Foolish Fintech Questions: Part II
BNPL, open banking, credit scoring, crypto, NFTs, SPACs, and more!
Here’s a quick test for you — Which line below matches the first line, A, B, or C?
I’m guessing you figured out the correct answer. It’s not difficult.
What’s interesting is that when social psychologist Solomon Asch asked a similar set of easy visual perception questions to a group of college students in 1951, 75% of them gave at least one wrong answer.
Why?
The reason is that Dr. Asch didn’t ask college students these questions alone or in private. He asked them when they were surrounded by a group of their peers, who were all answering the same questions.
What the subjects in these experiments didn’t know, however, is that all of their ‘peers’ in the study were actors who had been instructed to intentionally give the same false answer to the questions before the subject gave their answers.
Dr. Asch’s goal was to discover how peer pressure and the desire to conform to a group can change people’s opinions and even sensory perceptions.
It turns out that conformity — the act of matching attitudes, beliefs, and behaviors — is a deeply human trait that influences how all of us see and navigate the world.
There’s No Such Thing as a Dumb Question
All the best teachers I’ve ever had have gone out of their way — sometimes quite vociferously — to encourage their students to ask questions, even if the questions seem stupid or trivial.
The reason that good teachers do this isn’t because they expect every question to be brilliant (in fact, most questions aren’t especially insightful), it’s because they understand that the mere act of asking a question gives all of the students in the class the ‘permission’ to ask their own questions rather than continuing to hide within the group.
This is backed up by the science. One of Solomon Asch’s most interesting findings was the presence of a ‘true partner’ in his conformity experiments (another real participant or an actor told to give the correct response to each question) significantly decreased the odds that the experiment’s subject would choose the wrong answer in order to conform with the group.
Literally, it just took one additional person going against the grain to embolden the subject to trust their gut.
Foolish Questions
It’s within this spirit — being a true partner — that I periodically will publish my own list of ‘foolish fintech questions’ in this newsletter.
My questions aren’t especially insightful, but it’s my hope that by sharing them I can provoke some productive discussions, debates, disagreements, ideas, and (most importantly) more questions!
So, without further ado, here is my current list of foolish fintech questions, organized into loose categories.
Please please please reply to this email, message me on LinkedIn, or @ me on Twitter if you have thoughts on any of the below.
BNPL
Will merchants eventually turn on their BNPL partners?
Merchants loved credit cards … at first. Now they hate them. It’s human nature to, over time, take the good for granted and focus on the bad. BNPL is as or more expensive than credit cards and it presents a number of competitive concerns when provided by third-party brands like Klarna and Afterpay. There’s plenty of bad to focus on. How long until merchants’ enthusiasm for BNPL wanes (at least a bit)?
Which of the following companies — Walmart, Amazon, Shopify — will be the first to decide to build their own BNPL solution rather than continuing to partner?
Easy money is on Walmart, which has had a partnership around BNPL for the longest time and is building out its own fintech unit, Hazel.
What will the next generation of bank BNPL products look like?
The first generation of solutions — retroactively converting credit card purchases into installments — hasn’t worked because it completely missed the point of why consumers like BNPL.
These v1 solutions were largely built by the credit card groups within the big banks, who were focused on mitigating the damage that BNPL was doing to their portfolios.
Banks are working on v2 of their BNPL solutions right now. Hopefully we see more innovative, customer-focused designs.
Why won’t BNPL companies (Affirm, Klarna, Afterpay/Cash App) share customers’ data (with their permission) through data aggregators?
Sharing is caring guys. More importantly, I can’t build a PFM tool to help your customers manage their many BNPL loans if you don’t make this data available (with their permission). Come on!
Open Banking & Credit Scoring
Will open banking data aggregators like Plaid and MX eventually be considered Consumer Reporting Agencies (CRAs)?
Some companies in the open banking and payroll API spaces are actively embracing this designation. Others are trying to keep their distance. However, if cash flow-based underwriting continues to become more popular, I don’t really see how all the providers don’t end up here eventually.
It would help if Congress spent some time updating the Fair Credit Reporting Act so that it better reflected the way that lending works in 2021.
If you were building Credit Karma from scratch today, would you build it differently?
Free credit score monitoring is extremely common today (through both banks and fintech companies) and, more broadly, with the rise of BNPL I wonder if there’s less motivation on the part of consumers to improve their scores in the hopes of getting a credit card?
And with open banking now broadly available, there are a lot of other types of data that could be applied to the problem of helping consumers map out their financial journeys.
