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Fintech 🧠 Food - Open Data is the key to improving consumer outcomes, Stripe does USDC payouts & White House Digital Asset Framework - Sep 26 2022
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Hey Fintech Nerds 👋
Well, that was a week.
Another Fed rate hike, stocks plunging, and no end to the tightening markets.
A monster recession is coming.
And as always, the poorest will suffer the most. In this week's Rant, I talk about Fintech companies' role in helping fill that gap.
But if you zoom out, this forces us to deal with some problems we always had in the economy.
Global supply chains prioritized the cheapest goods over sustainability and resilience. That is now changing.
Europe was too reliant on Russian energy. That is now changing.
The Western world relied on cheap debt and low-interest rates to increase asset prices and make homeowners feel wealthy. That is now changing.
Success hides problems.
When times are good, we focus on solving issues.
When times are bad, humanity is often catalyzed into change.
Penicillin, radar, jets, nuclear power, rockets, and helicopters were all created during World War 2. Many highways and the internet were initially funded to help the Cold War effort, and so on.
World War 2 was a horrific series of events that caused immeasurable and unimaginable suffering.
But as a species.
We're often at our best when times are the worst.
And that gives me hope.
Supply chains are re-localizing, Europe is investing in long-term sustainable energy, and the side effect of changing central bank policy could be a rebalancing of global wealth inequality.
I hope so.
Weekly Rant 📣
I believe Open Data is the best way to help consumers in need.
The consumer needs Fintech innovation more than ever.
Change is coming, and the pain hasn't started yet. Interest rates are rising, the stock market continues to plunge, and rampant inflation is increasing prices.
It might not have felt like it, but according to the data, the past few years were fantastic for consumers.
In the past 5 years, child poverty has decreased in most developed economies, consumer debt defaults have fallen, and 10s of millions joined the investor class. Despite our partisan politics, global instability, and the number of problems the world faced, 2021 was a great year for most people.
In the U.S. child, poverty dropped from ~12m to ~4m
And debt defaults went from ~1% to 0.5% in consumer credit
But it's about to get ugly. Consumers face a cost of living crisis, rising mortgage costs, debt costs, utility costs, and a looming recession where job losses haven't started yet.
What happens when mortgage rates rise, and a deep recession hits? Demand for housing drops, and house prices fall. Indeed, the Fed knows this and is trying to make it happen to tame inflation.
Consumers own properties that may decrease in value, and as they do that, the cost of any new mortgages will increase, lowering demand for housing. In markets like the UK, where 2-year fixed-term mortgages are common, rising interest rates will almost immediately impact consumers. Possibly putting them in homes, they can’t afford to keep.
Compounding the issue, the tools we used in 2008 to help consumers with the housing crisis aren't available. The central banks can't cut rates to stimulate growth. Inflation is so incredibly high they're likely to do the opposite.
Consumer financial health is about to fall off a cliff.
We need Fintech innovation more than ever.
Fintech Innovations we can use.
We've done some good things already, but we can do more.
And IMO Open Finance and Open Data are the keys to doing more.
We've done some good already. Onboarding under-served communities and cashflow-based and payroll-based underwriting will become a new standard. The big banks are getting in on the act, and I think this is why Apple acquired Credit Kudos.
We have a data visibility problem. Consumers' financial lives are complex, and we need to see more data to be better financial advisors. Even with "Open Banking," each Fintech company only sees a snapshot of consumers' financial lives. We have to solve market fragmentation.
We have a data context problem. Data is messy; we need to add context to the data to make it usable. Financial services has a data quality problem. Transaction data often makes little sense in isolation and is far from "this consumer could save $100 a month by switching energy supplier."
More data + more context allow us to create better outcomes. Saving on utility bills, consolidating debt, or building an emergency fund are all worthy goals, but which one is right for you depends on your life context. But if we have the data and your life context combined, we can push you towards a better outcome for you.
