Fintech 🧠 Food - Is payments a race to the bottom?

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 33,198 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

What a couple of weeks. BaaS compliance took another hit as the FT reported Goldman is in trouble with the Fed over Fintech partnerships. (👀 TTK)

BaaS has standing regulations, but the issue here is visibility, which needs technology and the industry to work closer to solve. 

Crypto has the opposite problem. The regulations are unclear, but the tech couldn't be any clearer.

Visa made USDC available to acquirers WorldPay and Nuvei (I’ll cover that more next week). Square went down (you’ll have to wait a week for that too). We may get a Bitcoin ETF soon. ETH is a commodity, not a security, and Uniswap cannot be held liable for token scams. (👀 TTK)

Oh, and in what Universe would you have put Crypto Bridge Chainlink and SWIFT together?

Rumors of Adyen's demise are massively overstated. I discussed this with journalists, industry folks, and the wider tech industry. So that's your📣 Rant this week.

PS. I did an episode of the Convera podcast where I talk selling into enterprise and financial institutions. Check it out here.

Here's this week's Brainfood in summary

📣 Rant: Is Payments a race to the bottom?

💸 4 Fintech Companies:

1. Passthrough - Investor onboarding platform

2. Peanuds - Personal and business finance simplified

3. Scribe Up - A virtual card for subscriptions

4. Craftgate - Payment Orchestration based in Turkey

👀 Things to Know:

1. Fed warned Goldman's BaaS team about compliance oversight

2. Uniswap wins court judgment, ETH viewed as a commodity

📚 Good Read:

1. The rollercoaster of a Small Bank as a Service

Weekly Rant 📣

Is Payments a race to the bottom?

The big shock drop in Adyen's share price has many speculating that payments are a "race to the bottom." 

The thesis goes there are two paths.

1. Compete for big contracts (Adyen). This "forces you to lowball" on price.

2. Go after small businesses (Stripe). This forces you to go wide to service the business that balloons expenses, killing margins in time.

The Chamath Hypothesis concludes:

Chamath is wrong and doesn't understand payments.

He’s also got a point to a degree.

Where he’s wrong is that Payments are way more complex just being about price. 

Some bits compete on price, but the new battleground is performance.

Payments are critical. They’re at the core of any business.

You don't have a business unless you get paid. 

The value add isn't simply "the ability to get paid for the lowest cost." Depending on the buyer, it might be improving conversion at checkout, helping reactivate customers after a purchase, expanding into new markets, and managing fraud rates. 

Because one thing remains true above all else.

Payments are easy. Edge cases are hard.

The payments company that solves the most edge cases can create the most value. 

What happened to Adyen is they're in the middle of US market entry and a surge in R&D and infrastructure investment. The US is competitive because PayPal is a massive player with Braintree and doesn't want to lose market share. Adyen’s model is to get close to the metal (by becoming a bank locally). That is a significant capital investment in the short term, but it pays off in long-term unit economics.

The bigger picture? In 10 years, Adyen, Stripe, and PayPal will be much bigger than they are today and have stolen more market share from incumbents. 

The risk to Adyen and Stripe is not a race to the bottom but the young whippersnapper companies coming up beneath them, like Checkout, Nuevi, or even earlier players like Silverflow or Moov. 

To understand why, lets unpack

1. Who is Adyen?

   1. Clients

   2. Markets

   3. Products

   4. USP

2. Payments industry customer types

   1. The price-sensitive juggernaut (e.g., Walmart).

   2. The global tech enterprise.

   3. The mid-market retail, e-com brand.

   4. Small and medium businesses.

   5. Legacy merchants coming to e-commerce late with “omnichannel.”

3. Understanding the industry and competitive landscape

   1. The competitors and their go-to-market types.

   2. Who's poised for the fastest growth? Software platforms and payment partners that enable embedded finance.

   3. Geographies matter.

4. What happened to Adyen in H1?

   1. They surged “one-off” investment costs

   2. They were in the middle of a cost surge for market entry to the US.

   3. Local incumbents began price cutting to defend market share.

   4. The pandemic macro tailwinds that drove growth reversed

5. What happens now?

   1. Their biggest challenge is demanding growth clients who want them to become more modular

   2. The advantage in performance (on fraud & conversion) still appeals to growth enterprise

   3. The margin pressure will rebalance when the R&D “one-offs” fade

   4. They'll steadily improve unit economics in the US

   5. And will follow their largest clients into more markets

6. Is payments a race to the bottom?

It’s not that simple.

