Here’s one way to think about the digitization of product manufacturing and distribution.

You start with a physical product — say a CD — sold through a physical store, like Tower Records. You then transition to that same physical product sold through a digital store; picture Amazon.com selling a CD. Then you move to a digital version of that product, sold through a digital store. This is where things start to get interesting, because the digitization of the product allows for the nature of the product itself to change in ways that wouldn’t have been possible before. In the case of music, this was the jump we made from physical albums to individual MP3s sold through digital music stores like iTunes. And finally comes streaming, in which consumers stop buying individual digital products and instead continuously consume an equivalent digital service. In this end state, the notion of a ‘store’ starts to fades away as consumers stop shopping and start subscribing. Think Spotify replacing iTunes as the dominant distribution channel for digital music.1

At a 30,000 foot level, the journey looks something like this:

This model has been a very popular way to frame the digitization of financial services over the last couple of decades.2 Take credit cards as an example.

You start with a physical credit card, acquired in a bank branch. Then you get digital account opening, which enables the acquisition of physical credit cards through online and mobile channels. Then you get virtual cards and instant issuance, whereby a consumer can apply on a mobile device and instantly get approved and have a digital version of the card provisioned to their mobile wallet. And finally you get streaming credit, where consumers gain on-demand access to unsecured loans, when and where they need them (rather than through a ‘store’). Using this lens, we can consider BNPL the evolutionary descendent of credit cards:

This mental model makes intuitive sense. It’s neat. Everything fits nicely into boxes. It’s linear and because it’s linear it feels inevitable. Some industries may be a little ahead and some (*cough* banking *cough*) may be a bit behind, but everyone is headed in the same general direction.

The trouble with this model is that it leaves out a couple very important concepts.

First, not all products can or should be digitized. Until Zuck has us all plugged into his metaverse 100% of the time, we’re going to continue to need new iPhones and cars and Oculus headsets, to say nothing of products that can technically be digitized but that some of us prefer to enjoy in their older physical forms.3

And it’s not just the products themselves. Physical products often require physical stores. There are certainly cases where this isn’t true, but there’s a reason that car dealerships still exist. People like to test drive new cars before they spend tens or hundreds of thousands of dollars on them. Thus, the car buying experience can be digitized in places, but it will never be fully removed from the world of atoms.

Second, and more importantly, the model described above fails to take into account the notion of ownership.

Let’s Talk About Ownership

Specifically, let’s talk about the following points:

Assets are Underutilized

One thing that distinguishes the ultra wealthy from everyone else is their ability to extract maximum value from the assets that they own. Elon Musk provides a topical example. After offering to buy Twitter for $43 billion, a lot of people asked where Mr. Musk was planning to come up with the money. It was a good question! For being the world’s richest human, Elon is strangely cash poor. The vast majority of his wealth is tied up in the Tesla and SpaceX stock that he owns. For the most part, this situation seems to suit him just fine. But, but! When he needs to come up with $43 billion real quick, because Twitter’s Board of Directors thinks he’s full of shit, what does he do? He borrows it! As was recently reported, Elon Musk has succeeded in lining up funding to buy Twitter by, among other things, taking out a personal loan of $12.5 billion, secured by $62.5 billion worth of his Tesla stock.

That’s incredible for a lot of reasons, but one of them is how starkly it contrasts with the way that most consumers fail to extract value from the assets that they own. Let’s use home ownership as our example. According to data from the Federal Reserve Bank of St. Louis, at the end of 2021, Americans had accumulated approximately $14 trillion worth of mortgage debt for the purchase of single and multifamily housing. Analysis from ATTOM, a property data analysis company, found that more than 40% of mortgage residential properties in the U.S. were considered equity-rich, which means that the combined estimated amount of loan balances secured by those properties was no more than 50% of their estimated market value.4 In other words, a large percentage of American homeowners have access to a massive financial asset.

And what are they doing with that asset? Nothing so excessively dramatic as buying Twitter certainly, but perhaps taking out home equity lines of credit (HELOCs) to help pay down credit card debt or fix up their homes or start up a small business?

Nope. According to analysis from ATTOM, U.S. consumers took out roughly $200 billion in HELOCs in 2021, a significant decrease from the prior year and a small portion of the total amount of equity controlled by American homeowners.

Why is this?

There are a lot of reasons, but one that stands out to me is the amount of work it takes to get a HELOC. Depending on the appraisal process and the documentation required, it can take anywhere from four to six weeks to close on a HELOC and up to another couple of weeks to access the funds.

Now, of course, it’s not exactly a simple process for Elon Musk to borrow $12.5 billion against his Tesla stock, but the difference is that he can pay people to handle that highly manual and time-intensive process for him and to expedite it as much as he needs. Most consumers don’t have that luxury. They need technology to automate it.

The Cost to Manage Asset Ownership has Decreased

Here’s some good news on the technology front — it has never been easier or less expensive to digitally track and manage asset ownership. For proof of this, one need only look at the emergence of fractional investing and the proliferation of alternative asset investment offerings, which, when taken together, have given every consumer the ability to efficiently amass a diversified portfolio of fine art, rare wines, and classic cars.

This would have been unfathomable to legacy technology companies in industries like mortgage servicing, which built arguably less complex ledgers at significantly greater expense.

Web3 Gives Us a New Way to Enable Control Over Assets

Sticking with the technology thread for a bit longer, we need to talk about Web3. Set aside all of the scams and the nonsense for a minute. The cool thing about the technology underpinning Web3 is that it has the potential to shift the way in which creators and consumers exercise control over the assets they interact with.

Simon Taylor (a tall human5 and writer of the wonderful Fintech Brainfood newsletter) shared a great framework for thinking about the changing nature of ownership. It has three parts: asset, access, and control.

Simon uses a house as a metaphor:

• Asset: This is the house itself, an asset whose value is determined by characteristics like square footage and location.

• Access: This is the key. It gives the holder the ability to enter and exit and to extend those privileges to others. Crucially, however, access doesn’t confer ownership.

• Control: This is the deed to the property. It confers legal ownership, which in turn gives the holder of the deed control over the asset; to sell it or significantly alter it or leverage it for financial gain.

Now let’s use a different metaphor to demonstrate the potential value of Web3 — music.

Today, we have Spotify. It essentially acts as a marketplace, connecting artists with consumers and taking a cut of the value generated by transactions between the two. The asset is the music. Artists and consumers have a level of access (consumers can log in to access the service and change their preferences, artists can log in to upload music, drive discovery, and measure performance), but control is retained by Spotify. An artist can’t, for example, reward their 10 most frequent Spotify listeners with a small fraction of ownership in their favorite songs’ future revenue streams. The technology is simply not designed to allow for it (to say nothing of the business model).

In Web3, control over the asset can be retained by the wallet that created it. In this example, the artist could retain control over their music, allowing them to give ownership of the asset (or a fraction of it) to a loyal fan and allowing that fan to sell or leverage that asset however they see fit.

The Circular Economy is Coming

The final point I want to cover is a change in the way that consumers, particularly younger consumers, value the concept of ownership.

Let’s start with a definition. A circular economy is one in which resources are used for as long as possible and are then restored and repurposed when their use is over. In a circular economy, consumers value long-term ownership and the creative reuse of assets.

Why is this important?

Put simply, because Gen Z believes in it.

According to research complied by Twig (an interesting company that I’ll tell you more about in a bit) 43% of Gen Z shoppers actively look for brands and retailers that have environmental practices and 80-90% of Gen Z shoppers buy sustainably, either usually or sometimes.

This commitment to sustainability also shows up in the consumption choices that Gen Z consumers are making, according to a survey conducted by Gen Z-focused marketplace app Depop. They found that 90% of surveyed Depop users have made changes in order to be more sustainable in their daily lives, including reducing fashion consumption (70%), repairing clothing (60%), and only buying secondhand clothing (45%).

A New Model

A quick recap:

• Consumers underutilize the assets that they own, however …

• The cost to track and manage asset ownership has come down significantly in the last couple of decades, which has led to an increasing ability to democratize access to previously-unavailable asset classes. This is a significant shift, especially when you consider that …

• Web3 has the potential to further empower creators and consumers to retain, transfer, and leverage ownership over assets, which is particularly interesting given that …

• Gen Z is placing a greater emphasis on the importance of long-term ownership and the creative reuse of assets, driven by concerns about sustainability and the environment.

Due to these trends, I believe we need to toss out our old model for thinking about digitization and come up with a new one; one that puts asset ownership at its center:

You’ll notice that my new model is rather vague in its design. That’s intentional. I don’t think we know yet how exactly these new, ownership-centric models for manufacturing and distributing products are going to look. Nor do we know exactly how these new models will impact the ways in which consumers acquire and utilize financial products and services.

However, we do have a couple of hints.

The first comes from Apple.

According to reporting from Bloomberg:

Apple Inc. is working on a subscription service for the iPhone and other hardware products, a move that could make device ownership similar to paying a monthly app fee

The idea is to make the process of buying an iPhone or iPad on par with paying for iCloud storage or an Apple Music subscription each month. Apple is planning to let customers subscribe to hardware with the same Apple ID and App Store account they use to buy apps and subscribe to services today. 

The company has discussed allowing users of the program to swap out their devices for new models when fresh hardware comes out.

The subscriptions would likely be managed through a user’s Apple account on their devices, through the App Store and on the company’s website. It would likely also be an option at checkout on Apple’s online store and at its physical retail locations.

This service, when overlaid on top of our new, ownership-centric model, would look something like this:

It’s important to note that the success of this hardware subscription model will be highly dependent on Apple’s ability to seamlessly integrate financial services capabilities such as payments, lending, and risk underwriting into the service, which is reportedly one of the motivations driving Apple’s recent investments in bringing more financial services capabilities in house.

Our second hint comes from that company I promised to tell you more about — Twig.

Twig is a digital bank built on circular economy principles. It’s basically what you would get if Cash App and Aspiration had a baby and that baby was kidnapped at birth and raised by thredUP.

Here’s how it works:

1. You open up a Twig account and debit card, which provide the standard neobank spending and P2P payments functionality that you’d expect as well as impact analysis and carbon offsetting capabilities (à la Aspiration).

2. You upload a list of the luxury goods that you own (typically high-end clothing and electronics) and Twig uses its market-based pricing algorithm to instantly assign a value to each item.

3. Whenever you want, you can instantly sell any item that Twig has assigned a value to, for that exact amount, and receive an instant payment into your Twig account. You then mail the item (for free) to Twig, for them to resell or recycle.

Twig’s CEO boils down the pitch for his company to this — “we tokenize assets.” Here’s what that looks like, applied on top of our model:

Where Are We Going?

I don’t think it’s possible yet to predict if these new, ownership-centric models will gain meaningful traction with consumers, but it’s not hard to imagine how such models could significantly impact the financial services industry *if* they do.

Our ‘can’t let it go’ topics for this week include the failure of Fast and the dystopian wonder that is Axie Infinity.

Enjoy!

Alex

At the time, this fear of big tech struck me as a bit misguided. I mean sure, Apple had just released its credit card the year before and there were rumors that Amazon was maybe going to be launching a checking account, but none of these moves (nor earlier moves like Apple Pay and Google Pay) made me all that nervous because they didn’t seem to be done with the primary intention to make money. Big tech’s motivation for dipping its collective toe in the financial services waters appeared, to me, to be customer retention.

Take Apple as an example. It launched the Apple Card, in partnership with Goldman Sachs and CoreCard (among others), in order to make owning an iPhone an incrementally more valuable experience. The product’s uniqueness had nothing to do with the underlying plumbing; it was the integrated experience. Activating the card using your iPhone felt just like connecting a new set of AirPods. Setting the card as the default payment method in Apple Pay was as easy as breathing. And using it to buy other Apple products was unusually rewarding (3% daily cash back).

Apple wasn’t trying to dominate the credit card market. It was trying to continue to dominate the smartphone market.

And this is how I viewed all the other big tech companies — Google, Amazon, Facebook1 — nibbling at the edges of financial services. It was an ecosystem play.

And that is what I told nervous bank and credit union executives whenever we talked about big tech — don’t worry too much about it. It’s worth paying attention to, but not obsessing over They’re not trying to compete with you. They’re trying to compete with each other.

The best analogy I could come up with was Godzilla and King Kong.

Yes, gigantic monsters are real. And yes, they are rumbling through the streets of your city and knocking down buildings. But they aren’t here for you. They’re only vaguely aware that you even exist. They’re here to fight each other. Your job is to stay out of the way and not become collateral damage.

This analogy didn’t exactly set those executives’ minds at ease (nor should it have!) but it did give them a framework for thinking about the competitive threat posed by big tech and how that threat stacked up against less spectacular (but perhaps more dangerous) adversaries.

Consequently, I was pleased to see, between 2020 and 2022, the number of bank and credit union executives listing big tech as a top competitive threat for the coming decade decrease, while more salient threats like consumer-facing fintech companies and challenger banks shot up the ranks.2

And then, naturally, a bunch of stuff happened that made my advice to banks and credit unions look kinda dumb.

Specifically, the following things happened:

• Apple acquired Canadian payments company Mobeewave for $100 million.

• Google announced that it was creating a digital checking account called Plex, in partnership with a number of banks and credit unions, as part of a larger revamp of Google Pay.

• Google abandoned its plans to launch Plex, as part of a strategic pivot towards selling to banks rather than providing banking products directly.

• Apple announced a “Tap to Pay” feature, built on Mobeewave technology, that will enable iPhones to accept contactless payments.

• Apple acquired UK fintech start-up Credit Kudos, which specializes in analyzing open banking data to make credit decisions, for $150 million.

• Apple, reportedly, has started working on an internal project — codenamed Breakout — to bring a wide range of financial activities (payment processing, credit risk evaluation, etc.) in house rather than continuing to rely on partners.

What does all of this mean? Let’s break it down by digging into the deeper strategic challenges that Apple and Google have been dealing with for the past couple of years.

Apple

Around 2016, it became clear that Apple — which had only ever seen iPhone sales grow at a record-setting pace — was facing a new problem:

The 2016 slowdown in iPhone sales revenue, which happened in the wake of the release of Apple’s flagship iPhone 6, marked a saturation point. Put simply, in a world in which basically everyone owns an iPhone, convincing customers to buy an iPhone every 1-2 years is extremely difficult.

And so Apple pivoted. Services became the new buzzword in Cupertino and Apple launched a boatload of new offerings — financial services, gaming, news, fitness, streaming entertainment, etc. The goal in offering these add-on services was, at first, about differentiating the iPhone from competitors, in the same way that Apple’s integration of custom silicon chips into its hardware did back in 2010. The idea was that this increased differentiation would revitalize slowing iPhone sales.

But that didn’t work.3 And so Apple went further, as Ben Thompson explains:

Apple is, famously, vertically integrated; the company writes the software that differentiates the iPhones that it manufactures and sells for a profit. That does not mean, though, that the entire iPhone experience is integrated — there are significant amounts of modularity. … However, Apple can and has extended its integration into areas that were previously modular. … Services like Apple Card, Apple Arcade, and Apple News+ extend Apple’s integration forward with the goal of driving new revenue.

Apple’s new goal was to generate new sources of revenue (to offset flat iPhone sales) by extending its integration into the services that it offered and cutting out third-party suppliers that provide specific modules of functionality.

This reduced reliance on third parties had its limits, according to Mr. Thompson’s coverage of the Apple Card launch in 2019:

don’t be surprised that Apple is partnering with Goldman Sachs: the company (rightly) wants nothing to do with the regulations entailed by being a bank, even if it means sharing those lucrative transaction fees.

However, it turns out that Apple’s ambitions for vertically integrating its services offerings goes even further than Mr. Thompson thought, as Bloomberg recently reported:

Apple is developing its own payment processing technology and infrastructure for future financial products, part of an ambitious effort that would reduce its reliance on outside partners over time

Apple is developing its own processing system ... It’s also creating tools for calculating interest, rewards, approving transactions, contacting and reporting data to credit bureaus, accepting or rejecting applications based on its own risk assessments, determining and increasing credit limits, and handling transaction histories.

The first product that will rely on the new system is expected to be the upcoming “buy now, pay later” service. That feature, called “Apple Pay Later” internally, will have two parts: “Apple Pay in 4” for short-term, four-installment payment plans without interest and “Apple Pay Monthly Installments” for long-term payment plans with interest. 

Apple is discussing using the in-house technology for the four-installment plan. Apple would continue to work with Goldman Sachs on the longer-term installment offering, which will also have a higher maximum lending amount.

It seems likely that Apple will stop short of actually becoming a licensed bank, but it also seems clear that Apple, through acquisitions like Credit Kudos and the building of its own proprietary payments processing and ledger technology, is intent on taking as many of the non-bank charter parts of its banking-as-a-service (BaaS) stack in house as it can.

In short, Apple wants to squeeze as much money out of financial services as possible.

Google

When Google officially announced its Plex checking account product, it was part of a larger relaunch of the Google Pay app. While Plex took up a lot of the headlines, the more important news was hiding in a new tab in the app labeled “Explore”:

The first truly new tab in Google Pay is the Explore tab, which is a place where Google will aggregate deals for you. By default, it will just surface generic offers here, but you will have the option to allow Google’s algorithms to analyze your transactions in order to customize what offers appear. In what appears to be a nod toward privacy concerns, it will offer you an option to opt in to a three-month “trial” of the service. Since it’s a free service to begin with, that “trial” consists mainly of a reminder prompt that will pop up asking if you want to keep using it.

This feature was similar to merchant-funded “boosts” within Cash App, but with the key difference that it was Google — the most sophisticated and successful purveyor of digital advertising in history — providing it.

Similar to Apple’s early ambitions in financial services, the revamp of Google Pay and the launch of Google Plex seemed designed to further reinforce Google’s core business rather than creating an entirely new profit center.

Then something weird happened — Google pulled the plug on Plex:

Google is scrapping its plans to offer banking services directly to users. The shift comes nearly two years after the company first announced its banking plans and several months after a key executive leading the project departed.

This decision was especially perplexing because, based on the available evidence, Google Plex was going to be a hit. According to research from Cornerstone Advisors, nearly one in five consumers said (in a 2021 survey) they would have opened a Google Plex account when it launched. Among Apple Pay and Google Pay users, 33% said they would open an account.

Weird right? Why would Google kill a product that was going to be successful on its own and that would have further reinforced its core money-making business?

Here’s a hint, courtesy of the Wall Street Journal:

[Bill Ready, head of Google’s eCommerce operations] was concerned that Plex could make other banks think that Google was out to compete with them since it played a lead role in building the product.

But that’s not a totally satisfying answer. Google was doing this in partnership with banks, including Citi, which had more than 400,000 consumers signed up for the waitlist. And it wasn’t like Google was just using those banks as BaaS partners in the background. Their brands would have been front and center with the customers that picked them. Google was just providing the generic mobile experience wrapped around the banks’ products.

So again, why did Google do this? Why did it reverse course with its bank partners on Plex in order to abandon a product that looked likely to succeed and strengthen Google’s advertising business?

To answer this, we need to look more closely at that advertising business.

On the surface, business appears to be booming:

Google parent Alphabet Inc. posted another quarter of strong sales growth, capping a year when profit nearly doubled … The company’s dominance in online search, video and internet ad sales made it one of last year’s leading beneficiaries of an upswing in digital advertising. Last year, small and large businesses alike flooded into the ad market in a bid to win customers who spent early parts of the pandemic sequestered in their homes.

However, despite this pandemic-fueled surge in digital advertising, not all has been well in the world of digital advertising in recent years. Just ask Facebook:

Facebook parent Meta said on Wednesday that the privacy change Apple made to its iOS operating system last year will decrease the social media company’s sales this year by about $10 billion.

The change being referred to is Apple’s App Tracking Transparency feature, which made it much easier (and thus more likely) for consumers to stop third-party apps from tracking their behavior, which reduced the targeting capabilities of advertising platforms like Facebook, which in turn hurt those platforms’ bottom lines.

For a variety of reasons, Apple’s new privacy feature didn’t hurt Google nearly as bad, which enabled it to step into the void left by Facebook and pick up significant growth. However, Google would be foolish not to look at the $10 billion hit that Facebook just took from Apple and not worry about its dependence on advertising revenue.4

In order to diversify, Google has made a major push into the public cloud computing market. How major? In Q4 of 2020, Google Cloud Platform generated $3.8 billion in revenue and still lost $1.2 billion dollars. In other words, Google spent $5 billion dollars in just 3 months in order to continue growing its cloud computing business. Since then, those losses have shrunk, but Google Cloud Platform is still not turning a profit because Google continues to invest in it so heavily.

What are they spending all that money on? Most of it is going into the obvious stuff — data centers and software to run in them and engineers to manage them. However, a decent amount of Google’s investment in cloud has been in hiring experienced executives to sell Google Cloud Platform into specific industries. Financial services has been an especially big focus, with the recent hirings of deeply talented financial services experts like Sam Maule, Zac Maufe, Yolande Piazza, and the man himself — Bill Ready.

So, to return to our original question, why abandon Google Plex?

Here’s my guess — Google believes that it can squeeze so much money out of financial services companies’ desire to move to the cloud and digitally transform themselves that it is more than happy to scrap a promising consumer product on the off chance that its existence might offend those same financial services companies.

They’re Looking Right at You

We’ve been talking about the threat of big tech in banking for decades.5 However, Apple Pay’s launch in 2014 was a pivot point for banks and credit unions. The fear of big tech went from hypothetical (What if monsters exist?) to real and highly specific (OMG, I can see Godzilla and King Kong fighting. They’re literally outside my apartment!) And while I thought this pivot was cause for mild alarm and that it certainly called for caution and close observation, I still didn’t think it was a five-alarm fire.

Now however? It’s a five-alarm fire. Apple and Google want to make real money in financial services by either partnering with you or competing with you.

The monsters are looking right at you.

So, what should banks and credit unions do? What should fintech companies do?

I don’t know, but here are some of the questions that I’d be thinking about:

• What are the practical and regulatory limits on Apple’s Breakout initiative? There is plenty of fat to trim out of Apple’s current BaaS arrangements (cue Goldman Sachs’ executives shaking their heads vigorously), but I’ll be curious to see just how far Apple goes in bringing the financial services functions currently provided by partners in house. Building a payment processing system and a ledger seems like it’ll be expensive, but it’s certainly doable. Customer service for things like disputes should be a relatively easy extension from what Apple already does. But what about things like credit risk assessment? According to Bloomberg, Apple is considering using an “in-house risk assessment engine [that] would take into account consumers’ history as Apple customers, such as if they have routinely paid off purchases or ever had their credit card attached to iTunes or the App Store declined.” Danger, Will Robinson! FCRA compliance is no joke and I doubt Apple has the stomach to become a Consumer Reporting Agency.

• Will Apple flex its anti-competitive muscles with banks and fintech companies? Apple introducing its App Tracking Transparency feature in the name of protecting consumer privacy, while knowing full well the impact it would have on its big tech competitors, was a surprisingly brutal exercise of its monopolistic power. Now that it seems clear Apple is really trying to make money in financial services, might they try making similar moves against banks and fintech companies? Like, for example, what is this about?

• How will Apple’s investments in digital identity fit into all this? You know what wasn’t mentioned in the Bloomberg article on Breakout and was, in fact, quite conspicuous in its absence? Apple’s digital identity initiative, which has involved working with eight different U.S. states to add verified state driver’s licenses into Apple Wallet. Maybe this was just an oversight on the part of Bloomberg, but this would seem like an obvious component to Apple’s Breakout plan, particularly if Apple does move forward with a small dollar, pay-in-4 BNPL offering, which would require highly accurate, continual ID verification.

• What will Apple’s next financial services acquisition be? When you study the history of Apple’s acquisitions, one thing that jumps out is that Apple doesn’t buy companies for their brand value or customer base.6 When Apple buys a company, it does so because that company has a specific piece of technology that Apple wants to fold into its own stack. This is exactly what Apple did with Mobeewave and what it is doing with Credit Kudos. My question is what’s next? Will it continue to be small fintech infrastructure providers that help accelerate project Breakout or will Apple break its own rule and take a big swing?