What will the credit bureaus and FICO do about credit builder products?
It takes a while for fintech innovations to ripple back through the credit bureaus and the FICO Score, but it does happen eventually. For example, the online lending boom of the 2010s led to changes in the way that FICO (in FICO 10) handled personal loans.
With the recent surge in credit builder products from fintech companies, we will undoubtedly see changes to the way that the bureaus handle furnishing and the way that the FICO Score considers data supplied by these products. What will these changes look like?
What exactly does Akoya do?
PNC just announced the bank's integration with the Akoya Data Access Network, which allows PNC customers to share their account data with third-party fintech apps and data aggregators through a secure API without having to type in their credentials.
Great, but what exactly does this mean for consumers? If a PNC customer wants to use a fintech app or aggregator that isn’t a part of the Akoya Data Access Network, what happens? How many fintech companies and data aggregators are a part of the Akoya Data Access Network? Are Akoya-powered customer experiences meaningfully different or better than the experiences powered by other aggregators’ direct bank integrations?
Crypto
Can you ever really build a sustainable economy around play-to-earn games?
The developer behind Axie Infinity, a crypto video game, wrote that “You can think of Axie as a nation with a real economy.” The idea is that players can play the game to earn resources that can be used to create in-game assets that can be sold to new/other players for actual money. This model is called ‘play-to-earn’ and it’s put a lot of money in the pockets of players, mostly in developing economies like the Philippines.
However, recent volatility with the in-game tokens and tanking revenue for the game developer make me wonder how sustainable that “real economy” is. I mean, at a fundamental level, the in-game tokens are only valuable to the extent that there is demand from new players for them right? What happens when people get tired of playing the game or move on to something new (which isn’t, like, unheard of in the video game world)?
Wouldn’t the crypto equivalent to Roblox — a platform for creators to build games — stand a better chance at creating a sustainable economic value for participants?
Is there an appealing (and realistic) middle ground between traditional, top-down corporate structures and completely decentralized, bottom-up DAOs?
I’m extremely sympathetic to the argument that traditional corporate organizational structures disadvantage common shareholders and employees, to the benefit of executives and directors. However, I’m also skeptical (perhaps too much so?) that decentralized autonomous organizations (DAOs) are the best solution in every case. Hence my question — is there a middle ground between these two options? Can we create tools to give employees and common shareholders more influence without complete decentralization?
What is a good TradFi analogy for the Compound bug?
Compound accidentally distributed $162 million worth of its tokens to users. The founder of Compound Labs, the creator of the Compound protocol, said “In my opinion, this is a bank error in a couple people’s favor,”
But is that really the best analogy? After all, Compound users aren’t really customers. They’re more like employees with equity in their company. And Compound isn’t a bank. It’s a DAO that operates based on code that is governed by its decentralized and anonymous community. The code distributed $93 million to a set of COMP holders and then replenished that pool with an additional $67 million. Wouldn’t a better analogy be something like this — a company’s shareholders voted to award a small number of employees with an incredibly generous bonus (and refilled the bonus pool) and are now claiming it was a mistake and asking for the money back?
How quickly can DAOs fix their mistakes?
Speaking of Compound, this seems wild:
Is this part and parcel of how all DAOs work or are there alternative governance models that would allow for a mistake like this to be fixed more quickly?
What would happen if I was to take an image that had been sold as an NFT (say Steph Curry’s bored ape) and post it online and say that I own it?
What could Steph do about it? What should he be able to do about it? Does it even matter?
Will verified NFTs in user profiles become so ubiquitous online that the social embarrassment of stealing someone else’s image becomes a significant disincentive for that behavior?
Who is building the decentralized version of LinkedIn?
This is a crypto/NFT use case that I love. Imagine being able to provide a verifiable work history and portfolio of prior projects with absolutely no work on either your or your potential employer’s part. Imagine being able to spend a majority of the hiring process focusing on soft skills and personality fit rather than chasing down references. Thanks to David Bressler for inspiring this question.
Can crypto embrace regulation and still drive innovation?
For some thoughtful answers to this question, I’m going to direct you to my fellow fintech nerds:
Fintech Nerd Collective: Can crypto embrace regulation and still drive innovation?
Fintech Potpourri
Why did Google kill Google Plex?
As I tweeted after the news came out, Google Plex seems like it was going to work:
1.) Google Plex was going to work. Our consumer survey data at @CstoneAdvisors suggests that it was going to be popular, as @rshevlin notes here: forbes.com/sites/ronshevl… Also, Citi was signing up 10,000 customers a week for its Google Plex waiting list.