You’ll have to dive in to find out why. 👇👇

1. Who is Adyen?

After leading the boom years of Fintech, giant payment companies like Adyen, PayPal, and Stripe became the darlings of the tech sector. Their peers, Square and Toast, also took a substantial bite from the physical commerce world. 

While Square and Toast targetted physical point of sale small merchants, and Stripe became the queen of e-commerce for smaller companies, Adyen built its niche as the master of enterprise online.

a) Clients: Founded in 2006, the company quickly won major tech company clients like Meta, Tesla, Uber, and LinkedIn. Notably, in 2021, it won the primary payments business of eBay from its former subsidiary, PayPal. It also has significant retailers like Subway, Adidas, H&M, and Booking.com as clients. Stripe famously grew with its largest clients and built for platforms (like Shopify). Adyen built for growth merchants, meaning they swept up Netflix, Spotify, etc., when they were small. 

Adyen has platform clients, too. However, those clients (like Airbnb) controlled the payment funds flow more. As opposed to Stripe, which abstracts much of that complexity. Put another way. Adyen suits merchants who want to get more hands-on but have a single global platform. Stripe’s sweet spot is platforms and SaaS companies and abstracting complexity.

b) Markets: Based on H1 results, 56% of revenue came from EMEA, 25% from North America and 11% from APAC. APAC revenues are up 31% YoY as they follow their biggest customers into India and Southeast Asia. This trend of following global brands to be their default option as they globalize is something Adyen is particularly strong at. As it expands in the US, expect that share to shift, but this is not a "European player entering the US."

c) Products: Adyen does a lot, but at its core is an integrated platform for accepting payments online. The core value is providing an end-to-end solution from checkout to settlement. They are

1. A payments gateway

2. An acquirer processor

3. An acquiring bank

This cuts out several 3rd parties vs. other solutions, creating efficiency and more significant data and insight for fraud prevention or risk management. In turn, this creates a lower transaction cost for merchants than competitors. 

Unlike other payment solutions, it does not offer a "Master Merchant" solution. Stripe is credited with inventing the master merchant concept, which reduces the cost and time to accept payments online but at the expense of margin. And, while many of Stripe's customers are now set up as fully-fledged merchants (and the regulatory overhead that comes along with that), it's Adyen's DNA to start here. Adyen, to its credit, can replicate much of this simplicity with “Adyen for Platforms,” but it’s about where you start and where you’re strong. Adyen is trying to be more like Stripe and vice versa.

d) What's the USP? Adyen's key sales message is their "single unified platform" that manages 100s of payment types in 60+ countries. The thing they don’t say is that they’re an acquiring bank that’s got great tech. They create high margins through this combination.

This platform can accept online and in-store payments, create marketplaces (think SaaS embedded payments), and now card issuing. The single platform creates a hub for data across the payment lifecycle that helps improve conversion fraud prevention and gives customer analytics. 

For some context, Jareua Wade once described competitor Worldpay’s “trenchcoat strategy” for M&A. It’s really 10 different smaller companies in a trenchcoat. This means the service, API endpoints, and products vary dramatically by geography.

Adyen's default go-to-market is perfect for retailers who mix online with in-store in multiple Geo’s and care about balanced performance between unit economics of the payment vs. all of the other hidden costs in the payments industry that come from edge cases. 

