Fintech 🧠 Food - UK Fintech is Back!

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 31,520 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

UK Fintech is having a moment. Profitable digital banks, VCs opening offices, and the Prime Minister quote-tweeting them. Can it last? Will the UK regain the crown as the world's Fintech capital? That's this week's 📣 Rant. This is a two-coffee read.

I also had to cover the new OCC rules via Alex Johnson's amazing 📚 Good read on the topic. He lays out some takeaways, and I see some context below. You must read that bit if you're in BaaS or sell to banks and Fintech companies.

Meanwhile, the SEC is suing Coinbase. It's now more likely than less that the Supreme Court will deliver regulatory clarity. There is a new bi-partisan bill that might beat it, but can it get passed? Can Washington pass anything that's not a spending bill?

Stripe & CashApp, Amazon, and Affirm. The logos and wallets are all partnering. Where are the banks in this picture? Abstracted margin erosion in the payments business. But the shift to RTP may change the picture for some of them. More in 👀 Things to Know this week.

Oh, Blackrock is doing an ETF & Hong Kong is pushing banks to provide accounts to Crypto companies. The world is changing. I didn’t have time to cover that this week, but watch the trend of these headlines.

Ps. Shout out to BoomFi*, who raised their $3.8m Seed this week 🙌

Here's this week's Brainfood in summary

📣 Rant: UK Fintech is Back

💸 4 Fintech Companies:

1. Thematic  - Create your own index

2. Hokodo - BNPL for B2B

3. Berilium - Private assets for the mass market

4. Boomfi* - Stripe for Crypto

👀 Things to Know:

1. Stripe offers CashApp acceptance, and Amazon Pay offers Affirm BNPL

2. The SEC sues Coinbase

📚 Good Read:

1. The new agency guidance on BaaS by Alex Johnson

Weekly Rant 📣

UK Fintech is back baby!

A16Z announce it is opening its UK office, it's London tech week, and the sun is shining in the UK.

Wise is crushing it in public markets, Digital banks Starling, Tandem, Oaknorth, and Monzo are all profitable, and the Prime Minister quote-tweeted a VC.

Imagine Biden quote tweeting a VC. This is bold for a very sensible, reserved, stiff-upper-lip country.

So what the heck is going on?

I've said for a long time that the center of gravity for Fintech shifted away from the UK. 

After Brexit, it became harder for talent to get visas, and there were no new policy initiatives. Singapore, Hong Kong, and the Middle East became the most innovative jurisdictions for regulation. And the US private sector absolutely dominated Fintech growth.

To understand why it's coming back, we have to look at the UK's unfair advantages and how it can play to those strengths. 

As a lifelong resident of the UK who's recently spent much more time in the US Fintech universe, it feels like the right time for me to act as the bridge between these two worlds.

So let's do this 🏊‍♂️

1. The recent history of UK Tech and Fintech (2010 to 2016)

   1. The coalition government and the Silicon Roundabout

   2. Marketing: the UK on the global stage

   3. Policy: The competition mandate 

   4. Policy: A new path to a bank license

   5. Policy: The CMA, Open Banking and OBIE

   6. Marketing: "Passport to Europe"

2. Brexit and "Grit in the System"

   1. Perception is reality, and the perception became the UK is not open for business.

   2. Everything was Brexit negotiation or clean up. Fintech was an afterthought.

   3. (Some) Fintech companies had growing pains like fraud 

   4. (Some) Digital Banks had not hit profit

   5. The UK didn't do growth capital well

3. The rest of the world steps up

   1. The US Fintech bull market dominates mindshare

   2. The policy advantage shifts east

4. The UK's quiet renaissance 

   1. Digital banks hit their stride

   2. The Visa situation gets better

   3. The Khalifa report

   4. The financial services and markets bill

5. The Financial Services and Markets Bill

   1. A framework for digital assets 

   2. A new competitiveness mandate for regulators

   3. Refunds for scam victims

   4. Regulation of BNPL

   5. Regulation of 3rd party providers to Banks and Fintech companies

6. How can the UK capitalize on this momentum?

   1. Consistent commitment & funding for regulators

   2. Consistent backing for the industry regardless of Government

   3. Bank accounts and market access for Crypto 

   4. PSR and data sharing

7. Welcome to the UK

1. The recent history of UK Tech and Fintech (2010 to 2016) 📖

The UK has a history of being a global hub for financial services that stretches back nearly 1000 years. The City of London was a hub for the British Empire and today remains a global hub for insurance, FX, and banking. 

In the run-up to the 2008 financial crisis, the UK had benefitted from one of its longest uninterrupted bull markets in history. Financial services was good business, and the UK was central to it. Along with financial services, the UK is mostly a services economy. Its oil exports are dwindling, and it lost most of its manufacturing in the 80s as it transitioned to a services economy. 

