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Fintech 🧠 Food Nov 29 - Libra in January, HM Bradley & Current raises unpacked, Neobank subscriptions and why mission matters
Hey everyone 👋, thanks so much for coming back for more brain food, covering four fintech's that caught my eye this week, an in-depth look behind some of the biggest stories and best content of the week. It's the "I know kung-fu" version of what happened in fintech. Apparently. :)
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If you like this content, please do check out this BNPL take on the 11:FS blog. 👀
Fintech is about making finance better for everyone.
What gets me out of bed every morning and makes me write brain food every weekend is the idea that fintech is about making finance better. Money makes the world go around. Money pays for schools, hospitals, PS5s. Access to credit can create opportunities.
Money can also be abused, whether in financial crime, human trafficking, or climate change. If there's an issue you care about, there's a cogent argument that changing the monetary incentive or system will changes outcomes.
Finance wasn't always for everyone. 🏦
Many incumbent banks got into bad habits that are not mission focussed. For example, "share buy-backs"—buying their shares with company profit to drive up the share price. Or introducing fees for customers to help drive up profit. The incumbents also use teaser rates to acquire customers before adding an inferior long term rate. In isolation, this behavior seems like it is good for business. It's bad for business.
Post financial crisis, bank share prices are in the toilet; fintech is outgrowing the banks and, big techs are attacking from the edges.
Fintech companies that are growing are spending on R&D (or even M&A) to fuel their success. They do this because they focus on more than the profit. Their mission is how they get to profit. Everything aligns with their mission, and growth follows.
Post financial crisis, we saw a wave of Fintech companies work to make finance better and digital. Whether it's Square, Stripe, Chime, or name your favorite here, these businesses have two things in common.
1. They question long-held industry assumptions
2. They start at the customer problem and are laser focussed on solving it
As a result, these businesses are (usually) much more mission-driven than their incumbent competitors. To compete, they had to find an underserved segment, and they had to make finance better for that segment.
For Square, this was launching super simple payment acceptance and free P2P payments. For Chime, it was allowing customers to get paid early and having no-fees on everyday transactions. For Current, it's about providing excellent service to the underserved segments of society in an aspirational, not predatory way. For HM Bradley, it's about offering incentives to save more.
In short, fintech is about not being an asshole in your business model. It's about only looking at customers on a spreadsheet and charging them for late fees.
When you look at successful fintech companies, it is hard to separate their success from purpose. Even Revolut, one of the more capitalist, blitz scaling-focused fintechs origin story, comes from its founder Nikolai's dislike of being ripped off in consumer FX payments. Purpose drives change and growth.
There's still so much opportunity to make finance better. The insight for me is to acknowledge the world around your business and adapt accordingly.
If fintech is making finance better, let's do it across the entire business model.
It's better for business. It's better for society. It's just, better.
4 Fintech's 🤑
1. Envel - The Neobank with "autopilot for your money."
Envel features the usual Neobank capabilities like a debit card, cash wallet, bill management, daily spending limits. Envel also has a savings jar/pots feature that automatically moves money into things like your emergency fund. The "spending mode" feature is very similar to how more modern PFMs (e.g., Co-pilot, Plum) push consumers to save harder by setting tighter daily limits.
Envel is leaning hard into self-driving money as a concept and combining this with more familiar PFM. Individually none of the features feel revolutionary, but the package is smart. I always liked how Plum used behavioral psychology to get people addicted to saving. Envel could well head that way.
2. Charityvest - The tax-deductible digital charity fund
Instantly create tax-deductible, charitable giving accounts (Donor Advised Funds). Users can make tax-deductible contributions of cash, stock, or crypto. Customers can also instantly donate to more than 1.4m non-profits in the US from their fund balance. All with a single consolidated tax receipt. The platform also helps companies auto-match employee charitable giving. Vennfi just closed a $2.3m seed round.
3. Productfy - Bank as a Service Toolkit
Productfy has focussed on bringing together several standard services a Neobank or nonbank would need to create a financial product (e.g., Marqeta for payments, Yodlee for account aggregation, Equifax for credit scoring, and a bank partner). The pitch focusses on speed to market and being the all in one platform. It is quite similar to where Bond, Synapse, and Unit finance pitch their product. The BaaS 2.0 market is crowded, but the clarity of the proposition is exceptional.
Stripe's innovation abstracted the complexity of becoming a merchant, creating sub-merchants and packaging that all together into a beautiful developer interface. The 2.0 BaaS providers have started to find similar ways to package regulated activity to reduce cost and improve time to market. If Productfy's execution continues to be as good and as clear as their homepage and portal, they could be one to watch. They've neatly separated their audiences; the sandbox onboarding is slick, the customer support is already strong.
4. Lula - Mobility insurance-as-a-service for companies
Lula is a digital insurance broker meets outsourced insurance ops team for companies. They help companies distribute policies over multiple insurers, access risk assessment tools, and have a network of partners to handle claims.
In the past year, "fintech tools for SMBs" have been massive. Could insurance as a service for SMBs be the next big thing? Lula is early and appears to have pivoted from a ride-sharing app. But I like the concept—a lot.
Things to know 👀
The FT is reporting that the Libra association will launch a US dollar-pegged stablecoin in January 2021. It will be 1:1 backed by the US dollar, and the application to be regulated is currently being reviewed by the Swiss regulator FINMA.
🤔 My Analysis: I doubt they'll launch in Jan 2021. They have hired many regulatory heavyweights lately, and the Swiss regulator is very open-minded to crypto, but any launch outside of Switzerland would create a massive backlash. Central banks and governments are still not fond of the Libra concept, even if it is now essentially a US dollar stablecoin. However, I do believe if Libra ever does launch, it would do so as the dollar's competitor to China's central bank issued DC/EP. It's no surprise then that the most vocally unhappy central banks are European and Chinese.
