?? Debate over. Fintech has disrupted banking.

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Hey Fintech Nerds ??

Stripe passed $1trn in payments volume, so I guess Fintech isn’t dead.

The UK will make faster payments; slower. Because faster payments (RTP) really does mean faster fraud.

I also think we’re at a tipping point for meaningful disruption of consumer banking. Yes, in Brazil and the UK, but also in the United States. That’s your Rant this week.

PS. This week, Starling Bank announced its new CEO; let's take a moment to congratulate Anne Boden, a female founder, CEO, and former banker who led the charge for what a new digital bank could be.

Here's this week's Brainfood in summary

???Rant: Consumer Fintech is finally going to disrupt mainstream banking in a meaningful way.

?? 4 Fintech Companies:

1. Kani ?- Visa & Mastercard Reconciliation as a Service?
2. Stake.Rent ?- Cashback on Rent?
3. Shareholder Voting Exchange ?- Buy or sell shareholder voting rights
4. Finster ?- GenAI for financial markets data

?? Things to Know:

1. Stripe passes $1trn in payment volume
2. The UK to make it’s RTP Faster Payments slower to combat fraud

?? Good Read: How the wrong side won at Boeing

Weekly Rant ??

Consumer Fintech has started to disrupt mainstream banking in a meaningful way.

Big banks have been lazy.

They assumed they were too big to be disrupted by “unprofitable Fintech companies.” Meanwhile, Nubank just delivered $1bn in profit, Monzo is now the 7th largest bank in the UK, and CashApp is going all in to become the primary consumer account.

The digital-only and Neobanks are coming at the legacy banks much more aggressively.?

They're profitable, expanding their product base, and here to stay, while most big banks are cutting headcount or downsizing. Regionals are in a commercial real-estate crisis, and small banks face the choice of M&A or risky embedded finance.

Yet I still hear the same old excuses from big bank leaders.

Nothing quite?fuels me?like a banker making excuses, and this year's earnings season from the big banks was a?doozy. I've been itching to write this piece for weeks.

The old excuses against consumer Fintech are dwindling

• How can they be a bank that's not profitable lol
• We do all the things they do
• Oh, but they're not getting the full salary and direct deposit

We've moved from "the disruptors will never get the direct deposit" to "these disruptors are going squarely for the direct deposit in a unique interest-rate environment."

1. The cultural issue that prevents growth
2. Is that an issue if banks have record profits?
3. Profit doesn't solve market share erosion
4. Digital banks and Neobanks have a structural economic advantage
5. Regulation is creating a cost battleground
6. The consumer market has three core trade-offs
7. The messy middle is fun

1. Most incumbent banks and finance companies have a culture issue preventing growth.

Take a random walk with me as we explore a case study of a company entirely run by spreadsheets and business cases, with little regard for?what they actually do.

Boeing.

Oh, Boeing.

You can trace a direct line from the merger of Boeing and McDonell Douglas in 1997 and the 737 MAX. Boeing had historically been engineering-led, getting things right and doing what was needed. McDonnell was run along financial lines, focusing on cost control and "shareholder value."

Which do you think was better performing?

You guess it. Boeing

Yet after the merger, the McDonnell executives were able to back up their arguments with reams of data while the engineers talked about woolly-sounding things like culture and best practices.

In the end, the bean counters won. They always win.

The model is the truth and is what executives are measured by. It’s easy to draw a direct line between the model and the underlying accounts. The catch is that all those things fit inside a financial year, yet the things a business needs to do to thrive?do not?fit neatly into quarterly or annual cycles.

This financialization prevents companies from doing?the right thing?for growth and long-term "shareholder value." This is exactly why banks and incumbents in financial services can't innovate.

Giant mountain ranges don't disappear; they erode.

They erode market share, mind share, and relevance.

There's nothing more corrosive to long-term company health than a culture where the bean counters always win vs the engineers. Just like at Boeing post-merger, most banks let the obsession with spreadsheets and short-term metrics override innovation and customer value.?

Complacency?calcifies?in the form of a spreadsheet and process that is never questioned.

(As a Side note, I put Apple's recent malaise down to being too focused on efficient scale and not enough on being different and beautiful.)

