Fintech 🧠 Food - Fintech Infrastructure Wars, FTX Acquirers Voyager Assets & how Jamie Dimon resolved an age old payments issue

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 22,124 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

Another big week in the markets. As a Brit, watching my currency capitulate is painful. It may be fun to watch the currency plummet towards parity with the dollar, but what’s no fun is that pension funds were hours away from going insolvent before the Bank of England intervened.

Many American readers might not realize that the U.K. mortgage market has a standard 2-year fixed rate. Meaning 30k homeowners per month are moving from ~2% rates to ~6%. 

And while I bemoan the UK situation, that’s a rich nation. Things are so much worse in the global south and will continue to be so.

The ray of hope is that governments are intervening to reduce some costs for the consumer and businesses. And my sense is the bottom is near. There's only so much selling the market can handle before things look cheap. 

Speaking of looking cheap, is Bitcoin a risk asset or an inflation hedge? It’s happily trading sideways in USD terms but look at it vs. any other major currency or asset. It’s doing better than gold. It’s not crazy to say it is a better store of value than everything except the dollar right now.

For consumers, it’s often easier to buy BTC than USD. Especially outside the U.S.

It’s not that crazy when you look at the alternative.

Currency and bond markets are crazy.

Volatility is upside down.

Crypto is steady, and currencies and bonds are wild.

But we'll adjust to the new normal.

And when we get there, there's work to do to build better financial services for a better economy.

We're getting closer to Money 2020, and my calendar is getting full. But if you're in a financial institution and want to solve push payment fraud, drop me a line; I'd love to have dinner with you. And if you're a nerd, be sure to come along to my talk with Brett Harrison of FTX, who just stepped down as president of FTX. They've been busy.

📌 In partnership with my friends at This Week in Fintech, I have one exclusive ticket to give away to the Fintech Formal on the 11th of November in New York. This is the Oscars of Fintech, the most glam possible. If you want to win that ticket and can be in New York, reply to this email with your best Fintech-related pun. I hope the pun-fu is strong with you, sensei.

📌 Lastly, I wanted to plug this incredible panel from DevCon I had the privilege to host last month. It is an absolute masterclass in fraud. You simply must watch it.

Weekly Rant 📣

Fintech Infrastructure wars

The rise of modern Fintech Infrastructure has been a game changer. 

Market share of key technology in financial services has started to materially shift from incumbents to new entrants. 

Merchant acquirers earned $25bn in revenues in 2021. PayPal is the biggest player, followed by Fiserv, Global Payments, FIS, then, Stripe.

But the most interesting thing is how market share has shifted in the past 5 years.

Slowly, then suddenly.

In 5-year increments.

Merchant acquisition isn't the only sector being disrupted.

If you take every activity a bank or financial institution has to do, there's a Fintech API that does that thing as a specialist. What used to be a module for a core banking vendor is now an entire company.

But those companies face a more challenging market and path to revenue growth. They may have a great widget, but how far can they grow?

How to win at Fintech infrastructure.

Let's start with things I believe to be true about the market and, therefore, how to react.

• Real-time payments will become the default and should work across any rail (cards, local, international). 

• Consumer Fintech companies are shifting focus from user growth to profitability. 

• Each infrastructure vintage has its own opportunities and challenges.

• There's a huge opportunity for those with the best partnering DNA.

• We will see plenty of M&A too, and like all M&A, culture and cannibalization matter

• The "core" of banking is being attacked in various ways

Real-time payments will become the default and global.

Real-time is as inevitable as death and taxes. It might not happen tomorrow, but it will happen, and the consequences are massive. 

The velocity of money is (as it sounds) a measure of how fast money is exchanged in a given economy. As a measure, it is also typically higher in growing economies and lowers in contracting economies. It can't be spent when money gets "stuck" in a 2-day delay. 

Consumers, businesses, and the entire economy benefit when money is in real-time. 

But real-time payments often mean real-time fraud losses. 

When a consumer swipes, the payment feels real-time, but in reality, the money doesn't actually move until days later. The swipe fee (interchange) covers the risk of something going wrong.