So, why kill it? I’ve seen folks say that it was done out of fear of inviting more regulatory scrutiny. I’ve seen folks say it’s just much harder to build digital financial products than most people assume. And I’ve seen folks say that Google didn’t want to piss off its big bank clients in lucrative areas like Google Cloud (this is the theory I’m inclined to believe).
What are the most interesting examples of B2B2C business models in fintech?
Alex Rampell mentioned something interesting on a recent Clubhouse chat on BNPL — companies like Affirm actually have a negative CAC because their merchant partners are paying them to sign up new borrowers.
This is perhaps the coolest attribute of B2B2C business models (which Alex wrote about a few years ago).
What other examples are there of this ‘negative CAC advantage’ in fintech? Where could there be?
Why can’t credit card issuers ‘bolt on’ an additional credit line to my personal credit card in order to help cover business expenses for my company that doesn’t have a corporate credit card?
Start by identifying transactions on my personal card that look like business transactions (hotel stays, flights, etc.). Connect to my payroll provider to verify my employment and identify corresponding reimbursement debits for my card transactions. Use past transactions to underwrite me for an additional ‘work expenses’ line of credit. Add functionality into your mobile app to help me easily categorize work expenses and prepare my expense report. Let me keep the rewards and start selling your corporate credit card to my employer. Boom.
How will kid/teen banking apps handle the graduation process?
For the apps like Greenlight and Till that don’t intend to keep kids on their platform after they turn 18, how do they handle the graduation process off the platform? It’s obviously a monetization opportunity (referral fees), but how do you balance building that revenue stream with upholding your brand promise to always give the best possible financial advice to your customers? The lead aggregators (Credit Karma, NerdWallet, etc.) are a cautionary tale here, IMHO.
Does capturing a consumer’s direct deposit really matter?
I know it has, historically, and probably still does today, but I do wonder if we are rapidly approaching the point where automated and intelligent money movement (built on top of an increasingly open banking infrastructure) renders the advantages of having a customer’s direct deposit moot?
Also, do you ever wonder what would happen if employers took a much more active role in helping employees make allocation decisions about their paychecks before they were even distributed?
Will fighting climate change become a brand or a feature?
Nearly one in four Americans consider climate change to be the most important social challenge facing the country and yet only 9% of these consumers track their carbon footprint.
Helping consumers take action on climate change is a big opportunity, both in financial services and outside of it. My question is what’s the best strategy for pursuing this opportunity? Is it to build out a distinct brand focused on fighting climate change (à la Aspiration)? Or is it to build the infrastructure necessary to embed carbon tracking, offsets, and negative emissions capabilities into any app or service (à la Patch or Meniga Carbon Insight)?
Is it now officially a bad sign if a fintech company goes public via a SPAC?
I never really understood SPACs when they were booming and I still don’t understand them now, but it does seem like there are a lot fewer of them?
And the ones that are still happening don’t seem to be producing the results that the participating companies were hoping for (most recent example — MoneyLion, which is trading at roughly half of what its investors valued it at back in February).
What’s going on with this?
Are we in a fintech bubble?
I’m going to be debating this question with some awesome fintech experts live in New York at Empire Startups’ New York Fintech Week in a couple of weeks. You should join us if you can. Simon Taylor will be moderating the debate and will (I have it on good authority) be dressed as a judge.
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Short Takes
Tech builds for tech.
EquityBee, a platform for financing private company share purchases, raised a $55 million Series B.
Short take: This is a cool company solving an important problem, but it’s also an example of how the easiest problems for fintech founders to identify and solve for are the ones that they personally experience. How do we ensure that non-tech workers are also seeing the benefits of fintech innovation?
Shhhh!
Highnote, a banking-as-a-service card issuing platform, emerged from stealth with a combined $54 million seed and Series A.
Short take: I’m always curious about these fintech companies building in stealth. Is there really a competitive advantage in doing it this way? Just how stealthy were they being? After the announcement, were Marqeta and Lithic like “whoa! Where’d you guys come from?”
“I’m going to teach you to HATE spending money”
Deel, a developer of payroll tools, is reportedly raising at a $5.5 billion valuation.
Short take: Deel’s valuation has increased by 93x since May, 2020, which is not at all unusual in today’s VC environment. Capital is now a weapon. The part of the story that I want to read some reporting on now is how are companies spending all of this money? In my head, I’m picturing Monty Brewster taking the entire city of New York out to lunch.
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/