• Will Visa and Mastercard be more likely to side with issuers over Apple moving forward? The history of Apple Pay is fascinating. Apple negotiated a deal with Visa and Mastercard that allows them to decide which issuers are able to have their cards in Apple Pay and to extract a 0.15% fee from issuers on each Apple Pay credit card transaction. Apple was able to secure these special concessions (which Google did not get) from the networks in exchange for not developing its own proprietary payments network. According to reporting from the Wall Street Journal, credit card issuers have started griping about these fees (particularly for recurring transactions) and are pushing Visa to make changes. Visa has, so far, been reluctant to push these proposed changes through, for fear of angering Apple. But, like, at what point is enough enough? Apple launched its own credit card that now competes with issuers’ cards in Apple Pay. It’s getting into BNPL. It’s bringing payment processing in house and launching its own mobile payments acceptance capability. At what point do the card networks decide to stop giving into Apple’s demands for special treatment and start siding more with issuers in these disputes?

• How far up the stack does Google want to go? Google wants to be an infrastructure and software vendor for banks. It has made that abundantly clear. The foundation of its offering for banks is cloud computing and all of the data analysis and machine learning capabilities that tend to accompany it. How far beyond that do they want to go? Obviously Plex — a pre-built digital banking shell for banks to plug their checking accounts into — was a bridge too far, but how close to that end of the spectrum is Google willing to go? Would they build digital identity capabilities for KYC, similar to what Apple is doing? Would they build white label-able versions of their Google Pay budgeting and merchant offers for smaller banks to incorporate into their digital banking apps? And, on a related note…

• Will Google get into BaaS? I asked this same question in my recent essay on banking as a service. It makes a lot of sense, strategically. And from a technical perspective, they built 90% of a BaaS platform, similar to a Unit or a Stripe Treasury, for Plex. The only difference is that instead of having a Google-designed fintech product on the front end, you would plug in a bunch of fintech apps. Google would simply act as the middleware, connecting banks (like the ones it left high and dry with Plex) with fintech startups (perhaps sourced from its investment arm — CapitalG). It could even go further by tying in its Android developer community to create the ultimate fintech development sandbox, which would have the pleasant side benefit of putting more pressure on Apple to better serve its app developers, a task that it continually struggles with.

• Will Google let Google Pay languish? Beyond the strategic decision to cancel Plex, Google Pay has struggled to execute against its roadmap and, due to those struggles, to retain talent:

  Business Insider spoke with ex-employees and learned that dozens of employees and executives have left the Google Payments team in recent months, including at least seven leaders on the team with roles of director or vice president. One of the employees Business Insider spoke to said, ‘Plex was entirely [Vice President] Felix [Lin’s] and Caesar [Sengupta's] brainchild,’ and now both of those executives no longer work at Google. Progress on the bank account has already been ‘slower than expected,’ according to the report, and without its two leading architects, Plex may be delayed.

  Google Pay still exists today as a consumer-facing product. Will Google continue to see it a necessary component for Android to compete with iOS?Will Google give it a new strategic focus and direction? Will it continue to invest in it? Or will it eventually join the long list of products in the Google Graveyard?

Short Takes

1.) Bark and bite.

The CFBP is suing TransUnion and one of the credit reporting giant's longtime executives for allegedly continuing to employ deceptive sales and marketing tactics.

Short take: The quotes from Director Chopra regarding this action are something else. There’s been some idle speculation in fintech circles that the CFPB under Chopra is more bark than bite; all blog posts and no enforcement actions. Turns out, this CFPB barks and bites.

2.) BNPL, bumming me out.

Afterpay has recorded a huge blowout in its half-year losses after a surge in bad debts and other operating costs failed to offset a big increase in the group’s revenue.

Short take: This has been the story pretty much everywhere in BNPL land for the last 6 months to a year. The BNPL companies argue that the losses are due more to aggressive growth tactics than they are to the inherent quality of the asset class. Skeptics of BNPL, of which there are many, argue the opposite. I’m beginning to side with the skeptics. Coming out of the pandemic-fueled boom times, BNPL (as a lending asset) hasn’t been holding up great.

3.) ‘Orb Operator’ is apparently a real job.

Worldcoin promised to jump-start the global crypto revolution with an audacious plan: to give out digital money to all 7.9 billion people on Earth. To spread its crypto gospel across the planet, Worldcoin recruited a corps of “Orb operators” whose job it was to scan people’s irises — in order, they said, to keep people from claiming their payment multiple times.

Short take: Just promise me you’ll read this story and then go to all of the young people in your life (kids, younger siblings, nieces and nephews, whoever) and make them promise you that they’ll never become orb operators.

🎵 On the Road Again 🎵

Busy season for fintech nerds. Lots of travel, which means lots of humming Willy Nelson to myself while standing in line at airports.

New York Fintech Week is next week and I will be there. I am thrilled to be co-presenting with Jason Mikula (of Fintech Business Weekly) on the future of consumer lending. If you’ll be around, make sure to stop by and say hi!

This question is something of an occupational hazard in my line of work; one of those things that comes up from time to time and that you will be happier if you have a good answer prepared for it.

I had a good answer.

It went something like this:

• There are a few essential jobs to be done within the realm of deposits.1

  • Earn — provide a place for consumers to deposit their income and facilitate faster access to that income and create opportunities to generate additional income.

  • Spend — facilitate payments; everything from paying bills to shopping to repaying a friend for lunch.

  • Save — increase the percentage of money set aside for future needs and long-term opportunities.

  • Invest — generate desired return, at acceptable risk levels, over a long time horizon.

  • Speculate — generate maximum return over a short time horizon, with the expectation of significant risk and volatility.

• Over time, banks built a series of products to help consumers with each of these jobs to be done.

  

• These products became stagnant as the incumbent banks shifted their focus away from innovation. As always happens, people noticed and fintech companies started popping up and augmenting these legacy product categories with innovative new capabilities.

  

• This was both a good and bad thing. The good news was that consumers had way more choices for addressing these five fundamental jobs to be done. The bad news was that their financial lives became much more complex to manage as the number of different bank and fintech services they were using increased. According to research from Cornerstone Advisors, nearly half of Millennials have more than one checking account. And this is just the tip of the iceberg, as my Cornerstone colleague Ron Shevlin helpfully illustrated:

• To solve for this, we would wrap consumers’ increasingly complex and fractured financial lives would be with an intelligent, highly automated service that would allow them to reap all the benefits of our diverse, highly competitive financial services ecosystem without requiring an excessive amount of work to manage it all. We would give them Self-driving money.

  

Now sure, I had concerns about self-driving money. The vision painted by founders and VCs always seemed a bit ambitious, from both a technical and business model perspective.

That said, I very much bought into the concept and assumed that we would eventually get there. This quote from Adam Dell, a partner at Goldman Sachs and head of product at Marcus (at the time), summed up my thoughts well:

The end state of the bank of the future is a digital assistant that is constantly thinking about your best financial interests … Almost like having your own CFO whose job it is to optimize your money, uncover ways for you to improve your financial situation, and is relentless in that pursuit.

The future of banking is self-driving money … or so I thought.

A New Theory on the Future of Banking

We should start with an example.

Scenario: Let’s pretend, just for fun, that AMC (the movie theater company) decides to buy a stake in a gold and silver mine in Nevada.

What happens next?

In the old world: Given that AMC isn’t a top-tier public market stock, this news generates few if any headlines. The few stock market analysts that cover AMC view it as a bizarre if somewhat low-risk hedge and don’t materially change their views on the value of the company. Retail investors using online brokerages like E-Trade mostly ignore the stock. The average banking customer is completely unaffected.

In the new world: The news is covered widely because, well, it’s a good joke. Stock market analysts still don’t really get it, but the stock goes up because retail traders who are checking their trading apps multiple times per day appreciate Adam Aron’s mastery of memes. One of those retail traders sends her friend $5 worth of AMC stock using a P2P payments app because, obviously, it’s going to the moon. This encourages that friend to buy an additional $75 worth of AMC stock in his digital banking app, which he chooses to liquidate 6 hours later in order to use the modest capital gains to pay for dinner and a movie (at an AMC theater, of course).

Two things to point out here.

First, the new world scenario I just described isn’t theoretical. It’s what actually happened. AMC really did buy a gold and silver mine and that did cause its stock to go up.2 And while I can’t say exactly what individual consumers did in regards to AMC’s stock, I can say that sending $5 worth of it to a friend and buying more of the stock and then liquidating it at the point of sale to make a purchase are all things that consumers are empowered to do today, thanks to the latest generation of fintech products.

The second thing to point out is that all of this is really weird! It is emphatically not the ‘digital assistant constantly thinking about your best financial interests in the background’ future that Adam Dell prophesied. It’s basically the opposite. And I think it’s worth figuring out what big picture things have changed in financial services (and society, more broadly) to bring us to this place. I think there are three:

1.) Fintech infrastructure makes it easy to blend product categories together.

The reason that checking accounts, savings accounts, retirement accounts, and brokerage accounts have, historically, existed as separate, siloed products within banks is because they each independently evolved to address their distinct jobs to be done within deposits.

This was never a problem because the separation of these products served another unintended, but useful purpose — it introduced a helpful amount of friction when attempting to move money between them. In the same way that sometimes being a good stock broker means not answering your clients’ calls during a market crash3, the friction that has existed when moving money between savings and checking or between checking and an online brokerage account can serve as a type of useful governor on consumers’ more impulsive financial decisions. It essentially tells customers to just leave well enough alone, which in a world with compounding interest and a stock market that basically always goes up (over a long enough time horizon), is often financially beneficial.

However, thanks to the abundance of fintech infrastructure available to product developers today, these historical constraints no longer apply. If you want to build a P2P app that lets customers buy/receive/send/pay with fractional stocks and cryptocurrencies, you can do that with calls to half a dozen APIs. No big deal.

Now, of course, just because fintech product developers can blend these different product categories together and erase the friction that has traditionally existed when transacting between them doesn’t mean that they will … except that …

2.) Money is fun.

A key to the success of any consumer-facing fintech company is engagement — continually finding ways to increase the amount of time that customers spend in your app. The more engaged a customer is, the more opportunities you have to cross-sell additional revenue-generating services, which leads to lower customer acquisition costs and improved retention.

You know what’s engaging? Money. You know why? Because it’s really fun, as I wrote a while back:

Here’s a simple truth, which we often dress up in fancy words or avoid discussing altogether — money is fun. It’s fun to earn. It’s fun to spend. It’s fun to save and watch compound. It’s fun to wager.

And because money is fun, financial services providers have always had an inherent advantage over companies in other industries in getting their customers to engage frequently and deeply with their products and services.

And you know what’s not fun? Waiting days (plural!) to transfer money from your checking account to your brokerage account so that you can ape into the latest coin that Elon Musk winked at on Twitter or show Adam Aron that you appreciate his sense of humor.

So, if you are a fintech product developer and your job is to increase user engagement, why wouldn’t you take advantage of all this new fintech infrastructure and figure out some novel ways to seamlessly weave speculation (which is, by far, the funnest category of banking capabilities) into your bank product? Make it quick and easy to have fun! Your customers, particularly your younger customers, will thank you.

Speaking of which …

3.) Gen Z feels forced to be “risk on”.

You know who disagrees with my earlier assertion that a little friction can be a good thing for consumers because, long term, inaction is often more financially beneficial than excessive action?

Gen Z.

Gen Z vehemently disagrees:

I’m not generally a fan of generational bellyaching (find me a generation who doesn’t believe that the prior generations screwed them over) and I know one person on Twitter isn’t a statistically significant sample size, but I do think these tweets effectively convey an emotional trend that is important — many Gen Z consumers seem to feel hopeless about their ability to achieve financial security and build wealth.

It’s not really important if these feelings are rational. It’s how they feel. And that matters because it explains why a Gen Z consumer might view getting their paycheck automatically converted to crypto or paying for lunch using the capital gains from a meme stock sale as financially smart choices.

Put simply, from this perspective, volatility is a feature not a bug.4

Hands-on-the-Wheel Money

The reason that self-driving cars are a tempting point of comparison when trying to envision the future of banking is because, historically, banking felt, to the average consumer, a lot like making that twice-daily commute to work — slow and monotonous and yet, somehow, also mentally exhausting.

Who wouldn’t want to automate that? Who wouldn’t want to reclaim that wasted time and spend it on something more valuable?

But what if banking didn’t feel like that at all? What if it felt like a high-risk, high-reward, death-defying chase through a barren and hostile wasteland where everyone and everything was trying to kill you?

If it felt like that, self-driving money is the last thing you’d want. You’d want control. You’d insist on it. You wouldn’t trust your safety to some algorithm. And even if you did trust it, you still wouldn’t use it because it would be embarrassing. Your peers would mock you. You would want to keep your hands on the steering wheel at all times.

This increasingly seems to be the mindset of younger financial services consumers, which manifests as a type of recklessly brave, adrenaline-seeking financial decision making in the face of (perceived) overwhelming odds. WAGMI is the new “witness me!”

And fintech companies are starting to shape their products to align with this emerging zeitgeist. These products make up a new category — the antithesis of self-driving money — hands-on-the-wheel money.

It’s important to remember that hands-on-the-wheel banking is very new. It couldn’t exist even a few years ago because we didn’t have fintech infrastructure companies providing easily consumable APIs for each of the five jobs to be done in deposits. Today, we do, including (crucially) for speculation, thanks to embeddable fractional stock trading and crypto services from companies like Alpaca and Zero Hash.

And what are fintech product developers building in this new sandbox? Let’s take a quick tour:

• Cash App recently introduced the ability for users to directly send each other fractional amounts of stock or bitcoin. This is a first, within the world of P2P payments, and the implications are fascinating. In the same way that Venmo allowed consumers to personalize payments with memos, Cash App is now allowing users to personalize payments through the choice of asset. My friend just repaid me for drinks last night by sending me $40 worth of $ML. What are they trying to say! 5

• Fold offers a debit card with an interesting rewards program. Rather than earning points or miles according to a fixed structure or even based on rotating merchant categories, Fold debit card users that make qualified purchases earn opportunities to spin the virtual prize wheel within the Fold app. This gives Fold customers the chance to win prizes, which can range from 100 Sats (roughly 4 cents) to 1 bitcoin (your odds for this are 1 in 10,000). Customers are required to spin the wheel within a short window of time after the qualifying transaction is completed, although that window can be extended (and extra spins can be earned) by paying a $150 annual fee for the Spin+ Debit Card.6

• OnJuno is one of an emerging class of ‘crypto neobanks’ that offers a combination of tradfi features (high-yield checking, debit card) and defi features (buy and sell multiple cryptocurrencies). Its most notable feature is the ability for consumers to elect to automatically convert a portion of their paycheck (if they enable direct deposit) in crypto. The crypto can be allocated into a single cryptocurrency or split across multiple (BTC, ETH, USDC). The primary utility of this feature is, according to OnJuno’s website, to “enable the crypto community to live natively in crypto”. However, the primary appeal of this feature (judging from the company’s marketing) is more around striking it rich like Olaf Carlson-Wee.

  

• Wedge is a hybrid investment and spending app. It allows customers to trade stocks, bonds, ETFs, and Crypto and to ‘spend’ any of those assets in real time at the point of sale. The app empowers customers to choose the specific asset they want to use or, alternatively, it can automatically select the best asset for them. The pitch for Wedge revolves around control — we will give you the tools to harness market volatility and save money on each purchase.7

Is Self-driving Money Dead?

I’ll admit that the sale of Wealthfront — one the big proponents of self-driving money — to UBS and the exit of Adam Dell (and many other senior executives) from Goldman Sachs Marcus has shaken my faith a bit.

Self-driving money (like self-driving cars) appears to still be more of a theory than an in-market reality.

That said, I’m also not convinced that hands-on-the-wheel money will replace it. The last few years have given us a number of macro trends — pandemic-fueled boredom driving interest in financial speculation, low interest rates, rising inflation, strong but volatile performance for stocks and crypto — that have made hands-on-the-wheel money solutions look especially appealing.

Those trends likely won’t hold. At least not all of them. The market, like this newsletter, tends to be cyclical.

Short Takes

1.) Another fintech acquisition for Apple.

Credit Kudos, a UK open banking startup that helps lenders make better decisions, has been acquired by US tech giant Apple.

Short take: Credit Kudos specializes in loan underwriting using cashflow data, so the guess here is that their technology will be used by Apple to reshape Apple Card and/or launch new BNPL functionality. In both cases, the ability to evaluate consumers for credit without those consumers needing to have prime credit scores is very valuable.

2.) Embedded finance is eating commercial banking.

Baselane, a company that helps independent landlords manage bookkeeping and collect rent, announced that it added a banking platform to the mix.

Short take: Question — how do you eat a massive small business and commercial banking market controlled by thousands of banks? Answer — one bite at a time.

3.) Bet on the team.

Corporate management startup Ramp has secured $550 million in debt and $200 million in equity in a new financing that doubles its valuation to $8.1 billion.

Short take: One thing I’ve observed is that the funding rounds that appear the most crazy (and this one fits the bill) are usually the result of the intense belief that a specific investor has developed over time in a specific founding team. That seems to be the story with Ramp and Founders Fund’s Keith Rabois, who is quadrupling down on his original bet.

🎵 On the Road Again 🎵

April and May are going to be BUSY. I may set a new personal record for most conferences in the shortest span of time. If you are going to be at the same events, I’d love to meet IRL!

First up — New York Fintech Week.

Empire Startups is graciously allowing Jason Mikula (of Fintech Business Weekly) and I to share our thoughts on the future of consumer lending.8 You should join us! Register here.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

6

I had to include this screenshot from Fold’s website because A.) it’s a good distillation of the hands-on-the-wheel money pitch (have fun getting rich) and B.) the statement “be rewarded for good financial behaviors” is absolutely bonkers when you remember that we’re talking about debit card purchases and a variable rewards structure that usually doesn’t pay out.

This month, Jason Mikula of Fintech Business Weekly and I break down:

• Citi’s decision to stop charging overdraft and NSF fees.

• Chime’s (reported) decision to delay its IPO.

• SoFi’s decision to acquire core banking provider Technisys.

• Crypto companies advertising blitz in Super Bowl LVI.

And on a more serious and important note, Jason and I also spent a few minutes at the top of the episode talking about Russia’s invasion of Ukraine. If you are looking to learn more about the conflict and ways that you can help, I highly recommend starting with this piece written by Packy McCormick. If you are looking to understand how the conflict is impacting Ukrainian fintech companies, Nicole Casperson has done some excellent reporting that you should read. And if you’re curious to learn more about the mechanics of economic sanctions, take a look at Simon Taylor’s latest newsletter.

This is what the last four years have looked like for mid-size banks in the U.S.:

Not ideal, especially when you consider that interest income makes up roughly 75% of these banks’ total revenue and that the remaining 25% (non-interest income) is very likely to decrease in the coming years as overdraft fee revenue disappears and payments fee revenue continues to shift towards bigger banks and non-bank competitors.

This is what the last four years have looked like for private fintech companies1:

To put this in a broader context, venture investing in fintech has grown to the point where one in every five venture capital dollars invested last year was invested in a fintech company.

So, to sum up, mid-size banks are facing a revenue recession that seems likely to sustain for at least the next couple of years and fintech companies are benefiting from an outrageously bullish private market that shows no signs of slowing down.

In most industries, this would be the end of the story; incumbents struggle as disruptors (funded by investors that smell blood in the water) proliferate.

However, financial services isn’t, as we know, like most other industries.

U.S. banks, despite their struggles, have something that any aspiring fintech competitor needs — a bank charter.

So let’s back up and re-sum up the situation — it’s become harder for mid-size banks to make money in the ways they traditionally have, but they have an asset that many U.S. fintech companies, which raised $18.2 billion in just the last quarter of 2021, need in order to do business.

You smell that? What is that?

In a recent research report, Cornerstone Advisors defined banking as a service (BaaS) as:

A strategy where a financial institution partners with a fintech or other non-financial institution (i.e., brands) to provide financial services to the partner’s customer base, leveraging the financial institution’s charter and capabilities like account management, compliance, fraud management, and payment and/or lending services.

Put more simply, it’s an incredibly cost effective distribution strategy, as illustrated by the return on equity (ROE) and return on assets (ROA) achieved by the 30 or so U.S. banks currently dominating the BaaS space:

These profitability metrics help explain why, in a survey of financial institutions by Cornerstone Advisors, 11% of banks reported that they are pursuing a BaaS strategy, 8% are in the process of developing a BaaS strategy, and 20% are considering pursuing a BaaS strategy. 

It also explains the emergence of BaaS platforms, which provide the technical, operational, and legal middleware between banks wanting to offer BaaS and fintech companies that need to find and integrate a bank partner (or partners).

For fintech companies, these platforms match them up with the bank partners that will best fit their vision and reduce their time to market and upfront and ongoing expenses by orders of magnitude.

For banks, these platforms match them up with the fintech companies that best fit their target risk/return profile and significantly streamline the process of evaluating, onboarding, and supporting those fintech partners.

In exchange for these benefits, BaaS platforms take a cut of the revenue generated by the partnerships they facilitate, which comes from a number of different sources including interchange, ACH, KYC/KYB, fraud management, remote deposit capture, and card processing.

BaaS Today

So, to sum up where we are today, we have:

• Supply: Ongoing margin compression, decreasing non-interest income, and an increasingly competitive customer acquisition environment means that we should have a growing supply of mid-size banks looking to offer BaaS.

• Demand: The amount of money pouring into fintech, particularly in the form of larger pre-seed, seed, and Series A rounds, gives us a healthy demand for bank partners for the foreseeable future.

• Market Makers: Growth in both supply and demand combined with the technical, operational, and legal challenges of BaaS, has led to the creation of BaaS platforms, which exist to make partnering easier for everyone.

All of which tees up an even more important question — where will we be tomorrow?

BaaS Tomorrow

The short answer is I have absolutely no idea!

(helpful, I know)

The slightly longer answer is that while I can’t predict the exact future of banking as a service in the U.S., I do have a few questions that are starting to shape my thinking on this subject.

#1: How many banks does BaaS need? And how do banks differentiate themselves when BaaS gets more crowded?

According to projections from Cornerstone Advisors, the U.S. banking as a service market could grow from approximately $1.2 billion in revenue in 2021 to more than $25 billion by 2026. This projection is based on an assumption that the total number of banks offering BaaS services increases tenfold (to roughly 300) during that period, which seems entirely reasonable given the incentives for mid-size banks to participate in BaaS that I laid out above.

My question is where, in that growth curve, might we start to see diminishing returns for banks?

Banks’ fear of BaaS has always been that it will disintermediate them from the end customer and relegate them to being ‘dumb pipes’. For the most part, this concern strikes me as misguided. Fintech is already disintermediating banks from their customers and if BaaS can offer these banks a revenue lifeline, they should take it!

That said, it seems likely that at some point the sheer number of banks participating in BaaS will make it difficult for any one bank to significantly differentiate its offerings, which is a classic recipe for commoditization and margin compression. What will banks do then?

#2: Will big banks break into BaaS?

The conventional wisdom in BaaS is that the banks best suited to partnering with fintech companies are mid-size and community institutions under $10 billion in assets. Such banks are able to offer their partners a more generous split on debit interchange revenue (because there’s more of it to go around thanks to the Durbin Amendment).

While this explains why BaaS has evolved the way that it has, it by no means guarantees that it will remain true moving forward. Banks with more than $10 billion in assets could easily compete for fintech partnerships by offering a more generous debit interchange split (off of a smaller total) or by specializing in areas outside of debit cards (which is already a very crowded category in neobank land). For example, I’d be fascinated to see a super-regional bank with strong consumer lending expertise (and a large balance sheet) build a BaaS offering focused on enabling lending-first fintech companies looking for more support than a community bank or community bank + BaaS platform can offer.

#3: Will fintech demand for BaaS remain as inexhaustible as it seems right now?

I know I made a whole case for the demand side of the BaaS equation above, but what if I’m wrong?

Fintech companies that went public in 2021 have been taking an absolute beating in the public markets, as Alex Wilhelm at TechCrunch noted recently:

Nu, the parent company of Nubank, reported its fourth-quarter financial performance, and in response to rapid revenue growth and improving economics, the company saw its value drop 9% in regular trading today after falling sharply in recent sessions. Now worth just $8 per share, Nu is underwater from its IPO price and down about a third from its all-time highs.