We should measure and benchmark consumer outcomes as an industry. If you can measure it, you can manage it. We've got to hold ourselves accountable, and the industry should adopt consistent metrics (e.g., the financial health score) as a core success metric.
Don't hate; collaborate. The story of "open banking" has been very adversarial. Banks pushing for "security," also known as "getting paid." Not all aggregators and Fintech companies are leaning into consistent standards, focussing instead on their business growing. If we're going to create better outcomes, it's not going to come from regulators. The industry has to stand up in this moment and collaborate.
Looking back on the good we've done so far.
Consumer Fintech has been a force for financial inclusion on two main dimensions. Helping people without a credit score build a credit history.
Cashflow underwriting is a game changer.
Consumer credit bureaus (e.g., Equifax, Experian, and TransUnion) build a data set about each consumer based on data feeds from lenders, banks, and other sources like local voting records. Combined, this allows any bank or lender to have confidence that someone applying for an account.
Has repaid debt successfully before
Has several financial products
Has no history of fraud
That confidence is vital if lenders want real customers who will repay them.
The problem is it doesn't work for immigrants, the excluded or low-income sections of society (and we won't get into bias in lending decisions against women and PoC, but yes, that too).
In the industry, this catch-22 is called a "thin file." Referring to the fact that the credit agencies don't have a lot of data about this individual.
Enter: Cashflow underwriting.
Consumer financial behavior is a better indicator of their likelihood to repay debt than their income.
Companies like Affirm and Klarna can predict who is likely to pay them back better than traditional credit modeling.
Traditional models split consumers into tiers based on their credit score and historical losses to try and predict future losses. But this seminal blog by Affirm walks through how they became better at predicting repayment by only focussing on one data point. Did the consumer make the last payment? If the answer is yes, they're X% likely to make the next one, regardless of their credit score.
This model has proven to be more accurate than the credit score model.
It helps that Affirm has a lot of data to work with.
But have you noticed the giant ocean of consumer financial data in their checking account?
Paying an existing debt is a great predictor, but so is paying your rent and your bills on time. A consumer may have no credit history, but they have a financial behavior history. Companies like Petal and Credit Kudos took this data and packaged it to help drive lending decisions. Now consumer
Fintech companies use it to extend cash upfront to consumers and then report their repayment to the rating bureaus. Over time, the consumer starts to build a credit score. Even the bureaus are starting to look at this data, having seen its success.
Now, when you add in payroll data, you can see that someone will get paid next month and potentially pull a loan repayment directly from the paycheck. This has allowed advances on wages or "earned wage access" to pay people up to 15 days early in an emergency.
Let's set aside the risk that getting paid early means running out of money early. There's something here if we can use it right. When more data became available, we got more accurate lending to a population that may have previously relied on loan sharks.
You may have seen the Apple Card having issues with "sub-prime" customers (with credit scores below 660), with Goldman suffering the highest losses among their peers. This is likely due in part to Goldman being quite new at credit card lending, but it wouldn't surprise me if
Apple, the master of integrated experience, wanted more control over the losses and how the tech stack works. The rumored "project Breakout" would allow them to vertically integrate and do things incumbents find incredibly hard (like innovating in the underwriting model or auth stream).
I think cashflow-based underwriting is why Apple acquired a U.K. Open Banking provider called Credit Kudos. Credit Kudos, you can think of a bit like Prism Data, an API that specializes in using banking data to provide underwriting intelligence (although Credit Kudos was a regulated provider in the U.K.).
Cashflow underwriting has proven so successful that now even the big banks are getting in on the act. The idea is to use checking account data to underwrite consumers without a credit score, but there's a catch. The big banks are sharing this data in private with each other. Creating another little data cartel. This seems anti-competitive and bone-headed. It's likely "for security reasons."
But c'mon, folks, let's make data sharing secure and make sense for everyone.
We need more data visibility.
Seeing checking + payroll is nice, but it misses so much of a consumer's financial life.
