Fintech 🧠 Food - Chime layoffs, JPM's landlord account, ESGxFintech and should you leave your BaaS provider?
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Hey Fintech Nerds 👋
Another big week of layoffs with Chime, Twitter, and Stripe announcing. The problem with boom times is overhiring, and I hope we’re learning multi-generational lessons. If anyone has been affected, see this piece for why I’m long on Fintech talent.
As I thought about this week’s Rant, thinking beyond 6 to 12 months, something from Jason Mikula’s Money 2020 recap stood out.
The subject of ESG was missing from the show.
And he's right.
It was, and it is missing from mainstream Fintech discourse.
And yet, I've had this itchy feeling it's the next frontier in Fintech, especially for lending, for a few months but had been intimidated to write about it. How do you capture a subject this big and do it justice? The environment, sustainability, and governance are all combined with financial services. My brain can't do that game of battleships where every Fintech subject is mashed up against every ESG topic.
COP27 is in a couple of weeks, and despite world events, it is still a primary focus for governments for central banks. But in industry, less so. We need to fix that. Outside of dedicated brands like Aspiration, Treecard, or data providers, "ESG-as-a-Service" isn't enough of a thing.
And yet it's possibly the biggest market cap growth opportunity there is.
Have you noticed the energy crisis? Yep.
The cost of living crisis? Yep.
These things are related.
As I started today's Rant, I realized two things; first, no matter what I say, I'm likely tripping someone's political hot buttons in either direction. Second, there's the only way to do justice to a subject as big as ESG with 20k words to capture the nuance. I often evidence and back up claims to build a chain of logic and axioms to go with the otherwise very opinionated writing style.
It's long (sorry, Dan), but screw it; this one needed to breathe.
PS. Who's the best Hubspot / CRM / marketing campaign person you know? 🐟 related. Get in touch :)
Weekly Rant 📣
Where is all the ESG Fintech?
Climate tech is possibly the only sector of VC that is relatively steady in this market. Tesla continues to crush its earnings, and the global energy shortage has created a hunger for alternatives. Pitchbook estimates the market will be worth $1.4tn in 2027, growing at 8.8% CAGR.
Climate tech is huge. Climate x Fintech is not so huge.
ESG isn’t one thing, and neither is finance.
ESG is a complicated beast full of competing interests, incentives, and definitions. Every company wants to be seen to be green, but the underlying impact is excruciatingly hard to define and measure.
From every angle you look at ESG, you can see finance and financial incentives, but I see little Fintech. There are some, but why isn't there an armada of Climateclimate x Fintech?
To unpack this properly, we need to
Properly define ESG vs. Impact
The economic incentives and interests that exist today
The challenges that create like greenwashing
The Fintech companies addressing this today
What is ESG?
ESG is not impact.
Impact is the outcome of what you do. ESG is how you do it.
In theory, if your ESG rating is high, you should have a high impact, but the practice can sometimes be complicated. It's like measuring effort vs. achievement. It's a valuable measure, but not in isolation.
ESG stands for Environmental, Social, and Governance and acts as a report card on companies and industry sectors. Investors use the ESG "score" to evaluate and invest in companies. A higher ESG score will often mean a higher share price.
The world's largest investors, like Blackrock, have publicly committed to driving investment toward ESG and away from fossil fuels and other less sustainable industries.
The subject is fraught with controversy and complexity. For example, Blackrock is attacked by Republican states for being "anti-fossil-fuel" while Democrats accuse them of walking back their commitment to ESG.
Which makes you wonder why? Why wouldn't they take all of this criticism?
The short answer is demand. Consumers, pension funds, and corporates all want and will pay for ESG products. ESG products deliver growth in new industries and represent a massive commercial opportunity. The stock price of "ESG-rated" companies consistently outperforms non-ESG stocks. Whatever you think about Tesla or EVs, the sales growth rate looks like Big Tech in the 2010s.
Ethical is the new luxury.
Another answer is incentives.
Both carrot and stick. The carrot is the demand, and the stick is a direct push from governments and regulators to codify ESG standards into law.
Central Banks view climate change, particularly, as a risk to the functioning of the economy because the economy is forced into increasing spending to manage the risks. The increase in severe weather impacts various sectors, materially reducing GDP.
Most central banks require their banks and insurance companies to disclose the climate impact of their lending and insurance operations. The ECB and Bank of England also use ESG criteria when purchasing corporate bonds.
Delivering ESG is non-trivial.