BNPL leader Affirm has seen its value crater from $176.65 at its peak to just $36.24 today. Robinhood has seen its value fall from a high of $85 per share to $11.28 this morning. SoFi has taken lumps as well, suffering declines from a 52-week crest of $24.95 per share to just $10.10 today.

These results are starting to ripple backwards into the private market. Forbes recently reported that Chime, which was originally planning an IPO for early this year may be planning to delay that entrance into the public market until late 2022. Other late-stage private fintech companies will likely exercise patience as well.

The big question — will this ripple impact the ability for early-stage fintech companies to raise money? Will it be as easy to fundraise for YAN (yet another neobank) a year from now as it was a year ago? And if not, how will that impact the demand-side of the BaaS market?

Oh, and on a related note:

#4: How will fintech companies getting bank charters impact BaaS?

There aren’t a lot of examples of fintech companies actually getting bank charters — Varo, LendingClub, Block, and SoFi are the only ones I can think of — but I wonder if these companies’ successes plus a shift in focus away from growth to profitability for fintech companies (due to shifting public market sentiments) might motivate fintech companies to pull the trigger on a charter (and all the expense and pain that entails) a little earlier in their journeys than they might have before.

And if that becomes more common (especially if regulators streamline that path a bit more) how will that impact demand for BaaS for both banks and BaaS platforms?

#5: Will fraud and compliance issues scare banks off of BaaS?

I thought this blog post from early January, announcing changes to LendingClub’s business, was pretty interesting (emphasis mine):

LendingClub completed the acquisition of Radius Bank in February 2021. At that time, in addition to the direct-to-consumer deposit business, we inherited a fintech partner program, and several lending businesses. As we reach the one-year anniversary of the acquisition, and in conjunction with the conclusion of a strategic review of our business operations, we have made the decision to discontinue certain businesses that don’t fit our mission.

During the review, we also thoroughly examined relationships and operating activities for the fintech partners. As a result of our review, we are asking certain partners to modify their activities and/or operations to match expectations and contractual commitments, and we have begun exiting certain partners. As part of the ongoing dialogue with these partners, we have discussed transition plans or operational changes that could impact the services available to these partners and their customers.  

What “activities and/or operations” from fintech partners might have been concerning to LendingClub? Maybe an excessive amount of fraud? Here’s an excerpt from a Forbes article published just a few weeks before the LendingClub announcement (emphasis mine, again):

Forbes has learned that Robinhood, the dominant free stock trading app with 22 million active users, has become the latest fintech to ban transfers from a specific list of institutions as a blunt tool for fighting fraud.

Robinhood declined to disclose the specific institutions on the list, but Forbes has learned that it contains a wide variety of banks, including a heavy concentration of neobanks and the moderate-sized banks they partner with, plus a small number of large, traditional brick-and-mortar institutions. Some of the names on the list include: LendingClub; Ohio-based Sutton Bank (one of the partner banks that Square’s Cash App uses to store customer deposits); Tennessee-based First Century Bank (one of the partner banks for PayPal’s Cash Card); prepaid card issuer and digital bank Green Dot; New York-based Metropolitan Commercial Bank (the partner bank for digital bank Current); and Iowa-based Lincoln Savings Bank (one of the partner banks for fintech apps such as Cash App and Acorns).

Banks offering BaaS services to fintech companies generally aren’t liable for transaction fraud losses, but that doesn’t mean that excessive amounts of fraud can’t negatively impact those banks’ reputations, both at a network level and in the minds of regulators.

Will this growing vector of risks scare banks off of BaaS?

#6: Which BaaS platform bet will prove wiser?

There’s a lot of nuance in the BaaS platform space, but at a high level most BaaS platform companies are following one of two different playbooks. For our purposes, we’ll refer to them as the AWS playbook and the Hinge playbook.

First, the AWS playbook. Companies like Bond, Unit, and Rize are building developer-first platforms that focus on abstracting away as much complexity from the process of launching a financial product as possible. The goal is to make it drop-dead simple, just like spinning up a computing environment with AWS. No need to think about the bank partner on the other end. No need to worry about compliance.

This model can work for fintech companies, but it’s really designed for non-finance companies (SaaS companies, in particular) that are interested in embedding financial products into their core products/apps/experiences. Think Lyft offering a debit card for its drivers. Unlike fintech companies, which need to make the majority of their revenue from the financial products they offer and are thus very motivated to care about the details of bank partnerships and revenue splits, non-finance brands like Lyft make their money outside financial services. These brands want to add banking to make their products stickier, improve customer satisfaction, and diversify their revenue streams. There is a high likelihood that they will never want to take more ownership of the stack underpinning their financial product(s). It just needs to work. For bank partners, the benefit of this model is a turnkey BaaS channel that can be activated quickly and can start generating revenue with little upfront or ongoing work.

The Hinge playbook is, essentially, the opposite. The name is in reference to the Hinge dating app, which markets itself as “the dating app designed to be deleted”.2 Companies like Synctera and Treasury Prime that are pursuing this model are building platforms that focus on matching up fintech companies and banks in mutually beneficial partnerships. Rather than abstracting the partner banks out of the equation entirely, these platforms focus on helping fintech companies find partner banks that they will love:

These platforms streamline the process of creating and launching financial products (just like the AWS model), but never at the expense of keeping their fintech and bank clients in control. This model is a better fit for fintech companies, which are naturally incentivized to care about the compliance and unit economics of their products at a level of detail that non-finance companies usually aren’t. It’s also a better fit for larger and more sophisticated partner banks that have the resources and in-house expertise to work directly with fintech founders and want more ownership over compliance and risk management in BaaS. The Hinge model, like the dating app it’s named after, comes with the possibility of more long-term attrition, which can be offset by being the model of choice for new customers coming on.

Which model — AWS or Hinge — will prove to be more successful over time? I don’t know. It depends on how bullish you are about the future of embedded finance and how pessimistic you are that banks and fintech companies will ever be able to find love without matchmaking.

#7: Will BaaS platforms eat the core banking market?

Imagine this hypothetical — traditional banks turn, in increasing numbers, to BaaS platforms in order to start generating new revenue. They utilize these platforms’ built-in banking functionality (ledgers, processing, account management, etc.) rather than trying to integrate with their own, which would take too much time and money. As the BaaS platforms prove themselves and BaaS revenues bolster these banks’ bottom lines, the banks eventually port their customer-facing portfolios over to these platforms as well. At the same time, fintech companies operating on these platforms continue to scale up. Even as they grow and potentially acquire their own charters, they continue to utilize the BaaS platforms’ functionality. One day, we all look up and realize that the legacy core banking providers (FIS, Fiserv, Jack Henry, etc.) have been effectively supplanted by a new generation of competitors that started out in BaaS (Nymbus, Agora, Technisys, etc.)

Plausible?

#8: Will BaaS become the new strategic pivot for neobanks?

A popular move, in the first few generations of fintech, was the B2C-to-B2B pivot. Companies that started in B2C and built all the technology necessary to directly serve consumers or small businesses (Moven, Avant, Petal) realized that the technology they built could be spun off and sold to their competitors (Moven Enterprise, Amount, Prism Data) and sometimes that B2B play ended up being the easier and/or more lucrative approach.

I wonder if this current generation of fintech companies is quietly perfecting the next great strategic pivot — the B2C-to-BaaS pivot.

The basic formula would look something like this — start a B2C neobank, build and/or buy the technology stack necessary to operate the neobank with few external dependencies, acquire a bank charter, and pivot.

In related news:

And also:

Jiko, the fintech startup that made headlines last year when it gained a national charter after purchasing a small Minnesota-based community bank, said it is pivoting from its consumer-focused model and accelerating its business-to-business strategy.

"We always had this idea that at some point we would open up the [application programming interfaces]. We knew from the beginning that it wouldn't just be for the app," said Jiko co-founder and CEO Stephane Lintner, adding banking-as-a-service (BaaS) was a vision the startup had "early in its DNA."

#9: What’s the next “whoa, that came out of nowhere” BaaS platform play?

I have to admit, I didn’t see the SoFi acquisition of Technisys coming. But that’s the neat thing about BaaS. It sits at the intersection of so many different trends in financial services and fintech that it is constantly surprising.

So, what’s the next surprise going to be?

Here are a couple of wild, out-of-left-field guesses:

• A VC firm creates or buys a BaaS platform. A key challenge for BaaS platforms is ensuring that they have adequate demand (companies looking to work with bank partners to launch banking products). A key challenge for fintech VC firms is offering value-added services (i.e. stuff besides money) to fintech founders that ensure that the VC firm gets into the deals that it wants. This seems like a win-win, no?

• Big tech gets into the BaaS platform business. If you believe that eventually every SaaS company will embed financial services and become a fintech company, then wouldn’t it be logical to assume that the biggest and most powerful service providers for SaaS companies might eventually build BaaS platforms to help facilitate that transition? Hell, Stripe already has with its Treasury product (which powers Shopify Balance). I could see AWS jumping in. I could especially see Google adding BaaS in alongside Google Cloud as part of its renewed push to sell to (rather than compete with) banks.

• Visa and Mastercard add BaaS services. The card networks’ superpower isn’t payments or commerce enablement. It’s maintaining balance in a multisided network where the network participants don’t like each other very much. If BaaS grows into an opportunity that interests banks above $10 billion in assets and embedded finance really takes off, I could see Visa and Mastercard adding BaaS services that connect the two sides of their networks together in an entirely new way.

• Regulators create a public-sector BaaS platform alternative. To preface this, there’s absolutely no way that this happens. But, imagine this — the OCC builds a federal fintech sandbox that comes with the option for fintech companies to use their built-in BaaS platform. The platform is low-cost for the fintech company because the government doesn’t take a cut, but rather passes the modest amount of revenue from the revenue split to the participating banks. The banks get the revenue plus a headache-free compliance set up. Regulators get front-row seats to fintech companies’ operations and policies (and banks’ BaaS operations). And fintech companies (in addition to a low-cost BaaS platform) get a streamlined path to a bank charter in the future.

• DeFi Mullets-as-a-Service (DFMaaS) becomes a thing. Companies like Eco and OnJuno are creating neobanks on top of crypto infrastructure (DeFi mullet = fintech in the front, crypto in the back). If they are successful, could they inspire the creation of BaaS-like platforms focused on making it easier and quicker to build and launch similar products? The open question here would be what role (if any) would banks play?

Short Takes

1.) Little sizzle for Sezzle.

BNPL provider Zip is buying fellow BNPL provider Sezzle for $354 million in an all-stock deal.

Short take: As Alex Wilhelm at TechCrunch observed, this price values Sezzle’s projected annual revenue at a surprisingly low 2.7x multiple (by contrast, Affirm’s valuation, even after a rough stretch in the public markets, is 8x its current revenue). This suggests that the manic enthusiasm driving private BNPL companies’ valuations may finally be tailing off.

2.) Faster payments for produce growers.

Farm lending platform ProducePay announced Quick-Pay+, a service to get growers 96% of the price of a shipment in 24 hours.

Short take: Financing for produce growers with no requirement that borrowers use land as collateral or repay the loan before products go to market? Provided by a company that was founded by a fourth-generation Mexican farmer? This is exactly why I love fintech. More of this please!

3.) Citi comes over from the dark side.

Citi announced plans to eliminate overdraft fees, returned item fees and overdraft protection fees this summer.

Short take: Good news: this puts more pressure on banks that haven’t made moves on overdraft yet. Bad news: among the big four banks, Citi is by far the least dependent on overdraft fee revenue. Bank of America, JPMorgan Chase, and Wells Fargo have made smaller moves on overdraft, but no one should be satisfied yet.

Research Corner

The BaaS research from Cornerstone Advisors that I referenced multiple times in this piece comes from a recently released report (commissioned by Synctera) — Banking as a Service: Banks’ $25 Billion Revenue Opportunity in Fintech Banking.

The report goes deep into the opportunity for banks to participate in the growing BaaS market and provides practical advice for banks on evaluating BaaS platforms and fintech partners.

You can download the report, for free, here.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

The problem is that your industry is being dragged into the digital era where these skills that you’ve honed are basically worthless.

But — but! — then you hear about this new development — a digital ‘world’ that (mostly) adheres to to the spatial and scarcity constraints of the physical world and that (maybe) most of your customers will be spending most of their time in at some point in the future.

“Great!” you say. “We can port the distribution and customer service skills that we’ve spent decades honing in the physical world over to this new virtual world and position ourselves to be big winners when our customers eventually show up!”

This (plus a healthy dash of FOMO1), is the argument for why banks might start buying digital real estate — despite prices surging 700% in the last year — and building branches in the metaverse.

Now I am going to use the remainder of this piece to argue the opposite — why banks (and fintech companies) shouldn’t build branches in the metaverse.

Let’s begin by trying to pin down a definition for the term ‘metaverse’.

The Evolving Internet

I’ll start here. I recently asked a very smart person that I know to predict how much time we, as a society, would be spending in the metaverse 10 years from now. His reply? About as much time as we do today. His reasoning for this answer is that the metaverse is really just a new term for describing a place we already spend most of our time — the internet.

This is an incisive observation. After all, you and I are interacting, virtually, right now. The interaction is asynchronous, but of course it could be synchronous as well. The metaverse is, quite literally in this sense, the online friends that we’ve made along the way.2

This is a useful starting place for our definition, but there’s something missing.

If the metaverse was simply the internet, Meta might still be called Facebook3 and it certainly wouldn’t be spending $10 billion this year on the development of virtual reality (VR) and augmented reality (AR) hardware and software.

But they aren’t and they are and that means we need a refined definition, which covers the incorporation of technologies like VR and AR.

I found this one, from a recent piece written by Mario Gabriele, to be extremely useful:

The metaverse is the internet, enhanced and upgraded to consistently deliver 3D content, spatially organized information and experiences, and real-time synchronous communication.

Now we’re getting somewhere!

The metaverse is the internet, but in its next evolutionary form; a form that seeks to maximize the the immersiveness of the experience for users.

Ben Thompson of Stratechery sums up this line of thinking nicely:

the Metaverse is the set of experiences that are completely online … which is to say that the Metaverse is already here. Sure, today’s experience is largely denominated by text and 2D, but video is already a major medium, first in the form of entertainment and now a vital tool for work. This is a trajectory that, in my estimation, inexorably leads to virtual reality: if all that matters is digital, why wouldn’t you want the most immersive experience possible?

OK, so if the metaverse is where we (humans that use the internet) are inevitably headed, then why shouldn’t banks and fintech companies rush into this new world, full steam ahead?

The simple answer? It’s not ready yet.

What Web2 Has Become Great At

A nuance that gets lost in the silly web2 vs. web3 debate is that web2 (loosely defined as the internet post-Facebook and Twitter and YouTube) has, by virtue of having been around for a while, evolved from a monolithic set of services and experiences designed to appeal to everyone into a diverse ecosystem of online communities designed to appeal to the smallest possible niches and subgroups.

Here’s Ben Thompson again (emphasis mine):

Facebook and Twitter represented Social Networking 1.0, where you were expected to be your whole self online; that expectation, though, was like a legacy company using computers to run their analog business model: it may have been more efficient, but it wasn’t at all an optimal use of technology. The entire magic of software is that it is malleable and scalable, and those qualities extend to users creating completely different personas and experiences based on the particular online community that they have joined.

When Facebook and Twitter and YouTube started, they were built to appeal to the broadest possible audience. This makes sense! The platforms had to attract users from all the diverse corners of the web1 internet in order to achieve scale and start benefiting from network effects. Hence cat videos on YouTube.

But as the platforms scaled and matured, the nature of how they were used shifted. Subgroups on these platforms started coalescing around shared experiences, interests, and identities. Hence YouTube’s BookTube community, which my wife (a fanatical reader) swears by and that I had never heard of before and never would have stumbled upon in a million years on my own.

And this is representative, broadly speaking, of the internet that we have today. Facebook groups are used by over 1.8 billion people every month. There are more than one billion groups on WhatsApp. Reddit has 1.2 million subreddits, 138,000 of which are active (and often highly influential, as r/wallstreetbets demonstrated last year). Overall, 77% of internet-using consumers say that the most important group they're a part of now operates online.

Looking into the immediate future, I think it’s entirely reasonable to expect that the first wave of companies building experiences in the metaverse — Meta, Decentraland, The Sandbox — will intentionally design those experiences to be as broadly appealing as possible in order to quickly attract users and start generating network effects.

In the case of Meta’s virtual reality game Horizon Worlds, I can personally attest that the experience is utterly bland and inoffensive. And descriptions I’ve read of other virtual worlds sound similarly generic.

Again, this isn’t a bad thing. It’s by design.

One day, if the universal experience of spending time in the metaverse becomes sufficiently enjoyable4, I could see a similar pattern to what has happened with web2 playing out — a massive number of people interacting in the metaverse will split off into a myriad of different affinity and identity-centric communities.

The Golden Age of Digital Community Banks

Thinking about the cyclical contraction (new, broadly appealing experience) and expansion (diverse, community-driven experiences) of the internet, it’s clear to me that the opportunities for financial services companies to leverage the internet to deliver value for customers change significantly, depending on where in that cycle we are.

When disruptive companies introduce new digital experiences that appeal to a broad set of users, they aggregate demand from those users and, as a consequence, become entrenched as critical acquisition channels for other companies trying to reach those users.5

However, when users begin to disperse, spending more of their time interacting in niche communities and subgroups on these platforms, a new opportunity to create value emerges — digital community banks.

As I’ve written before, a digital community bank can be created to serve virtually any group of customers, as long as that group has a specific set of unmet functional and emotional needs and is bound together by a durable and self-organizing identity.

And with the costs to spin up a bank never having been lower (thanks fintech infrastructure companies!) and the number of niche communities self-organizing on the internet never having been higher, we’re now entering the golden age of digital community banks.

Banks and fintech companies that haven’t embraced the digital community trend should strongly consider it. There’s plenty of whitespace left to attack.

Not Yet

At some point in the future, it’s possible (perhaps likely, given the amount of money being invested) that the various digital worlds being built today will have aggregated sufficient user attention and engagement that financial services companies will need to invest in the metaverse as an acquisition (and perhaps customer service) channel.6

But we’re not there yet, as Mario Gabriele colorfully illustrates in his piece on Decentraland:

I have also walked around empty lots and whole neighborhoods without a soul in sight. At around noon on a Tuesday, I stood in Frankie's Tavern, a virtual dive bar, watching a music video alone. After hearing about District X, Decentraland's red-light district, I fruitlessly searched for brothels that apparently exist.

Until the metaverse is a little less empty, resist the temptation to colonize it with branches and billboards.

Sponsored Content

Fintech Meetup ticket prices go up this Friday! Don’t miss out on joining thousands of fintech and banking industry professionals already signed up for the world’s largest Fintech meetings event. We’re facilitating 30,000+ virtual meetings so you can create opportunities with Fintechs, VCs, Banks, Networks, Payments companies, Credit Unions and many others! Virtual, March 22-24. Get Ticket Now

Short Takes

1.) Apple Tap-to-Pay taps payment partners.

Apple has announced plans to introduce a new Tap to Pay feature for iPhone that turns the device into a contactless payment terminal. U.S. merchants will be able to accept Apple Pay and other contactless payments, including Google Pay and contactless credit and debit cards, by using an iPhone and a partner-enabled iOS app.

Short take: I’m surprised. Apple is making this capability available through partners (Stripe is up first) rather than restricting it to just Apple Pay. Not their usual M.O., which makes me think that they’re a little worried about driving merchant adoption given the ubiquity of dongle-based solutions from companies like Block.

2.) Crypto companies attempt to self-regulate.

Several big crypto companies, including Coinbase, Circle and Anchorage Digital, launched the Crypto Market Integrity Coalition, which is taking aim at “manipulation and abuse.”

Short take: This is a smart and very common lobbying tactic, but the rubber will meet the road when one of the members of the coalition has to make a tough choice on growth vs. customer/investor protection. Take Coinbase as an example. It will soon be launching a marketplace for buying and selling NFTs. The NFT market is absolutely rife with scams and plagiarism and wash trading. Incumbent platforms like OpenSea and LooksRare have mostly avoided cracking down on this behavior for fear of driving creators and investors away. Will Coinbase voluntarily hold itself to higher standard as it attempts to unseat those incumbents?

3.) Like Genghis Khan, but with more pizzazz.

The Department of Justice announced the arrest of Ilya Lichtenstein and Heather Morgan, who allegedly attempted to launder more than 25,000 Bitcoins that were stolen as part of the 2016 hack of Hong Kong-based cryptocurrency exchange Bitfinex.

Short take: I don’t really have any meaningful analysis to add here, but I feel compelled to point out that Heather Morgan is (among many other things) an amateur rapper, who performs under the name Razzlekhan, who she describes as “like Genghis Khan, but with more pizzazz.” And within Razzlekhan’s discography is a track titled “SaaSholes”, which have lyrics that truly need to be seen to be believed (warning — you can’t unsee this, so proceed at your own risk).

Research Corner

It’s here! It’s here! It’s here!

Cornerstone Advisor’s What’s Going on in Banking 2022 report is now available!

If you have any interest at all in what U.S. banks and credit unions are planning to do this year (and if you work in fintech then you should care), this report is invaluable.

You can download the report, for free, here.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

6

It’s very possible that this is a generational thing. My youngest son has taken to the metaverse like a fish to water.

We also spent a few minutes at the end sharing crypto and fintech thoughts that we just can’t let go, including one that may end up inspiring the next big DAO (🥠, 🥠).

Enjoy!

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

January was a blockbuster month for fintech, so without further ado I present five fintech trends that caught my eye over the last month:

1. Fashion-forward Fintech

2. The Neobank-ification of QuickBooks

3. The Credit Bureaus Evolve

4. The Delicate Dance of the DeFi Mullet

5. Better Banking for Lower-Income Americans

1. Fashion-forward Fintech

What happened?

• Twig, a circular economy fintech, picked up $35 million in Series A financing.

• Responsible, an embedded finance platform for fashion, raised a $6.6 million seed round from Barclays.

So what?

If your goal is to start a bidding war between VC firms to fund your Series A, you literally cannot come up with a better description of your company/product than this:

[Olympic ice skating TV commentator voice]: Notice those buzzwords! See how gracefully it combines fintech with crypto and ESG? Magnificent.

Let’s set aside Twig’s marvelous marketing copy for a moment1 — the underlying concept here is very interesting. It’s essentially a bank account that allows you to upload a list of your possessions (clothes and electronics, particularly) and instantly liquidate those possessions whenever you want. Think Cash App + iBuying except for retail items rather than real estate.

Responsible is similar — buying back used clothing from the owner instantly — but it relies on an embedded distribution model via an e-commerce plugin.

When I hypothesized, in a prior newsletter, that that the atomization of banking would lead to new and wildly unique financial products, this is the kind of thing I was thinking of.

2. The Neobank-ification of QuickBooks

What happened?

• Heard raises $1.3M to help mental health professionals run their own business.

So what?

OK, I’m cheating here a bit. This company didn’t raise in January. The news is from back in March of 2021, but I just heard about Heard from a recent edition of Simon Taylor’s Fintech Brain Food newsletter and I wanted to write about them.

Heard provides accounting, payroll, and tax management services (software and human accountants) for private mental healthcare practices.

What’s interesting to me is that Heard is following the same basic playbook that niche neobanks like Daylight and First Boulevard are using — a combination of software and people focused on solving the unique financial needs of a specific, durable customer segment. The difference is that heard is starting with accounting rather than banking because, as Simon put it well in his newsletter, “accounting is the operating system of SMBs.”

That’s interesting! That means, in theory, that segment-specific startups could attack SMB accounting incumbents like QuickBooks in the same way that Daylight and First Boulevard are attacking Chase.

Watch this space.

3. The Credit Bureaus Evolve

What happened?

• Equifax, TransUnion, and Experian are all adding support for BNPL providers to furnish repayment data.

• Experian is planning to launch a tool — Experian Go — to allow credit invisible consumers to create their own credit reports.

• TransUnion will enable consumers to give crypto lenders access to their personal credit data.

So what?

Two forces are, simultaneously, pushing the credit bureaus to evolve.

One is regulation. To say that the CFPB is intently focused on credit reporting is underselling it:

And this pressure is encouraging the bureaus to make changes to help consumers get credit for the positive, credit-related things they are already doing.