Real-time payments like Zelle, Cash-app, and Faster Payments (U.K., Australia, Singapore, etc.) are push payments. When you press send, the money is gone, and there are currently little to no consumer protections. 

Countless real-time rails are emerging (e.g., Pix in Brazil, FedNow, and even Canada's Interac are going real-time). 

But support is still patchy, and consumer protection varies wildly by jurisdiction, limiting adoption (and economic potential).

This has to change, and Fintech infrastructure providers could be key in making that happen. Payments specialists, core banking providers, card issuer processors, account aggregators, compliance, risk, and regtech providers can lower risk for consumers and businesses in real time.

Why can't payments just work?

Not just domestically but anywhere.

This is the challenge and opportunity for Fintech infrastructure providers. 

It will require a ton of integration, compliance work, and hard yards, but the demand is there.

(I also think Stablecoins as a global real-time rail could be very interesting if regulators don't nuke it first).

Consumer Fintech companies are shifting focus from user growth to profitability.

The last two generations of Fintech infrastructure providers bootstrapped growth by growing with their customers. Signing a CashApp or Chime as it produced was a massive win for an ecosystem of providers. Marqeta's IPO docs alone show just how critical CashApp still is to their business.

From 2017 through 2021, time to market was a crucial advantage.

But now, every SaaS line item is being scrutinized.

One way for companies to save cost is to push down the pricing of their existing suppliers; another is to vertically integrate and move down the stack. 

Moving down the stack (from a BaaS provider directly to an issuer-processor) may yield better unit economics if you have enough scale. 

But, it's also complex and requires upfront Capex spending before it delivers any results. It is a risky move to start that today.

Depending on the size of the consumer, Fintech company may have already done this, be mid-way through, or have planned to do so in the future. Each buyer persona has its own problem set and pros/cons of vertical integration and switching costs.

Providers to these companies may be considering pivoting from smaller companies to enterprises or financial institutions. That's easier said than done; it's a different go-to-market with different messages and sales talent.

Perhaps the most at-risk are the companies that just do orchestration or are features-not-products. What revenue can you defend if you're a SaaS that does orchestration, and that's all you do? Or, if you're early and just do transaction enrichment, how much revenue growth can you drive in this market?

Don't get me wrong, I love transaction enrichment (per last week, I think it is key to helping consumers). Orchestration has massive value to the customer (mainly where it's orchestrating many provider types or partner types). There's also a big difference between BaaS for cards vs. BaaS for every financial product with compliance. 

But it's a question of sustainable revenue growth and margins.

There will be winners in those categories, but they're hard to break into rn.

Each infrastructure vintage has its own opportunities and challenges.

I think of Fintech infrastructure in vintages. There are at least two, possibly three. 

Vintage 0 is anything pre-2010. We did have new companies built back then in infrastructure, but they'd often grow to a certain size and then be bought by someone bigger (so think Banno acquired by Jack Henry, Fiserv acquiring Monetise). FIS has spent more than $52bn on M&A, Fiserv in the $48bn ballpark. 

These companies only grow when the economy does or does M&A. They're trading market share from each other and are now threatened by a new wave of suppliers. They're too big to be in any immediate danger but perhaps too slow to move quickly. They need to invest long-term and strategically, but the change in the market cycle suits them as positive cash-flow businesses.

Vintage 1 is companies who have IPO'd (or should have), so the consumer example would be CashApp and Chime, and the infrastructure supplier vintage is Marqeta and Galileo, respectively. Vintage 1 would also include the merchant side payments companies (Stripe, Block, Adyen, etc.) and some early onboarding companies like Socure.

What's interesting about this vintage is they're now reaching maturity and forced to focus on things the incumbents specialize in, SLAs, uptime, and possibly getting better at M&A for growth. They can increasingly win market share from incumbents but may no longer be suitable for the smaller client segments (unless they get really good at partnering).

This vintage also spins out a lot of smaller companies (e.g., Persona and Embed from Block) because they had to solve problems digitally before a mature digital-only infrastructure supplier ecosystem provided that part of the value chain.