2. Is culture an issue if banks have record profits?

a) Banks have record profits.?The big banks all reported record profits, dividends, and share buybacks. Amazing!?

b) Banks have the stickiest, highest-value customer segments.?Big banks are still where most paychecks land monthly; their customers run the spectrum, including high-earning and elderly customers. The prime and mass affluent customer base might use plenty of Fintech apps, but the direct deposit is with the bank they've had since their late teens or early 20s.

This is why the big banks still have a much higher overall deposit base and asset size than many upstarts in Fintech.

c) The license is a moat.?A banking license is the highest level of regulation a financial institution can have that touches consumers. Banks can access central bank payment systems and accounts and accept deposits as a funding source for lending. While in some markets like the UK, we now see equal access to the central bank, it's rarely at the same scale, and lending requires a funding source. If that isn't coming from consumer deposits, it has to come from the market, which historically can be expensive and risky.

d) Bank economics still make sense.?A bank should have the lowest cost to operate a lending business of anyone in finance. They have a license to accept consumer deposits and use that as their funding source to lend (by creating new deposits). Thanks to the magic of fractional reserve banking, they can create $10 of new lending for every $1.?

e) The big banks still have the stickiest deposits.?The ideal funding source is sticky deposits. As we saw during the SVB crisis, deposits that can exit the bank quickly can create a run-on-the-bank scenario. Historically, mass affluent or prime customer segments' monthly salaries are the most sticky deposits. The banks still dominate this category.?

The biggest banks also operate diversified, global balance sheets. There's a reason Chase's strategy is "fortress balance sheet." They see growing the balance sheet sustainably as their moat. And it is.

3. Profit doesn't solve market share erosion.

a) Big banks have record profits, aren't all they seem.?Record profits won't last forever. Either the rates they pay on savings will have to increase, or they'll see deposits exit the bank. These banks have incredibly high operating costs, they're not winning young consumer or business customers, and their net promoter score (brand perception) is in the toilet.

Market share is decreasing, and?they're propping up the share price?with record dividends and?share buybacks .?

b) Consumer demographics are shifting towards Fintech and away from banks.?High-income segments are aging out of the population.?Profitable customers get older every year, meaning their sustainability is under pressure. Without being glib, if the oldest customers begin to pass on and younger customers do not replace them, the available pool of profitable customers shrinks.?

Younger populations are becoming higher income as they age.?Tomorrow's Prime customer in their 40s with a mortgage is today's college kid with no credit history. Ideally, you get them with a credit card early on, but companies like SOFI are beginning to win here by sensibly refinancing student debt.

The traditional customer segment: When the cost of acquisition (CAC) and cost to serve (CTS) are reduced by a factor of 10, so is the amount of revenue per customer required to hit profit. With over 60% of millennials already using fintech apps as their primary account, the future Prime customer JPMorgan covets is slipping through its fingers each year.

That's why Jamie Dimon is "shit scared" of Fintech. He gets it.

c) The balance sheet is only a moat if it's producing growth.?Bank share prices have, for the most part, fallen consistently since 2008 on a relative basis. There are exceptions to this, but the vast majority are not growing revenue or market share in real terms. Like Boeing, they're focussing on the business cases that make sense on the spreadsheet and struggle to stay the course on long-term bets.

This means structural challenges like a high operating cost base and a loss of focus on what the customer actually wants are entrenched.

Banks mostly worry about basis point movements on a balance sheet.

Digital businesses worry about basis point movements in engagement and customer value.

Somewhere in the middle is the right answer.

4. Digital Bank economics have a structural advantage.

a) Digital-only Fintech apps have a unit economics advantage.?A big bank's cost of acquisition is, at best, $200 and, at worst, $1,000. The same is true for the cost to serve, which can run from $150 to $500 (depending on the product and customer complexity). A Fintech company rarely breaks $10 to acquire and $50 to service the account.

The difference is the revenue.

A bank would aim to generate at least $1000 in fees and NIM from its clients. Nonbank wallets (like CashApp) typically do neither, while digital banks like Nubank or Monzo avoid fees and haven't pushed hard at lending. In fact, the average revenue per user for digital banks and Neobanks seems very low.

(h/t Jared Franklin for the table)

But when you consider for many digital businesses, the cost to acquire and run these accounts is in the ~$50 region, the hurdle to be profitable is MUCH lower than banks.

That's why companies like Nubank, Monzo, Starling, and Cashapp are reaching unit economic profitability.?

b) The cross-selling has just started.?With a base of millions of customers, in the case of Cashapp, more than 60m customers, these companies have only just started to sell more products. Looking at what a big bank would sell and do a check list, it's incredible how little is in the shop window.?