2. Who are the customers, and what drives value for them?

a) The price-sensitive juggernaut. For example, Amazon or Walmart operate with razor-thin margins. They value price and commercial leverage above almost all else. They'd rather understand the details, pull more in-house, and grind out better unit economics. They might select the lowest cost option but can do more grunt work because it is meaningful to their business. 

b) The global tech enterprise. Airbnb, Shopify, and Meta are higher-margin businesses aiming to expand internationally. The value performance is the highest. They want a partner who delivers the highest conversion at checkout for ultra-solid unit economics. This is Adyen's sweet spot. Marketplaces and SaaS companies are slightly different; while Adyen plays well here, I'd argue that's Stripe's sweet spot.

Market context: The reality of a company like Spotify or Netflix is they're doing two things at once: 1) Pulling more in-house and getting closer to the metal in developed markets and 2) expanding into markets faster than Adyen can enter them (although Adyen has a strong lead vs Stripe).

Most massive merchants have a primary payment partner and then a series of others to help them enter new markets with a specific product or issue and as a commercial hedge. The phase of going “multi PSP” is an interesting inflection point for merchants who want to bring that in-house to control experience and unit economics. This could be a place where orchestration finds its natural home.

c) The mid-market retail, e-com brand. Joe and the Juice, Lush, and Casper are mid-market brands that value simplicity and unit economics. Exposure to in-person and online retail can be complex, so they need a partner who blends these two worlds well. Again, Adyen has a core strength here (where Toast, Square, etc., are more mid-market players). 

d) Small and medium businesses. A sub-100-person or growth-stage company typically cares more about speed and simplicity in its early days. Packy McCormick once described Stripe as the "Payments team you hire as an API," Canonically, that's spot on. Adyen can (and does) play in this part of the market, but some companies' default model of becoming a merchant is prohibitive or undesirable.

e) Legacy merchants coming late to e-commerce. Many businesses prioritized the in-store experience even up until the COVID-19 pandemic. Their highly embedded, customized in-store locations made changing payment systems complicated. But with growing omnichannel needs, they’re now modernizing their tech stack. When they do, there’s a good chance they’ll pick a newer player to help them.

3. Understanding the industry and competition

The full payment acceptance (acquiring) landscape is complicated, with countless companies appearing to offer some or all of the same thing. But if we zoom in and look at who Adyen would compete against for customers, there are broadly four categories (h/t to Justin and the UBS née Credit Suisse research team for this model).

a) The competitors and go-to-market types. There are four main types of payment-acquiring routes to market driving growth. Software platforms, Payments partners, SMB direct and enterprise merchants. 

🏃‍♂️ GTM #1: Software platforms like Square, Clover, and Toast may have a terminal or provide pure software like Shopify as a core competence. They focus on being the operating system for SMBs to accept payments and run their operations (who make 60 to 70% of market revenues). 

🏃‍♂️ GTM #2: Payment partners are services like Stripe Connect Adyen Platforms that embed their payment acceptance capability into their partner's software. AKA embedded finance. Checkout and Nuvei have also entered the chat as serious competitors. They serve marketplaces and vertical SaaS companies.

🏃‍♂️ GTM #3: SMB direct distribution is more traditional, where the terminal or software is distributed by someone other than the platform (e.g., a bank). This is the classic model, and a whole class of companies managed this historically with mom-and-pop stores up through mid-market (and still do). Interestingly Adyen has stated categorically they do not see this as a market for them.

🏃‍♂️ GTM #4: Enterprise scale or legacy platforms. You could loosely throw in the acquiring banks here and traditional acquirers like First Data Corp, Elavon, and Worldpay. The 500lb Gorilla in the US is Chase Paymentech. They're a "two in one" payments processor and acquiring bank. They're also massive. With fewer handoffs, middlemen, and economies of scale, they can pass off cost savings to the most price-sensitive companies like Walmart and Amazon. (Although the reality of merchants that size is they all have multiple relationships with acquirers, banks, and processors for performance, market coverage, and price).