So when the financial crisis hit, the UK was extremely exposed. 

a) The coalition government and the Silicon Roundabout

Then in 2010, a new government came into power. No political party won an overall majority forcing the parties to negotiate a power-sharing arrangement. The expectation was that Labor and the Liberal Democrats (Lib Dems) were natural collaborators. Still, in a plot twist that would make an excellent Succession episode, the Conservatives did the deal with the Lib Dems. (There's a whole subplot about how the two party leaders went to the same school there somewhere).

There was a weird air of optimism around this election. 

David Cameron became Prime Minister, and Nick Clegg was Deputy Prime Minister. In a way, nobody getting what they want created a compromise on policy that could have been a shit show. And turned out to do some really good things for Tech and Fintech.

The Lib Dems and Conservatives overlap well historically in the role of capitalism as a force for good in society. Recognizing that the UK had over-indexed on financial services (but had strengths in it), one of the first initiatives was to make the UK a global center for technology. 

The UK didn't have Silicon Valley. 

It had a roundabout.

The Silicon Roundabout is a cluster of emerging technology companies around Old Street, a district in East London. Around that, it would attempt to play to its strengths. 

The UK had a set of structural advantages.

• London was a mini New York, Washington, and Bay Area in one. There are very few cities on the global stage where you could walk from the central bank to Parliament to the head office of the world's largest banks and tech companies.

• The UK has 3 of the top 20 Universities globally. The UK punches above its weight for technology research and development but has struggled to commercialize it. Formula 1, Cycling, and Sailing base their R&D hubs in the UK because of this unique specialism. 

• The UK timezone trades with Asia and the Americas. The UK is almost ideally placed for international offices for timezone overlap (it probably didn't hurt that the UK invented timezones too 😁).

• UK Common Law is a global standard. The vast majority of international trade happens in UK law. Common law is very sensible. Judges are required to attempt to make a "common sense" reading of the facts and circumstances. While it uses case law as a base, its far less mechanical than US law, for example. Therefore it is generally perceived as fair and neutral.

• Early adopters of Fintech infrastructure. The UK was one of the first markets in the world to issue contactless (tap-to-pay) cards and had real-time payments available from 2005 via the Faster Payments network.

But how would the UK play to these strengths?

Surely it was delusional to think the UK could have a silicon valley? 

The plan was twofold. 

1. Marketing the UK on the global stage and 

2. Policy changes that play to the UK's strengths.

b) Marketing the UK on the Global Stage

Perception is reality.

So much of what the UK did well in the early days was PR. For financial services specifically, this included the launch of a physical hub, an industry trade association, and ministers making announcements and speeches at this hub. 

Level 39 is a co-working space in Canary Wharf that became the center of the Fintech universe in 2014 ~ 2016. Revolut had its office there, Innovate Finance was based there, and it was in the shadow of the biggest banks in Europe and the world, like Barclays, Goldman, JP Morgan, and HSBC. 

Innovate Finance organized a series of events where the most senior government ministers would give speeches. The seniority of the person making the speech meant what they said became news. 

And what they said had bite.

c) Policy: The FCA competition mandate 

Policy creates possibilities.

The cabinet office created a tech advisory board with entrepreneurs and investors who directly advised on policy.

The UK first gave its consumer financial services regulator, the Financial Conduct Authority (FCA), a competition and innovation mandate. 

In practice, this led to something called "project innovate," a dedicated team within the FCA who were accessible, sensible, and an in-house translator for Fintech companies. Unlike a conversation with a regulatory examiner, this didn't feel like they were out to mark your homework but rather play class lecturer and have you think about your homework more before you write it. Chris Woolard, Anna Wallace, and the entire team there did a phenomenal job finding the line between being helpful and managing consumer harm in the whitespace of innovation. 

Two other initiatives came from this team, the digital sandbox and Techsprints. 

The digital sandbox was actually a process companies enter if they're launching an innovative product that doesn't neatly fit regulation ("inside the regulatory perimeter," as they'd say, because regulators love an extra word). The quid-pro-quo was a no-action letter for the duration of the project being in the sandbox, meaning you could do something new. In return, the regulator leveled up their learning massively by having complete visibility to innovation while it was still early. 

Techsprints were hackathons without the word "hack" to make people feel better (compliance folks scare easily, especially at banks). 

Techsprints would propose a key industry challenge (like how do we get better at reporting data to the regulator?), and teams would create mini solutions. The regulator learns. The teams get direct access to the worries of the regulator. (The folks at AIR now run many of these Techsprints for global regulators, with former FCA folks building on this success).

d) Policy: The Bank of England's alternative route to a bank license

Becoming a bank has a cold start problem.

You can't get a license without capital to absorb potential losses and be financially sound. And you can't get funding to build a bank without getting a license. So the UK did something elegant. It split the process in two.