Monzo offers consumer loans, overdrafts, savings, and checking,?but that's it. It does not offer mortgages or auto loans and has only recently launched stock trading. Nubank just delivered a $1bn full-year profit and mid-20s return on equity (RoE) performance. It now has over 100 million customers and is on track to be the world's best-performing bank if it can keep up its growth rate.

c) The customer base is aging into being more profitable.?Yesterday's 20-something is today's 30-something. The millennials are getting older, starting families, and increasing their income. As they do, they're thinking about retirement, having a higher deposit base, and increasingly relying on Fintech apps for parts of their financial lives. A lot of these consumers might?also?have a big bank relationship, but that bank is not top of their wallet.?

The same headwind that sees the big banks' customers age out of the market also sees the disruptors' customer base age in to profitability. The argument that banks always had was that digital banks were the "side app" not the full relationship, but Monzo has an average deposit of over $1,000 per customer. That's not massive, but it's growing YoY.

Now project that trends out a decade.

The remaining argument is that these apps focus on low-income segments.

d) Digital and Neobanks are moving up market.?Nubank's stated strategy is to move into Brazil's premium and affluent market segments. Starling in the UK (Monzo's competitor) has child accounts and does well with the 40-something prime segment (it also offers mortgages). The suggestion that digital and Neobanks can't address the prime and affluent customer base is simply false. They already do.

I also love the idea of transforming less profitable customers into healthier ones.?It's now culturally relevant for Gen Z and Gen A to think about money and be good with it. We have more data than ever available from open banking and payroll to price risk for consumers. A trend to watch is to see if the credit builder and earned wage access products can deliver on the promise of improving financial health.?

That finally gets us out of the catch-22 where the only profitable customer was subprime, generating fees and a lot of interest in credit cards. In a world where companies operate at a much lower cost, require less revenue, and can cross-sell effectively based on consumer need.

5. Regulation is making the market a cost battleground

Regulation has created multiple pressures that drive the competitive dynamic.?

• Increased capital requirements (BASEL III), especially in the wake of the banking crisis, put downward pressure on bank profits.?
• The downward pressure on fees will reduce the traditional banking revenues from the consumer segment.
• The CFPB's encirclement of "wallets" could potentially create costs for wallet providers but also legitimize them somewhat compared to traditional bank accounts.
• Open Banking being a regulation means the stickiness of deposits isn't what it used to be.
• In Brazil, Europe, the UK, and elsewhere, the path to digital businesses to get a full de novo banking license is much clearer, creating competition for banks with much lower cost structures.

This will force some smaller banks to exit consumer entirely, others have already shifted focus to embedded finance.?

But let's say a bank or Fintech wants to win.?They have choices to make.

6. The tradeoffs Banks and Fintech companies have to make

Winning consumer market share requires managing key tradeoffs with pressures on all sides. Regulators are capping fees, making consumers potentially less profitable, and incumbents and disruptors have different cost structures.?

a) Build branches vs closing branches.?Over the past decade, most banks have closed more branches than they've opened. Chase opened 300+ new branches in 2022 while Wells Fargo closed over 1,000. There's a reason Chase keeps building branches. It works. Chase opens more accounts than any other bank and is growing the business. To win the banks have to keep their cost structure higher, which means their profit hurdle is higher, which makes competing on unit economics harder.?

Mid-sized and smaller banks often aren't building branches, haven't been amazing at the experience, and rely on sticky consumer deposits. Those deposits are now seeking the highest yield, and the higher yield is coming from Fintech companies like CashApp and Robinhood than most banks.

b) Maximize profit vs maximize utility to the customer.?Fees and charges maximize profit but often leave consumers unhappy. Fintech companies and nonbanks solve more of a customer problem but haven't been profitable. This is changing as Fintech companies are starting to cross-sell. The profit imperative as they go public or prepare to IPO is mission-critical. Both banks and Fintech companies need profit as we go into the next 5 years.

Banks and Fintech companies that win will focus on the customer utility as the north star. Are we making their financial lives better overall? Are we doing the right thing? I think plenty of people in banks try to maximize those outcomes too, but it's too if they're run as a spreadsheet with customers. Too many banks say the word customer centricity without living it.

c) Exit consumer entirely or focus on it completely??Regulator pressure on fees is forcing some banks to consider exiting the consumer segment to focus on SMBs. At the other end of the spectrum, CashApp is now the core revenue-generating engine for Block, once better known for serving merchants.?