Adyen is uniquely positioned as a software platform (in-store), payments partner (embedded finance specialist), and capable enterprise scale. It is not as strong as Stripe at being a payments partner (yet) or as specialist as Square or Toast in being a software platform. But strong at both and experienced working with an enterprise.

You could imagine a similar image for every market player.

b) Who's poised for the fastest growth? Software platforms and payment partners who enable embedded finance. This shouldn't be surprising, given the companies serving growing markets are growing. The secular market trend is towards embedded payments online and mobile payments in person.  All POS terminals are becoming default software-first. This enables the new entrants to win the “omni-channel” legacy merchants.

We see that the provider's age often matches the client's age. Younger growth companies prefer modern providers who can immediately service many use cases. 

Consider SMB's priorities.

The younger SMB will likely prefer a modern software provider who's "all in one" for their use cases and can help them get to market quickly. Square and Toast are perfectly set up for the boutique coffee shop or small chain. 

If you look at the older SMB's priorities, they're less likely to change to a modern software platform. For older SMBs, changing will likely be more effort and business interruption than staying still. They have high switching costs but are unlikely to grow as fast as a new business.

👉 Takeaway: Software platforms are winning growth.

Consider the priorities for SaaS and marketplaces. 

They need similar things, a complete offering, and a fast time to market. The crucial difference is that time to market has to work for their client. Shopify wants its customers to be able to take payments as quickly as possible. Stripe checkout is canonical, super easy to integrate, and solves all edge cases payment acceptance solutions.

There aren't many vertical SaaS or marketplaces older than a decade, and many grew with companies like Stripe or Adyen. Now they're at scale, they're likely to add other payment partners, but why change their core provider?

👉 Takeaway: Payment partners are winning growth.

Companies outside these two categories ARE stuck in a race to the bottom. Acquiring banks are willing to undercut prices to maintain a wider banking relationship. They use price sensitivity in payments to win a more lucrative part of the business.

c) Geographies matter. Europe, Asia, and North America have fundamentally different competitive landscapes and market pressures. 

Europe has 100s of payment types and wildly different e-commerce patterns, as do payment preferences. In Scandinavia, it's commonplace to use the local Pix equivalent Vipps or Swish, the Netherlands has a heavy focus on the IDEAL label, and the baltic region has wallets that support cash at local agents. Born in Europe, Adyen can natively support many of these payment types from its "unified platform." Europe is the home of regulations like PSD2, Strong Customer Customer Authentication (SCA), and GDPR. These have to be on point.

Adyen has grown up in a market where cross-border, multiple currencies, and payment types are the default. It built relationships with European-based enterprise customers like Adidas, Spotify, and Booking.com.

This suits 

• Growth companies starting scale across borders (in or beyond Europe).

• Companies that need to support online and offline (e.g., in Eastern Europe, being able to support in-store can be critical for some clients ) 

• Companies operating in multiple markets where fraud patterns vary massively by payment type, local culture, and norms.

👉 Takeaway: Growing up in Europe forced Adyen to manage complexity, scale, and cross-border by default. It follows its biggest clients into new markets to maintain primacy with that client and is doing this better than its peers.

Asia, like Europe, has countless payment methods and local payment types like LINE pay in Taiwan. E-commerce is exploding across these markets, but again, cash is still a significant player, and being able to manage offline and online is beneficial. 

APAC is the fastest growing part of Adyen's business and is a hub for regional and global companies (like laptop makers Asus and Acer and TV maker BenQ.) Malaysia, Indonesia, and the Philippines are rapidly growing markets that must mix in-store and online for e-commerce.

Adyen's cross-border blend of in-store and offline, enterprise scale, and ability to deal with multiple local regulations allows companies to start to go global.

👉 Takeaway: Asia is discounted in the calculus of the recent Adyen results, given it is a major part of its business.