However, the other force, which we don’t talk about enough, is business. The credit bureaus are for-profit businesses. Many of the new innovations they introduce are, understandably, designed to help them make more money from lenders or from consumers directly.

What’s most interesting to me is how these forces overlap and occasionally come into conflict. For example:

• Experian is keeping its BNPL repayment data separate from its traditional credit data, in order to “protect consumer credit scores from immediate negative impact”. That’s very consumer friendly, but I wonder if this will make it more difficult for lenders to incorporate this data into their decisioning processes (which would be bad for business)?

• Experian Go is the first consumer-focused mechanism that I’m aware of for triggering the creation of a new credit report. Good for credit invisible consumers! But also, maybe, really good for fraudsters looking to create synthetic identities?2

• TransUnion is letting consumers take their TradFi credit histories into DeFi. That has the potential to be useful for consumers and DeFi lenders. Will TU allow TradFi lenders to get visibility into consumers’ DeFi lending histories?

4. The Delicate Dance of the DeFi Mullet

What happened?

• Current launched a 4% APY interest product.

• Current partnered with TurboTax for faster tax refunds.

So what?

I’m going to go out on a limb and guess that there’s only one company in the world that is partnered with both TurboTax and Compound Labs.

Current is trying to build what it calls ‘hybrid finance’ and what fintech Twitter tends to call the ‘DeFi mullet’ — a banking service that seamlessly combines the intuitive user experience of fintech with the infrastructure and yield advantages of decentralized finance.

One of the reasons this concept is so hard to build is that it requires companies to put customer value above ideology.

If you’re a web3 person, it’s likely that you think web3 is the answer for pretty much everything and that software products like TurboTax are unrepentant evil:

That’s a perfectly understandable perspective!

It’s also understandable for web2-era fintech folks to look at web3 and conclude that 99.99% of it is made up of scams and speculation.

What’s hard to do is to set aside your personal feelings and build the best possible product for your target customers, drawing equally from web2 and web3 toolboxes along the way.

5. Better Banking for Lower-Income Americans

What happened?

• H&R Block launched Spruce, a digital bank for low-income Americans.

• Walmart is acquiring One and Even with the intention of creating a digital bank for customers and employees.

So what?

If you really want to get better digital banking solutions in the hands of lower-income consumers, you need to obsess over distribution.

It’s relatively easy, today, to build many of the banking features that these consumers need (early access to paychecks, automated savings, earned wage access, etc.)

However, as Nik Milanović3 recently pointed out on Twitter, too many of these features are currently offered by fintech apps that expect users to find them rather than being embedded in the places where these consumers already are:

I’m personally more bullish on Walmart than H&R Block, but both are great examples of companies with built-in distribution advantages offering digital banking solutions to the exact consumers fintech most needs to help.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Manufacturing and distribution. These are the two challenges that every founder wrestles with.

The question that’s interesting to me is which challenge do you start with?

Obviously the answer depends on a number of specific factors — the customer problem that is being solved, the founding team and their very particular set of skills, etc. — but I also think it depends on the ‘era’ in which the company is being founded.

In financial services, I would argue that, after 15 years or so, we are leaving the era of manufacturing and entering the era of distribution.

The Manufacturing Era

The recent history of disruption in financial services can be hung on a timeline of product innovation.

Picture the first couple generations of neobanks incorporating budgeting capabilities, automated savings, early access to direct deposits, and fee-free overdraft into checking accounts. Or online lenders digitizing the entire customer journey, from acquisition and underwriting through servicing and collections.

The details don’t really matter for our purposes, it’s the pattern that matters — carefully pick a customer problem that is being solved sub-optimally by incumbents, build a significantly better alternative, and use the obvious appeal of that wedge product or experience to gain traction in the market.

This is the great unbundling of financial services, which we’ve been writing about for a while now.

(The infamous CB Insights ‘fintech unbundling banking’ graphic would normally be placed here, but I’ll spare you this time)

The crucial point with these companies is that they had to prioritize manufacturing over distribution because the products and experiences they wanted to offer didn’t exist. There was nothing off the shelf that they could use to get started. In a lot of cases, the things they wanted to do were considered impossible by regulators and bank executives. To prove it was possible, they had to manufacture it.

It’s not an accident that many of these ‘manufacturing era’ companies ended up spinning off fintech infrastructure companies to resell the technology they built in house or having ex-employees start fintech infrastructure companies to solve the problems they dealt with in house.

And it shouldn’t surprise us that many of these companies (though not all) relied on relatively conventional distribution strategies. After all, they manufactured a really compelling product! A product that hadn’t existed before. A product that, when presented through popular advertising channels like Google and Facebook, would essentially sell itself.

So, for the most part, that’s exactly what they did.

The End of the Manufacturing Era

The success of fintech over the last 15 years has, ironically, created conditions that have made it much more difficult for new fintech companies to succeed using the ‘manufacturing-first’ strategy of their predecessors.

First, and most importantly, fintech has become the single favorite category of VC investors (and, I presume, their LPs). In 2021, private companies raised a record $621 billion in venture funding globally. One out of every five of those venture capital dollars was invested in fintech.

That’s an absolutely staggering amount of money and the downstream effects of all that money being introduced into the ecosystem are profound.

Facebook and Google are the obvious winners. More money in fintech leads to more competition, which in turn leads to increased spending on digital advertising, which has produced the astronomical customer acquisition costs that today’s fintech founders are saddled with.

More fundamentally, this increase in competition has created significant pressure for new fintech startups to move fast.

Gone are the days when you had to spend years building your tech stack, negotiating partnerships, and perfecting your product. With the benefit of modern infrastructure and a mature BaaS landscape, you can build a new fintech company in months:

The trouble is that now that these fintech infrastructure companies exist, it has become really hard to justify not using them.1 This is obviously good for them (pick-and-shovel business baby!), but it can make it hard to manufacture a differentiated product with strong unit economics when you and all of your competitors are using (and paying for) the same couple dozen APIs.

And that challenge — building a differentiated consumer fintech offering — is compounded when you realize that your competitors are going to rapidly and continuously copy all of your cleverest and most unique product features, which forces you to do the same or risk falling behind.

The end result is a convergence of fintech product roadmaps, as I noted recently:

If you’re a well-funded BNPL company, you’re probably going to partner with e-commerce infrastructure companies and add banking and crypto capabilities to your app. If you’re a neobank, you’re likely going to add crypto and BNPL. If you’re building finance solutions for corporate customers, you will be tempted to converge towards a combination of AP/AR automation, corporate cards, and revenue-based financing in your product roadmap.

And this is where we find ourselves — in an intensely competitive environment in which it has simultaneously never been easier to launch a consumer fintech product and never been harder to launch a sustainably differentiated consumer fintech product.

So, what’s a clever fintech founder to do?

The Distribution Era

You could, of course, buck the fintech infrastructure trend altogether, take your time, and try to build a differentiated consumer fintech product from scratch. There are plenty unmet financial needs that require solutions fundamentally different than the financial products we have today. If you have unusually patient early investors and access to an abundance of spare engineering talent, you could conceivably go down this path.

Or, alternatively, you could shift the focus of your strategy for achieving competitive differentiation away from manufacturing and on to distribution.

This is the path I think we will see a majority of consumer fintech companies take over the next 10-15 years.

In fact, we already are.

Welcome to the era of distribution.

Two Horses

Let’s start with the obvious. If you’re going to pursue a differentiated distribution strategy, you can’t utilize the same tactics that everyone else is already using. No matter how clever you are in your execution, you can’t rely on social media advertising or leads from NerdWallet or generic influencer marketing or getting someone famous on your cap table and putting their name in the first paragraph of every one of your press releases. And if you say “SEO”, I’ll whack you with something heavy.2

Differentiated distribution strategies are differentiated precisely because they aren’t obvious or push-button easy. They are difficult to conceptualize and time consuming to execute. And because of that, they require focus. You can’t, as we say in Montana, ride two horses with one ass. You have to choose.

And that choice, from my perspective comes down to this — convenience or community?

Convenience

The argument for convenience, as the foundation of your differentiated distribution strategy, is that the acquisition of financial products is almost never the end goal of consumers:

Whether they’re willing to admit it or not, banks sell enabling products. Consumers don’t want mortgages and credit cards and 401Ks; they want a nice place to live, the ability to buy stuff (including stuff they can’t quite afford), and to not work until they keel over and die.

And, therefore, the most valuable thing you can do for your customers is to reduce the work necessary to get a financial product down to the absolute minimal level.

In this model, the details of the financial product itself are mostly irrelevant (as long as it can enable the outcome the customer is looking for). The important part is making the acquisition experience easy.

Take lending as an example.

Traditionally, customers have had to identify the need for a loan, shop for providers, compare the product options, and apply for the one(s) that they prefer. The onus for acquiring the product fell, primarily, on them and banks competed in the shopping and product comparison stage and in making the remaining steps in the process as streamlined for the customer as possible.3

However, the ideal experience for customers isn’t a more convenient account opening process. It’s not having to apply for the loan at all. It’s embedding lending within the context of the activity that the customer is attempting to complete.

If the foundation of your differentiated distribution strategy is convenience, then the endgame that you are playing towards (whether you know it or not) is embedded finance.

The goal is to unobtrusively provide the needed financial services within the products and services that your customers already use to complete non-financial services activities. Think of auto lending within car dealerships (facilitated by RouteOne and Dealertrack) or split pay within e-commerce (facilitated by Klarna or Afterpay).

Successfully executing on this strategy can be hugely beneficial. Customer acquisition goes from being one of your most frustratingly large line items to a free service provided by your partners (or, in some cases, a revenue driver … BNPL providers have a negative CAC because merchants pay them to send them new customers).4

Of course there are drawback as well. Competition for embedded finance partners can be fierce and can easily lead to margin compression (ask BNPL providers). Additionally, while acquiring new customers through indirect channels can be easy and inexpensive, cross-selling additional products to them (when they have no prior connection with your brand) is extraordinarily difficult.5

Community

The argument for community, as the foundation of your differentiated distribution strategy, is essentially the opposite of the argument for convenience. Instead of financial services fading invisibly into the background, the thesis here is that interactions revolving around money can form the backbone of durable, deeply engaging communities; places where consumers will go out of their way to spend their time (and more of their money).

This argument is, ironically, the one that community banks and credit unions have been making for decades.

The key difference is in the way that ‘community’ is defined.

The digitization of financial services has led to the emergence of two new models for community-oriented distribution models — digital community banks and web3 communities.

Digital Community Banks

Neobanks like Daylight, Nerve, First Boulevard, and Panacea Financial are modernizing the concept of community banking by building banks for specific consumer segments rather than specific geographies. These segments can be defined by identity (Daylight was built for LGBTQ+ consumers, First Boulevard for African-American consumers) or profession (Nerve is a neobank for musicians, Panacea is for doctors), but they all have a few common characteristics, as Rob Curtis (CEO of Daylight) explained to me last year:

1.) The community has to self-identify as a community, for the long term. Certain groups — freelancers, students, etc. — may be bonded by common functional needs, but those bonds are temporary because these groups don’t self-identify themselves as part of a permanent community.

2.) The community has clearly identifiable and unmet product needs. If your product isn’t solving unique and meaningful pain points for the community then it’s just an affinity marketing play.

3.) The community has clearly identifiable and unmet emotional needs. It can’t just be functional. There has to be an emotional need that you can satisfy. This helps you build your brand and improve customer retention.

4.) The community has self-organizing, purpose-driven groups within it. These groups, if they value your product and connect with your brand, become an enormously important (low cost) acquisition channel.

What’s striking about this is that the product (the thing being manufactured) is a relatively small part of the equation. Much of the focus and investment is on the community aspects (how the product is distributed and engaged with), which manifests as things like this from Daylight:

we have a network of live financial coaches in the app that will help customers think about money mindset, about forming good financial habits, and improving savings rates.

If that sounds unusual for neobanks — which tend to over-invest in their product and in traditional marketing tactics like sponsoring professional sports teams and under-invest in customer service — you’re right. And that’s the point.

Web3 Communities

Let’s skip over the silly Twitter debates and just stipulate that web3, in general, can be thought of as the internet as we know it today, but with ownership more evenly distributed to creators and users, via crypto tokens.

The interesting bit of web3, for the purposes of this discussion, are the communities that can be created when creators are natively empowered to provide economic incentives and ownership to users. In this way, web3 neobanks are (if you tilt your head and squint your eyes quite a bit) like the modern version of credit unions.6

Take Eco as an example.

Eco is essentially a web3 neobank. It describes itself thusly7:

As that description suggests, Eco’s product is a combined checking, savings, and payment offering, built entirely outside of the traditional banking system.8 However, the core of the business, as CEO Andy Bromberg explains, is community (emphasis mine):

Community is at the very core of what we're trying to achieve at Eco. We can't achieve the full extent of our ambitions without the support of a community that shares our vision and wants and believes in it as much as we do, and we must reward that belief in order to sustain it.

This is where Eco (and other web3 neobanks) are different — they can programmatically reward users for their engagement with and contributions to the community via crypto tokens.

Eco calls them Eco Points, which they describe as an “open rewards currency”. It’s not abundantly clear to me how one earns Eco Points. At the moment, the primary point of engagement around Eco Points appears to be an automated Twitter account (The Accountant9) that allows Eco customers to grant Eco Points to each other for (among other things) spreading the gospel of Eco:

The specifics matter less at this point than the broader implications of this experiment (and others like it) in programmatic financial incentives for community building.

And the implications are fascinating.

Optimistically, one could envision a world in which web3 neobanks use tokenomics to generate early momentum with users and that momentum carries over into the formation of a durable community.

As an example, NFT marketplace LooksRare recently sent the biggest customers of Opensea (the biggest NFT marketplace and LooksRare’s main competitor) some of its tokens (LOOKS) and gave users the ability to earn more LOOKS tokens if they bought and sold NFTs through their platform. And what do you know? After doing this, LooksRare jumped past OpenSea in terms of total transaction value traded on its platform. Cool!

Pessimistically, one could envision a world in which web3 neobanks use tokenomics to artificially juice their growth and retention numbers while making rich people even richer and exposing ordinary customers (whose “deposits” likely won’t be FDIC insured) to an excessive number of scams. Unfortunately, LooksRare also appears to be a good example for this worst-case scenario:

In reality, this is what appears to have happened:

1. LooksRare builds an NFT marketplace with slightly lower fees than OpenSea (based on a preliminary TechCrunch analysis of their pricing schemes and media coverage).

2. LooksRare also creates a token, given to users for trading on its platform, providing a stake in its future governance in exchange for using its service.

3. Users execute wash trades of expensive NFTs to accrete LOOKS tokens, artificially boosting LooksRare volumes and putting huge amounts of LOOKS tokens into the hands of the already crypto-wealthy, ensuring that the future LooksRare DAO will be heavily influenced by a handful of users.

Convenience or Community?

This isn’t merely a choice over distribution strategy — though it is that and it will be an enormously consequential choice for founders building today — it’s also a question about what the role of financial services should be and will be in the lives of consumers.

I can’t wait to see how fintech companies answer it.

Sponsored Content

Get your Fintech Meetup ticket before prices go up this Friday! Join 1,000+ organizations already signed up for the world’s largest fintech meetings event. 

Don’t miss out on the easiest way to meet leading Fintechs like Alloy, Checkout.com, NIUM, Socure & Upstart, Investors like Bain Capital Ventures, General Atlantic & Tribeca Venture Partners, Major Banks like Bank of America, Citibank, J.P. Morgan & Wells Fargo, Neobanks, 100+ Community & Regional Banks, 150+ Credit Unions, Networks, Payments Cos and many others! Virtual, March 22-24. Get Ticket Now

Short Takes

• Stop trying to make ‘super app’ happen.

  Walmart’s fintech startup, Hazel, is acquiring neobank ONE and early wage access provider Even, in a bid to create a “financial services super app, a single place for consumers to manage their money.”

  Short take: The term ‘super app’ is constantly misused and needs to go away. A super app, by definition, is broader than just financial services. And “a single place for consumers to manage their money” already exists. It’s called a bank account. That’s what this is (and the reason to be legitimately excited about these acquisitions) — Walmart is building a digital bank for low income Americans. That’s cool! That’s the headline!

• The end of an era.

  UBS is acquiring robo-advisor Wealthfront for $1.4 billion.

  Short take: It’s hard not to look at this as the end of the robo-advising era. The business model has just never made a lot of sense. A 0.25% fee requires massive scale to produce positive cashflow and even when you achieve that level of scale (as Wealthfront and Betterment have) you’re always living right on the edge. After failing to find traction with its pivot to self-driving money, it’s not surprising to me that Wealthfront ended up here. It’ll be interesting to see what happens to Betterment.

• Where do credit reports come from?

  Experian will begin allowing credit invisible consumers to create credit reports from scratch and populate them with their recurring, nondebt bill payment history.

  Short take: This is the logical next step in the journey that Experian started taking with Boost. If you can add recurring, nondebt bill payments to your credit report to boost your score, why can’t you use that same data to create your credit report from scratch? I do wonder what the end of this journey looks like, particularly if regulators get involved. Why shouldn’t all credit reports require consumer permission before they are created?

Research Corner

🚨New research alert🚨

If you liked this newsletter (particularly the bit about embedded lending) then you’ll love this new research report from Cornerstone Advisors (commissioned by Newgen): Cultivating a Digital Lending Ecosystem Strategy.

The report provides a cogent definition of the term “ecosystem”, walks through the past, present, and future of digital lending ecosystems, and outlines the concrete steps that banks and fintech companies can take to build and/or participate in such ecosystems.

You can download the report, for free, here.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

In this episode, Jason and I bid farewell to 2021 by discussing:

• The credit bureaus’ long-time-coming embrace of BNPL.

• The introduction of new products in the P2P payments space.

• The tables turning on fintech SPACs and what to expect in 2022.

And, as is quickly becoming tradition, we spent a few minutes at the end talking about the news stories and trends we just can’t let go of (spoiler alert — several web3 buzzwords are involved).

Enjoy!

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Larry Diamond, Zip:

I think the reason that buy now, pay later has been so successful is it delivers a better and fairer alternative to the credit card

Nick Molnar, Afterpay:

we never wanted our consumers to revolve in debt, we keep our consumers’ best interests at heart

Max Levchin, Affirm:

I got my first credit card a couple years after coming to America and promptly destroyed my credit, because I had no idea how to use this power tool.

Dan Schulman, PayPal:

Twenty years from now, there will be no more credit cards, really

Sebastian Siemiatkowski, Klarna:

Those who can afford to pay off their balances each month reap rewards through loyalty schemes while those who can’t afford to simply get into more debt.

This anti-credit card positioning for BNPL has become so ubiquitous in the industry that it even showed up in the CFPB’s recent announcement that it was going to be investigating the surging U.S. BNPL market:

Today the Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies offering “buy now, pay later” (BNPL) credit. The orders to collect information on the risks and benefits of these fast-growing loans went to Affirm, Afterpay, Klarna, PayPal, and Zip. The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.

Lenders have touted BNPL as a safer alternative to credit card debt, along with its ability to serve consumers with scant or subprime credit histories.

Here’s the thing though — comparing BNPL to credit cards, while smart messaging for the BNPL providers1, isn’t all that useful for policymaking.

A more useful point of comparison would be another bank service; a service that, coincidentally, has also been in the CFPB’s crosshairs lately:

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” said CFPB Director Rohit Chopra. “We will be taking action to restore meaningful competition to this market.”

BNPL and overdraft are mirror images of each other; overwhelmingly similar and yet, in key ways, undeniably different.

In this post we’ll analyze some of those similarities and differences because, much like when Kirk and Mirror Kirk swapped universes, it’ll help broaden our perspective.

Through a Glass, Darkly: Comparing Overdraft & BNPL

Let’s start with overdraft.

Overdraft

Overdraft — the service that enables consumers to make deposit transactions in excess of their available account balances — started out as a simple courtesy that banks offered to customers who mistimed their check-writing and deposits.

From those humble origins, it has grown into a monster.

A number of factors — most notably the rise of debit cards and digital payments and the passage of the Durbin Amendment — helped overdraft evolve from a courtesy offered by banks to their most valued customers to a critical source of revenue paid primarily by their most desperate customers.

According to research from the CFPB, overdraft and non-sufficient funds (NSF) fees generated $15.47 billion in revenue for U.S. banks in 2019, which represented nearly two-thirds of banks’ total fee revenue. Previous CFPB research has indicated that a small subset of financially-vulnerable customers pay a majority of these fees (which average about $35 a pop), often as the result of mistakes or inattention rather than deliberate cashflow management strategies. According to previous studies, less than 9% of account holders have more than 10 overdrafts annually and pay close to 80% of all overdraft revenue. Recent analysis from the Financial Health Network sheds more light on exactly who these frequent overdrafters are:

low-to moderate-income households were nearly twice as likely to overdraft than higher-income households. Black and Latinx households with accounts were also far more likely to report having overdrafted than White households (1.9 times as likely and 1.4 times as likely, respectively), contributing to the disproportionate financial costs borne by people of color. 

Additionally, we found that young people with checking accounts are more likely to overdraft than older people with accounts: 35% of those aged 18-25 had overdrafted, compared with just 7% of those 65 and older. 

Furthermore, overdrafters are far more likely to have nonprime credit scores. Thirty-three percent of checking account holders with nonprime credit scores have overdrafted, compared with only 10% of those with prime credit scores. Among households with more than five overdrafts in a year, 80% don’t have prime credit.2 

Not great, Bob.

But here’s some good news.

Competition from fintech companies (along with relatively steady pressure from regulators and lawmakers) has pushed banks to revamp their overdraft programs, to the benefit of consumers.3 You’ve heard about the big changes — Ally and Capital One eliminating overdraft fees altogether and big banks like PNC and JPMorgan Chase taking steps to reduce accidental overdrafts — but there has been a subtler, but more important shift playing out over the last decade. During that time banks’ overdraft revenue fell 57%, the percentage of regular overdraft users (those with 10 or more transactions annually) fell by 40%, and the size of the average overdraft increased from $50 to nearly $200.4

Looking forward, it’s easy to envision a market in which consumers have a plethora of different overdraft options — from banks and neobanks, both free and inexpensive — to choose from.

Now let’s hop universes and talk about BNPL.

BNPL

According to estimates from Cornerstone Advisors, consumer spend through BNPL grew from $24 billion in 2020 to nearly $100 billion in 2021. That growth, aided hugely by stimulus payments and the pandemic-fueled surge in e-commerce, was captured almost entirely by fintech companies like Affirm, Klarna, Afterpay, and PayPal, which (according to McKinsey) diverted $8 billion to $10 billion in annual revenues away from banks.

However, when we talk about BNPL we need to be precise. A lot of different lending models and businesses get lumped under the umbrella of BNPL. McKinsey helpfully outlines six of the most common models in the graphic below, including the one (integrated shopping apps) that I want to focus on.

Much of the growth in BNPL is due to the explosive growth that Klarna and Afterpay (and competitors like PayPal and Affirm) have seen in the use of their split pay or pay-in-4 products.

The way these products work is simple — a consumer is presented with the option (typically at the point of sale) to split their payment into 4 installments. The first installment (25% of the total transaction) is paid at the time of the purchase and the remaining three installments (of 25% each) are paid back in two-week increments (for a total loan term of six weeks). The loan is offered at 0% interest and typically comes with no fees (some providers charge late fees). The loans can be repaid via ACH, debit card, or (in some cases) credit cards and, if the loan isn’t repaid, access to loans from the BNPL provider in the future is often suspended.

As shown in the graphic above, pay-in-4 BNPL loans are most commonly used for smaller dollar transactions (less than $250), with 80%-90% of loans averaging between $100 and $110. A majority of the volume for these loans is sourced from higher-margin, discretionary-spend categories like apparel, footwear, fitness, accessories, and beauty. The typical pay-in-4 customer is young and either non-prime or credit invisible.5

Pay-in-4 BNPL providers make the majority of their revenue — projected by McKinsey to reach between $4 billion and $6 billion in 2023 — from the merchants they are integrated with, which pay fees ranging from 3% to 6% of each transaction.

As McKinsey observes in referring to Klarna and Afterpay as “Integrated Shopping Apps”, the future of pay-in-4 BNPL is moving beyond 1:1 merchant integrations to becoming comprehensive shopping destinations, as I noted in an article about Klarna a while back:

The strategic purpose of this shift is to eliminate Klarna’s dependence on its merchant partners for customer acquisition by converting first-time Klarna customers into highly engaged shopping enthusiasts that spend increasingly large amounts of their free time in the Klarna app.