But delivering the ESG can be challenging.
In theory, a good ESG score means a business has a net positive impact on society and the economy. Often the challenge with this method is that it can (and often is) be gamed like any score or metric.
Companies like Exxon and Shell purchase massive amounts of Carbon offsets and are by some measures the "most" ESG-compliant companies worldwide. Or Tesla, the producer of electric vehicles often preferred by investors, always receives a rough ride on earnings calls about the sustainability of its battery supply chain and how it treats staff.
The rating agencies believe all three factors can impact a company's future profitability and creditworthiness, so they provide some useful definitions of what they mean by ESG.
I share these to consider where Fintech companies and the industry could impact.
The "E" in ESG is measured by the rating agencies S&P and FTSE Russel rate across four factors, greenhouse emissions, water use, waste/pollution, and land use/biodiversity.
The way to improve this score is controversial. Consider a mining or agriculture firm that uses tons of water but produces biofuels or minerals for EV batteries. They might use a ton of water and create waste but contribute to fewer greenhouse emissions. Is their E score good or bad?
Or what about the large banks, who have "$1trn committed" to funding sustainable investments but also lend heavily to the fossil fuel industry? One person's sustainability is another person's cancel culture.
The rating agencies look at how a company treats its workforce (pay and conditions), whether products are safe, create geopolitical risk, and if their behavior risks a boycott as consumer sentiment shifts.
That last one is a doozy. If the public thinks what you do is bad, you could have a worse credit score or less investor appetite for your stock.
How would Coinbase be rated after their refocus on mission controversy during the pandemic? Is Robinhood a force for financial inclusion or weaponizing derivatives and pointing them at consumers, creating harm?
One could argue both sides; annoyingly, neither "side" would be 100% correct.
Good governance for countries and companies will involve ensuring decisions are well made, can be held to account, and involve as many communities as possible. Good governance means ensuring the shareholders can hold company directors to account, that a company is diverse, and avoiding conflicts of interest.
Diverse boards and leadership teams consistently outperform those not diverse in the public markets. Investors buy stocks with more diversity, and companies with more diversity perform better. It's just good business.
But it gets more complicated with things like shareholders voting on executive compensation. When the largest shareholders are all asset managers, the answer is nearly always executive pay goes up much more than employee pay.
And is the Meta governance model where Zuck is God the right answer for that business, its shareholders, and the world?
Maybe, maybe not.
There are no easy answers, but despite that, some Fintech companies do exist and are making a difference.
The "ESG Fintech" that does exist
These categories came top-of-mind for me, and I also asked the Twitterverse what they consider an interesting ESGxFintech company.
Standard disclaimer applies, if I didn't name your company, the world still loves you; these are examples and are not intended to be exhaustive.
Consumer Fintech companies that promote a greener lifestyle, such as Aspiration bank and Treecard. Treecard is a no-fee Neobank offering with a recyclable card that plants a tree for every $50 spent. Aspiration has debit and credit card offerings and is a registered SEC broker, helping consumers get up to 3% (or more) APY on ethical investments.
Consumer Fintech with a social mission. The rise of "Neobanks for x Community" is a very positive development. Companies that focus on underrepresented segments that have a problem to solve, like LGBTQ+ or immigrant and student populations. You could even argue "credit builders" have a social mission.
Companies that help consumers direct their 401k and investing. Tumelo helps Robo advisors and pension fund users vote on Shareholder issues. These votes are then passed on to fund managers, who can vote by proxy. It's now common for many Robo and 401k offerings to show "ESG ratings" and offer specific climate funds to their customers.
Data providers for consumers and SMBs (Patch, Doconomy, Cogo, Climate Earth). Patch is an API that lets you build climate action into anything. Cogo estimates the carbon impact of card spending, and Doconomy provides raw calculators for a transaction or corporate-level impact based on the S&P rating methodology. CoGo is also available via Natwest as an integration/feature for their consumers.
Carbon accounting and disclosure platforms like Persefoni and Sweep. Both companies "automate" carbon accounting and disclosure, helping collect data from various sources and identify ways for a company to reduce its impact.
Professional investor tools. Data providers and platforms allow investors (and insurance firms) to get unique perspectives on how climate might impact a stock or commodity. Specialist trading platforms for carbon credits also exist (Xpansiv), and even Carbon tokenization projects (e.g., Toucan).
As I look at all of this, pieces of the infrastructure are there, but something isn't quite connecting.