Vintage 2 is anything after ~2014 to 2016(I know that's vague). This would include most of the BaaS providers (Unit, Bond, Treasury Prime), the next-gen issuer processors (Lithic, Highnote), and the entire stack of supporting services (Alloy, Sardine, Unit 21, Drivewealth, and literally every other Fintech infrastructure company). 

This vintage is perhaps the most interesting.

Some have deep bank partnerships, monster revenue growth, and an anchor client (or several), but some don't.

You could argue that the Fintech bubble created too many "me-too" companies. Can the market support 6 payroll-API companies? Probably not, but it's also a super powerful technology. Does the world need 15 KYC and AML platforms? Probably not, but winning at compliance and fraud is winning at Fintech. 

All markets tend towards a power law, where the winners take the lion's share of the gains.

In this vintage, we see market caps, but it's not obvious who the winners are in revenue terms. Who has a moat?

We'll see consolidation, where the bigger companies might want to acquire the smaller ones. But that's not an easy decision when runway and staying alive matters. Although it's an excellent excuse for another slug of funding at a flat valuation (like FTX did).

There's a huge opportunity for those with the best partnering DNA.

The last 5 years of the Fintech infrastructure business have really been a war for customers and growth. In that market, everything looks like competition.

But the reality is there's a massive difference between Fintech providers. If you're terrific at account aggregation, being aggressive on KYC may play to strategic vision, but it's also short-sighted when revenue is the game.

The incumbents figured this out a long time ago. The massive incumbent companies know how to handle frenemies that compete on one business line and collaborate on another. So long as net revenue increases, you don't have to win all of a customer to get any revenue from them.

Perhaps Vintage 1 & 2 are learning these lessons as they mature, and the V.C. cash starts to run low.

I've seen some amazing examples of partnering lately, and behind the scenes, there's a ton of collaboration between Fintech providers. It feels like everyone is picking their dance partners. But there's a big difference between "preferred provider" and "only provider is us if you want to use our core product."

We will see plenty of M&A, and like all M&A, culture and cannibalization matter.

The cash-flow-positive incumbents are looking at a market where exciting companies and technologies are becoming more affordable and willing to sell by the day.

The trick will be integrating them into an already massive organization in a way that drives meaningful growth without all of the talent immediately leaving. Those that already know how to sell to the existing client base are more likely to have a culture fit. 

The valuation-rich, revenue-questionable teenage vintage may also look at M&A, especially if there's an opportunity to grow revenue around their core business. But per the above, it may make more sense to look for the immediate adjacencies than chase grand unifying visions of market domination. Account aggregators could do more in brokerage or insurance. KYC providers could look at PII data storage and so on.

The "core" is being attacked in various ways

The sleeping giant sector of Fintech infrastructure disruption is "core banking," especially since Fiserv acquired Finxact.

Core banking is a great business, with 10-year contracts, consistently high margins, and the highest possible switching costs. But as a result, many banks feel like prisoners to their core. Trying to switch core banking providers and getting it wrong can be existential for executives. Getting it wrong = getting moved on and hauled in front of regulators.

That's because the underlying ledger and accounts are at the core's core. 

This is where the money lives, and like your heart and brain, it's connected to everything else the financial institution does.

And because it's so mission-critical and connected, there are 1000s of individual regulations related to lending, reporting, fairness, fraud, compliance, AML, and just-about-everything that relies on "the core" in many large financial institutions.

The incumbents know this and play to it.

But the reality is the core is now being unbundled and attacked from various sides.

• Bits of the core, like the ledger, have created a category of "ledger-as-a-service" companies like Fragment. While they often serve non-banks and Fintech companies, they could get re-bundled.

• The new providers like 10x, Mambu, and Thought Machine are making meaningful progress. I saw on Linkedin 10x claimed to be adding more in deposits monthly than all European Neobanks combined (probably helps to have Chase as a client in the U.K.).

• The payments companies from Vintage 1 are also making moves; for example, Galileo acquired Technisys, a modern core banking stack. If you look at FIS, J.H., and Fiserv, that has been their game for a while.

So, where does that leave us?

The Fintech infrastructure market is fascinating.

Genuinely.

It's a complex market, with companies fighting for different segments and client types. 