First, a prospective bank would submit an application and undergo rigorous reviews and interviews. If it passed this part, it could receive a license "with restrictions." By separating the process in two, the banks that achieved a "license with restrictions" could use that to secure further VC funding and have the required regulatory capital. 

In the shadow of the financial crisis, plenty of entrepreneurs who believed in disrupting banks, consumers, and especially small businesses (SMEs) were underfunded and overcharged. 

Consequently, a line of startup banks applied for this new license, including Monzo, Starling, Tandem, Atom Bank, and Oaknorth. 

Today more than 23 banks achieved a full a license 

e) Policy: Open Banking Implementation 

Open Banking needed a standard. 

If PSD2 got people thinking about Open Banking and the potential for tech to disrupt financial services, the Open Banking Implementation Entity clearly defined how it would work.

Open Banking was a wooly European law that was up to the states to implement. It wasn't clear how any of this should work officially. Nobody knew what it should look like when done properly with APIs (the number of banks that launched API documentation pages for APIs that would help you find an ATM that copied Stripe was adorable, though). 

Screen scraping (using your login credentials to let software login and retrieve your data) had been around for 5 or so years with limited uptake. The whole point of Open Banking was this it was official and secure. 

The competition regulator, the CMA (Competition Markets Authority), actually mandated the UK's largest banks to fund an entity that would define these standards. 

It hasn't been plain sailing, but Open Banking works. If I need to get data or initiate a payment from any UK bank to any merchant or software, it's fast and reliable. The possible downside is it's not as broad as the private sector innovation we see in the US (for example, it's not common to have a brokerage, lending, and checking all available). 

But give it time.

If you want to see the future of Open Finance standards, you could do a lot worse than looking at what the UK has done.

f) Marketing: "Passport to Europe." 

Get one license, and access 27 markets.

One of the structural selling points of the UK was the idea that an international business could get regulated in the UK (for example, with an e-money license) and operate across the EU's 27 markets and 500m population. 

The reality was (and is) always more complicated. But it is a massive head start and very different to having to go state by state for MTLs (real compliance nerds know).

The UK became great at marketing and policy and a gateway to Europe. Its ability to implement open banking, alternative banking license, and Fintech darlings like Starling and Monzo captivated the world's attention.

It was a vibe. 

2. Brexit and "Grit in the system." 🤦‍♂️

2016 was weird man. 

On June 24th, I woke up to one of the biggest shocks of my professional life. Before going to bed, I had confidently stated on the Breaking Banks podcast that the UK would vote against Brexit. 

Like all humans, I'm often wrong, but the timing on that one stung. 

I remember walking from Old Street to Moorgate the day after Brexit and feeling surreal. It was a gorgeous sunny day, and everything was continuing as normal. Pret still had people getting breakfast, cab drivers were angry at cyclists, and Marks and Spencer was still my happy place. 

But something felt off. 

a) The perception became the UK is not open for business.

The UK lost one of its selling points.

The "gateway" to Europe marketing angle doesn't work as well when the population votes against being in Europe. With that, the almost instant access to talent and passporting of regulatory licenses went with it. Tech companies complained of the extreme difficulty in retaining existing European staff members. 

For those staff, it also felt a bit hostile. It wasn't immediately clear what the legal status of a citizen of a European country would be in the UK. Would they have to go home? Did they have a job? Did the population want them here? Not fun.

b) Everything was Brexit negotiation or clean up. Fintech was an afterthought.

There was no plan.

The Brexit campaign was the most unprepared entity for Brexit. They talked of having a plan, but it was paper thin. The UK had spent 30 years intertwining its laws with Europe and unpicking that wouldn't happen simply. When you go down the list of essential things to figure out, "maintaining the Fintech industry" wasn't in the top 100.

The Irish border, customs, taxation, and a snap general election created chaos. 

c) (Some) Fintech companies had growing pains like fraud. 

Growing up is hard.

You have to get a job and responsibilities and deal with consequences. In Fintech, fraudsters usually target these younger companies because the sign-up process is simple and the business hasn't built the muscle it needs to defend against these attacks.

No matter how smart and how good the tech is, experience counts for something. What the incumbents had done historically may not have been perfect, but it complied with regulations and rarely created new risks. 

d) (Some) Digital Banks had not hit a profit.

If you tilt your head and squint, innovation looks a lot like risk.

Worries emerged about the ability of the new banks to be profitable. The conventional view in the UK banking lobby and crowd was that banks should be profitable. That's what they're for. When Monzo had to place a line in its annual report stating some level of risk that the business would continue to operate as a going concern unless it could target profitability, the media had a field day.

The UK financial press (I'm looking at you, FT, Telegraph, and Times) had a field day tearing down these Fintech darlings. The schadenfreude at the bank c-suite level was off the charts too. "See, we told you they were a flash in the pan."

In response, the UK central bank tightened up the regulatory capital required by banks. One regulator described this as "grit in the system" 

Being an innovator become just that little bit harder.