What about investments, savings, insurance, pension plans, store cards, and Fintech apps? There's a whole universe of financial data we're missing. While there's an API for most data sets, the ability to aggregate all of that and present it neatly has so far been lacking.
In the U.S., smaller banks often lack coverage by aggregators. The bigger banks may occasionally break the screen scraping done by aggregators to "manage security" (get paid). With payroll providers and investment services, coverage usually tops out around 80%, which is good but the long tail matters. And insurance is nowhere in this picture.
How do you help someone build a savings buffer, have the right insurance and manage cashflow shocks if you can't see the whole picture?
In Europe, it's even worse. In theory, "all of Europe" has regulated open banking, but in reality, it has open checking in the U.K. that works quite well. No savings, no loans, no investments.
Be careful what you wish for when it comes to "regulated Open Banking." I'd argue it has limited the potential of the free market somewhat.
Across the continent, consumers' usage is limited, and providers' coverage varies widely.
We need more context about consumers' lives.
Financial services data is terrible.
My favorite is how my bank reports Kentucky Fried Chicken in the U.K. One of their group companies, "Yum restaurants Inc" comes up on the transaction feed. And some transactions and line items are just baffling strings of text like this:
"A/C 1245 VVN PAY"
This text was never supposed to be seen by humans. The engineers who created the formats used in the financial system had to work with tiny storage and network capacity, providing maximum functionality. In that light, they were remarkably efficient, and frankly, with their technology, they performed miracles.
But that doesn't help consumers in times of distress, and this data is super valuable if it means something.
U.K digital bank Monzo was the first I saw attempting to make transactions meaningful. They took transaction data and started adding cleaner wording to the consumer transaction feed, the google maps location of the store, and even a merchant logo. Being human-readable had the side effect of increasing consumer trust (and it's why to this day, Monzo is my default demo for best-in-class UX, it's the details).
Folks like MX are often used to help clean up and categorize this detail, and now there's a whole ecosystem of companies who fix Plaid data and make it use case ready (e.g., Henron, Pave, and Spade in the U.S.)
The picture is still a mess, but the infrastructure plays are coming.
Now, if the data makes sense, we can put it in the context of a consumer's financial life.
They may lack a savings buffer, but the bigger problem is their income is lower than their expenditures, so the first thing to do is provide contextual recommendations about where they can save money. Perhaps their energy supplier is too expensive, or compared to similar income brackets, they're spending much more on their insurance and could find a cheaper deal.
That's useful to the human because it's actionable.
Data + context help us create better outcomes.
Imagine a hypothetical world where we could see the complete picture of consumer financial data, and that data was useful.
A high % of people who make over 6 figures live paycheck to paycheck. Having a high income doesn't make someone good with money. A high % of people who cash checks immediately like cash because it gives them control over their money, but it means they miss out on becoming more financially healthy or building a credit score.
Both of these personas have very different life contexts.
If we could get enough data about them, we could begin to infer their context. And this is where the magic of Fintech kicks in.
The outcome we want to create is similar, but how we get them there depends on their context.
Let's hold ourselves accountable with benchmarks.
There is no lack of support for the consumer; it's just uncoordinated. Regulators, consumer advocacy groups, and well-intentioned humans in Fintech and financial services have the same goals, but it’s a mess.
W need a shared framework for what good looks like to try and improve consumer outcomes.
Luckily there is such a thing.
This graph is from the consumer financial health network, defining a score to move people up from vulnerable to coping to healthy. Several basic steps drive someone up the graph.
Spending less than income
Able to pay bills on time
Having liquid savings to cover shocks
Building long-term savings
Having manageable debt
Attaining a prime credit score
Having appropriate insurance
Able to plan ahead financially
We want to drive people to the right of this graph.
Indeed, we're now seeing several consumer Fintech apps that do precisely this (Onuu covered this week is one, and I see one every other week).
But my hot take is this shouldn't be a specialist service. It should be hygiene.
Like any measure, the consumer financial health score is imperfect, but it is a useful starting point.