Businesses can comply with regulations; consumers can buy more ethical funds traders can get data and trade, but it left me with some questions.
Areas we could explore
Where is all the lending? Impact lending is one of the least funded categories in ClimateTech, according to CommerzVentures. If "non-dilutive funding" is the big thing in Fintech, how would we make it work for climate? Funding energy is hard because the payback windows are long, and only some technologies are ready for prime time, but hard things are usually opportunities in disguise. Imagine if someone had been funding grants for the government, and we gave them a commercial balance sheet.
The big banks have publicly committed $trillions to "ESG" causes, but the secret is that it isn't getting deployed. Meanwhile, some of the most promising ESG and impact investing opportunities rely on either venture capital or government funding. This feels like the space for a specialist to fix.
Should Fintech focus on corporate governance? Outside of Tumelo and shareholder voting, is there more Fintech could do to activate the consumer role in corporate responsibility? Is this something the consumer and businesses should be aware of, or something we do when helping consumers save and invest? It's a tricky subject because governance is so tied to ethics, which is often personal. Perhaps easier for community focussed Neobanks and brands than the mass market.
Why isn't "auto-offset" a default in more apps? The infrastructure exists with Patch + Fidel + Open Banking (and all their equally worthy competitors). If we're trying to find more things to cross-sell to consumers, why not subscribe to auto-offsetting? Could we bake in the Carbon accounting in B2B Fintech platforms and CFO tools? Perhaps this has been tried and didn't get much uptake, but I sense this needs to be a "default effect" rather than a nudge.
The Overton window, complexity, and 80/20s
Life is a spectrum, and so are complicated issues—a range of opinions, world views, and imperfect data.
The fact that E, S, and G are all rolled up into one score can help assess credit or investment risk if that is your job, but it doesn't help consumers and businesses make better daily choices.
But at either end of the spectrum is an extreme.
The problem with Ethics is it is often such a personal subject. But sustainability is just good manners. It's not being an asshole to the planet or other humans.
And most people, most of the time, are not assholes.
The world is complicated and full of nuance, but plenty of good 80/20 rules often work.
We often know what needs to be done and don't hold ourselves accountable. For physical health moving more and eating a balanced diet sounds easy, but most people don't do it.
Until along comes a phenomenal design in the Fitbit and Apple Watch daily step count trackers. Little visual indicators that help humans stay accountable are true works of genius.
The same is true with finance and ESG. Most people and companies have no simple way to hold themselves accountable.
Yet we have the data.
Yes, the data is imperfect.
But we're not trying to optimize everyone to be a high-performance athlete; we're trying to take them from where they are to somewhere better. That's a much easier task for the design that doesn't require getting lost in what is and is not greenwashing.
So why isn't Fintech sustainable by default?
I'm not talking about everyone becoming a certified B-Corp while also trying to fund a company, get customers and be default alive.
I'm talking about infrastructure, APIs, and design practices.
There's clearly investor and consumer demand, but we have yet to stick the landing in Fintech or financial services.
But if we combine balance sheet power, big public commitments, and entrepreneurial spirit, what can we achieve?
4 Fintech Companies 💸
1. The Coterie - Banking for the Rich, not High earning
The Coterie is a Neobank by founders, for founders, helping with lending, investing, estate planning, and later, mortgages. The Coterie estimates that 1 to 3m Americans have between $1m and $50m in illiquid assets as founders or early employees. They're not big enough to qualify for proper "wealth" management and not high earning enough to fit into the big bank buckets. The Coterie has created a modern-day Neobank to wrap around these customers and provide a curated service.
🤔 Founders find themselves in a weird spot of being rich on paper but not in salary terms. This situation breaks most traditional wealth banks' spreadsheets that want liquid assets or salary. These customers can be hugely valuable, taking out huge mortgages and managing sizeable net worths. The Coterie doesn't need millions of customers to be a very high-revenue business.
2. Melt - The data and asset-backed credit card
Melt asks customers to connect their bank account information, employment data, and return information and offers a super low-rate credit card. Melt has no fees and provides tools to ensure users can always pay on time and build good credit. The card isn't secured traditionally; users don't need to put down a deposit (which limits the positive impact on credit scores). Instead, Melt uses the upcoming tax return as security.