North America and the US are markets dominated by card payment types, and since the pandemic, e-commerce has been accessible to most of the population. The main difference for Adyen vs. Europe and Asia is that the US has an enormous hyper-competitive market. As the home tech companies wanting to expand globally are headquartered in the US (such as Meta). So Adyen has a strong wedge into the market but is now amid market entry.

And it's this US market entry that impacted their H1 results.

This is where we started this Rant.

4. What happened to Adyen?

While the Fintech market cratered and public companies like Affirm and Robinhood lost 90% or more of their market cap, Adyen kept trucking. 

Adyen became the low-key darling of payments and Fintech, delivering mind-blogging growth and profit after the results season.

Until.

This is not a pretty picture.

The king of enterprise stumbled.

Or did they?

Adyen's H1 2023 revenue growth came 21% to €739.1 million, below the forecast of 25%, and profit (EBITDA) fell by 10% compared to the same period the year earlier. 

This isn't high growth and high margins.

This is slowing growth and eroding margins. Oh dear. 

There are a few factors we have to consider here.

a) One-off investment costs. Adyen historically has the highest revenue per headcount metric of its peers. It is now investing in new products over multiple quarters that have yet to deliver the kind of revenue the wider business does. Adyen believes it is playing a longer game, but the market is spooked. Yet they have proven the ability to do this in the past (e.g., with their success in omnichannel). Adyen likes to build in-house for long-term unit economics and differentiation. They’ve done almost zero M&A for this reason, and this is driving high up-front costs for them.

b) The cost of market entry to the US.  As it hires ahead of demand, it has cost today for potential revenue it needs to support tomorrow. That headcount is expensive compared to other regions. Standing out requires a large sales force over a massive geographical area and a surge in marketing costs. In Asia, Adyen can pick off markets that suit it (like Taiwan), and Europe has many adjacent markets. 

👉 Takeaway: Adyen has cost today for profit tomorrow. Hurting margins.

c) Strong incumbent's price cutting. Companies like Braintree and Stripe have a headstart and home-field advantage. As Adyen enters, Braintree, in particular, is aggressively price-cutting to defend market share from Adyen. Adyen hasn't faced the same type of price war historically, and this is partly driven by macro. Braintree is also every bit as solid when it comes to R&D.

👉 Takeaway: Revenue growth is restrained by competitors' price cutting.

d) The pandemic macro reversing. Anything correlated to e-commerce had hyper growth through 2020 and 2021 as physical retail cratered. Some of Adyen's largest customers also benefitted from this change. Their stellar growth came from new client wins and massive payment volume increases in their existing client base. The same is true for competitors Stripe and Braintree from PayPal. 

👉 Takeaway: Companies that serve growth customers all have margin pressure.

5. What happens now?

My hypothesis:

• Their biggest challenge is demanding growth clients who want them to become more modular

• The advantage in performance (on fraud & conversion) still appeals to growth enterprise

• They'll steadily improve unit economics in the US

• The margin pressure will re-balance

• And will follow their largest clients into more markets

a) Their biggest challenge is demanding growth clients who want them to become more modular. As the growth clients become multi-processor and multi-bank, the value of a full stack lessens and can even dilute their core value proposition. The answer is to become more modular for individual capabilities like KYC, fraud, and PII/token vaulting. As the market becomes modular, platforms are at risk of specialists in each area. Adyen can do vaulting, but they might not be as good as Very Good Security or Basis Theory. Adyen can prevent fraud but not as well as Sardine* or Sift).

You can see a world where payment orchestration platforms become super valuable in a multi-processor world. Platforms must offer orchestration and modularity to retain their volume with the most demanding customers. Partnering is the new all-in-one. Does this erode Adyen (Stripe, Nuvei, and Checkout), or does it give them a new way to scale?

b) Adyen's performance advantage works for its ideal customer profile. The Adyen advantage has been a mix of performance and tech on one side and enterprise-scale on the other. This uniquely suits growth enterprise companies or growing brands. Adyen occupies a sweet spot. My hypothesis is they still do. They're in good shape if they can go modular where needed and be thoughtful about which partners allow them to retain their data and “single platform/full stack” value prop. The single platform can deliver higher conversion in-store, online, and in multiple markets, even if its modular at the edges.