Why shouldn't we have an open benchmark on consumer financial health if we get open finance? The data is all just sitting there, waiting to be benchmarked.
So benchmark yourselves Fintech companies. Are you improving outcomes?
I'm mindful of Goodhart's law, which states any measure ceases to become a good measure when it is a target.
But in the true OKR sense, this is about alignment, not incentives. How will we know we're succeeding if we don't have some data feedback loop?
And how do we succeed alone?
Don't hate; collaborate.
I sincerely hope the side effect of this Fintech bear market is a little more collaboration. It's not Fintech infrastructure providers vs. each other or Banks vs. Fintech companies.
It's us vs. the problem.
And the problem is consumers are struggling.
The industry has to get better at partnerships.
No more data cartels.
No more limiting which Fintech companies or partners can access consumer data "if they compete."
This is the consumer's data.
Let's sort out standards, adopt a core metric on outcomes, and get good at building wealth for the society we serve.
They call it financial services, after all.
4 Fintech Companies 💸
1. Portabl - The Universal Digital Identity
With Portabl, users create a single identity that they use with multiple providers. They can link to existing bank and Fintech accounts and manage data sharing from a single dashboard. It uses verifiable credentials (a W3C standard) to empower the consumer to permission data between 3rd parties. This means users can sign up for a new service with two clicks in a much more privacy-friendly way than traditional KYC. Users can update their credentials at all providers in one go instead of individually.
🤔 Portabl is the first example I've seen that could solve consumer data ownership. The tech it uses has existed for a while, but something in the execution is elegant. When consumer data ownership is the default, it will be so obvious we will wonder why it didn't always exist. Your identity shouldn't be owned by banks or intermediaries like Big Tech or Plaid. You own it. 42% of consumers abandon signing up for a Fintech app or service because it requires full KYC. Verifiable credentials give better privacy and a better experience. It's a no-brainer. But it also has a chicken and egg problem; which bank or Fintech will accept the KYC'd credentials of "someone else" first?
2. Onuu - Subscribe to better financial health
Onuu is an app that provides personalized financial goals and recommendations based on consumer spending habits. Onuu bakes in life and accident insurance to its offering and charges a monthly or annual subscription. Onuu will soon include a checking account, debit card, savings account, and credit card.
🤔 If you'd pay for Netflix, why not pay to have better financial health? Consumers are in the middle of a cost-of-living crisis and rightly cutting back on subscriptions like Netflix. Perhaps switching to an account that makes personal recommendations is a better use of that cash. The measure of apps like Onuu is; can they grow and deliver enough value? Or is this just really good R&D for whomever eventually acquires them?
3. Footprint - KYC + PII Vaulting all in one
Footprint provides a best-in-class KYC suite (that includes liveness detection) with personal data vaulting. Traditionally this is offered as two different vendor solutions; by combining them, Footprint can differentiate on pricing and developer experience.
🤔 Fintech companies need to collect KYC information before opening an account, and then they need to store it somewhere. Footprint is entering a crowded market with very well-funded incumbents, but it could displace both with disruptive pricing.
4. Pice - Instant B2B payments for India
Pice allows marketplaces, SaaS companies, and e-commerce stores to accept payments from businesses online. It creates a "3-click checkout" experience and delivers instant settlement to the merchant. Customers can also integrate with their accounting software and manage their payroll through the platform.
🤔 B2B payments are an enormous TAM that just hasn't gone digital (outside of corporate and virtual cards, which are seeing explosive growth in some markets). Pice reminds me a little of Balance (which Stripe invested in) as a checkout for B2B. There's something in merchant solutions for B2B payments, but I don't know that anyone has solved it yet
Things to know 👀
The framework report notes that digital assets could help reinforce U.S. leadership in the global financial system and technology. But that crashes in a "so-called" Stablecoin, and volatility needs to be considered. The reports call for expanding the use of existing legislation, responsible energy use for mining, and further research into CBDC.
