payments processors, KYC providers, fraud tools, and different partner banks.
Those BaaS providers could get quite large someday, but today they're best suited to early-stage companies that value time to market or companies that won't drive their unit economics solely from payments. If a Neobank's primary revenue line is interchange (AKA, swipe fees), they're always looking at maximizing that as they scale. BaaS providers (like all aggregators) also have scale and can still offer tremendous value, but there are so many BaaS providers. Maybe in this market, one would exit?
Or maybe Plaid could get there themselves, slowly, by integrating with partner banks and payments processors themselves.
Speaking of competitors, MX, Finicity, and others have similar opportunities and possibly less regulatory and industry scrutiny and overhead. Perhaps they're even better placed to make some of these moves.
Then there's the whole ecosystem of companies that exist on top of Plaid that helps to enrich the data, provide credit scores, or risk insights. Would Plaid make acquisitions downstream to broaden its offering?
Acquisitions require capital.
Plaid can't acquire everything with their current funds (even after a monster round), and this isn't the market to IPO into. Perhaps then, we see another raise for them (and their competitors) to start pulling the banking stack together.
Also, it's worth remembering that the USA isn't the only market globally (I know, shocker). There are Plaid clones in every significant developed market, and Plaid has entered Europe directly. Expansion may take a while, but the possibilities are endless.
It has been fun crystal ball gazing. Til next week 👋
4 Fintech Companies 💸
1. Milo - Crypto Mortgages
Milo is a mortgage lender initially focused on helping non-US citizens gain a mortgage for a residential property in the US. It has announced (with its Series B) a "Crypto mortgage" that will allow customers to "use their crypto wealth" to buy a house.
🤔 Even with the price correction, plenty of people are Crypto rich and fiat (cash) poor. Traditional lenders often don't consider Crypto wealth when looking at a mortgage's credit risk (underwriting). And while specialist realtors do now take Crypto to buy a house, there wasn't a place that did so in a digital and Fintech experience. As a feature to get attention, Crypto worked for Robinhood and is driving massive awareness for Milo. As Frank Rotman put it, "It's a CAC hack."
2. Carry 1st - African game publisher embedding Fintech
Carry 1st is a mobile game publisher that localizes content for African markets with language and regional tastes. With more than 1m users, Carry 1st has aggregated Africa's disparate and often hard to manage payment infrastructure into a single platform. Game creators can manage, distribute and collect payment for games with more than 90 different payment methods.
🤔 One entrepreneur told me last week that if you're building Fintech in Africa, you have to build the infrastructure yourself before creating the business on top. This is true for anyone who's operating in the digital economy. As we saw embedded finance and payments become a massive enabler for vertical SaaS businesses in the west, we see this now in Africa but with local nuance.
3. Moni Africa - Social trust based lending for Merchants
Moni provides cash flow advances, micro-insurance, and working capital for agents and small business owners in Nigeria, Cameroon, and Ghana. Instead of requiring collateral for those loans, Moni relies on the local community to vouch for business owners. Moni creates "clusters" of 5 to 40 agents or merchants, and these clusters have "cluster heads" who give cluster codes to a potential new merchant.
🤔 Using existing social structures to vouch for new users is a model that has worked for informal financial services communities for centuries. Everything with Africa requires understanding the local context, and Moni has focussed on agents and social underwriting. Perhaps no greater example of the local market context than this. I'm curious to see where else in the world this could work :).
4. Hedgehog Invest - Fractional Real Estate investing (via Crypto)
Hedgehog is tokenizing commercial real estate (think movie studios and warehouses) and packaging it for retail investors. Initially launching in the UK, Hedgehog intends to be available to US and non-US investors, creating a global market for commercial real estate. Over time they will expand beyond real estate into things like infrastructure investment.
🤔 Fintech is increasingly heading towards capital markets. There are services like Lex Markets that offer fractional real estate shares, but the Hedgehog team believes they can secure more liquidity from the open market with tokens. If Goldfinch uses DeFi to buy emerging market loans, could Hedgehog help consumers buy commercial real estate? Possibly. Although I think the ultimate buyer here is more likely to be institutional (again, like Goldfinch).
Things to know 👀
Acorns, the savings and investments app, has canceled a proposed $2.2bn merger with a SPAC. Acorns cited "market conditions" as its reason for canceling and will write down $17.5m in costs.