As with all things, the key is for each to play to their own strengths rather than trying to become something entirely new. 

As a market observer, this phase in the Fintech cycle is much more interesting than the everything-is-growing, valuations always go up game we played last year.

Time to do strategy with a capital S.

S.T.

4 Fintech Companies 💸

1. Dolar - Live in Dollars in LATAM

• Dolar allows consumers to send, receive or pay in pesos or dollars from a single account. Users transfer funds into the account that is then "pegged to the dollar" using the stablecoin USDC. Dolar also offers a debit card to spend and offers 4% cashback. The initial user base is the 20m Mexicans who travel to the U.S. yearly and still exchange cash at the airport.

• 🤔 Dolar is a prime example of Stablecoins becoming the offshore dollar (or Eurodollar for everyone else). Local central banks will likely try to squash this type of consumer behavior eventually because it limits their ability to impact the economy when they change interest rates. But I can imagine consumer demand to hold and transact in dollars will spike in the next 12 months. That could be a wedge for Stablecoin issuers to exploit. As a U.K. citizen paid in dollars, I can tell you that holding dollars makes a massive difference because of currency depreciation. 

2. Hoptrail - The on-chain / off-chain AML tool

• Hoptrail mixes on-chain and off-chain data to give AML risk visibility to compliance teams in Financial Institutions. With a single dashboard for AML reviews on legal entities, risk scoring on decentralized exchanges, and source of funds explorer. They're targetting financial institutions, law firms, and Crypto investors as clients. 

• 🤔 I absolutely buy that financial institutions have a visibility problem. The big banks see a ton of fraud and AML risk coming from Crypto, and Crypto forensics only show half of the picture. But financial institutions also have upwards of 10 (or more!) fraud, AML, compliance tools, vendors, and processes. As a result, their dashboard may suit Crypto investors and law firms much more in the short term.

3. Binocs - Institutional Grade Turbotax for Crypto 

• Binocs has over 100 integrations with major wallets and decentralized exchanges. It also supports DeFi and derivatives products and compiles a single dashboard to comply with tax in the U.S., U.K., South Africa, and Australia. Often the Crypto teams at an institution are small and have a heavy workload to comply with taxes in multiple jurisdictions. Binocs is starting with a freemium model but looking to expand over time.

• 🤔 There is no shortage of "TurboTax for Crypto" apps, but Crypto product complexity is increasing over time. The ability to manage those long-tail, complex product types could be a wedge for Binocs.

4. Spade - Transaction Enrichment API

• Spade takes transaction data and enriches it to make it human-readable and accurate. The team is taking a "data science" driven approach to build its enrichment and claims this enables it to deliver higher accuracy than the other market players. 

• 🤔 As I ranted last week, transaction data is often useless unless enriched. I can't help but think this should be the default model rather than something a company has to do on top of another company. The battle for transaction enrichment is now a question of how opinionated and use-case ready you want that data (or not). I also wonder about the addressable revenue of transaction enrichment alone or whether it's an M&A target for something bigger.

Things to know 👀

1. Chase passes $10bn deposits in the UK and looks to expand

The Chase debit and savings account in the UK now has more than 1m customers and more than $10.8bn in deposits. The group estimated a net loss of $450m in the past year but reiterated its commitment to the UK market and intends to launch credit cards in 2023.

• 🤔 This is what happens when you commit; you get results. Chase will double its staff to 2,000 next year; it spent $700m buying Nutmeg, which it also “intends” to add to a credit card launch in steps to become a full-service bank. This isn’t cheap, but they have the firepower to stay in the game and could be rewarded.

• 🤔 It’s hard to overstate Chase's cashback and savings offer in the UK is much better than their competitors. Chase offers 1% cashback on all purchases, 1.5% APR on savings, and 5% APR on roundups. There is nothing close to that as a current account in the UK. (Although Santander offering 3% back on bills when energy prices are skyrocketing is a nice touch).

• 🤔 All this is on a new core (10x Banking’s Supercore) that didn’t exist a few years ago. New market entry on a new tech stack. There are lessons to learn here for other banks watching. Firstly, new cores can work greenfield, and secondly, market entry is rarely cheap.