The mood music wasn't good.

e) The UK doesn't do growth capital well.

Companies had to look to the US to grow.

If you look at the cap table of the UK (and European) Fintech companies who went global, you'll generally find a tier 1 US venture capital or cross-over fund.

The UK might be the world's best seed and Series A market to raise a round as a Fintech company. It might also be the hardest to raise a Series B. Unless you're a payments business, the VC and investment community typically have less appetite for growth businesses. 

The UK had a ton of momentum but slowly ran out of steam.

3. The Rest of the World stepped up 🌍

a) The US Fintech bull market dominates mindshare

Every company became a Fintech company.

I attended Money 2020 in Vegas in 2018 and 2021, and the difference was astonishing. 

2018 was a payments industry show. The stands were all big payments companies and felt flat. Like you couldn't buy a laugh or moment of humanity. Trade show. Business. Sales. Suits. 

2021 was like night and day by comparison. A gathering of Fintech nerds, Crypto's peak, and a family reunion. Like Fintech used to feel in London, but bigger. T-shirts, VC's closing deals by the LOVE sign, "I'm in Vegas, but I don't have a pass. Can we meet outside?"

In 2021, one in 5 VC dollars went into Fintech. I counted one Y-Combinator batch where nearly 40% of the companies were in Fintech. Every week there was a SPAC or IPO for something Fintech related. Affirm, Robinhood, and even Coinbase went public. 

Visa attempted to (and was later denied) the acquisition of Plaid for $5bn, which placed a price tag on Fintech in an era where VCs had never had it so good. Infrastructure like Plaid also became a phrase. "Plaid for X" became a company category, as did "BNPL for Y Geography." 

I recall a Plaid report where on average, Americans have 3 Fintech apps installed on their phone.

Fintech was mainstream. PayPal and Square stock led the market. 

New York was a vibe.

The UK was just sort of there. 

b) The policy advantage shifts east

Everyone wants a Fintech ecosystem.

Singapore and Hong Kong compete for the most innovative jurisdiction in APAC. Singapore has a digital-only banking license, and so does Hong Kong. Hong Kong passes Crypto regulation, and so does Singapore. Regional hubs with large shipping ports are wired to think internationally and deal with global businesses. The Monetary Authority of Singapore (MAS) has a business development mandate. If you go to a conference, you might meet someone from MAS who will offer to help you set up locally and learn about regulations in the city-state. (Picture that in your next regulatory exam meeting)

The UAE, with regulators like the Abu Dhabi Global Market (ADGM), became one of the first in the world to pass comprehensive Crypto regulations. Across the middle east, states are attempting to build open banking, CBDC, and Fintech ecosystems. 

Meanwhile, the FCA suffered a significant brain drain, both to the private sector and international regulators who continued pushing the perimeter and finding better ways to manage risks with digital. (A fun side project would be to track the LinkedIn history of the FCA project innovate team and where they ended up. There's a massive premium on FCA-trained, innovate folks. They're just good).

c) The pandemic made Fintech more global

The world got smaller.

The pandemic made the world viewable through a Zoom window. In that world, your next-door neighbor and someone on the other side of the planet were the same distance. Outside of some minor timezone issues, it was striking how that's when US VCs and capital started to look a lot more internationally.

Some of that had to do with giant funds, a lack of options to deploy in the US, and the US being saturated. But to me, the observer felt like America discovered UK Fintech during the pandemic (and the rest of world Fintech, for that matter).

4. The UK's quiet Fintech Renaissance 🎨

Something shifted this year. 

In the depths of the Fintech bear market, the large digital banks all start hitting profitability. My Fintech friends from the US are in town for Fintech Week or Fintech Connect or something. UK entrepreneurs are lighting up my inbox with new companies that feel properly exciting. Four things have happened that stood out.

Firstly,

a) Digital banks hit their stride

Profit is sanity. 

Wise profit is up 52% YoY to £92m ($115m), Starling's profit is up 6x YoY at £195m ($245m), and Monzo is delivering MoM profitability for the first time. The one everyone forgets, Oaknorth, the mid-market lender, just delivered £152m EBITDA with a Return on Equity at 26%.

These are not rookie numbers. 

These are strong numbers delivered in the middle of a banking crisis.

Some banks are helped by tailwinds; for example, Starling and Monzo are used heavily as travel cards. After Brexit, the interchange revenue on UK cards used in Europe increased from ~0.30% to ~1.2/1.5%. Starling, in particular, deployed the emergency bounce-back loans (BBLs) during the pandemic and built much of its profitability on that wedge. 

But all of this has been quietly building for some time. In the height of the bull market and the depths of the bear market, the one headline you never see is "person works hard consistently." That happened, and this vintage of companies has come of age in a similar time frame. 

It's a credit to them, but the next generation of these companies must now be the focus.

b) The Kalifa review

You can see the future of UK policy by reading the right reports.