🤔 This is the credit builder card done right. The look and feel are part CashApp, and the clarity and upfront nature of the FAQs and "not-so-small print" is fantastic. But more importantly, they've taken APIs that already exist (Open Banking and Payroll) to build a smart new way to underwrite. Like all new underwriting, lending is easy, getting paid back is hard, and we'll only know if this works in 10 years. But I want this to succeed. You could imagine this with points/merchant rewards being better than whatever the X1 card hype is all about.
3. Sidekick money - Active fund management for Pro-sumers
Sidekick provides access to "risk-managed" portfolios balanced across equities, real estate, crypto, and more through an app interface. The long-term aim is also to offer a line of credit, so investors don't have to sell investments if they need liquidity. The team is a mix of former Fintech operators and senior bankers aiming to bring something unique to the UK market.
🤔 What's old is new again, and "active" fund management is making a comeback. The Roboadvisors may have found their market with Nutmeg selling to JPMC and the others trading sideways. The world doesn't need another stock trading app, but we have seen a trend for modern-day active fund managers like Titan, Equi, and now Sidekick. I wonder if the TAM in the UK for this type of investor is big enough or if the way The Coterie is going might be a better wedge in.
4. Nirvana Money - The Credit and Debit card all in one
Users who direct deposit at least $500 a month get a line of credit worth one month of pay. The service costs $8 per month and then has no other fees. Consumers can see their cash and credit balance in one app and spend directly from their primary bank account or credit line. Because the card runs on credit card rails, consumers also benefit from the protection of using a credit card for purchases.
🤔 Another example where Payroll APIs materially change the nature of credit building for consumers. Using card rails with standard features is neat, meaning Nirvana gets extra interchange, and the consumer receives extra protection. Unlike Melt trying to "feel" like a Credit Card, Nirvana is much more approachable and possibly mass market. You could imagine the Walmart Fintech products ending up looking like this. The Legendary Fintech founder Bill Harris is behind this effort, so it's one to watch.
Things to know 👀
Project Guardian is my #1 story this week, even if it isn't the "headline news" - it's one of those where there is so much to take from it about how it will impact our future in Fintech; it's crucial to understand.
The Monetary Authority of Singapore ran a pilot for a complex series of trades involving several banks on Polygon and AAVE using w3c's verified credentials (VCs) for KYC. JPM's Ty Lobban says they issued tokenized Singapore Dollar deposits, which as a liability of the bank, are backed by the bank's credit rating and balance sheet. Ty also points out in a thread that the way they used VCs (credentials) "frees DeFi front ends from needing to do KYC checks." Oh, and they also built an institutional wallet and shared all of the contract addresses for the transactions 👏.
🤔 We don't have to ruin DeFi to manage the risks. Yes, it's "only" one transaction, but it involves real money and shows institutions can use the permissionless DeFi infrastructure in a compliant way. It also potentially makes Stablecoins much more scalable, backing them against a commercial bank rather than trying to build a Stablecoin as a bank (like Circle and, to some extent, Paxos are).
🤔 DeFi is the new capital markets infrastructure. It's default global, 24/7, and programmable. The whole "internet of money" thing could sort of actually happen. Money is locked in TradFi, and TradFi is heavily regulated. The off-ramps are more important than the on-ramps, but institutions are enthusiastically building those. Why? Because they see the order of magnitude improvements in cost, transparency, liquidity, innovation, and new asset classes the infrastructure presents.
🤔 But we might kill DeFi by trying to regulate it with TradFi in mind. Regulators say "same risk, same rules" a lot, but the risks are not the same. In some cases, they're higher, and in some, lower. JPM has given us a path to not having to regulate DeFi wallets, even with institutional participation.
🤔 The debate is often very national; we need to work more with FATF, IOSCO, and the FSB. We also need to focus on education and engineering solutions; the lobbying and anger toward regulators on social media are not productive. I believe DAOs can build the future, manage risks far more effectively, and "co-regulate."
🤔 I love that JPM contributed engineering solutions to compliance problems, building on open-source tools. From banks that don't do open source to here's the public domain link to everything we did is a massive swing. If you haven't looked closely at w3c's verifiable credentials, you should.
🤔 The US-centric tech press often misses this stuff, but MAS is quietly nailing it. Gradual, drip-by-drip, precedent-setting "pilots" are useful case studies for regulators in other markets. This pilot is fucking cool; well done to everyone involved.
Chime will lay off 160 people, reduce office space, renegotiate vendor contracts, and decrease the number of contractors. Chime has announced it is EBITDA profitable, and the CEO Chris Britt says it is well capitalized.