2. FTX wins auction for bankrupt Voyager Digital assets

FTX US has been selected as the winning bidder for Voyager's assets, with a bid valued at $1.4bn. The offer values the assets at $1.3bn plus $111 million "additional consideration" in potential incremental value. This follows Voyager filing for bankruptcy in July after they had significant exposure to the Three Arrows Capital fund that unraveled after the Terra collapse.

• 🤔 This in the week Brett Harrison stepped down as president. Big changes are coming. I sense FTX is mid-pivot towards being regulated and wants some execs with that track record. I’ll have to ask him, and you’ll have to be there to find out @ Money 2020 in Vegas this year…

• 🤔 I doubt this deal has been done without some diligence; FTX is, above all else, a trader by nature. Acquiring a bankrupt business always looks concerning, but if it has revenue and customers and can enhance your business, it's a deal worth doing.

• 🤔 This story follows rumors that FTX is raising another $1bn for acquisitions. Some investors are still long-term believers in Crypto (or whatever web3 and digital assets become).

• 🤔 This is a great time to be able to land grab market share. Compared to 12 months ago, many Crypto businesses with users and revenue are in a difficult financial position. They're as cheap now as they may ever be.

• 🤔 If Crypto doesn't completely disappear, what does it become? There's a scenario where most tokens are securities regulated by the SEC. I see FTX becoming a significant player and market structure in that world. Like if NASDAQ and Robinhood had a baby. I doubt Crypto ever disappears, but I also doubt it will be as wild as it was in 2019 through 2021. 

• 🤔 Crypto continues to trade downwards, but so is everything else. Have you looked at BTC vs. GBP? When priced in anything but dollars, Bitcoin looks much more stable than it's often credited for. 

•  🤔 Macro matters, and FTX could have fantastic timing. I sense the dollar strength eventually has to fall back next year because the consequences are too high for it not to. Stocks and risk assets will bottom out, but we get a real-economy recession in Q1. If that happens, and we have a "new normal" where Crypto is a part of the mix in two years, we'll look back on these moves as shrewd. If it doesn't, does FTX pivot to being a Fintech business that uses tokens?

Good Reads 📚

1. How JP Morgan's Plan to kill Credit Cards split the bank

This F.T. piece recounts a meeting in November of last year between the JP Morgan Corporate Bank payments team and their consumer cards business. Reportedly Jamie Dimon pushed these teams to put aside any differences and collaborate to counter the threat coming from Fintech companies and real-time payments with the wise-crack, "If I hear that any of you aren't sharing information with each other, or you're hiding information, you're fired."

• 🤔 Cards vs. non-card payments is an internal struggle of P&L ownership that resembles the game of thrones in some organizations. The consumer cards business is incentivized, bonused, and targeted on its ability to drive revenue from cards. If another internal division is launching a product that will impact card revenue, it's a competitor.

• 🤔 Cannibalization is hard. If one side of the house loses, how does it get compensated? The consumer cards division delivered $5bn of revenue in 2021; if a new "pay-by-bank app" cannibalized that revenue, would it be at the same margin? JPM's solution is elegant; the consumer division manages the consumer experience and service with this new payment type (and recognizes that revenue), while the corporate bank builds the tech and works with merchants. A clear line in the sand with potential upside for all. Sounds simple, but it's not always that obvious.

• 🤔 Short-term "pay-by-bank" is focused on the many Zelle-like payments (P2P, bill payments, check displacement) that cards hadn't typically touched. These payment types have a considerable fraud problem, so a bank proactively building consumer protections and servicing is good. 

• 🤔 Real-time, non-card payments are coming, but their support is patchy at best. It reminds me of the mobile telco days pre voice over I.P. Before Whatsapp and iMessage, every telco had its own messaging service and zoom competitor. Meanwhile, Skype was cute but somewhat irrelevant. Real-time payments are similar, often national, closed-loop, and competitive. We'll end up with several global payment rails, and this is one area where U.S. Dollar stablecoins could be very effective.

Tweets of the week 🕊

That's all, folks. 👋

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