There could be a whole rant about this picture alone.

c) Adyen will steadily improve economics in the US. Its recent hiring surge came when competitors began to price cut. They had a double-whammy of revenue and profit hits. Adyen has been an incredibly cost-disciplined company throughout its history. Considering that Stripe had nearly 8,000 employees at its peak, Adyen still hasn't passed 4,000. These are vastly different businesses in many ways, but Adyen has been public for a long time and has shown it knows how to manage costs. The question is, will the R&D and infrastructure effort pay off? If it gets licenses, it can get better unit economics. The R&D isn’t as clear-cut.

d) The margin pressure will rebalance. Travel is hot but cooling; e-commerce has started to grow in line with its long-term trend. If this remains true, Adyen will benefit from the tailwinds that have helped to drive their growth over the past decade and a half. However, large merchants are incredibly price-sensitive, tokens are the new battleground, and the networks are raising the base fee. Combined with competitors from the early stages (Moov/Silverflow), chasing pack (Checkout/Nuevi), direct competitors (Stripe/PayPal), and incumbents. There will absolutely still be margin pressure. Will the R&D and infrastructure effort pay off? That’s the big unknown.

e) Adyen can expand into more markets over time. Y'all forgot about Asia. Geographies matter, especially to growth enterprises and tech companies. Netflix, Spotify, and Meta will see their growth come from expanding into new markets. Brands like H&M will want to serve a rising middle class as these markets grow. Adyen has a better beachhead here than Braintree or Stripe. Again, Nuevi and Checkout are making this part of their thing, though.

Adyen might not be the only partner in these new markets, but their "single unified platform" will play a big part in retaining the "default" operating system status. You have to wonder if LATAM will make them consider M&A at some point.

Adyen may have taken a step back in its earnings growth, but it is still a rare beast driving substantial revenue and profit growth simultaneously.

It’s doing all this with a steadfast focus, being as close to the metal as possible and full stack. That has a high up-front cost. They might not enjoy their historic margins and growth forever, but they’re doing many things right.

6. Summary: Is payments a race to the bottom?

No.

Competitors can't keep up the discounting forever without dramatically harming their performance. Macro tailwinds are reverting to the long-term mean. Adyen will return to price discipline once it has completed the R&D and infrastructure investment it believes it needs to achieve its long-term “full stack” position. 

One example of infrastructure investment. Adyen just got temporary permissions for a UK bank license. This significant and costly effort pays off in the form of unit economics over the long term.

There are value levers that drive a sustainable pricing advantage for their ideal customer profile. Adyen's sweet spot is tough ground to take. PayPal hasn't driven infrastructure investment sustainably in its Braintree business. Stripe has focussed on R&D but now arguably has too many products, cost challenges to manage, and an IPO to navigate. 

Where does that leave us?

Payments are full of edge cases. Investment in R&D and infrastructure drives a sustainable advantage in solving those edge cases. That has a real business benefit. 

Enterprises demand scale and lower prices for unit economics.  

That takes enterprise scale and cost discipline.

That tension means there is opportunity. 

Coming up from below will be a new generation of payment acceptance companies like Moov and Silverflow.

The chasing pack of Checkout and Nuevi are snapping at their heels.

The biggest clients want more modularity and orchestration.

Will Stripe, Adyen, Square, Toast, and Braintree win a new vintage of growth customers?

Will we get a whole new generation of massive payment companies?

And where does payment orchestration fit?

Game on.

ST.