The latest numbers reported by Klarna — 18 million monthly active app users globally and 3.5 million in the US — suggest that this strategy is succeeding.

Cultivating a large base of recurring shoppers allows Klarna and Afterpay to sell access to those customers back to their merchant partners via affiliate marketing and advertising programs.

Overdraft vs. BNPL Pay-in-4

So, how does overdraft compare to BNPL pay-in-4?

Let’s review:

• Overdraft is increasingly happening on larger (and more intentional) transactions, becoming less expensive (or free), and generating less revenue for providers. BNPL pay-in-4 is mostly the opposite.6

• Overdraft and BNPL pay-in-4 thrive in the same customer segments, but BNPL will arguably become more useful to those customers as BNPL providers begin furnishing to the credit bureaus.

• BNPL pay-in-4 is obviously much less expensive for consumers than overdraft, but I do have concerns about the clear incentive that BNPL providers have to push consumers to shop and spend more than they can afford.7

• BNPL pay-in-4 is designed to be far more transparent and intentional in its use than overdraft, which has relied on a lot of accidental usage and confusing pricing structures. This is beginning to change as banks modernize their overdraft programs, but they have a lot of ground to make up on this front.

• Overdraft and BNPL pay-in-4 can both be difficult to manage, but in different ways.

  For BNPL, the challenge is keeping track of payments (especially when using multiple providers). Two-thirds of BNPL users who have missed a payment in the last two years said it was because they lost track of when the bill was due, according to Cornerstone Advisors’ survey data.

  And for overdraft, the complexity stems more from the U.S.’s antique payments infrastructure, as the CFPB’s Rohit Chopra notes:

  

Not New, But Different

A mirror universe — in which we see similar, yet intriguingly-different versions of the characters we know — is a compelling storytelling device. It’s also a useful analogy for those of us working in financial services. There are very few truly new ideas in banking, just old ideas with new and interesting twists.

Overdraft and BNPL pay-in-4 fundamentally serve the same customer need — short-term liquidity for consumers with cashflow imbalances and a lack of access to mainstream credit products. The twist with BNPL pay-in-4 is that it shifts the cost of this short-term liquidity from consumers to merchants. This innovation is a potentially promising development, but also introduces new incentives that deserve thoughtful scrutiny.

As the CFPB (and other regulators) dig into these areas, I would strongly encourage them to think holistically rather than in silos. If for no other reason, it may lead to some compelling plotlines for a television show in the future.8

Sponsored Content

Fintech Meetup, the world’s largest fintech meetings event, is just 70 days away! There are no speakers or fireside chats…just 30,000+ virtual meetings that fill your pipeline with new leads, partners and opportunities. Meet 3,000+ participants from Fintechs, Major Banks, Neobanks, Regional & Community Banks, Credit Unions, Investors, Networks, Solution Providers, Tech cos, Retailers & Merchants and many others! Virtual, March 22-24. Get Ticket Now.

Short Takes

• BNPL Cashback

  Affirm launched a way to earn cashback rewards on its buy-now-pay-later purchases. And Afterpay partnered with Rakuten to launch its own cashback rewards.

  Short take: No wonder everyone is so confused! BNPL companies keep finding new ways to make their products seem like credit cards (but better). In this case, it’s adding cashback rewards. The interesting twist here is that the cashback is provided on an individual merchant level through offers made in the BNPL providers’ apps. Compared to regular old credit cards, I could see merchants preferring this option. We’ll see what consumers think.

• Churn that Butter

  Butter, a platform that prevents customer subscription payments failures, raised $7 million.

  Short take: First, great name. Makes headline writing easy. Second, this is another reminder of just how much extra value is waiting to be wrung out of the subscription economy. Companies like Pipe are turning subscriptions into upfront revenue. Butter is turning the problem of accidental subscriber churn into a wedge product for a new payments infrastructure company.

• Betrothed Now, Pay Later

  Carats & Cake, a point-of-sale financing solution for venues and property groups, raised $19.3 million.

  Short take: Given that weddings have been on a decades long streak of becoming more elaborate and expensive (at least according to my parents), I can see the appeal of BNPL for wedding venues. That said, I have questions about this one. For example, Carats & Cake says on its website that it doesn’t pull consumers’ credit files to underwrite its split pay loans, but that seems odd (and maybe risky) given the size of the overall transaction?

Research Corner

🚨New research alert🚨

Ron Shevlin and I teamed up to create The Definitive Guide to Potentially Misunderstood Fintech Trends & Terms (and what they mean to the banking industry).

You’re going to want to download this report (which you can do here), trust me. It’s got all the fintech buzzwords you love to hate — super apps, open banking, embedded finance — and plenty of snark and (dare I say) insight.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Before we close the books on 2021, I want to look back on a few notable fintech trends from the end of the year.

In addition to today’s newsletter — in which I will hit on 5 interesting fintech trends that caught my eye — I will also be releasing another episode of the Fintech Recap podcast with Jason Mikula next week, where we discuss a few of our favorite fintech news stories from December (subscribe to the podcast on Apple Podcasts or Spotify, if you haven’t already).

Now, on to the five most interesting (to me!) fintech trends from December, 2021:

1. People paying people.

2. BNPL breaks into browsers.

3. Banks take the lead on overdraft protection?

4. Tax prep is the new fintech (and crypto) frontier.

5. The transformation of mortgage servicing.

1. People paying people.

What happened?

• Alloy Labs Alliance, an association of community banks, is launching CHUCK, an open network for instant payments to compete with Zelle.

• Facebook is testing a new feature to let users split payments in group chat.

• TSB’s Paul Pester is building Loop, a “social network for money.”

• Block’s Cash App will now let users gift each other stock or bitcoin.

So what?

Despite the fact that person-to-person (P2P) payments never has been a profit center, companies continue to believe that offering it is critical to acquiring, engaging, and retaining customers.

I’m not sure that belief is warranted1, but regardless it seems like investment is going to continue pouring into this area.

My level of optimism for these specific initiatives ranges from high (CHUCK seems likely to be a worthy competitor for Zelle and the addition of stocks and crypto to Cash App’s P2P functionality makes a lot of sense) to neutral (I don’t know if there’s room for a new P2P app in the UK, but I wish Mr. Pester the best of luck) to very low (I’ve yet to see evidence that Facebook knows how to crack payments, despite its many attempts).

2. BNPL breaks into browsers.

What happened?

• Microsoft is building buy-now-pay-later into its Edge browser through a partnership with Zip.

• Klarna rolled out a BNPL browser extension powered by its PiggyVest acquisition

• Butter made a BNPL extension for the Opera browser.

So what?

As BNPL has proliferated across (seemingly) every e-commerce checkout page, BNPL providers have had to get creative in finding new and differentiated points of entry into the commerce experience. We are seeing BNPL in brick and mortar, BNPL apps transforming into comprehensive shopping apps, and now BNPL migrating down the e-commerce stack from specific websites to being built into internet browsers.

This strategy makes sense, although success will be highly dependent on how well it’s executed. Will the change be communicated clearly to users? (Microsoft Edge users seem pissed FWIW) Will the service be interoperable? (Klarna’s browser extension works across Chrome and Edge right now, with more browsers coming) Will there be other value adds, beyond financing, built into the experience? (Opera and Klarna are both bundling in cashback offers and coupons)

Once the browser wars end, expect to see the next BNPL fight play out at the OS level (Apple and Google have already made initial moves in this space).

3. Banks take the lead on overdraft protection?

What happened?

• Capital One is getting rid of all consumer overdraft fees, eliminating a $150 million annual revenue line for the bank.

• JP Morgan Chase, starting next year, will give customers a day to restore overdrawn balances before assessing overdraft fees.

So what?

Let’s play a quick game of bad/better/best.

Bad: Banks making an excessive amount of revenue from overdraft fees, including on unintentional, small dollar overdrafts that don’t provide any value to customers.2

Better: Neobanks offering limited, but much less expensive overdraft protection options.3

Best: Neobanks continue to offer competitive overdraft protection products and banks take steps to reduce or eliminate overdraft fees and/or reduce the amount of unintentional overdrafts while continuing to offer robust overdraft protection.4

Feels kinda weird to write this, but is it possible that Capital One now offers the best overdraft protection product in the industry?

4. Tax prep is the new fintech (and crypto) frontier.

What happened?

• FlyFin, an AI tax and CPA engine for freelancers and the self-employed, raised $8 million in seed funding.

• Column Tax raised $5.1 million seed round to launch mobile tax-prep products.

So what?

The seeds of this trend were planted when Cash App swooped in to acquire Credit Karma’s tax prep business. However, in the last year this trend has picked up steam, as established fintech companies and new startups have realized how much more value they can layer on top of the tax preparation experience.

FlyFin is one of a growing group of fintech startups focused on making it easier for gig workers, creators, and other freelancers to manage their finances and file their taxes.

Column Tax is going in a different direction, building tax filing and tax refund advance lending services that can be embedded through APIs into other companies’ apps.

Expect to see tax preparation and tax refund advance lending show up on the list of table stakes features for neobanks within the next year or so.

And, of course, expect to see crypto grab this trend and take it even further! As more consumers decide to get part or all of their paychecks in cryptocurrencies, they will need integrated capabilities for managing the complex tax implications of that decision.5

5. The transformation of mortgage servicing.

What happened?

• Mortgage provider Rocket Companies agreed to acquire personal financial management app Truebill and its 2.5 million users for $1.275 billion in an all-cash deal.

So what?

This is an interesting acquisition, on a couple of different levels.

As Alex Wilhelm at TechCrunch noted, the acquisition was surprisingly inexpensive for Rocket (compared to the prices we’ve been seeing in fintech, and SaaS more generally).

More importantly, in my opinion, is the strategic rational for this acquisition, which I outlined in this thread:



Put simply, Rocket is using mortgage servicing (which it started doing in earnest in 2010) as the foundation to create a comprehensive personal financial command center for each of its customers. The acquisition of Truebill accelerates this endgame. As I’ve written before, it’s about time somebody did this.

Research Corner

🚨New research alert🚨

Ron Shevlin and I teamed up to create The Definitive Guide to Potentially Misunderstood Fintech Trends & Terms (and what they mean to the banking industry).

You’re going to want to download this report (which you can do here), trust me. It’s got all the fintech buzzwords you love to hate — super apps, open banking, embedded finance — and plenty of snark and (dare I say) insight.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Why do we like predictions?

I mean, I know why I like them and why other folks like me — analysts, journalists, and self-appointed thought leaders — like them. They perform. People love reading predictions pieces.1

But why? What value do they provide to readers?

I think the value of predictions about the future, when they’re done thoughtfully and with some humility, is that they help create conviction.

For anyone building something new, conviction is important. Founding a company or building a new product or service is basically a bet that you know what people are going to need. It’s a bet on the future and how closely your vision of the future will align with reality. The more conviction you have in how the future will play out, the bigger the wager you can make.2

Of course, those wagers only pay off if the underlying bet on the future is right. And waiting to see if you’re going to be right (as the rest of the world forcefully pushes back) can be excruciating, as this scene from The Big Short entertainingly illustrates:

So, how do you build (and sustain) conviction?

Predicting the Future

There are two basic approaches to predicting the future.

The first (and most common) approach is to predict what will change.

There are lots of frameworks for doing this. A favorite of mine is Daniel Burrus’s Hard Trend Methodology, which forces you to separate your ideas of what will change in the future into hard trends and soft trends. Hard trends are future certainties, things that will happen whether we want them to or not. Common areas where hard trends are found include demographics (all Baby Boomers will eventually retire) and technology (Moore's law). Soft trends, by contrast, are things that may happen. Common examples tend to revolve around predictions of consumer behaviors and preferences, which are wrong all the time (consumers are weird!)

Unsurprisingly, technology companies tend to be very good at building conviction around hard technology trends. Not all bets made on the ever-advancing progress of technology pay off3, but many of them do. A good example is Netflix.

Despite it’s roots in the DVD business, the long-term plan for Netflix was always to stream movies over the internet. This was Reed Hastings’ vision from the start. And the conviction driving that vision came from an easily-understood and calculated hard trend:

The name Netflix itself always held the promise of movies delivered over the Internet. The problem … was that back then they couldn’t stream movies over 56K modems.

But there was Moore’s Law and improvements in bandwidth which could be plotted, and that is exactly what Hastings did. “We took out our spreadsheets and we figured we’d get 14 megabits/sec to the home by 2012, which turns out is about what we will get.” So what does his spreadsheet tell him about the next ten years? “If you drag it out to 2021, we will all have a gigabit to the home.”

In financial services, the emergence of digital-only neobanks over the last 20 years or so was based on conviction in a similar hard trend, as Brett King, Founder of Moven, explained to me:

In 2005, I was commissioned by HSBC to do a 20-year outlook on how digital technologies were going to disrupt their business. And the key thing was the network effect — understanding that this technology enabled you to change things quite quickly, but bankers expected customers’ behavior to be very sticky and not change.

For example, the branch. My assessment, back in 2005, was that by 2008 internet activity would overtake the branch, particularly from a transactional perspective, and then by 2015 mobile would overtake both the branch and the internet. At the time, this prediction was treated mostly with disbelief and it wasn't really until 2013 or 2014 that the numbers started to show that it was really happening.

A second, less common approach to predicting the future is to predict what won’t change.

This approach isn’t a particularly good fit within the current tech startup zeitgeist. Founders are supposed to have a bold vision of a completely different future and a relentless drive to create that future, even (especially?) if it requires bending reality to their wills. That’s the behavior we tend to mythologize.

Building a business based on rather mundane predictions of what won’t change in the future feels, by contrast, kinda uninspiring.

And yet, it’s a strategy that Jeff Bezos (one of the most disruptive entrepreneurs in history) recommends:

I very frequently get the question: "What's going to change in the next 10 years?" And that is a very interesting question; it's a very common one. I almost never get the question: "What's not going to change in the next 10 years?" And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection.

It's impossible to imagine a future 10 years from now where a customer comes up and says, "Jeff, I love Amazon; I just wish the prices were a little higher." "I love Amazon; I just wish you'd deliver a little more slowly." Impossible.

And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.

Now, of course, Jeff Bezos founded Amazon based on a prediction of what would change in the future; a hard trend — the growth of the internet will enable individual companies to aggregate customer demand at an unprecedented scale and level of efficiency.

However, he built Amazon into what it is today through a series of big bets based on what he thought wouldn’t change, namely consumers’ desire for low prices, immense selection, and fast delivery.

This dichotomy — a bold founding insight into what will change and a series of mundane company-building insights into what won’t change — is a characteristic of some of the world’s most successful companies.

Let’s return to Netflix. Reed Hastings co-founded the company based on a vision of consumers streaming entertainment over the internet, a technology-enabled future that was hard to imagine in 1997. And yet, he (and, more recently, his Co-CEO and Chief Content Office Ted Sarandos) have built Netflix into the behemoth that is today by making big bets on what won’t change.

One such bet is that consumers want to watch movies and television created by the most talented and creative actors, directors, and producers. This is not a bold or novel insight. It’s obvious. HBO (among others) has pursued a content-above-all-else strategy for decades. However, Netflix’s conviction that this won’t change, that attracting great content creators to make original content that large numbers of people want to watch (and lavish with awards) will remain important is what has motivated the company to increase its spending on original content from $2.4 billion in 2013 to an estimated $19 billion in 2021.4 It is the conviction that drives the company’s overall strategy (as articulated by Ted Sarandos) — “to become HBO faster than HBO can become us.”

What Won’t Change in Financial Services?

In the financial services industry, I think we’ve gotten pretty good at cultivating insights into what will change. If you have an idea for how banking will change in the future and if you can foster sufficient conviction in that idea from the broader fintech ecosystem5, you can write your own ticket these days.6

The part we’re still not great at, in my opinion, is identifying and making significant investments in the things that won’t change.

So I thought it would be helpful, as we head into the new year, to provide my answer to the question — what won’t change in financial services in the next 10 years?

Convenience

It's impossible to imagine a future 10 years from now where: customers tell us that they want more steps between the thing they are trying to do and the financial product or service they need in order to do it.

• This has obviously been the founding insight driving the success of many fintech companies over the past 20 years. It’s also the animating conviction behind banks’ frantic digital transformation initiatives.

• However, banks or fintech companies that rest on their laurels in this area are destined for trouble. The reality is that while conducting banking activities in a smartphone app is more convenient than going into a branch, it’s still an extra (and unwanted) step for most customers most of the time.

• The next frontier for convenience in financial services is embedded finance — placing the necessary financial activities within the context of the non-finance activity that the customer is trying to complete. Auto lending was early to this frontier and BNPL is the current instantiation of it. I expect many more examples of it in the future.

Customer Service

It's impossible to imagine a future 10 years from now where: customers won’t want to have the option to quickly interact with an expert to answer their questions or help them solve a problem relating to their money.

• Banks are ahead of the curve here, from a resources perspective. However, banks also continue to mistake customers’ desire for responsive customer service with the manner in which that customer service is delivered. Branches ≠ Better Service

• Fintech companies generally prefer to avoid the cost of staffing a world-class customer service center, instead relying on self-service tools (bots, FAQs, etc.) and minimally-staffed chat and email solutions. This generally proves to be untenable as these companies scale up and are forced to add more expansive customer service operations, as Robinhood7 and Coinbase8 recently did.

• When it comes to money, the reality is that customers will always want to have the option to interact, in some way, with someone who can quickly help them when they have a problem. The stakes are just too high in financial services for anything else to be acceptable. Consequently, fintech companies should make bigger bets on customer service at earlier stages of growth.

Trust

It's impossible to imagine a future 10 years from now where: customers keep their money with a company that they don’t trust.

• In 2017, Goldman Sachs ranked 98 out of 100 in the Harris Poll’s corporate brand reputation poll, based on a survey of 23,000 U.S. consumers. That same year, Goldman Sachs announced that it had added more than $4 billion in deposits from consumers through its new retail banking arm in less than one year. This broke the brains of many fintech observers who I spoke with at the time. These observers had bought into the mistaken idea that because consumers didn’t like banks (an assertion that was, itself, questionable) they wouldn’t want to keep their money with them, if they had a different option.

• This apparent contradiction revealed a deeper truth — when it comes to money, consumers want to work with companies that they trust first and with companies that they like second. It’s not only about “is this a good company?” It’s also about “will the money I’ve given this company today be there tomorrow?”9

• Banks don’t have a monopoly on trust. Fintech companies have taken (and will continue to take) market share away from banks by combining superior products with appealing, trustworthy brands. However, fintech companies are fooling themselves if they believe that the concept of trust is illusory or unimportant. It is (and will continue to be) critical and investments in constructing and reinforcing a trusted brand will never be bad investments.

Capital

It's impossible to imagine a future 10 years from now where: Capital risk isn’t a significant challenge for startups and low cost of capital isn’t a significant competitive advantage for incumbents.

• Most fintech companies will, eventually, get into lending because, to be blunt, that’s where the money is. However, lending is a stressful business to be in. When I spoke with the founders of Provide — a fintech company focused on lending in the healthcare space, which was acquired by Fifth Third — they shared that one of the biggest ongoing challenges in running their business was maintaining sufficient capital to keep lending.

• The ideal solution to this capital risk problem is to gain access to an inexpensive and stable source of funding — consumer deposits. Doing so can have a transformational impact on the economics of the lender’s business, as the recent success of Lending Club demonstrates. In Q4 of 2019, Lending Club originated $3.1 billion in loans. In Q1 of 2020, Lending Club acquired Radius Bank, a regulated depository institution. In Q3 of 2021, Lending Club (now a regulated depository institution itself) originated $3.1 billion in loans and made $57 million more in revenue and $27 million more in net income than it had made in Q4 of 2019. 🤯

• The long-term economic value of becoming a regulated depository institution is overwhelming. This will motivate fintech companies to seek bank charters earlier in their growth trajectories via acquisitions, mergers, and de novo applications.10

Banking is Good Business

It's impossible to imagine a future 10 years from now where: startups and companies outside of banking view banking as a bad business to be in.

• Companies outside financial services, particularly SaaS companies, continue to discover that offering financial products and services to their customers tends to increase retention and expand profit margins. This is the central point underpinning Angela Strange’s famous thesis that Every Company Will Be a Fintech Company11, which I expect to continue playing out as she predicted.

• Meanwhile, at the bottom of the stack, banks have discovered that enabling non-bank companies to offer financial products and services by acting as their regulated bank partners is also a great business to be in. According to analysis from Andreessen Horowitz, partner banks like CBW Bank and NBKC operate at profitability levels that are 2-3 times above the industry average. I expect to see more and more banks, particularly community banks, pivot to this business model or add it onto their existing ones.

• And finally, of course, there’s the infrastructure that banks, fintech companies, and companies outside financial services need in order to effectively serve financial services customers. This pick and shovel business is also a great one to be in! You have BaaS platforms connecting different levels of the stack together (e.g. Bond). You have former fintech operators starting companies to build the back-office tools that they wished they’d had (e.g. Hummingbird). And you have B2C fintech companies spinning off the tech they built in house (because it didn’t exist when they needed it) and selling it to banks and other fintech companies (e.g. Avant/Amount). I expect all of these areas (and many more) to see continued growth over the next decade as the rising tide of fintech lifts all boats.

Sponsored Content

500+ Organizations have already signed up for Fintech Meetup, the world’s largest fintech meetings-only event! That’s right - no speakers or content … just 30,000+ double opt-in online meetings that result in Deals, Partnerships and Funding. Meet 3,000+ participants from Fintechs, Banks, Credit Unions, Community Banks, Investors, Networks, Solution Providers, Tech cos, Retailers & Merchants and many others! Online, March 22-24. Get Your Ticket

Short Takes

• Tap that equity.

  Hometap, a home equity financing platform, raised $60 million.

  Short take: Hometap invests in the future value of customers’ homes in exchange for an upfront cash payment. It’s not a loan, so there’s no interest or monthly payments. The term of the investment is ten years, after which the customer either has to buy out Hometap, sell the house, or take out a HELOC or refi their mortgage.

  My concern with this model is, given the rapid appreciation we’re seeing in most real estate markets, how many customers will essentially be forced to sell their homes or take out a new loan because they can’t afford to buy out Hometap?

• A massive opportunity.

  Rho, a builder of SMB corporate spend, cash management, and banking solutions, raised a $75 million Series B. Also, Nearside, a small business-focused neobank (formerly known as Hatch), rebranded and raised a $58 million Series B.

  Short take: At a high level, Rho and Nearside would appear to be competitors both raising Series B rounds. However, a quick look at both companies would tell you that’s not the case. Rho is focused on mid-size commercial clients that need treasury management and AP automation. Nearside is focused on providing better checking accounts to small businesses. They are, in fact, about as different as two companies in the same business can be.

  This is your regular reminder — financial services for SMBs is a truly massive opportunity.

• Mixing your metaphors.

  Burrata, a developer of identity devtools, raised $7.75 million from investors including Stripe.

  Short take: First of all, Burrata is a very good name. Crypto startups always have the best and/or most insane names. It’s great. Second, this quote from CMS Holdings (a crypto investment firm that invested in Burrata) is wonderful:

  

  It’s unclear if the person giving this quote knows what the idiom ‘salt of the earth’ actually means, but points for being the first person in history (I’m guessing!) to combine a Biblical reference with an Arrested Development reference.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

We were thrilled to be joined for this episode by Simon Taylor, Co-founder of 11:FS and publisher of the Fintech 🧠 Food newsletter.

We didn’t plan it this way, but the theme of this month’s episode turned out to be: Calling It Quits. Jason, Simon, and I discussed:

• Capital One’s decision to eliminate overdraft fees.

• N26’s decision to exit the U.S. market.

• David Marcus’s decision to leave Facebook/Meta.

We also spent a few minutes at the end of the episode discussing El Salvador’s “Volcano Bonds” because, well, we couldn’t not.

Enjoy!

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

As an early present (because I know you’ve all been on your best behavior this year), I have a double helping of fintech content for you this week.

First, my monthly recap of the five most interesting fintech trends from November, 2021 (found below). And later this week, a Fintech Recap podcast with Jason Mikula (and a special guest) breaking down some of the more interesting fintech news headlines from the past month.