🤔 Chime is still committed to becoming a chartered bank, and that's a mountain to climb. The reward for getting there is the ability to lend with the lowest cost of funds. But the price for getting there is often heavy and involves significant compliance investment.
🤔 In the shift from managing growth to getting to profitability, the headcount you need changes. Fewer people build the plane-as-you-fly, and more people fix it for efficiency.
🤔 The best way to solve a profit problem is to grow revenue from the existing customer base. So I'm curious how effective Chime has been at cross-selling if they'll go deeper into credit or add the "feature-as-an-API" companies that help with subscription management or student debt.
🤔 Feature velocity suffers when a Neobank does finally get a charter. Chime is big and trusted now, but their feature velocity has stalled out. They've added a high-yield savings account, but by no measure would I consider their experience benchmark. It's good, but not great. And that's an opportunity they could exploit for the users they have.
3. JPMC Launches a platform for Landlords - The platform automates invoicing, payments and receipts. Story from JPMC aims to provide landlords with data to set rent levels, identify property investments, and screen candidates. 100m renters pay an estimated $500bn in rent annually, 78% of which is via check.
🤔 Aiming at checks is a smart business case. They're an expensive payment type that almost nobody likes, and turning that into digital payments suits JPMC's core business and strengths.
🤔 Will this just be another big bank and failed experiment? Whether the banks win depends on their ability to deliver feature velocity and quality. JPMC is spending BIG on digital, and the market doesn't like it. Goldman eventually had to reign in their ambitions, but maybe JPMC, with Dimon at the helm, can persist and deliver new revenue lines that drive the core business.
🤔 This is another example of Fintech companies providing the R&D roadmap for banks. "Accounts for Landlords" has been a theme for the past 18 months. Buildium and Turbotenant have got some traction, but perhaps the bank has a bigger economic incentive.
🥊 Quick hits 🥊
🥊 Amazon partners with Parafin for revenue-based finance. Amazon's new "sales-based finance" will allow a cash advance tied to the merchant's future sales for a fixed %. The press release sellers can get capital "in days," with capped rates, no fixed term, and no personal guarantee required. Payments are only required when the seller has made sales, not on a fixed schedule.
🤔 Small businesses need cash flow, but is this BNPL for business? And will it survive the credit cycle? On the surface, revenue finance is a fantastic product. Payback from sales should only hit you when you sell. The former banker in me thinks it looks like lending, and regulators want lending to have an APR, which could be problematic. And I sense as an asset class; it could face the kind of reckoning and pushback we now see BNPL getting. But by that point, several $bn companies will be doing it. Massive win for Parafin, though 👏
Good Reads 📚
This blog from Numeral caught my attention; as a specialist payments processor, they're providing more modular building blocks and positioning themselves as a graduation point from BaaS for Fintech companies. They cite the benefits of a BaaS provider being time to market and reducing the cost of getting live. But the downside is limited flexibility to innovate outside of fixed capabilities, lacking rails or features an entrepreneur might need (like SEPA payments in Europe), and, most importantly, BaaS providers might limit economies of scale.
🤔 The age-old challenge of where to specialize and where to rely on specialists is recycling. Ultimately it comes down to where you can have the most business impact. Will replacing the API deliver better unit economics or burn precious runway and sprint cycles to get to where you are already?
🤔 The API usually wins when it adds more value than a company could deliver. Twilio and Stripe now see so much volume and have so much coverage they have already solved the first 3 to 5 years of issues a developer would have in self-build. They've seen the errors that will appear and auto-handle them.
🤔 Consumer Fintech companies have a unit economics challenge, and I think the best way to solve that is finding more revenue; they are already quite lean on cost. Removing the BaaS provider Rev Share is one option, but there are in my opinion, much lower-hanging fruit. Like adding new products and services like subscription management or BNPL aggregation. And perhaps the BaaS providers can help deliver some of that too.
🤔 The counter-argument is Nubank and Monzo, who built many of the tech stack they use in-house. Now operating at scale, the revenue they need to be profitable is a fraction of that others might need. They now have to maintain that stack (and tooling because much of it was built pre-DevOps tooling being the norm). Life is engineering tradeoffs for someone else's spreadsheet.
🤔 The lesson might be if you're big and aiming at a charter, owning the stack gives you a moat and the ability to do unique things for your customer. If you're smaller and serve a niche, or you're a non-finance company, the BaaS providers will always out-innovate. Shopify still uses Stripe, after all.
Tweets of the week 🕊
That's all, folks. 👋
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