🤔 You have to admire Acorn's transparency in their decision-making here. Rushing to the exit for the stock to get hammered isn't a good outcome for anyone. Robinhood's stock is down nearly 90% from its 52-week highs, and it will be hard for investors not to see Acorns as another Fintech SPAC to short.
🤔 Acorns is a very different business from Robinhood; it focuses on long-term subscription and AUM growth. The problem with long-term growth is it is slow. Their shot at being one of the Fintech Super Apps has probably gone now, and they may fit better in the portfolio of an existing company. Still, they pioneered features like "found money" and roundups that should become defaults in every Neobank and banking experience. I love that they've tried to do it right, and with a bit more blitzscaling of product, they could make a real dent in the investments market.
🤔 The performance of Fintech companies that have gone public via SPAC has been horrible, but so has the tech market. Investors have gone "risk-off" as the interest rate rises start to react to inflation. How much can central banks raise without negatively impacting the real economy? Bankers will enjoy tech stocks taking a bath, but main street could quickly be on its knees.
🤔 Is the party over? It's complicated. Tech companies traded at historically high earnings multiples (200x to 300x earnings). Were they all likely to grow into that valuation? Questionable. But not all public tech stocks are created equal. The sheer earnings growth of blue-chips like Block or PayPal has been staggering. These are profitable businesses that have room to grow.
🤔 When all about are losing their heads, read Frank Rotman threads. I also really liked Nik Milanovic's point that there's a very good chance we see a March 2020 style V shape dip. Cathy Wood's thesis is after a period of inflation; we're headed towards deflation. Her argument goes that lack of supply today is causing companies to 2x to 3x their orders to fill inventories. In 6 to 12 months, we'll have too much supply and not enough demand.
🤔 If we do have a correction, expect a flight to quality. We've had a massive amount of VC funding and talk of "lack of pricing discipline." In that market, traction is everything. Simply saying "we're a Fintech company" isn't enough. But, I believe wholeheartedly that the finance industry is being disrupted and being reshaped into something new entirely.
🤔 Zooming out, either the Internet and digital are massive secular shifts, or they're not. And if they are, over a longer time horizon and will likely continue to reshape the world.
CashApp will allow its US users to send Bitcoin for free to any user with a Bitcoin wallet worldwide. Unlike typical Bitcoin transactions that can take an hour to clear and involve high fees, lightning network is near-instant and much cheaper. Lightning does this by making transactions off the Bitcoin blockchain and later settling back against Bitcoin.
🤔 Those who know the cards world can think of Bitcoin as a settlement layer and Lightning as an authorization (Auth). No money moves when you make a debit or credit card transaction; you're just "authorizing" that money to move. You walk out of the store with your purchase, but the banks "settle" between 1 and 3 days later. It's fun to see this concept play out in the Crypto world.
🤔 Lightning is often described as a "Layer 2" scaling solution. Ethereum also has its own Layer 2 scaling solutions, with many different approaches emerging that trade-off speed vs. security. Examples include Arbitrum, Optimism, zkSync, and of course, Polygon.
🤔 Given the sheer energy and excitement in the Ethereum ecosystem, it's interesting to watch such a massive company focus solely on Bitcoin. While twitter just announced support for NFT profile pictures (which live on Ethereum), Block has a much more singular focus on Bitcoin. With 36m monthly active users, Block could make Bitcoin payments a thing if even 1% of their base uses Bitcoin for payments.
🤔 Bitcoin as a payments rail could make sense; Bitcoin as a payment currency makes very little sense because of its volatility. To a US-based consumer, wouldn't it make more sense to send a USD stablecoin, near free, to anyone in the world? FWIW, I think Jack is the GOAT Fintech product brain, and he may prove to be right over the long term here, especially for Geographies like Africa where the censorship resistance of Bitcoin could have massive value. In these markets, volatility is relative, and Bitcoin looks stable by comparison.
🤔 I can't escape the pull of the Eth ecosystem. Ethereum is Java. It's worse at almost everything than its competitors, but it has community, developers, and adaptability. I can't see a future without Ethereum or Bitcoin. But I can see a future where a US Dollar stablecoin becomes a Eurodollar (offshore dollar) for everyone else. It's already common in markets with local currency volatility to hold dollars. Why wouldn't this be true in the new financial rails too?