Subscribe to Fintech Takes here, if you haven’t already, to ensure you receive the podcast as soon as it drops. You can also subscribe on Apple Podcasts or Spotify.

And without further ado, the five fintech trends from November, 2021 that caught my eye:

1. Fintech Acquisitions: Eat or be Eaten

2. The Platonic Ideal of a Distribution Model

3. Fintech’s First-party Fraud Fiasco

4. Crypto Solves Payroll?

5. The Long-term Sustainability of Alternative Investment Assets

1. Fintech Acquisitions: Eat or be Eaten

What happened?

• Personal investing platform Vestwell acquired Sumday, a college savings platform, from bank BNY Mellon.

• BM Technologies, a neobank, will merge with Seattle-based First Sound Bank.

• Oportun, a consumer lending platform, will acquire neobank Digit for $212.9 million.

• Financial services marketplace MoneyLion acquired content creation platform Malka.

• Klarna continued its acquisition spree by buying out PriceRunner, a Nordic shopping comparison site with 3.4 million products from 22,500 retailers in 25 countries, and browser extension Piggy.

So what?

I wrote recently about the trend of banks acquiring fintech companies, which I expect we’ll continue to see in increasing quantities.

That said, we are also seeing an uptick in the number of acquisitions being made by fintech companies. Even if you discount Klarna’s crazy shopping spree — like cutting out Olympic scores from the East German judge — you are still left with a myriad of interesting examples. You have fintech companies acquiring non-financial products (MoneyLion). You have fintech companies acquiring other fintech companies in adjacent verticals (Oportun). You even have fintech companies acquiring fintech companies from banks! (Vestwell)

Fintech companies are now getting a taste of what community banks in the U.S. have experienced for decades — an environment in which you are always either eating or being eaten.

2. The Platonic Ideal of a Distribution Model

What happened?

• Klarna is moving from shopping facilitator to e-commerce destination with the launch of its global one-stop shopping app.

• Afterpay launched buy-now-pay-later for subscriptions in the US.

• CommBank's venture arm launched a machine learning shopping app for Gen Z.

So what?

If you provide a payment or lending product, the Platonic Ideal for distribution is for that product to be the last step — the obvious and unscrutinized conclusion — in a much longer journey that you control and orchestrate.

The initial form of BNPL was a distribution model based on merchant partnerships. The ideal form of BNPL is a distribution model based on a highly engaging, always-on digital shopping assistant.

That’s basically what Klarna and Afterpay1 are building. And it’s what CommBank in Australia is, in a somewhat clumsier way, trying to build with its Cheddar shopping app.

3. Fintech’s First-Party Fraud Fiasco

What happened?

• First-party fraud is reportedly becoming a big problem at big neobanks like Chime and Cash app.

• Neuro-ID, an anti transaction fraud platform, raised a $35 million Series B.

So what?

Everyone should really read this Forbes article on fraud in neobanks. Parts of it were legitimately shocking to me:

HMBradley, a three-year-old, Santa Monica-based online bank with $375 million in assets, saw a startling rise in fraud coming from the transfers it gets from Chime and Cash App accounts. The schemers would typically open an HMBradley account, then connect it to an existing Chime account. They’d request to transfer funds from Chime, and when the money reached HMBradley, they’d quickly ferry it into a third bank account. Often, the funds HMBradley was pulling in from Chime didn’t exist—and that’s possible because of the way the U.S. bank-to-bank transfer network, or the Automated Clearing House (ACH) system, works. 

While HMBradley typically only sees about $500 worth of fraud per month, in May it lost tens of thousands of dollars, split between Cash App and Chime users, according to CEO Zach Bruhnke. To stop the bleeding, Bruhnke put longer holds on transfers so that a customer trying to pull in funds from a Chime or Cash App account would have to wait a few more days to see the funds arrive in HMBradley. 

Chime CEO Chris Britt again prefers to shift the blame. He says that small companies like HMBradley and One “probably don't have the same level of sophistication in terms of how to process things like ACH transactions and transfers from online accounts.”

It’s not often you see fintech companies go on the record talking about the fraud problems caused by other fintech companies. Nor do you typically see the CEO of one of those companies blaming the fraud on the other companies’ lack of sophistication.

Spicy stuff!

What many of these reported problems come back to is first-party fraud — the use of fraudulent tactics by customers under their real identities and accounts, much of it involving the U.S.’s antiquated ACH payments system.

First-party fraud is a notoriously difficult problem to solve (or even identify2), which is why I am playing close attention to the field of behavioral biometrics (and companies like Neuro-ID) which has the theoretical capability to divine a new user’s intent, which could be extremely useful in detecting users planning to commit first-party fraud.

4. Crypto Solves Payroll?

What happened?

• UK fintechs Mode and PayEscape are partnering to let people accept their payroll in bitcoin.

• Zebec Payroll, a Solana-based payroll provider, raised $6 million.

So what?

There’s a lot of talk in crypto and DeFi circles about the need for better on-ramps. And rightly so! Most corners of crypto are still legitimately terrible to use for neophytes.3

One approach to solving the onboarding problem would be to build the on-ramps at the very beginning of the process — enable consumers to get their paychecks (or a portion of their paychecks) directly in crypto.

I can see the appeal of this idea to crypto builders and investors that want to convert more mainstream consumers into crypto users. I’m just not sure I see the appeal for the consumers themselves.

Zebec Payroll makes the case that this capability can unlock the ability for real-time, streaming wages:

“What we are basically enabling is making money continuous,” Zebec CEO Sam Thapaliya told CoinDesk in an interview. “Imagine I send you $100 over 10 days, and you’re receiving money every single second. It makes money programmable. It makes money a continuous flow and enables completely new possibilities for how money can function in the world.”

But … like … we could do this with non-crypto technology as well, right?4

5. The Long-term Sustainability of Alternative Investment Assets

What happened?

• Yieldstreet launched a fund for small investors to bet on art.

So what?

This is part of a much larger trend — the democratization of the ability to invest in fractions of basically anything. Classic cars. Fine wines. And, of course, art.5

What’s interesting about these investment offerings is the way they try to blend the financial (consistently strong, stable returns) with the aesthetic (invest in things that are beautiful and/or interesting). Here’s Yieldstreet’s Managing Director and Head of Art Finance, Rebecca Fine:

Most collectors also prefer to buy art to put it on their walls rather than simply buying for profits. Fine said that while the details are still in development, the company is planning events where investors can view the artworks and learn more about collecting from art experts and artists.

“The experiential aspect will be a big part of the platform,” Fine said. “Ideally we’re hoping to inspire them to not just invest, but buy physical art and build more of their own collection.”

My question is how well will these fractional alternative investments hold up, as an asset class, when interest rates go up and retail investors are left with a comparatively less attractive investment that they can’t actually show off in their homes?

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

I’ve succumbed to this temptation more than once.

Financial services is just different, I’ll say. It’s highly regulated. It runs on unbelievably old legacy technology. There’s a higher standard when you are dealing with people’s money.

Blah, blah, blah…

The reality is that our industry isn’t as unique as we pretend. And we do ourselves a disservice if we assume that there’s nothing we can learn from smart folks solving hard problems in other industries that are structurally similar to our own.

Healthcare is my favorite example.

Heavily regulated? ✅

Operating on startlingly old technology? ✅

Dealing with critical, highly sensitive issues for customers? ✅

Banks and fintech companies can learn a lot by studying the evolution of the healthcare space. To help with that, I reached out to Brendan Keeler, author of the wonderful Health API Guy newsletter.

Our conversation, edited for length and clarity, is below (along with some additional commentary and clarification).

Know Your Role

We started by trying to map together the roles of various companies in each industry. Are banks more like healthcare providers? Or are insurance carriers the better analogy?

Brendan (Health API Guy):

All right. So what I've been thinking about lately is the parallel between fintech and digital health. You have the banks as the big incumbent institutions. They're brick-and-mortar, they've used scale in terms of building more and more as a mechanism and being as far-reaching as possible. I think banks have done that better than hospitals. But insurance carriers might be the better parallel to banks.1 The thought being merchants are doctors and insurance carriers are the banks because they're the ones holding the bag. Does that resonate with you? Does that make sense?

Alex (Fintech Takes):

It absolutely does. I’m curious how healthcare has evolved over the last year because what I’ve noticed in banking is that a lot of the advantages that banks had built up in terms of distribution just kinda disappeared overnight due to COVID. It's like "boom!" something happens and suddenly everything that you spent decades optimizing for because you knew that was the competitive advantage, suddenly all of that changed.

Everyone knows that they need to update the way that they distribute their product or connect with their customers. That whole distribution model needs to change, but it's not as easy as that because you know what the end state needs to be but you need to retrain all of your muscles and all of your processes because you spend decades or, in the case of some of these banks, hundreds of years optimizing these processes that now are not based on the right assumptions.

Banks know that they need to be digital and that these things have changed, but there's no real intuitive understanding of how you retrain yourself to walk in a different way.

Brendan (Health API Guy):

Yeah. And there's a parallel there. For payers, for insurance carriers, they're ancient and lethargic and all the same stuff. But they are, more so than banks or even hospitals, sort of virtual. You very rarely where you're like, "Let me go walk into my health insurance, my local Cigna." You're always a phone call away. So I think they were geared more towards a digital revolution.

But the hospitals that are closer, I think, on that part of the analogy of, "Okay, what does it mean to do telehealth, the virtualization of the digital front door, all that stuff?" It’s somewhat close to embedded finance, taking each of those atomic functions and allowing others to utilize it externally or embed it into their software. That idea (embedded health) does play in health to some degree.

Digital Disruptors

How do you disrupt analog incumbents that offer a comprehensive, but largely undifferentiated set of products and services? In financial services, neobanks are showing us the roadmap for answering this question. In healthcare, the most relevant example is “virtual first care” (VFC).

Alex (Fintech Takes):

Another parallel that's interesting is this idea that if you're going to be all things to all people, then the important thing is to have a comprehensive set of things that you can offer.

In healthcare, a carrier wants to be able to cover every type of insurance or every type of customer, they want to be as comprehensive as possible. So scale and the fact that you're big and have the resources to do it, all of those things are really important. Same thing with providers — one-stop shop for all of my health needs much in the same way that banks they keep trying to get bigger in order to get that universal banking model.

But with this shift that we've seen, now the cost to me as the consumer of shopping around or going to different providers has basically dropped to zero. It's just more clicking on my phone; it's downloading an app; it's super easy.

So now the point competition has shifted from that distribution and convenience of getting everything in one place to finding the product or service that’s best in class, that's better in one area than anything I've ever been able to get.

And I think that's the parallel to neobanks. They're not out-competing banks on breadth. There's no way that they possibly could, but they find one area that's underserved relative to these other ones. Maybe one that's particularly well suited to digital as opposed to in-person. And then they just really nail that one experience and build from there.

Does that have any parallels with health?

Brendan (Health API Guy):

Yeah, for sure. The most visible example right now is on the provider side with virtual first care.2 Neobanks pioneered it. You could see there's a bank for people of color. There's a bank for youth, there's a bank for the elderly. And in virtual-first care, a parallel model is now getting super popular. That's what Zus, the company I work for, is aiming to help enable is the infrastructure for these companies — by specialty or disease (say for diabetes), but now increasingly identity-focused too.

Alex (Fintech Takes):

Right. That brings up a really interesting question for me, which is what is the intersection of utility and identity when it comes to delivering these services?

On the one hand, in banking the utility is I want to invest, I want to buy stocks, I want to save money, I want a loan for X, Y, Z. There's very specific utility product needs that I have. Maybe the parallel in health is different categories of care or different diseases or different areas of illness, but at the same time, we're starting to look at how that intersect with the unique needs of specific groups that have challenges that are a little bit different, right?

So if we're talking about African-American consumers, or we're talking about a specific vocation like musicians or whatever, they're going to have different financial service challenges, even around those very specific utility needs.

As an example, an LGBTQ+ consumer’s need for a savings or wealth management product might be a little different because they want to save more money earlier in their life in order to cover the expenses of adopting a child. The core need might not be vastly different from the utility standpoint, but it’s different enough that generic savings and wealth management products are painful to deal with. Whereas when the product is really tailored to them, all of that friction disappears.

So I think that's the value trade off that we're starting to see in the neobank space — getting closer to the intersection of the utility and the identity for a specific problem area.

Brendan (Health API Guy):

Yeah. I think you're spot on. In healthcare, we had generic telehealth first. Then we had telehealth focused on specific diseases. Now we are seeing the intersection of identity. That can be all-encompassing — say I'm going to provide everything for transgender care. Or there's now even more nuanced virtual-first care, that posits that to provide behavioral health to Asian Americans, I need to understand their norms and their culture. There’s a friction or a pain to somebody in healthcare when you don't have that empathy and when you don't have that understanding of identity in the right way. So I totally dig that.

Alex (Fintech Takes):

Can I ask you a question on that front?

Brendan (Health API Guy):

Mm-Hmm.

Alex (Fintech Takes):

It’s difficult for someone who’s not a member of a specific group to build these really tailored banking products and experiences for that group. They just don’t understand the problem well enough. This is why you see a neobank like Daylight describe itself as “built by LGBTQ+ people for LGBTQ+ people”. That “built by, for” part is really important because the people building the products understand the problems really intimately.

This approach to building a bank is enabled by infrastructure that doesn't require them to have a licensed bank charter or to be a part of a bank already. The neobank has a toolbox and a set of tools that they can build with to do that.

What's the equivalent infrastructure in healthcare?

Infrastructure: Part 1

At the end of the day, fintech startups need regulated banks to partner with. Hence the existence of banking-as-a-service (BaaS). I was fascinated to learn that digital health startups don’t face quite as daunting of a regulatory moat in order to become “covered entities”. This hasn’t eliminated the need for digital infrastructure providers in healthcare, but it has made the nature of those providers’ services different than what we see in financial services.

Brendan (Health API Guy):

What's so interesting is there is a certification to be a provider organization — a covered entity — but it's pretty easy compared to a banking license, which is (to my understanding) difficult and expensive. To be a covered entity there are some hoops you have to jump through, but it’s pretty clear you can just go and do it.

So rather than banks exposing specific functions that these neobanks can use, in healthcare we see companies spinning up like Wheel. Wheel has hired a bunch of telehealth providers and then they say, “here's an API to utilize that function and you can go and create whatever you need.” And we're seeing that for health coaches and we're seeing that for other core clinical functions. So rather than incumbents benefiting from their regulatory capture and protection, like you see in banking, there's more of chance for somebody new to come in.

Is there a fintech that is going in like "I'm going to be a bank so I can offer embedded banking or embedded finance"?

Alex (Fintech Takes):

Yeah. There definitely is. It's a little bit different in banking in that as a fintech company you have to get to a certain scale before you can take on that regulatory piece, but we are seeing bigger ones get to that point.

SoFi spent $22 million to acquire a small bank in order to get a charter. And once they have a charter, there's a set of advantages that they will get from that. And actually it's interesting that you mentioned the API thing because SoFi also bought Galileo, which is one of the newer processors behind the scenes for cards and accounts and stuff. So in a way they're buying all the different levels of the stack now that they've reached a certain scale. And I think they have that same intention which was now we're going to be a direct provider of these services, but we're also going to be able to enable this activity across other providers and help foster more of a marketplace around this set of capabilities.

So I think the blurring of those lines is really interesting because once you have the technology to be able to do it, there's lots of different ways that you can leverage that technology.

The Limits of Digital

What percentage of your services can be delivered in a fully digital, self-service manner? What percentage of your services *should* be delivered in a fully digital, self-service manner? What is the ideal role of people in industries that are rapidly being digitized? Brendan and I compare and contrast financial services and healthcare on these questions.

Brendan (Health API Guy):

Another question I have for you is that as I look at banks versus, let's say providers, there's an inherent physicality to health. There are things you need to do in person. Maybe we get to a point where there's robots and Alexas and all that stuff. But, right now, there's a physicality, that means that certain functions can't be virtual.

Alex (Fintech Takes):

I have to have my blood drawn, right? So assuming that there is no Theranos that's going to come in and actually make that viable at home. I have to go in for certain things.

Brendan (Health API Guy):

Right. But for banks, that's much lower. Maybe there's a few functions that are in person, but is there a future where everything can be virtualized and therefore then extended via an API?

Alex (Fintech Takes):

It’s really interesting because in my head I'm picturing this continuum. On the one end it's like we can do everything virtually, and on the other end it's we have to do everything in person. And banking and healthcare incumbents have a view as to where that point on the continuum is. And disruptors have a view of where that point on the continuum is. And each of them has valid points for why they think it needs to be where it is. But, to your point, there's also an upper limit as to where it can be for each industry.

In financial services, there's a lot of disruptors that believe we don't need to do anything in-person. We can start an all-digital bank that has a completely remote workforce. We don't have an office, we don't have a central headquarters. We certainly don't have branches or in-person locations and everything can be delivered digitally.

And I think in financial services the five stages of grief that banks have gone through as they adapted to that idea, is that at first you have to have in-person for really any type of financial service activity. And then they got to the point where they said, “okay, maybe the simpler stuff like a checking account or a credit card or some of those things can be just all digital, but there's always going to be other activities that are needing some level of in-person interaction.” And that's like mortgages or investing, that kind of stuff. And now we're seeing that belief being challenged by Rocket Mortgage and Blend and those guys digitizing the mortgage process and obviously Robinhood and many, many others that are digitizing the investing process.

That said — and this maybe ties back into healthcare — I think that there's actually two dimensions to this question.

The first dimension is purely tactical — are there activities that can't be done remotely or electronically? In the case of healthcare, yes, absolutely. In the case of finance services, maybe not. There might not actually be anything that has to be done in person. It's all just ones and zeros.

But the second dimension is more strategic — to what level do you have to provide human interaction in order for this to be a satisfying experience to customers and have them get what they want out of it?

I think that's where fintech companies underestimate the importance of not necessarily in-person branches, but at least person-to-person interactions. Robinhood, as an example, just spun up a call center for customer service. But that's very recent. Before that, if you had a problem with your Robinhood account, which a lot of people had very big problems with their account, there's literally no one you could call, and go like, "Hey, it's going to be fine. You don't actually owe $300,000 on those options bets. Just wait a day and you'll be fine." There was no one you could call to talk about that with. And I think that fintech companies and their belief that everything can be ones and zeros undersell the importance of that.

What's the healthcare perspective on that?

Brendan (Health API Guy):

Yeah. I think the two dimensions you're saying. Is what is the max? If you actually just go through and say what's paperwork or what is intrinsically tied to being in-person? It sounds like, in banking, you can almost go to 100. Then there’s the question of how much of an appetite is there for that and in that appetite, as you're saying, a large factor is relationship.

I think we see some interesting stuff in healthcare. Smart companies that are building in virtual first care, they think about, "Okay, let's build a care team and a care plan and have dedicated people who know and can care constantly and are all thinking about this patient." Let's think about really from first principles about how we're communicating with our populations. So yeah, I think they try to overcome it when they are doing virtual-first care to say, "How do we have a lot of touch points?” And those are texts if the population is young or it’s "let's call the person because it's a Medicare population." But the companies that I see that are successful, the verbiage they use almost always in the first two or three sentences when you talk to them about their business is relationship. They're talking about the relationship they have with the patient.

So yeah, I hear you, there's different dynamics. And I don't think in either industry there's probably appetite for fully virtual, unless we're all in the Matrix or something.

The Dream (Delusion?) of Personalization

One similarity between financial services and healthcare? Both industries have been talking about the dream of data-driven personalization for decades. So far, it has been a dream deferred. But how realistic is it? And what would truly personalized medicine/banking actually look like? Brendan and I discuss (and Brendan talks some shit about banking).

Alex (Fintech Takes):

Right. I totally agree with that. I guess another thing that I'm curious about is advice.

Everyone has different goals and a set of constraints personally that make what they're looking for very, very different than the generic thing. So, you can give generic advice that like, “yeah, it's usually always best to have X amount of money in an emergency fund”, but that's not really tailored to the individual.

One of the concepts we talk a lot about in banking is this idea that, over time, we get to the idea of a bank of one person — Alex's bank. And it is going to tell me very specific things based on my situation, my goals and the parameters that I set.

I'm sure they talk about individualized or personalized healthcare, but where are the bounds of that conversation?

Brendan (Health API Guy):

Yeah. Personalized healthcare is the dream with the growth of genetics and bioinformatics. More and more testing and a lot of that testing actually shifting from, “I do this once a year” or “I do this once a decade in a in a clinic” to “I do this regularly at home”. And the provider ships you something to do that test. As you get older, Medicare now might pay for Fitbits and more continuous measurement devices.

The holy grail is aggregating that data and having a truly personalized care plan that's not just, "you have diabetes, follow these steps", but continuously feeding in data and updating the plan.

The problem with health is that, no offense to banking and fintech, but the data is a little bit more complex. It's not just debits and credits or something. But

I'm not trying to talk shit.

Alex (Fintech Takes):

How dare you! It is so complex in banking. The human genome can take a seat behind Plaid open banking data, thank you very much!

Brendan (Health API Guy):

So that's a tricky part because even if you're a big, big hospital in the U.S., you're tiny compared to a bank. There's far more care institutions in the US than there are banks. There's what, 5,000 banks in the US?

Alex (Fintech Takes):

Yeah. It's like 4,000 and change now.

Brendan (Health API Guy):

Right. And there's hundreds of thousands of provider organizations of all scales. So all those silos mean that it's more like merchants. Even if you're a big merchant, you don't have a complete picture of all the buying habits and you can't form the perfect personalized ads or tailor what they need immediately, because it's so scattered and that's closer I think. It's still scattered in banking, but...

Infrastructure: Part 2

So 👏 Much 👏 Infrastructure 👏 Talk 👏

How do healthcare providers share data and get a comprehensive picture of their patients’ overall health? What are the moral underpinnings of infrastructure in healthcare (and do we need some more of that in banking?) What are some good healthcare parallels to the big fintech infrastructure companies like Stripe?

Alex (Fintech Takes):

No, that makes sense.

And for banks there are these common infrastructure points that the vast majority stuff gets forced through. At the end of the day, everyone makes payments with ACH or on the card rails. So there are these choke points where most of the data goes through. It's all the same format. Most of it is digital, even though it's 1970s-style digital, but card transactions are digital. There's a bunch of advantages I think that financial services have when it comes to applying analytics to data and trying to get down to a better understanding of the customer. Whereas, as you're saying, in healthcare, it's like there's a million different providers, all scattered in a really geographically dispersed way. There really isn't a whole lot of centralized infrastructure that anything runs through.

And in financial services, I can basically get access to anyone's bank and financial information. Maybe I have to do it in a not-so-nice way and scrape it. Maybe there are some parts that I'm not totally seeing, but I can get a pretty comprehensive picture with the customer's help. And there's not a huge amount of regulatory red tape in the way.

What's the equivalent in health? Like if I'm a consumer and I want to provide some care provider with a complete and total picture of my health, how do I do that? What can I do? What stands in my way?

Brendan (Health API Guy):

There are equivalents to Plaid in healthcare. They do some screen scraping, but also use standard APIs. But what's interesting is that for healthcare we have regulation that requires, like open banking in Europe, open APIs.

Alex (Fintech Takes):

That's good!

Brendan (Health API Guy):

So that means to pull the data, all the providers and all the payers have to open up the same Plaid-like flow: type in my username and password. The challenge with it is that while you, as a customer, might know your bank account username and password, you probably don’t know the equivalent logins for healthcare accounts. You might not even have accounts! Healthcare organizations don't issue you an account automatically because it might cost some money. If you try to create an account, then you have to identity proof in a really old fashioned, knowledge-based question way. So you have this broad network for pulling the data, but then you go to the average person and they're like, "Well, I have nothing to type in."

Alex (Fintech Takes):

That's really interesting because I think an equivalent in banking that we're starting to run into is the difference between your bank and your payroll system.

In payroll world, you can get an interesting, different, and (in some cases) more useful set of information on what's going into your customer's paycheck. And the payroll systems have all of that, so the payroll API companies are like, "type in your payroll account password!"

I don't know what that is!