4 Fintech Companies 💸

1. Passthrough - Investor onboarding platform

Passthrough allows VCs, PE firms, lawyers, and fund administrators to collaborate on investor onboarding. The product aims to save funds weeks of admin to close their fund faster, with an average 20-minute completion time for investor onboarding. The onboarding also includes full KYC and AML checks (including beneficial ownership). 

🤔 Tools for funds are a theme at the moment. It's hard times out there for GP's out raising. Passthrough is very specialist in what they do, but in the long term, they head towards a back-office as a service that has a crowded space. Are there enough funds to have a big enough market size for this product? They completed a Series A in Feb of 2023, so they likely have enough runway for a little while, but I'm curious to see if they can drive enough revenue and market share to get to a decent Series B. Growth is a difficult spot. Although if anyone has the fund relationships for raising, it's probably these folks. And, everything is markets tech right now.

2. Peanuds - Personal and business finance simplified

Peanuds provides debit cards, checking, multi-currency accounts, and analytics for prosumer and business customers. The service also has multiple payment rails, contact management, and "extensive analytics." 

🤔 They're leaning into digital asset businesses and freelancers. The cynic in me feels like this is copy+paste Revolut. But then, Revolut does so much that could be true of anyone. They're aiming at being pan-European, which is a crowded market. Funding and traction will be key, and it's not obvious they have anything to stand out. But that's the best thing about entrepreneurs: they surprise you. And, outside of Revolut, there isn't a dominant Pan-European spend management player yet.

3. Scribe Up - A virtual card for subscriptions

With Scribe Up, users link their cards to find existing subscriptions and cancel any unwanted bills with a click. The service then puts subscriptions "on autopilot." The service will also ensure users can complete a free trial period without defaulting to paying an unwanted subscription.

🤔 Starting a subscription is easy; canceling it is hard. During the pandemic, consumers signed up for on-demand services faster than ever flush with their stimulus checks. Now they're less well off, going outdoors and traveling, and that subscription isn't getting used. If a user can't find the button to press to unsubscribe on the website, they often either leave it running or, worse, issue a chargeback. The chargeback will cancel the subscription but should be a last resort. I see subscription management becoming a default feature, but is it a business? Minna Technologies sells this service to banks like Lloyds and ING, showing up in every Neobank. 

4. Craftgate - Payment Orchestration based in Turkey

Craftgate allows e-commerce merchants to manage banks, payment processors, and alternative payment methods from a single dashboard. Featuring everything from a closed-loop wallet to payment retries and payment methods like GarantiPay. 

🤔 Turkey is the payments innovation market that gets far too little attention. While its inflation and economic troubles get the headlines, Turkey has been a global leader in payments innovation for decades. This market is worth $365bn for payments with a CAGR of 26%. Cash still dominates a market with 86m consumers that is poorly serviced by large tech companies from the West or East. Local banks have been highly innovative and filled some of this gap, but this well-educated market feels ripe for disruption. 

Things to know 👀

1. Fed warned Goldman's BaaS team about compliance oversight

According to the FT, Goldman's Transaction Banking partnership division has stopped taking on new clients after a warning from the Federal Reserve. The Fed raised issues such as insufficient due diligence and monitoring processes. The partnerships team provides accounts, payments, and banking services to Wise and infrastructure companies like Stripe.

🤔 Goldman is the most visible large bank selling "Banking as a Service" due to its public and visible partnership with Stripe Issuing and Treasury. Quietly, other large bank payments divisions support similar companies in partnerships, but few as directly or via 3rd parties like Stripe, Unit, or Treasury Prime, so-called "BaaS providers." The main difference is in providing the underlying account structure and sponsorship to the card network.

🤔 The regulatory eye of Sauron is now on "Bank 3rd parties," AKA Banking as a Service. Three federal agencies issued guidance on 3rd parties following the collapse of several banks and failings at smaller banks that operate BaaS programs. 

🤔 Yet the BaaS business case is as strong as ever. Banks' primary source of income is dwindling in a market with lower deposits and less credit quality. Smaller banks feel this the most. BaaS offers deposits and lending to customers at a near-zero acquisition cost (CAC) via 3rd parties.