In February 2021, Sir Ron Kalifa delivered a report commissioned by HM Treasury on UK Fintech in which he concluded:

It recommended

1. Putting Fintech at the Heart of trade policy

2. Create a new Visa scheme for Fintech talent

3. Improving the IPO listing market (dual-class shares + preemption rights)

Foreign talent represents more than 42% of the UK Fintech workforce. At its best, the UK is a hub for international talent, and its core strength is its policy, the rule of law, and international flexibility. 

These reports are often long, but they're full of ideas. Not all of them make it into policy, but many do. Sir Ron, the former CEO of Worldpay and respected entrepreneur, was given the almighty task of creating this review. These reviews create a focus and become the basis of policy-making in the civil service.  

The UK now has three brand-new Visa’s

1. A founder visa

2. A scale-up visa

3. A “high promise” visa for graduates of top schools globally

This certainly solves the gap tech companies had (although it is a smidge elitist. As someone who got an apprenticeship aged 16, I’m a big believer we need to create more paths for everyone, not just those already ahead).

c) The arrival of growth capital

"Who should we know in Europe?" 

There are more VCs with larger funds than at any time in history. That dry powder has to deploy somewhere. European Fintech was always somewhat discounted compared to the US. Partly due to the lack of growth-stage VCs but partly because it was a less mature market with fewer experienced founders and investors.

The US Angel networks, the SAFE agreement, and Angelist make everything easier.

Europe didn't really have that ecosystem.

That's changing. 

The former founders and operators are out there, the networks are forming, and the Growth stage VCs are paying attention. A16z is the latest in a wave of companies setting up shop in London (and across Europe). Many have quietly been here for a few years, running dinners, meeting founders, and picking their spots. 

Whether the UK becomes a satellite or hub remains to be seen. It certainly has a shot if it can deliver on some of the policy promises. 

d) Marketing is back

Prime Ministers have a magnifying glass

Rishi Sunak not only tweeted a16z's Chris Dixon, but he also appeared on 20VC and gave a keynote speech at London Techweek. Whatever the PM does will get attention; if the PM does something often enough and with the right feel, it's a clear signal to industry and the private sector.

This worked from 2010 to 2016. In the documentary 11 Years, the story of UK fintech, Tom Blomfeld, the then CEO of Monzo, says exactly that. It was possible to be a bank.

Entrepreneurs picked up on the signal. What signals could the UK now be sending?

From a tech zeitgeist perspective (if there is such a thing), this Government is playing it well to appeal to the tech crowd. I mean even the graphic design is just good isn't it?

But all of this is nothing without policy.

5. The Financial Services and Markets Bill 2023 📜

The biggest change to financial services regulation in 30 years?

If you're in compliance or regulation, it's always worth paying attention to what the UK is up to. Historically the UK led European developments in financial services and has a track record of developing concepts others use and adapt.

The bill aims to remove a cap on banker bonuses, allow insurance companies to invest in long-term assets like wind farms, and change how senior bankers are hired and staffed. 

There's a lot to a bill like this, but the bits that will impact Fintech the most are the following:

a) A new mandate for regulators

A growth and "competitiveness" mandate.

The FCA and PRA will be pushed to ensure they're delivering growth and international competitiveness. I read this as a reframing of the "competition and innovation" mandate the FCA had but later closed. This should be good for Fintech companies, especially those struggling post-Brexit. Perhaps more interestingly, it could lead to intentionally creating more innovative policies.

The regulators will create a new sandbox for financial market infrastructure and consulting on the consumer credit act. A recent amendment in the House of Lords also ensures Parliament will oversee the regulators and hold them to account on behalf of the general public and private sector.

b) A framework for digital assets

A sensible start.

The nuts and bolts would give legal certainty around consumer protection and how consumers are made whole in the event of any hack or theft of Crypto. Cryptoassets are considered "financial promotions," which sidesteps the issue of defining what type of token something is to figure out who regulates it. The UK says if it's finance and you're promoting it to consumers, it is a financial promotion, and the FCA regulates you.

The UK will largely follow Europe regarding the Stablecoin putting in capital requirements for Stablecoins). The Bank of England would oversee Stablecoins as a payments system. 

We don't have to neatly define everything to manage the risks. The bill also gives the regulators the power to "designate activities" that are subject to regulation. Essentially, they get to react as the industry grows.

The UK already has a separate registration process for Crypto businesses, which has been painfully slow. The UK industry also suffers from a lack of access to banking. Passing this law could help, but the industry must step up, manage the risks and protect consumers.

Banks are blocking Crypto businesses because there's still a ton of fraud coming from that direction. That's fixable.

There's an entire process yet to play out. Still, there's a great deal of excitement about the UK's willingness to listen in international circles, with CEOs like Brian Armstrong of Coinbase meeting the Prime Minister and vocally supporting the UK moves.

c) Refunds for scam victims

Faster payments = faster fraud.