So in healthcare, it's almost like, take that payroll problem, but then multiply it by the number of different healthcare providers that you see on a somewhat infrequent basis. Like, if someone asked me, “hey, we can pull in information about blah, blah, blah. Just plug in your account information for your dermatologist.” I'd be like, "I don't know what that is. I think I went there seven years ago? I have no idea."

So that makes a lot of sense as a challenge.

Brendan (Health API Guy):

Yeah, in healthcare we have infrastructure to facilitate specific functions — like sending a message — which is kinda the equivalent in banking to the payment rails. But we also have infrastructure that doesn’t really have a good parallel in banking.

For example, we have Carequality and Commonwell, which are actually for healthcare providers. This is hard to envision in bank world, but imagine if one bank could go "you know what? I have the information here for Brendan, let me pull the full account of information to see what they have in another bank." That’s not really available in banking, but that's what we have in healthcare, which makes sense. Any healthcare provider is going to want to see the full picture. Coverage for these services is only 70% of providers, but that's still pretty good.

Alex (Fintech Takes):

I'm just so fascinated by the deep similarities and yet interesting differences between healthcare and financial services.

One of them is that in healthcare there's this baseline understanding that we should all share data and do all these things because at the end of the day we all want the most comprehensive picture because we're all trying to solve the same basic problem, which is we wanna help this person get better.

In financial services, that should be the way that they think about it, but it's not. There was a quote that I saw from a story where they were having this debate about open banking, and one of the bank CEOs said something to the effect of "it is my data and I don't have to share it, and I don't have to give it to my customers if I don't want to."

In healthcare world, that's a malpractice-y type of thing to say. It’s just clearly, diametrically opposed to the best health outcomes for consumers. But in financial services, that's still a very prevalent way of thinking if you’re a bank — it’s my relationship with this customer and the financial services I provide to them have nothing to do with their overall financial health so I am under no obligation to share it or try to consume a broader picture. It's just about me and this customer, and I want to try to lock that down as much as I can.

It seems like there's almost a deep philosophical difference there.

Brendan (Health API Guy):

There's a philosophical difference. Many providers I think would be like, "we have to care for the patient. Let's do this."

There's also regulation like HIPAA (which was passed in 1996). It says that the patient has the right to their data and it also says that these covered entities, these hospitals, they need to be able to exchange data. There's still pushback, because it's still businesses and if you're the rural hospital, you might be like, "Oh shoot, I don't want to give away my client list." Not everyone thinks of them as patients, it might be thinking of them more as customers. However, there still is a higher standard I think because of the Hippocratic Oath and the idea of caring for people, versus just a lot of banks are a lot closer to the money.

Alex (Fintech Takes):

Yeah. I think we need a Hippocratic Oath in financial services. We have it a little bit if you're a fiduciary and acting in that capacity, what are your responsibilities? But it's not treated or looked at in any way close to the same way that that is in healthcare. And when it comes to the regulations around privacy and consumer being able to share their data, we’re still not close. Maybe we're getting closer with what the CFPB is doing right now around open banking, but we need to get a point where our baseline is, "it's the customer's data, they can take it wherever they want and everyone has an obligation to share this data and make it available."

Brendan (Health API Guy):

Yeah. It's interesting. I think you can scale this thought across not just banking or healthcare, but also with merchants: anytime that I'm going to a service and typing in my username, password, giving my data, shouldn't I be able to grab a copy of that? The appetite is growing. It's just starting in healthcare and banking where it's arguably the most important data sets to enable patients and customers to get their data.

Question for you — you have Plaid, you have Stripe, you have Modern Treasury, these connector companies. And it seems to me Stripe is quickly turning into the mega connector. They're doing the on-ramps onto the networks and starting to get their toes into banking-as-a-service, which may compete with other smaller providers.

Any thoughts on that whole area of connector-type companies and how they will evolve?

Alex (Fintech Takes):

For sure. They're enormously complex companies and there's a bunch of different things they do, but the basic model is that they’re going to do one thing that is relatively simple, but they’re going to do it way better and easier than anyone else.

So, in Stripe's case, it's helping people accept payments online. They basically said “we're just going to be 10x easier than anyone else at enabling that and we're always doing to be and that's our core competency.” And then what they do with spinning into banking-as-a-service or into fraud or into any of these other areas that they’re getting into is basically saying “once we reach a certain scale at doing our one thing, that then gives us a data advantage in doing all these other things.”

So, using banking-as-a-service as an example, they have this product that just blows me away, that's called Stripe Capital for platforms. And they will, for any platform business like Airbnb that operates on Stripe and that processes transactions through Stripe, make working capital loans to the platform’s customers through that platform and Stripe takes 100% of the credit risk for all of those loans, and all the they do is then just split the profits or split the revenue with the platform. So, from platform company’s perspective it's literally just flipping a switch and suddenly you’re making loans that you don't have to underwrite or think about or do anything on. And Stripe's ability to do that in a guaranteed way is entirely powered by their confidence from all the data that runs through their pipes and what they know about those customers that are operating on that platform.

So it's this weird compounding superpower where you make one thing really easy and then you just build layers and layers of value on top of that one thing.

You would know more than me, but in health, it almost seems like the equivalent is going back to Apple as an example where it's like we're just going to build a watch that's a great sensor for collecting health data. But then once you have enough people using it and you have enough data going through there, there should be all kinds of value added services you can layer on top of that. And I don't know that that's Apple's core strength in the same way that it is Stripe's, but it seems like it's the same type of opportunity.

Brendan (Health API Guy):

Yeah. I think there are two parallels to Stripe.

There are a number of companies that are sitting on the full clinical data networks I mentioned (Carequality and Commonwell) as an on-ramp, like Health Gorilla or Particle Health or Redox. Stripe got enough data that it could say, "Hey, we're really good at fraud detection because of the massive data". Gorilla or Particle Health or Redox could make the same play of "we're pulling so much data that we are able to cleanse it and de-duplicate it and make it usable.”

There's also another company called Truepill, which is a layer on top of the national e-prescribing network (Surescripts), the network that is why you don't have a printed prescription. They layer and provide value there and have been super popular. They are now breaking into other services, like an API to send a nurse to your home. So they're starting to go horizontal and try and meet a lot of the needs of a company.

So some parallels, but nobody that's the Stripe-size success yet, I would say.

Alex (Fintech Takes):

I guess that gets to another difference between the two industries is that Stripe got to the point it got to so fast because they rode a wave that everyone was really incentivized to ride on. They couldn't have picked a better simple thing to enable over the last 15 years than e-commerce payments. That's the best possible vehicle to hitch your wagon to. But I think that the playbook is still very interesting because it might take you a little while longer to get to scale, but it does seem like in a lot of these areas from an infrastructure standpoint, the advantage is (and the moat is) the data that you have.

This is why the notion of Stripe and Plaid as competitors to me is really interesting. Stripe and Plaid deal with a lot of the same stuff and they're in the same business, but they almost seem go out of their way to not compete with each other. I think it's because there is competitive overlap, but the types of insights they have into the data that they collect are just really different. Plaid is very focused on individual customers and enabling data sharing. And, to a certain extent, trying to stay out of the business of building stuff on top of that data. They just want to be the connector that ties everything together and their goal is to connect more types of institutions and keep adding nodes to their network. I think Stripe's vision is to get 90% of the really big e-commerce volume flowing through their pipes and then deepen that and build a huge amount of value on top.

They're such similar businesses, yet they're taking very divergent paths to monetizing on top of it. It's pretty interesting.

Brendan (Health API Guy):

When Plaid was getting picked up by Visa (and then not picked up by Visa), I was thinking, “well, how interesting would it be (and how threatening to Visa, Mastercard, and the banks) if Plaid and Stripe had merged?” But yeah, it does seem like they stay cautiously out of each other's domains. That's not necessarily the case here (in healthcare) because, for both the Plaid world and the overlay-on-the-network Stripe world, there are bit players that try and do both. Without merging or acquiring, you start to stray from core competencies, you start to build a massive new product in that space against big competitors ... that is not an easy undertaking.

Alex (Fintech Takes):

I think the interesting thing will be trying to see if there's a wave of companies that you can enable. So much of what happens in fintech that's interesting to me too is just good luck and good timing. I talk to companies in the space and they're just like, "Yeah, we'd be dead right now except everyone was locked in their house for a year. And so that just provided this huge artificial boost to our business.”

The trick is being the infrastructure partner that enables categories that just see a surge in growth that maybe no one saw coming. A lot of times that's the boost that a business needs to go from not viable to viable. I don't know if there's a particularly category within healthcare that's poised to grow a lot more than others, but hitching your wagon to the right one of those areas can be a huge boost towards driving an adoption.

Brendan (Health API Guy):

Yeah. You can never predict when regulation or a global pandemic will strike to enable your business model.

Alex (Fintech Takes):

Exactly. That's the problem.

Big Tech, Big Threat?

Sorry, I know that’s some horrific wordplay. But I couldn’t let Brendan go without asking him about big tech’s forays into healthcare and if it inspires the same hysteria that it does every time Apple, Google, or Amazon sneezes in the direction of a bank.

Alex (Fintech Takes):

Here’s another topic I wanted to ask you about — one group of companies that both healthcare and financial services are nervous about and don't like in a lot of ways is big tech.

We have our run-ins and financial services with Google and with Amazon and with Apple and others. And it bumps into a similar issue which is there's this expectation that like, oh, of course, banks should have to participate in these ecosystems and should have to share all of their data with these companies and consumers are using Amazon or they're using the iPhone or they're using whatever to navigate their day-to-day decisions and those decisions should be populated with all of their financial services data.

However, those companies are not always the best partners in that exchange. There's no way Apple or Amazon or Google wants to reciprocate and share the data they have on customers with those companies. And a lot of times there's this coopetition model where Apple is like, "we have Apple Pay and we're going to enable any card issuer to put their card in that wallet. But oh, by the way, we're going to charge an extra percentage to the card issuers anytime the cardholder uses the card inside Apple Pay." So there are these weird coopetition things that end up happening with big tech.

I would imagine health is exactly the same way.

Brendan (Health API Guy):

Yeah, there are definitely similarities.

I was just reading an article and the author was talking about the history of Apple and how they hoodwinked banks by getting in and then saying actually “we're going to launch a card with Goldman Sachs”.

In healthcare, the angles of attack for Apple versus Google versus Amazon are quite different. You have Amazon launching Amazoncare. That's a direct competitor to healthcare organizations. Google, Amazon, and Microsoft all have cloud offerings specific to health.

That said, I think the rhetoric around big tech in healthcare is a bit unfair. These companies are trying to make a difference in healthcare, which certainly needs all the help it can get. And they’re not going to come in and just flip the whole table over — they can’t do that. There’s HIPAA and other regulations that they have to adhere to like everyone else. All these companies can do is use their unique strengths to build cool products. Who knows if they’ll work. Maybe Amazoncare will be successful as a telehealth care provider. Maybe it won’t. But we don’t criticize startups when they miss on something and we shouldn’t automatically critize Apple or Google as complete failures when these big ambitious swings don’t work.

You tell me, why did Google Plex fail?

Alex (Fintech Takes):

Yeah, Plex was going to be Google’s checking account. They shut it down and there's a lot of connecting-string-on-a-corkboard theories as to why they did. But I think the reality is, to your point, it took them a long time to launch it, it wasn't going super well, there was a lot of turnover with the team and eventually they were just like, “why are we doing this? We can just sell cloud services and other things to banks that do this for a living. What extra value are we offering by being in this space?”

I don't know too much about the Amazoncare stuff, but that's a really interesting one to me. Amazon fascinates me in that they have no problem diving into a new area and really competing very aggressively in it, but it does seem like they pick their spots carefully because they do recognize that sometimes there's not a big enough margin or there's regulation or other things that would make it impractical for them to get into it. And I would think that healthcare wouldn’t be super appealing to them if I was evaluating all the potential new markets they could get into.

What seems to be their thinking and jumping into healthcare?

Brendan (Health API Guy):

Yeah I think they're going to do healthcare stemming from other core competencies. They're going to make Alexa HIPAA-compliant. They're going to add some new services to AWS.

The Amazoncare one is so interesting. There's a Ben Thompson theory that Amazon's strategy is to have a margin off on top of everything across all industries. And in this case, they want to go in and be this virtual care provider that can be like Amazon Prime. They want to be the home health service provider that comes to you. They want to ship these things to your door. I think that's so in line with Amazon Prime, which is a core competency of theirs — delivering most services virtually, but being able to get the needed products or equipment delivered to your front door fast.

The challenge of delivering premium care is definitely tricky. Can they pick it up? I think they're sharp people, but it's a different muscle in some ways.

Alex (Fintech Takes):

That helps me construct a bit of a unified theory in my head, which is when you look at companies that are trying to get into these markets, you have to look not at what they do, but at a core competency that is structurally similar to what they are good at.

Amazon is a really good example because one of the challenges we were talking about with healthcare is it’s always at least partially physical; something needs to be shipped to your door. You need to do a test and send it back in. Or there's some other physical interface component. So the reason that Google can't compete with Amazon is because Google doesn't know anything about warehouses and shipping and logistics and all the things that Amazon is really good at in the in-person world, even though they are obviously a digital-first company.

In healthcare, you're never going to get rid of those in-person logistics. Part of it just can't be ones and zeros. So Amazon is probably a much more natural competitor/supplier in the healthcare space. And I could see them even doing something where they spin up Amazoncare in Ben Thompson terms, they use it to aggregate demand and then they force other providers to come on as third-party sellers within their little ecosystem and force them to live within their marketplace. That all makes perfect sense for healthcare.

But then when you look at Amazon and banking, you have to ask how much does Amazon’s core competencies overlap with banking? We don't tend to ship a lot of stuff. Amazon’s logistics advantages doesn't mean a whole lot.

Every big tech company is probably going to try, at some point, to get into every one of these industries because they can't help themselves. But which ones are they naturally suited to doing well? And which ones should we say, "Yeah, I'll believe it when I see it, but that doesn't seem like a natural fit."

Brendan (Health API Guy):

Yeah. I think that's a good way to put it and I think there are going to be successes and failures and again going back to Apple — Apple is super successful with their Apple Watch and Apple Health. And Apple Health Records is the leading personal health record, the equivalent of Mint for PFM.

Why is that?

It's because they are a consumer brand. So, of course, for this consumer-facing product they have all the people on their platform. So that works. But if they tried to spin up a healthcare clinic — where does that map to anything that Apple already does well? It just doesn't. They can't even do services. They can't even do virtual services.

So yeah, it's funny to see people point at this type of stuff and say, "Oh, look, it's really hard for big tech to get into healthcare or banking." It's like, “no, no, no, it's hard for them to do something that's not the right thing for them to do.”

Sponsored Content

Get Your Fintech Meetup ticket before prices go up on Friday! Need leads? Need partners? Need funding? Fintech Meetup is the answer--it’s the easiest way to fill your pipeline, meet new partners and find potential investors! With 30,000+ online meetings, Fintech Meetup gives you 30,000+ opportunities to meet Fintechs, Banks, Credit Unions, Investors, Networks, Solution Providers, Media and many others! Online, March 22-24. Get Ticket Now

Short Takes

• The Social Network sequel no one asked for.

  Gemini raised $400 million in funding to help it build in the metaverse as it goes head to head with archrival Meta.

  Short Take: I get that the Winklevoss twins vs. Zuck is an irresistible story angle, but come on. Gemini’s archrival isn’t Meta. Meta doesn’t care about crypto (as David Marcus discovered). Gemini doesn’t know the first thing about virtual reality. Why are we trying to make this a thing?

  Also, this quote from Tyler Winklevoss is just the worst:

  

• Not another teen banking app.

  EarlyBird, a kids’ investing app, raised a $4 million seed and UNest, a parental investment app for kids’ savings, raised a $26 million Series B.

  Short take: Finally! Something a bit different. EarlyBird and UNest both allow parents to set up investment accounts for their kids and make it easy and memorable for loved ones to contribute to it. They’re basically wrapping a much better digital experience around the traditional custodial account. Excellent.

• Shopaholic

  Klarna continued its acquisition spree by buying browser extension Piggy.

  Short take: Someone needs to take Klarna’s credit card away from it for a while. That’s eight acquisitions in just the last couple of months. I like the the theoretical strategic fit of most of those eight acquisitions, but it takes time and resources to turn theoretical fits into operational successes and I’m getting worried Klarna won’t have enough bandwidth to handle all these new additions.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Here’s how it worked:

• A consumer downloaded the Card Case app to their smartphone and was able to see a map of all the nearby merchants that were using Square’s POS Register.

• In the app, the consumer was able to look up information on these merchants (operating hours, menus, special offers, etc.) and choose to ‘open a tab’ at any merchant that they wanted to shop with.

• When the consumer visited a merchant that they had an open tab with, the merchant’s Square POS Register would automatically detect their smartphone (using geofencing) and would pop up the consumer’s name and face on the screen.

• When the consumer was ready to make a purchase, all they had to do was give the cashier their name to complete the transaction.

• In the background, Square would charge the card on file, send the consumer a digital receipt, and give them the option of adding a tip.

It’s the only payment product that I’ve ever used that was, legitimately, a 10x improvement on the experience of using a credit card or debit card. Apple Pay, Google Pay, Toast Order & Pay … none of them come close.

It’s also one of the few fintech products to ever permanently lodge itself in my brain. I honestly miss it … and apparently I’m not the only one, as I discovered on Twitter recently.

So, what happened?

In short, the product never took off. Despite the quality of the payment experience itself, Square wasn’t able to drive enough adoption on the merchant side to make the product truly useful:

Anytime you opened Square Wallet, the app would show the shops nearest to you that would take it as a form of payment. Even in San Francisco's South of Market neighborhood, the epicenter of the city's startup scene -- the place where Twitter itself was invented -- you would never see more than a smattering of shops that would take it, and the choices were always random. All too often, they weren't the places you really wanted to go.

Without that ubiquity, Square Wallet was never able to rise above novelty.

The company killed the product in 2014.

In explaining that decision years later, Square’s CFO would say:

I think what we learned there and why we shut it down is if you tried to contain what a consumer wants to do, you effectively are removing utility from them.

Intent Matters

There are two basic ways to approach product development. There’s the strategist’s way and the idealist’s way.

The strategist’s way starts with constraints — price, competition, margin, etc. — and works backwards. The idealist’s way starts with a (perhaps unrealistic) vision of the future — of what the customer would ideally want — and works forwards.

These two schools of thought (and the inherent conflicts between them) are best illustrated by the development of the original Macintosh computer, which was initially conceived of as a low cost, mainstream personal computer by Jef Raskin, an early Apple employee. Raskin was a product strategist through and through, while his coworker Steve Jobs was the prototypical product idealist. They did not, as you might have guessed, get along well:

Jobs was enthralled by Raskin’s vision, but not by his willingness to make compromises to keep down the cost. At one point in the fall of 1979 Jobs told him instead to focus on building what he repeatedly called an “insanely great” product. “Don’t worry about price, just specify the computer’s abilities,” Jobs told him. Raskin responded with a sarcastic memo. It spelled out everything you would want in the proposed computer: a high-resolution color display, a printer that worked without a ribbon and “could produce graphics in color at a page per second, unlimited access to the ARPA net, and the capability to recognize speech and synthesize music, “even simulate Caruso singing with the Mormon tabernacle choir, with variable reverberation.” The memo concluded, “Starting with the abilities desired is nonsense. We must start both with a price goal, and a set of abilities, and keep an eye on today’s and the immediate future’s technology.”

The conflict between Raskin and Jobs ended with Jobs replacing Raskin as the head of the Mac team and quickly (and, in his typical management style, brutally) remolding the team around his singular obsession to build an “insanely great” computer:

The result was that the Macintosh team came to share Jobs’s passion for making a great product, not just a profitable one. “Jobs thought of himself as an artist, and he encouraged the design team to think of ourselves that way too,” said Hertzfeld. “The goal was never to beat the competition, or to make a lot of money. It was to do the greatest thing possible, or even a little greater.” He once took the team to see an exhibit of Tiffany glass in San Francisco because he believed they could learn from Louis Tiffany’s example of creating great art that could be mass-produced. Recalled Bud Tribble, “We said to ourselves, ‘Hey, if we’re going to make things in our lives, we might as well make them beautiful.’ ”

This, in my opinion, is the root of Apple’s success as a product-led company. Steve Jobs understood, perhaps only at an instinctive level, the need to prevent commercial objectives (make money, beat competitors, etc.) from infecting the process of designing and building Apple’s products.

In short, he understood that intent matters in product development.

This is what Square screwed up back in 2011 with Card Case. The company’s primary intent was strategic (build a closed-loop payments network connecting consumers directly with Square’s merchants) and that intent imposed constraints on the design and development of the product (it only worked at Square merchants), which ultimately proved to be its undoing.

I see this mistake happen a lot in fintech, probably because fintech companies ship products so often that they have more opportunities to fall into this trap. That said, banks and merchants aren’t immune to making this mistake and I think examples of each are instructive.

Merchants: CurrentC

CurrentC was a mobile payments app developed by the Merchant Customer Exchange (MCX), a group of large merchants that included Walmart, Target, Best Buy, CVS, Shell Oil, Lowes, Michaels, Publix Super Markets and Sears.

The app was, in many ways, ahead of its time:

• It allowed merchants to present offers and coupons at the beginning of the shopping process, in a similar way to what BNPL providers are beginning to do.

• It facilitated payment transactions via QR codes, which has become a much more popular way to pay in the U.S. since the beginning of the COVID-19 pandemic.

• It utilized the ACH rails to process payments rather than the card networks, in the same way that Plaid is now enabling with its account-to-account payments functionality.

And yet, CurrentC failed, in a highly public and rather spectacular fashion. The development of the app was besieged by delays, as each MCX retailer attempted to add in its own proprietary features. Retailers angered customers by disabling other mobile payment options in order to promote CurrentC. And the experience of actually using the app was, for the brief time it was available to the public, clunky and unintuitive.

Why?

Once again, it comes back to intent. The purpose behind the development of CurrentC (and the creation of MCX, more broadly) wasn’t to build a better payments experience for consumers. It was to reduce the payment processing costs that merchants were paying to banks and the card networks. How do I know this? Because Lee Scott, the former CEO of Walmart said so when asked if he thought MCX would succeed:

I don’t know that it will, and I don’t care. As long as Visa suffers.

Ironic, isn’t it?

Walmart and MCX wanted to cut their payment processing costs and make the card networks suffer, but by letting that intent drive the development of CurrentC all they did was ensure that they would be the ones that suffered.

Banks: Retroactive BNPL

Consumers like BNPL because it enables them to buy stuff that they can’t quite afford without interest or fees (for the most part) and because it is conveniently integrated into the point-of-sale experience.

So, if you are a bank with a large credit card portfolio and you are worried about the $8 billion to $10 billion in annual revenues being siphoned away by BNPL, do you:

A.) Build a competitive, low-cost BNPL product that is similarly well integrated into merchants’ checkout pages and POS terminals?

or

B.) Add the ability for existing cardholders to retroactively convert purchases over a certain size into installment payments that come with interest and/or fees?

A product idealist would hone in on the first part — consumers like BNPL because — and would work forwards from there. They might not build an exact replica of Affirm or Klarna; they might build a fundamentally different product that addresses the gaps in BNPL, but the product that they built would be focused on their customers’ problems.

A product strategist, on the other hand, would focus on the second part — worried about the $8 billion to $10 billion in annual revenues — and work backwards from there. They would design a product that protected the company’s existing revenue streams first and then tried to deliver some value to customers second.

You can guess where I’m going with this.

American Express Pay It Plan It, Citi Flex Pay, and Chase My Plan are all wonderful examples of the latter approach to product development. And much like MCX and CurrentC, these products have failed to achieve their strategic goal (fending off the threat of BNPL) precisely because that goal constrained the development of those products in the first place.

Cultivating Product Idealism

This is a hard problem to solve.

It’s not a problem that you can throw more money or bodies at — MCX had plenty of both. Nor is it a problem that clever product managers can design their way out of — Square built the absolute best mobile payments experience with Card Case and still failed.

The problem is nuanced. It’s about incentives, both obvious and subtle. It’s about the composition and culture of teams. It’s about taking your time and making mistakes and indulging in your more artistic impulses.