🤔 My Analysis: Stablecoins are one of those things where I feel very strongly that in 10 years, they'll low key be standard and just another rail. Today's mega fintech growth businesses (Stripe, Shopify, etc.) started by serving the bottom end of the market, the overlooked. Betting on growth is a great strategy. B2B payments are slow, expensive, and tomorrow's businesses (especially those that transact internationally) could use a better rail. Stablecoins are an abstraction over the out-dated US Dollar B2B payments space.
🤔 My Analysis: B2B payments are massive and increasingly need to happen cross-border. Stablecoins have enormous potential as a real-time, global, dollar-based Fedwire. There are a few projects that interest me here in addition to Libra (e.g., USDC, Celo, and then businesses like Wyre or Sila).
🤔 My Analysis: I'd be remiss if I didn't mention Dwolla here. They've been around as an excellent, non-stablecoin based rail for nearly a decade. But think about the small business globally and want to collect USD from other companies, not consumers. This type of payment is where Stablecoins could find a niche. A massive niche.
HM Bradley revealed a savings program in April and has since received $90m in deposits. It offers a credit card with 3% cashback for a consumer's highest spend category, 2% for the second-highest, 1% on everything else. Consumers who pair a card with a deposit also earn more. The Crunchbase article notes an investor was impressed by the % of customers who send their paycheck for direct deposit, opt into one-click credit, and engage with savings goals is "staggering."
🤔 My Analysis: The credit card with 321 reminds me of many of the wildly popular Santander 3,2,1 cards that supercharged their credit card acquisition when launched in the UK. It's a proven acquisition strategy, but the twist of applying cash back to the consumer's spend categories is a brilliant, modern, customer-centric move. It feels more like an Apple card than something by a "bank."
🤔 My Analysis: Increasing a customer's savings rate as they take more products in cross-sell is fantastic on two levels. In a low-interest-rate environment, the savvy consumer is looking to optimize their savings rate; this will appeal to that consumer (usually higher income, lower risk). It also creates an incentive for the consumer to take cross-sell products from HM Bradley. We've seen bundles from big banks before, but never this neat, and never with such a clean incentive (or at least, I haven't seen something this clean). No wonder their cross-sell is strong.
🤔 My Analysis: Not enough companies can do one-click credit applications or approvals. Regardless of how it works behind the scenes, that experience of instant is incredible. It works for BNPL, and it works exceptionally well for the Chinese big tech companies. Instant credit approval will become table stakes.
Current has doubled its member base in 6 months with their product, designed to improve millions of Americans' outcomes.
🤔 My Analysis: Currents rise has been rapid and speaks to great execution and how mission permeates everything they do. They have a clear view of who their audience is and have solved the real problems of finance. Congrats to all involved.
Good reads 📚
Square Cash App is estimated to be buying around 40% of newly-issued Bitcoin. PayPal just allowed it's nearly 300m global active users to near-instantly buy Bitcoin. The impact this has had on Bitcoin purchasing is evident at PayPal's supplier (Paxos), who's crypto exchange (itBit) saw their values explode. The volumes seen suggest PayPal is now buying almost 70% of the new supply of bitcoins.
🤔 My Analysis: Despite the crypto price pullback, the fundamentals of crypto are very different from 3 years ago. Bitcoin is now widely accepted as an investment, yes speculative, yes volatile but an investment nonetheless. Crypto isn't the wild west anymore. It is increasingly a well-regulated, consumer-centric asset class that hedges the hidden inflation resulting from endless central bank money printing and low-interest rates.
Top 15 banks have 50% of all deposits, making it nearly impossible for Neobanks to compete on the cost of capital. Meaning if Neobanks are going to get to significant revenue growth, subscriptions could be key. Revolut is offering a tiered system, which brings together low rate FX with the ability to invest on margin. Subscriptions could be the beginning of the great "rebundling" of consumer financial products. Throw in BNPL management, utility bill management, a marketplace for finance, cash flow optimization, insurance, and more.
(Source: CB Insights)
The blog post suggests the perfect Neobank subscription includes, at a minimum: Free ATMs, brokerage and investments, physical and virtual cards, crypto, checking and savings, loans, PFM, P2P payments. It then adds the option to invest in art, collectibles, private company shares, real estate. Then wrap all of this in "self-driving money" to optimize against the user's goals. 😅
🤔 My Analysis: I didn't even list everything they suggest, and what's clear is there are so many capabilities out there that can be bundled. As fintech becomes unbundled, the question is, what is the right interface or brand to rebundle it, and how much capability needs to come together to justify a reasonably high monthly subscription (e.g., $20 or more)?
🤔 My Analysis: Who wants to be a bank that takes deposits to lend, and if they're lucky, hit a 10x PE multiple? Instead, businesses like Microsoft or Adobe that move to subscription revenues are closer to 30x to 40x price to earnings (also they achieved massive earnings growth). Would the same be true for Neobanks?
🤔 My Analysis: By blitzscaling, Revolut is actually in an interesting position to do well because of the breadth and depth of capability they offer. I do wonder if getting a full banking license is a bad thing for a Neobank. Once you have that license, quite quickly, much of the effort turns into keeping it.
🤔 My Analysis: I believe the opportunity for the Superhuman of banking is out there and will charge a subscription. I just wonder if the way we get there won't be via big bank acquisitions and roll-ups (did someone say SPAC?). It has to be said most attempts to do "subscriptions" by Neobanks today have gone down like lead balloons. Subscriptions have to offer that sense of overwhelming value (e.g., Spotify, all the songs ever). No Neobank has done that yet.
This essay has a lot to it and is well worth your time if you're in a Neobank or Fintech investing.