🤔 It's unclear who manages what risk. The bank is on the hook to the regulator, but how do they know how their 3rd parties (the BaaS provider and its programs) behave? Complicating matters further partnerships via Stripe and others can be "4th party." Bank to BaaS provider to SaaS platform to end customer. Mo' parties, mo' problems.

🤔 Banks need real-time visibility and look through to 3rd and 4th parties. That is possible with Fintech compliance providers (like Sardine* and, I believe, Alloy), but it's not how many bank programs are designed today.

🤔 Goldman can't catch a break. They've had a string of bad earnings results, losses in their partnership with Apple, and sell-offs of recent acquisitions like Greensky, the POS lender.

2. Uniswap wins court judgment, ETH viewed as a commodity

A Judge in New York's Southern District has thrown out a class action suit against the decentralized Crypto trading service Uniswap. The SEC has always shied from calling ETH security; the judge (who will also preside on Coinbase vs. SEC) called it a commodity. The lawsuit claimed Uniswap failed to register as an SEC broker-dealer or 

🤔 Crypto industry 3 - SEC 0. Three courts have now repudiated Chair Gensler's claim of regulatory clarity. SEC vs. Ripple, SEC vs. Greyscale Trust (for its ETF), and now this class action judgment from the Southern District of New York is perhaps the strongest yet. In the summary, the judge stated that DeFi legal certainty is a matter for Congress, not regulators, given the complexity of these assets.

🤔 This is a monumental win for DeFi platforms like Uniswap. For a long time, there was uncertainty over whether a decentralized trading platform like Uniswap could exist in the United States. These exchanges operate 100% automatically, with companies contracted by token holders to make updates based on community governance. In practice, this means much more transparency in decision-making transactions and significantly lower operating costs (and, therefore, costs to users). 

🤔 It's also huge for Ethereum and Coinbase. This is the same judge in the SEC vs. Coinbase. Given this outcome, the likelihood of the judge finding for the SEC that Coinbase violated securities laws appears very low.

🤔 We sorely need congressional action. Europe, the UK, Singapore, Hong Kong, and half of the Middle East now have clear regulations for Stablecoins, tokens, financial promotions to consumers, and more. The US has lots to learn from and several draft bills it could work on. 

🤔 Crypto's worst offenders are being cleaned up. The wake of Celcius, FTX, and the large market failures in Crypto are leading to action being taken and arrests being made. What's clear is there's also a credible core of the industry left standing, adding value.

🤔 Isn't it interesting that we're fixing some structural issues when the Crypto price is lower? If we can get regulatory clarity, we also get a global, 24/7, programmable financial infrastructure. It's time to put down the pitchforks and consider how these worlds co-exist.

Good Reads 📚

1. The rollercoaster of a Small Bank as a Service

Jason covers Lineage Bank, once a small Tenessee-based bank with $27m assets in 2020 that ballooned to $242m two years later. The bank owner had a history of embezzlement at previous banks to cover an alleged gambling habit. 

🤔 Not all bank leadership is created equal. If you ask around with Fintech operators, a few smaller bank names often come up as diligent but approachable companies. Unfortunately, with over 5,000 banks, there'd likely be a bad apple or two in the bunch. Given how quickly BaaS can generate deposits and lending opportunities, it's not surprising there's a gold rush of small banks vying for this space. 

Tweets of the week 🕊

From John Piazza

“The seriously abbreviated state of non-card instant payment rails in the US:

- 42/10,000 FIs have adopted FedNow

- 300/10,000 FIS have adopted TCH RTP …Representing 1.2% of electronic payments

- Stablecoins? ~10/10,000 FIs

We have a looooooong way to go folks. Keep pushing!”

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a * (3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only. (4) I'm not an expert at everything you read here. Some of it is me thinking out loud and learning as I go; please don't take it as gospel—strong opinions, weakly held.