Apple solved this problem by allowing Steve Jobs to blast around its hallways, whisk his team away on field trips to look at Tiffany lamps, and hire people in unusual ways:

Jobs’s primary test for recruiting people in the spring of 1981 to be part of his merry band of pirates was making sure they had a passion for the product. He would sometimes bring candidates into a room where a prototype of the Mac was covered by a cloth, dramatically unveil it, and watch. “If their eyes lit up, if they went right for the mouse and started pointing and clicking, Steve would smile and hire them,” recalled Andrea Cunningham.

This isn’t a replicable solution.

A more useful example to study is our old friend Square, which didn’t abandon its goal to build a consumer payments app and create a closed loop network, but did take a very different approach to pursuing that goal the second time around.

I think the development and growth of Cash App provides a few important lessons:

• Simple, grassroots origin. Cash App was created in 2013 (interestingly, a year before Square Wallet was killed). It wasn’t part of some grand strategic vision and it wasn’t (at the time) an especially big or sophisticated product. It was created during a company hackathon for the purpose of helping consumers easily send money to each other.

  • Lesson: The easiest way to spark idealistic product development is to let talented people mess around in their spare time. If you start out, on day one, trying to play 3-D chess, things quickly get complicated.

• Resources and autonomy. For the first 5+ years of Cash App’s existence, Square did a remarkable job of funding new product features, both obvious (debit card) and unusual (Bitcoin in 2017?), with very little corporate interference.

  • Lesson: Nurturing promising new products and helping them grow is a delicate proposition. It’s a bit like building a fire. You want to slowly feed it resources without smothering it or overwhelming it with more than it needs.

• Creative control. One of Cash App’s most unique and valuable attributes is its brand. Starting with #CashAppFriday social media campaigns in 2017 and expanding into everything from a truly wild apparel line to hip-hop, Cash App has carefully cultivated a brand that isn’t like anything else in financial services.

  • Lesson: The hardest thing for corporations to relinquish control over is brand. Trust me. Early on, I bet Jack Dorsey had to tie Square’s Chief Marketing Officer to their chair to stop them from getting involved in Cash App’s brand. Good thing he did though. Product idealists can only do what they do best if you trust them to get weird.

• Patient corporate strategy. The single most impressive thing, to me, about Square’s stewardship of Cash App has been the incredible patience and restraint that it has shown in merging it with its merchant ecosystem. It really wasn’t until the last year or two that it has started to build bridges between the two product sets. Obviously, the Afterpay acquisition and enabling Square sellers to accept Cash App as a form of payment will accelerate things on this front, but Square has clearly been playing the long game.

  • Lesson: Corporate strategy has an important role to play in product development. Every company rightly wants to build a flywheel that drives a sustainable competitive advantage for them in the market. The trick, though, is not rushing assembly of that flywheel.

Sponsored Content

Need to meet new partners & customers in 2022? Fintech Meetup has you covered! Taking place online, March 22-24, we use proprietary tech to facilitate 30,000+ meetings for 3,000+ participants from fintechs (including Akoya, Array, Clair, MANTL, Nium, Ripple and hundreds more!), investors (including Bain Capital, General Atlantic & Mosaik Partners), banks (including Bank of America, Citi, JP Morgan & Wells Fargo), tech cos, credit unions, networks, media and more! Learn More & Get Ticket

Dumb Advice for Banks

This is going to be a recurring feature in this newsletter, inspired by Matt Levine, who wrote recently:

Say words about crypto. Say words about electric cars. Tweet a picture of a dog. Your stock will go up. Your shareholders will be rich and happy. You can raise lots of money to finance normal good businessy things, because your stock is at an all-time high, because you got in a fight with Elon Musk on Twitter or changed your avatar to a Bored Ape or whatever. Lower your cost of capital. Embrace the stupidity.

Banks, of course, are going to be some of the last companies on Earth to join in the trend of saying or doing nonsense things about crypto or other meme-adjacent topics in order to pump up their stock prices. Banks are too conservative and, more to the point, their earnings are doing just fine these days. They don’t need memes the way AMC does.

But that shouldn’t stop us from having fun! So, periodically, I’m going to offer some truly dumb advice for how banks can improve their share price by doing dumb, meme-type things (NOTE — THIS ISN’T INVESTMENT ADVICE!).

Idea #1 — Sell the first digital bank branch NFT.

OK, I think this one is actually pretty good!

You take a branch that you are already planning to sell, you snap a picture of it, you raze the building to the ground, you sell the land to someone and make money, you mint an NFT of the image and sell it as the first digital bank branch (this is the destroy-an-actual-diamond-to-move-the-value-to-a-digital-diamond asset transference hypothesis) and make more money, then brag on Reddit and Twitter and elsewhere about having destroyed a branch to mint an NFT and make even more money as your stock go up … I guess? I don’t know.

Got other dumb, meme-inspired ideas for banks? Send them my way!

Get Fancy, Fintech

Everything is fintech, including (I’m delighted to discover) black tie charity galas in New York City. I’m not able to attend this year (throw next year’s party in Montana, Nik! We’re fancy out here!) but you certainly should. RSVP here.

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

it’s only right that I cap off an insanely busy month with a summary of the five interesting fintech trends that caught my eye in October, 2021:

1. Banks are … GMI?

2. The challenges of being a challenger bank.

3. Parent-approved boyfriend or bad boy?

4. What’s the right strategy for crypto investing?

5. I wish you good fortune in the B2B banking wars to come.

1. Banks are … GMI?

What happened?

• Bank of America’s Life Plan tool grew to over 5 million users in its first year.

• American Express expanded beyond its premium roots, with record new card acquisitions among Gen Z cardholders, small businesses, and more blue collar workers.

• Piermont Bank launched BancFi, a credit platform for fintechs and their users.

So what?

I vacillate between thinking that banks are doomed (an opinion strengthened when they do things like this) and thinking that banks (at least some of them) are actually gonna make it.

The headlines from October have pushed me to the optimistic side of that spectrum.

Looking for evidence that big banks can build compelling digital experiences? Check.

Looking for evidence that old-fashioned brands can acquire a younger, more diverse set of customers? Got you.

Looking for evidence that mid-size and community banks can keep up with the pace of fintech? I have you covered there too, complete with glowing testimonials:

2. The challenges of being a challenger bank.

What happened?

1. UK neobank Monzo is abandoning its plan to get a US banking license. It is also in talks to raise £300m at £3 billion valuation.

2. N26 raised a $900 million Series E at a $9 billion valuation.

3. Neobank Revolut acquired the team of New York-based recruiting marketplace Wanted.

4. Starling is launching its BaaS product across Europe.

So what?

The big European challenger banks provide an interesting window into the future of neobanking. Specifically around this question — what do you do after you reach scale?

You have millions of customers and strong brand awareness in your core markets. You have a load-bearing infrastructure and operating model. You probably aren’t making a profit yet, but your investors are pot committed and will continue to shovel more money into your coffers.

So, what do you do? [Dennis Hopper voice] WHAT DO YOU DO?

You could try expanding into new geographic regions, but that hasn’t exactly been smooth sailing for N26, Revolut, or Monzo.

You could acquihire an HR team, which is what Revolut seems to be doing through its acquisition of Wanted, I guess?

Or, if you want to be boring, you could just keep plugging away at growing revenue, cutting expenses, and sticking to your established growth strategies.1

3. Parent-approved boyfriend or bad boy?

What happened?

• Greenlight is going to teach parents to invest.

• Step partnered with a Fortnite champion.

• Square’s Cash App is now available to users 13 and over.

• Copper Banking, a digital bank for teens, raised $13.3 million in seed funding.

So what?

It’s becoming increasingly clear that there are two ways to win in the banking-for-kids space. You can build a brand tailored to parents, with an emphasis on safety and financial literacy. Or you can build a brand tailored to teens, with an emphasis on financial independence and (mild) rebellion.

The actual products are, generally, pretty similar, but the go-to-market and growth strategies are very different.

Greenlight is clearly focused on parents and is expanding its products accordingly. Step and Cash App are all in on teens, with brand identities and celebrity sponsorships to match. Copper Banking — somewhat uniquely — seems to be trying to split the difference, although this quote from one of Copper’s investors would seem to suggest that building a brand focused on teens is the priority:

Teens don’t want one imposed on them by their parents. Copper has the brand, the product and the go-to-market model to fill that void.

4. What’s the right strategy for crypto investing?

What happened?

• Average revenue per user at Robinhood dropped in Q3 as crypto trading volumes fell.

• Coinbase’s Q3 revenue missed analysts’ estimates as monthly active users fell and the company tests a no-fee subscription service.

• Investing exchange Public launched crypto trading.

So what?

As an asset class for retail investors, crypto is inarguably here to stay. Bitcoin and Ether just hit new all-time highs and Tim Cook, CEO of Apple, just revealed that he owns crypto in his investment portfolio.

And yet, it’s not clear to me what the best way is for financial services companies to profit off of retail investors’ enthusiasm for crypto.

You can try to become the home for wild crypto speculation, but this strategy is subject to the extreme volatility of the exotic cryptocurrencies that drive this speculation and the public markets have a hard time accepting this volatility, as Coinbase and Robinhood have discovered:

In the second quarter, for example, the company [Robinhood] said that nearly two-thirds of cryptocurrency revenue was attributable to dogecoin transactions, a parody token that returned more than 15,500% on a year-to-date basis when its price peaked in May. Dogecoin has since struggled to gain momentum after falling sharply off its high.

Or you can attempt to bolt crypto on to your existing investment platform and help your customers navigate the inherent volatility, as Public is doing:

Public.com’s trading platform includes social features that allow users to follow other investors and share ideas. The company has also made several decisions to help safeguard investors. In addition to restricting options and margin trading, Public.com has stepped in during volatile periods. It temporarily restricted users from buying shares of Hertz Global Holdings Inc. in 2020 as the car-rental company’s stock price dramatically swung. During the meme-stock rally earlier this year, it added safety labels, which warn users of the possibility of financial loss, to stocks such as GameStop Corp. —something they have done for other more volatile investments.

Since cryptocurrencies can be a highly volatile asset class, Public.com will include so-called volatility reminders on cryptocurrency pages. Public.com will also offer crypto-focused educational content on the platform

I’m honestly not sure what the right answer is, but this seems like a question every bank, fintech, and consumer-facing crypto company is going to wrestle with.

5. I wish you good fortune in the B2B banking wars to come.

What happened?

• Brex raised $300 million in funding at a $12.3 billion valuation.

• Ramp launched free payments and invoice management software.

• Modern Treasury launched virtual business accounts to streamline payment reconciliation.

• Corporate spend startup Jeeves launched in Canada.

• American Express opened business checking accounts.

• Mesh Payments launched spend intelligence and insights for subscription businesses.

• Airbase announced plans to return nearly all interchange revenue to its customers.

So what?

I see tweets from founders in the B2B banking and corporate spend management space like this:

And I immediately think of this line from Game of Thrones:

Much like in GOT with the Iron Throne, every company competing in the B2B banking space is trying to get to the same place — an integrated spend management software platform that seamlessly combines deposits, payments, and credit.

Every company is converging on this vision from a slightly different place. Every company is (or likely soon will be) extremely well funded. And things are starting to get cutthroat.

Watch this space.

Fintech Naming Awards

In writing this newsletter, I get exposure to a lot of fintech companies. As a former marketer, the first thing I always notice are the names.

So, to add a little fun, I’m going to start a new section in this newsletter and hand out some fintech naming awards.

Best Name That Shouldn’t Work But Surprisingly Does — Sommelier

Sommelier is a hard word to spell and a hard word to pronounce and it’s French. It shouldn’t work as a name for a decentralized finance protocol for automated portfolio management and yet … I think it kinda does?

Best Name Based On A Figure From Classical Mythology — Persefoni

Named (I presume) after the Greek goddess and queen of the underworld. I’m a sucker for the classics, but I could use a clear articulation of why Persephone is a good inspiration for a climate management and accounting platform. Maybe because she brings Spring?

Best Old-Fashioned Name For A New-Fashioned Bank — Marygold & Co

Be honest, if I told you I was opening an account at a financial institution called Marygold & Co, would you assume the institution was a community bank?

I certainly would have. But no! It’s a digital-only neobank that I’ll admit to never having heard of. A digital-only neobank with a charmingly old-fashioned name.

Nerd Corner

A new month means a new question for the Fintech Nerd Collective — How can traditional banks adapt or evolve to compete with fintech? What moat do they have?

I went a bit against the grain in my answer and there were a lot of other great, unconventional answers that really challenged my thinking on this topic. Check it out!

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/

Consequently, in the current venture investing environment, this predictive ability of mine has become supercharged.

According to data from CB Insights, there were 439 mega investment rounds ($100 million or more) in Q3 of this year, up from 173 in Q3 of 2020.

And over approximately the same time frame, the following fintech product announcements were made:

• Ramp launched free AP automation capabilities for its customers.

• Corporate spend management startup Jeeves launched Jeeves Growth, a revenue-based financing solution in any currency.

• Nubank launched a corporate credit card, in its first foray into business banking services.

• Stripe and Klarna entered a strategic partnership to enable any merchants using Stripe to offer buy-now-pay-later.

• Upgrade announced that it is adding BNPL loans to its cards.

• MoneyLion announced a BNPL product.

• British challenger banks Revolut and Monzo piled into the BNPL space with their own offerings.

• Investing exchange Public launched crypto trading.

• MoneyLion launched a crypto investing service.

• Acorns announced that it is building a crypto investing product.

• PayPal added a savings account and other features like crypto to its payments superapp.

• Affirm announced that it is launching crypto and debit products.

None of this was especially surprising or difficult to predict.

If you’re a well-funded BNPL company, you’re probably going to partner with e-commerce infrastructure companies and add banking and crypto capabilities to your app. If you’re a neobank, you’re likely going to add crypto and BNPL. If you’re building finance solutions for corporate customers, you will be tempted to converge towards a combination of AP/AR automation, corporate cards, and revenue-based financing in your product roadmap.

Basically, everyone is planning to do what everyone else is doing.

It’s the Spider-Man Pointing Meme-ification of fintech.

It’s understandable. Investors expect their portfolio companies to ship. For founders, the pressure to show that you are constantly pushing out new products and product features is intense and, let’s be honest, there are only so many novel ideas that your product development team is going to come up with in a quarter. And, by the way, those novel ideas take significant time to build!

By contrast, copying existing products and product features in the market is fairly straightforward. If you can’t backwards engineer it just by looking, there’s probably some senior product manager out there who’s built it before for you to hire. Or you can acquire a company that’s already built it. Or you can buy it from one of the myriad new fintech infrastructure providers that have popped up over the last few years.

The problem with this fast follower approach to product innovation is that it risks becoming decoupled from what should always be our North Star in fintech product development — what does the customer want?

In that spirit, I thought it might be helpful to look at three of the hottest fintech trends at the moment — BNPL, green banking, and super apps — through the lens of what customers actually think about them.

BNPL

What’s happening?

There’s a lot happening in BNPL right now. Here are a few of the most important trends:

• Neobanks’ new feature. As mentioned above, established neobanks in the U.S. (MoneyLion) and the UK (Revolut, Monzo, Curve) have all introduced (or are planning to introduce) BNPL as a feature within their apps.

• Banks and the card networks give it another go. Version 1 of banks’ response to BNPL — the ability for cardholders to retroactively convert large transactions into installments — hasn’t worked. No surprise there. What will be interesting is seeing what banks (and the card networks) come back with for version 2. Capital One’s upcoming BNPL product should give us a good idea of whether bank BNPL solutions have a chance to succeed. It’ll also be interesting to see how the card networks adapt to BNPL. I wouldn’t be surprised if a new, specific tier of interchange fees for BNPL transactions is introduced at some point.

• Shopping apps. The established BNPL providers — Affirm, Klarna, and Afterpay — are all in the process of trying to convert one-time customers acquired through merchant partners into recurring customers that start the shopping journey in their apps.1 To accomplish this, these providers have all made product discovery and shopping a central experience within their apps. This impulse is likely what motivated PayPal to flirt briefly with the idea of acquiring Pinterest — moving further up the commerce funnel.

• Closed-loop networks. BNPL is also proving to be a crucial bridge between the merchant and consumer sides of payment providers’ emerging closed loop networks. PayPal and Square (through its acquisition of Afterpay) are the two most obvious examples, with Square in particular being highly focused on bringing this vision of a new closed loop payments network to fruition.

• The BNPL-ification of everything. Finally, we are seeing BNPL being adopted as a wedge product for fintech startups, typically focused on a specific vertical or use case that isn’t already well penetrated by the big BNPL providers. BNPL for B2B payments is the most popular example, but we have also seen BNPL for healthcare, BNPL for car repairs, and BNPL for rent, among others.2

What do customers want?

But what about customers? Are they onboard with the BNPL-ification of everything?

According to consumer survey data from Cornerstone Advisors, it appears that the answer is yes. While BNPL saw relatively modest growth between 2019 and 2020, we project that total BNPL transaction volume in the U.S. will reach nearly $100 billion in 2021, a significant increase.

Despite this growth, it’s worth noting that $100 billion still pails in comparison to the trillions of dollars of transactions facilitated by credit cards, debit cards, and cash.

More significantly, BNPL isn’t a perfect solution for customers. 31% of BNPL consumers consider their financial health to be “dire” or “struggling” (versus “managing” and “thriving”). In contrast, of consumers who don’t use BNPL services, just 20% rate their financial health as dire or struggling. Over the past two years, 43% of BNPL users made late payments and, interestingly, two-thirds of them said it was because they lost track of when the bill was due (versus not having enough money to pay the bill).

How should this impact product roadmaps?

The first challenge in BNPL was convincing consumers and merchants to adopt it. That’s now mostly done.

The next challenge is finding ways to leverage BNPL to improve consumers’ overall financial health — cash flow management, credit building, etc. — while still delivering value to merchant partners.

Anyone thinking about BNPL right now should focus on financial health.3

Green Banking

What’s happening?

Consumer demand for sustainability (and ESG more generally) is surging. This is leading companies to invest in sustainability at a few different levels:

• Sustainability-as-a-Service. Carbon accounting platforms, offset marketplaces, and impact measurement services are seeing record investment (more than $100 million) in 2021.

• Sustainability built into financial services infrastructure. Stripe is a leader here, with its carbon removal purchase tool for small businesses and its recently announced partnership with Deep Science Ventures, a London investment firm that will recruit scientists to develop ways to remove carbon dioxide from the atmosphere. Mastercard has also launched a carbon footprint calculator for banks to offer their customers.

• Sustainability-focused financial services brands. Aspiration, ATMOS, Carbon Zero, Cushon, Trine, and Raise Green all offer sustainability-focused deposits, investment, and lending products. These companies are building brands designed to attract climate-conscious consumers across generations.

What do customers want?

In a recent consumer survey conducted by Cornerstone Advisors, consumers were asked “what is the most important social challenge facing the United states today?”4

Climate change was the most popular response.

Not a huge surprise.

Where things got interesting is when we asked consumers what steps they take in their daily lives to actually address climate change. Do they, for instance, track their carbon footprint?

Most consumers told us that they don’t, but the really interesting part is that there was virtually no difference between the 23% of consumers who consider climate change the number one most important social challenge facing the U.S. and all other consumers.

This discrepancy is the reason why demand for embedded sustainability is growing. Consumers are increasingly worried about climate change, but even the most concerned consumers struggle to translate that concern into tangible action. Consumers (particularly younger consumers) want sustainability built into the products they use on a daily basis. Checking accounts, for example.

How should this impact product roadmaps?

Sustainability as a standalone brand is a challenging long-term strategy. The rising popularity of climate-focused messaging and products (and the growing focus on ESG overall) will make it difficult for companies like Aspiration to standout from the crowd.5

Sustainability as a product feature will, however, become table stakes faster than you might expect. Consumers, especially Gen Z, are demanding more than corporate ESG policies. They want sustainability built into the products they use everyday.

Are you building a deposit, investment, or lending product? You better have a plan for how usage of your product positively impacts the environment.

Super Apps

What’s happening?

Attention has become the most valuable commodity in financial services. The rebundling of fintech is being driven by a larger fight to capture and monetize customers’ attention. This is playing out at a couple different levels within the fintech space:

• Commerce-focused super apps. This is the true, Alipay-style definition of a super app — the blending of financial and non-financial activities into a single, integrated environment. This is what Dan Schulman wants PayPal to become (although the pullback from the reported Pinterest acquisition perhaps demonstrates the limits of shareholders’ tolerance for this vision). It’s also what the big BNPL providers — Affirm, Klarna, Square/Afterpay — are building towards.

• Financial services marketplaces. One step down from the commerce-focused super app, is the financial services marketplace. This is the modern incarnation of the old ‘banking app store’ concept that we used to talk about — a platform that provides a combination of direct financial products and a marketplace featuring the products of other financial services providers. Two interesting examples of this model are Credit Karma, which has expanded from solely recommending other companies’ products to now offering a deposit account with an interesting approach to rewards, and MoneyLion, which claims to be building its own open marketplace.

What do customers want?

According to consumer surveys from Cornerstone Advisors, approximately 1 in 3 consumers have more than one checking account. This finding undermines the idea that consumers want a single financial super app.

However, when we asked consumers how their frequency of interactions with their primary, secondary, and tertiary checking accounts changed over the course of the pandemic, we found something interesting. Consumers indicated that they had scaled back on experimenting with multiple accounts and had settle in with their favorites.

And who were their favorite accounts with?

We saw a significant shift, between October 2020 and July 2021, in primary checking account status from traditional banks to fintech companies, with Bank of America among the biggest losers and PayPal among the biggest winners.

How should this impact product roadmaps?

The COVID-19 Pandemic and the resulting increase in the usage of digital channels accelerated the adoption curve for fintech. Consumers moved from experimenting with multiple financial services apps to focusing more on their favorites.

Neobanks and other fintech apps benefited from this shift. Apps that offered a wide breadth of functionality — PayPal, Cash App — were especially well-positioned to see increased engagement and conversion to primary account status.

There’s no evidence (yet) that consumers want a single app to rule them all (or even an open financial services marketplace), but the rebundling of fintech apps into full-service banking apps does appear to be paying dividends for some providers.

Sponsored Content

Fintech Meetup is the industry’s next can’t miss event! It’s the easiest and most efficient way to find new partners and customers! Get your ticket before prices go up on Friday, so you can meet leading banks including Bank of America, Citi, Goldman Sachs, JP Morgan, Wells Fargo, neobanks including Dave & Revolut, networks, investors, community banks, credit unions and more! Prices go up on Friday, so Get Ticket Now

Short Takes

• Fintech-as-a-Service

  Extend, a digital payment infrastructure platform that helps banks compete with fintechs, raised a $40 million Series B.

  Short Take: This is interesting — Ramp-as-a-Service for banks. Zero integration because it’s already built on the legacy payment processing infrastructure that banks already use. Apparently the company just signed American Express as a partner, which should accelerate growth significantly.

• Travel is tricky.

  Selfbook, a hotel payment platform, raised a $25 million Series A.

  Short take: Travel presents some weirdly hard fintech problems. Hotels, for example, tend to break payments up into all kinds of separate charges that can be tricky for consumers to manage and reconcile. Fintech companies focused on travel would seem to have a defensible moat.

• How many headless checkout solutions do we really need?

  Rally, a one-click headless checkout solution, raised $6 million.

  Short take: This is kind of a weird quote from one of the investors in Rally?

  

  Like, it’s great that this company fits into an established category with a lot of larger competitors, but doesn’t that also mean that it might have a tough time standing out from the crowd? How many headless checkout solutions do we really need?

Fintech Recap: Money20/20

ICYMI, Fintech Takes now offers a podcast — Fintech Recap.

In this inaugural episode, recorded at Money20/20, Jason Mikula and I break down the fintech trends that everyone was talking about at the show, including crypto, the intersection of payments, commerce, and social media, and the increasing focus on fintech infrastructure.

Give it a listen!

Fintech Takes

Fintech Recap: Money20/20

Listen now (38 min) | Exciting news! Fintech Takes now includes a podcast — Fintech Recap. The purpose of the podcast is, as you might have guessed from the name, to recap the most interesting news, trends, and ideas in fintech on a regular basis. The best part of the podcast is that I get to collaborate on it with one of my favorite people in fintech …

Read more

4 years ago · Alex Johnson

Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson

LinkedIn: Linkedin.com/in/alexhjohnson/