Good Reads 📚
This full post is worth a read, my summary can't do it justice, but I wanted to add some analysis here:
Mario compiled a compilation of views from Crypto investors on what to look for in 2022. Key insights include; sovereign data will change the Internet (users owning and being able to port their data), music NFTs are heading for a breakout, DAOs will start to focus on hard problems, and wallets will go beyond transactions.
🤔 Sovereign data has been the subject of debate between the Web 2 vs. Web 3 crowd. Chris Dixon points out that Web 2 companies reach a certain size and have a dis-incentive to open their data and platform access. Twitter killed its API access, Facebook monetizes user data, and Google grows as it hoards more data ever. He argues Web 3 users can take their data anywhere, which becomes the core growth mechanic of Web 3.
🤔If you take the example of Looksrare vs. Opensea, you can see this play out. Opensea is the dominant NFT marketplace, but all of the growth and value has gone to the founders as a centralized service. The Crypto world has been keen for Opensea to create a token that gets some share of upside and aligns incentives. Opensea might be foolish to do that because the SEC would be all over them in a hurry. Looksrare was able to see every Web 3 wallet that had made trades on Opensea and airdrop $LOOKS tokens to those wallets. All a user had to do was claim the tokens, and they could then head to the Looksrare service and start earning more $LOOKS and Eth in return for using the platform.
🤔 In effect, we see giving away ownership as a form of marketing. The smaller network always has a shot at the bigger network because the NFTs sit in the user's wallet, not at Opensea. But what remains to be seen is if the decentralized alternatives can build compelling experiences. Coinbase still dwarfs Uniswap, and Opensea dwarfs Looksrare. But the core fact remains, users' assets can exist on any platform, and that's a game-changer that's not fully priced in.
🤔 "Wallet" is a loaded term that can mean different things to different audiences. To a Fintech or finance audience, a wallet is a catch-all term for software that can store or move value in many ways. PayTM is a wallet, MPESA is a wallet, Google even called their pay product "Google Wallet." Web 3 wallets are very different but often confused with Fintech wallets because the initial use case is storing and moving value.
🤔 Web 3 wallets change the center of gravity on the Internet. Web 3 wallets are much like a leather wallet. You can store anything in that leather wallet, money, identity, gym cards, stamps, a picture of your cat, old receipts, that ticket stub from a Beyonce concert in 2009, and anything else. No 3rd party can dictate what you store in a physical wallet. This is very different from the Apple passbook, which requires central authorities and Apple to agree that "yes, this thing can go in your wallet."
🤔 This re-orienting of control around the user creates new use cases. Nobody has as much data about you as you do. Nobody sees all of your interactions with 3rd parties like you do. Web 3 wallets allow you to vote, sign, own, and transact with any 3rd party and then have any other 3rd party build functionality as a result. Imagine if Mcdonald's wanted to give a free burger to everyone who's paid more than $100 in Eth gas fees? They could issue a "burger NFT token" to every single wallet.
🤔 Imagine tagging things like your credit score or your KYC history to your wallet instead of a centralized service. You'd massively improve privacy and the level of data available for underwriting. Any service could ask you for your credit score without paying a central actor, and only you could decide if that service gets to view the score. Fintech, regulators, and privacy advocates really love wallets, tokens, and Crypto; they should all love them for different reasons.
🤔 The wallet of tomorrow won't look like they do today. Today's Crypto wallets are built around assets and transactions. Tomorrow they need a new design paradigm, and I have no clue what that could be. Not all of your data will sit in your wallet, but just like how a Visa debit card can be "tokenized" to live inside a phone, services can tokenize your data to sit inside a wallet. Projects like Arweave and Ceramic will allow developers to access that data easily, but only if you let that happen.
🤔 No centralized service has all the data; no centralized bank has all the liquidity, but a decentralized service can access all of the data (if the user allows it) and all of the liquidity pools. The counterintuitive thing about Crypto is decentralization could ultimately have better network effects than central services. The scale of a decentralized world is ALL OF THE DATA and ALL OF THE LIQUIDITY.
Tweets of the week 🕊
That's all, folks. 👋
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