🤔 The choice of the term "digital asset" is intentional. Some of it is optics; digital asset sounds less scary than Crypto and more regulated. But also, a digital asset could use any technology. Ultimately this is a glow-up I think the industry should embrace. Much like how a credit card can be "tokenized" and used on your mobile phone. Why can't any asset be a token?
🤔 The regulators are coming. The report encourages the SEC and CFTC to "aggressively pursue" enforcement actions against unlawful activities. The pain we've seen so far coming from the SEC towards Crypto may be just the beginning; this reads like a mandate to go harder.
🤔 This report could have massive implications for Fintech companies and Neobanks using money transmission licenses. There's a potential "federal framework for nonbank payment companies" coming. This would impact nearly every Neobank and embedded finance provider.
🤔 NFT marketplaces could end up as regulated as any Crypto exchange. The bank secrecy act and AML laws could be applied to NFT marketplaces. The consultation won't be complete until mid-2023, but NFT marketplaces will have to up their compliance and fraud prevention game.
Walmart staff will soon be invited to a beta of the digital checking account offering called One. The Neobank app combines two Fintech acquisitions, One Fintech and Even Financial. Even Financial allows employees to access their wages early, and the One app offers up to 2% cashback when spent in-store. One has more than 200 employees and $250m in capital and is a partnership between Ribbit Capital and Walmart.
🤔 Distribution matters, and starting with 1.6m employees is good; getting access to all Walmart's customer base is better. Walmart is everywhere, can accept and handle cash, and is a known brand. I'm curious to see if and when this goes beyond their staff. Will it be a very different product or similar?
🤔 Retailers have done co-brand banking for decades; what's new here is the potential to wrap an offering around Walmart employees as Uber does for its drivers. Improving the financial health of staff is proven to increase retention and reduce the number of sick and absences.
🤔 When you're as big as Walmart, margins matter. If someone uses the One card in-store, instead of the interchange fee being something Walmart loses to the card issuer, they'll end up with that in their pocket.
🤔 In the bear market for consumer Fintech, the opportunity for digital offerings from large brands with the financial firepower to last is significant. Mid-sized banks, retailers, and Telco's could be back in the game (directly or via M&A). These brands may already have distribution, their issue was innovation, but the wave of Fintech providers potentially changes that. I'm also curious to see if we'll see other big V.C. to large brand tie-ups like Ribbit and Walmart.
Stripe says that getting paid for freelancers is problematic in many markets, and freelancers are a global workforce after the pandemic.
🤔 This got my compliance spidey sense tingling, but I checked the docs, and the organization making the payment must be based in the USA. That limits the compliance risk on the sender side quite dramatically.
🤔 Users link their wallets to access USDC in their "express account." Express is a service that KYC's the last mile individual and allows that individual to withdraw from the account to their wallet. Stripe is giving the sender (a company based in the USA) the ability to KYC the recipient (freelancer based abroad), also limiting the compliance risk.
🤔 It looks *a bit* like Remote or Deel doing payouts in USDC at first glance. But has a wider audience and potential use cases. Well done to everyone at Stripe & Circle, a massive organization that can make a meaningful impact on freelancers and the global economy
Last tidbit, the merchant carries the fraud risk. They're gonna want the world's best Fraud API for that, no? 👀
Good Reads 📚
This incredible piece lists demographic shifts, wealth inequality, and the global internet exposing the world to messages that used to be hidden as the three most significant forces shaping the world in the next. It was published in 2019 before the Ukraine war or inflation, but still an incredible read. Definitely check it out.
🤔 Population shifts will drive long-term growth or decline for nations. This has implications for everything from a nation's ability to pay its social welfare to its ability to grow as an economy. The most interesting chart was the demographic shifts over the next 30 years and the shift in populations. Over the last 30 years, the USA increased in population by 31%, and China by 30%. Over the next 30 years, the USA will grow by just 13%, and China will decrease by 20%.
Tweets of the week 🕊
That's all, folks. 👋
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