The UK has had faster payments since 2005, and as account-to-account (A2A) volumes continue to grow combined with digital onboarding, scams are the single biggest issue facing most of the industry. The bill would bring this new rule into law, and while it won't solve the scam problem, it creates an incentive to do so.

The PRA has proposed a mandatory 50:50 split refund compensation scheme. The idea is that the sending and receiving bank or Fintech company would swallow half of the loss. This is well intended but could unfairly penalize smaller companies with smaller balance sheets, exposed to that one Fintech company where all the fraud happens.

This will still leave a lot of work for the industry to do.

Scams are so incredibly hard to detect because they look like authorized payments. The customer authenticated a transaction. The traditional methods of relying on fingerprints or biometrics don't work if that person has been tricked. We need to spot what has changed before the transaction. 

d) Regulation of BNPL

BNPL is marmite.

In the UK, if there is a topic someone either loves or hates, we say it's marmite. Based on a very odd spread that's sold for toast (called marmite, which is objectively disgusting, but my wife loves it). 

Depending on who you listen to, the same is true of BNPL.

For some, it's almost payday lending and a consumer credit trap. For others, it's a novel way to buy goods with less delivery risk and a shopping app experience. The new regulation views it as credit and will require warnings about the consequences of being unable to pay. In addition, reporting to CRAs will be required in the event of a delinquency. 

Many BNPL providers already do this, so the regulation is a non-event. Which is all very sensible and British. I heard a news commentator once say, "The Governor of the Bank of England regulates with his eyebrows." (And what magnificent eyebrows they were) And it's a good metaphor for UK culture. It's a fairly constant dialogue at the most senior levels. 

e) Regulation of 3rd party providers to Banks and Fintech companies

If you're big enough to be regulated. You get regulated. 

HM Treasury will gain the power to define payments companies, e-money license holders (AKA Fintech companies), and financial market infrastructures as a "critical 3rd party." If a company gets this designation, it becomes subject to oversight by the Bank of England (which would be like getting Fed oversight of any MTL holder who got big enough).

These moves' big trend and takeaway is flexibility and a focus on competitiveness. As the facts and circumstances change, so can the rules and how those rules are interpreted. This flexibility makes English common law so popular on the international stage, and the same is true of its law-making process.

6. How the UK can capitalize on its moment in the sun ☀

So far, this has all been a bull case for the UK.

The country with the worst inflation in Europe, very few minted trade agreements, and a general election coming no later than summer 2025.

There are challenges for sure.

Whether the current Government does or doesn't continue, I hope the focus on Fintech stays. Not least because I am, but because the potential here is off the charts, and the Fintech companies at an early stage are so imaginative. 

Here's my wishlist. 

a) Consistent mandate & funding for regulators

The FCA brain drain was for real.

Part of that was because international nations offered much higher salaries to the talent; part was because the office moved to Stratford (no, really). But much of it happened because the regime changed and lost the mandate to focus on competition and innovation. A conservative government's downside is that it sometimes sees a regulator as a "red tape machine" rather than a crucial enabler of policy innovation and a national strategic asset.

There's talk about combining or simplifying the Bank of England, FCA, and PRA setup. If done well, that makes sense. But I'd much rather see investment in the regulator and its sandboxes as a strategic asset and enabler of Fintech and financial services. 

b) Consistent backing for the industry regardless of Government

No more grit in the system, please.

Fintech employs more than 60,000 people and has created profitable, publicly listed companies and consumer choices. We need this. But it has without question not all been upside. The Crypto and Fintech industries do have a fraud problem. Regulators are right to be cautious and look for control of these risks. 

But that control doesn't come from just going slow on approvals for all companies. It comes from the engagement the project innovate team used to give. And working to turn Techsprints into Techreality. 

c) Bank accounts and market access for Crypto 

If we follow the rules, we get to play the game

The regulation through eyebrows has led most of the banks to "de-risk" Crypto. Limiting the amount consumers can withdraw makes it almost impossible for a Crypto business to get a bank account. If the UK Government is serious about making the UK a global leader in the future of financial markets, tokenization, and digital assets must solve this problem.

d) PSR and data sharing for scams

The UK has a shot at doing special things with data.

One of the biggest challenges Fintech companies have in preventing fraud is that they don't see the same dashboard as the banks. 

The Open Banking Implementation Entity (OBIE) proved you can move an industry around a standard and get the banks to coordinate with Fintech companies. The UK designed standards for how APIs would work that is now live. 

Fast forward to 2023, and the world has moved on. A2A and open banking-initiated payments are increasing in volume. With that, scams have become the problem to solve. Other markets have built structures (like Early Warning Services) for privacy-preserving sharing of transaction risk, but they haven't succeeded in creating collaboration between big banks and Fintech companies.

We need that.

7. Welcome to the UK 👋

Whether you're a VC opening an office here, a Fintech company looking to expand, or someone in the UK that's been plugging away in Fintech for a decade.

You’re in good company. Palantir, Open AI, and Anthropic just opened offices too.

But there’s one thing you should know.

We're a bit less "Hey, let's do a partnership!" and a bit more "Fancy a chat?" 

Don't let that discourage you. We create world-leading payment companies like Checkout and Worldpay. We have profitable digital banks and a place called Waitrose, which is just lovely. 

Sign up for the Fintech events. 

Check out Kroo, Yonder, and Sequence for what the next generation of UK Fintech might look like.

Recognize the local culture (what worked in the US doesn't copy+paste)

Chase nailed it. 

Chase came to the UK and has absolutely crushed. 10Bn in deposits in 18 months with 5m customers.

So Welcome.

If I can help in any way, hit reply to this email. 

And you need to get yourself into the Fintech regions. Manchester, Leeds, Scotland, Wales, and quietly Birmingham are hubs people often forget.

The UK is back.

It's nice to be back.

I hope it lasts.

ST.

4 Fintech Companies 💸

1. Thematic  - Create your own index

Thematic allows individuals, funds, and research firms to create an index without the cost and complexity of partnering with S&P or Bloomberg. Users select global equities or Crypto, backtest against historical data, and create passive or active index rebalancing rules. It also allows creators (e.g., Lenny Rachitsky) to create an index and monetize it through licensing or conversion to an ETF.

🤔 My big Fintech theme is the next frontier is disrupting Capital Markets. Thematic is doing just that (and well named, since it's a theme demonstrating a theme). Not everyone should create an index, but creating an index should be easier. Perhaps the most disruptive part of Thematic is the flat pricing structure and letting the index creator own the IP. The industry is wildly profitable and runs on spreadsheets and humans today, it needed to be more API driven and have a SaaS front end. 

2. Hokodo - BNPL for B2B (UK & Europe)

Hokodo lets companies take payments from other businesses with a simple checkout interface online. Users can give 30 or 60-day payment terms without the hit on their balance sheet (B2B BNPL) and offer trade credit. Clients include marketplaces like Ankorstore (European Faire), or wind turbine businesses.

🤔 They're selling more revenue without balance sheet risk. Often businesses offer some level of credit but the process is highly manual. This solution should be a no-brainer. The sales pitch is very similar to consumer BNPL on the surface (40% increase in conversion, 30% increase in order value, and 24% more monthly purchases). The founders gave me an interesting example of how industrial businesses (like one selling wind turbines) push replacement parts into e-commerce and offer trade credit there. B2B is becoming default digital.

3. Berilium - Private assets for the mass market

Belrilium lets users buy top strategies from private equity and credit funds like Blackrock or KKR for as little as $10k. Historically, These funds have performed better than stock and bond investments with lower risk. Traditionally this needed between $1m to $5m, but so long as you're an accredited investor, you can access these funds. 

🤔 A few folks have been doing class of investing this for a couple of years (e.g., Equi launched in 2021). However, this is the kind of market segment that could comfortably have more than one player. Brokers in this space regularly grow into billions in revenue after a few decades. This is tech-driven finance more than fintech infrastructure, but we need more.

4. Boomfi* - Stripe for Crypto

Boomfi lets merchants accept Crypto from multiple chains, layer 2's, and rails within minutes. The service includes pay links, hosted checkout, and API supports one-off payments, recurring payments, and subscriptions. It starts to bleed into B2B payments too with support for invoicing and the service is non-custodial.

🤔 One day, all payments will be tokenized, and when they are, we'll need checkouts and payment acceptance to support those tokens. This team got me excited. The CEO Jack founded the UK wellness service Urban.co, and Michael comes from Nium (which IMO is closest to Crypto & cross border). Isn't Stripe the Stripe for Crypto? Well, yes, but they're also Stripe which means they have a lot of other competing priorities. That leaves room in the market for specialists for Crypto merchants. 

Things to know 👀

1. Stripe offers CashApp acceptance, and Amazon Pay offers Affirm BNPL

The online checkout space is getting more complex and more consolidated. Stripe will offer merchants to accept CashApp as a payment type in-app or online. Customers can pay with their CashApp card or wallet balance. On desktop, this involves a QR code; on mobile, an app-to-app experience creates an approval flow. 

🤔 Wallets like CashApp and Venmo are becoming a major alternative payment type and rail. While users can add cards to their wallets, increasingly, they're using the card issued by that wallet or the cash balance in the wallet. This becomes a closed-loop transaction when paying at checkout with that wallet and from the wallet's cash balance. This helps the merchant reduce the fees from card rails, and the wallet provider collects a significantly higher margin.

🤔 Alternative payment acceptance buttons like Amazon Pay are also becoming an online default. Venmo, Amazon, Klarna, Shop Pay, and possibly Paze will make checkout even more crowded. It also makes aggregating that, managing risk, and improving conversion at checkout even more complex. Each of these wallets ultimately wants to build a moat on moving away from the fee structure of card rails. It's a delicate dance of doing that without hurting the revenue they get from those rails today.

🤔 This commoditizes the underlying role of banks and payment acquirers. Ever more layers on top of the banks and acquirers are needed by merchants to accept payments as they become more complex in e-commerce. A simple checkout won't cut it. Inversely, this is an opportunity for banks and acquirers to start to partner with the new PSPs and possibly even white-label them as part of a go-to-market.

🤔 Mo' rails, mo' problems. The job of merchants, banks, and Fintech companies in managing fraud and AML risk gets exponentially harder as more rails are added. Now add in RTP, account to account, and open finance-based payments. Now consider international charges, too; the number of payment rails at checkout is growing. This creates a visibility gap. The industry has talked a good game about sharing data, but now it needs to get on with it. (Kudos to Unit21 for attempting to do this via their DAO, and yes, Sardine* is also building an initiative with 314b designation called SardineX).

2. The SEC sues Coinbase

The SEC has sued coinbase on allegations of being an unregistered securities exchange. The silver lining of this move could be bringing clarity to Crypto in the US and legitimizing the space. According to the SEC, Coinbase acted simultaneously as an unlicensed exchange, broker, and clearing agency. This merges three functions that are traditionally separate in securities markets. For its part, Coinbase argues the US has no clear legislation on digital assets and has applied (and acquired) for multiple licenses but been denied by the SEC.

🤔 Passing legislation has been challenging in the US, so it's unsurprising that regulations and the courts are the tool to create compliance in this vacuum.

🤔 At the same time, a new bi-partisan bill aims to help clear this confusion and develop a framework for "sufficiently decentralized" or the Hinman test tabled in Washington. Combined, these moves create an air of uncertainty over the future of digital assets. This will force many institutions to adopt a wait-and-see approach.

🤔 If the SEC wins in court, Coinbase could challenge or eventually settle, get a license, and become a fully registered market participant. While this wouldn't seem ideal, it would create clarity in the market and legitimize the US' largest digital asset exchange. If this stays tied up in court for a long time, there's a possibility congress could pass a bi-partisan bill before it's done. 

🤔 The "separation of concerns" point is an interesting one. Do we want a broker, who's also an exchange, who's also a clearing agency? It's efficient, but history teaches it can lead to conflicts of interest.

🤔 Long term, I'm hopeful that one way or another, we've entered the end game for regulatory clarity. One way or another, we will legitimize digital assets, and when that happens, we're off to the races with an entirely new infrastructure for capital markets.

Good Reads 📚

1. The new agency guidance on BaaS by Alex Johnson

The Federal Reserve, FDIC, and OCC have issued joint guidance for banks on managing risks from 3rd party relationships. This covers all outsourcing, the use of consultants, payments providers, and technology providers. Banks must maintain a complete inventory of 3rd parties and periodically risk assess those parties.

Alex defines 12 key takeaways, including "all customers are bank customers" Even if a BaaS intermediates, all problems are the bank's problem, and smaller banks don't get a lighter compliance burden. It also focuses on managing Fintech companies that go out of business. Smaller banks can collaborate and use Fintech providers to help with the compliance tech burden.

🤔 Guidance is a super helpful thing for everyone in the space. The industry has evolved dramatically in the past decade. The last time this guidance was updated, Banking-as-a-Service wasn't a thing, and it was rare for Fintech companies to be a bank providers. How the world has changed. There's very little new or earth-shattering in this, and yet it is a comprehensive checklist of activities clearly written. 

🤔 There are clues in the guidance regarding what the regulators are responding to. If you look at actions at state and federal levels, findings included 3rd parties like consumer Fintech companies having high volumes of complaints. After the banking crisis considering the "financial soundness" of 3rd parties has also got a heightened focus. A lot of this looks like the way banks themselves are examined (management team, governance) being expected when appropriate to be in place over 3rd parties. And. That seems logical. Right? 

🤔 This impacts everyone from bank vendors to Fintech companies to the banks themselves. Banks must consider everything about a 3rd party, like the business plan, management team experience, financial soundness, the volume of customer complaints, and ability to manage any risks and responsibilities. The guidance recommends ongoing monitoring, including reports, periodic visits, and regular testing of controls.

🤔 There are great Fintech tools to help banks manage, audit, and test the quality of 3rd parties. On the surface, the guidance leaves the "how" up to the banks. The default would be spreadsheets and committees, but in 2023 we can do better with dashboards and data. The interesting challenge for banks is their legacy providers might be more compatible with spreadsheets and committees. The Fintech companies that can help them grow deposits, NII, or reduce cost are best managed with data and dashboards.

🤔 The USA still needs an "e-money license" or something similar. There is too big a gap between state-level MTLs and a banking charter. 

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.