Consumer is hard, it's much more regulated and requires scale to make the cost model work. The Chase approach is fortress balance sheet. The Fintech approach has much lower costs and much higher consumer utility.?

The biggest players in the market will find their position in these tradeoffs, but the smaller and mid-sized players have to make a choice.?

7. The messy middle

We're in transition, and as yet, there is no clear winner, but the patterns are obvious. This leaves a few tradeoffs for banks of all sizes and shapes.

a) Big banks can keep eroding, partner, or be much more aggressive.?Chase is very aggressive in growth but has also partnered well (e.g., with Navan for expenses and acquiring Nutmeg in the UK). The ideal is to pursue partnerships and growth aggressively. Too few have this focus in the consumer business line.?

b) Smaller banks are stuck between deposit flight or a higher cost of funds.?The way to keep deposits would be to pay more to savers and checking account holders, which would make them less profitable.?

c) Digital banks and wallets have to execute on the revenue opportunity.?It's easy to launch new products, but it's much harder to get adoption and drive revenue from them. Every consumer app with millions of customers is blitzscaling its product offering base (as it should). Will it work? Time will tell.

Complacency at any incumbent is no longer acceptable. Next time you hear someone say, "Oh, we could do that" or "Yeah, but" in relation to consumer Fintech, send them this Rant.

You can indulge in whataboutism for any of the growth consumer Fintech companies. There's always some negative you can throw at them, something they don't have that big banks do have.?

As a practical matter, the large banks still have all of the customers, balance sheet, and regulatory advantages and moats they always had.?

I'm not arguing that big banks aren't big.?

I'm arguing big banks have a problem.

They use those factors to become complacent.

And complacency is the issue.

I'm reminded of this incredible quote from the father of one of the first-ever Fintech companies.

From Dee Hock (founder of VISA), One From Many (p. 34):

Countless times over the years, I have asked diverse groups of people to reflect very carefully on their work with organizations and to make a simple balance sheet. How much time, energy, and ingenuity did they spend obeying senseless rules and procedures that had little to do with the results they were expected to achieve? How much did they devote to circumventing those rules and procedures in order to do something productive with the remainder? How much was wasted interpreting such rules and enforcing them on others? How much time and talent did they simply withhold due to frustration and futility? It's a rare person who arrives at a sum less than 50 percent. Eighty is not uncommon.

So here's your takeaways.

To every bank:?the singular priority must be getting the costs out and the talent in. Rip out bureaucracy and empower product teams to move at fintech speed.

The way you make decisions is the problem. The voices saying Fintech is not a threat are the problem. Yes, compared to the disruptors, you have more constraints in compliance, countries, and talent, but there's a lesson. That's not closing branches and existing businesses. It's driving hard and competing.

To every Fintech:?You've proven you can win the young. Now, get after the lucrative mass affluent segments the incumbents can't hold on to.?You're not there yet. Offering a direct deposit isn't the same as being the home of that customer. The affluent core of the big banks needs a product they can almost ignore that works with every payment type. The numbers on the wall should be those of the top 4 banks.?

It's time to compete by understanding what the competitors do well, your relative strengths, and how you win.?

To you, dear reader:?The messy middle is fun. Complacency is never ok.

After a week at Fintech Meetup, I saw so many of you who care deeply, get into the details, and push hard to make finance?better.

I see you. I see how much you care. And that's why I love this industry.

Money makes the world go round.

Let's make it better.

ST.

4 Fintech Companies ??

1.?Kani ?- Visa & Mastercard Reconciliation as a Service?

Kani helps manage reporting and reconciliation files for Visa and Mastercard. BIN sponsors, Neobanks, and merchant acquirers use Kani to simplify and automate reconciliation. Matching files from various counterparties can be painstaking and often gets left to in-house teams to figure out. In addition, Visa (GOC) and Mastercard (QMR) report standards often change, requiring engineering build to keep up with them. Clients include Neuvi, Paysafe, and Discover.

???This is as Fintech nerd as it gets.?As companies look to go multi-processor, expand internationally, or scale, the back office often gets left behind. At the back of the back office is reconciliation and reporting. Payment automation and lingering companies solve some of the issues but don't go all the way to scheme-ready reports. Currently very UK focussed but looking to expand internationally, I can imagine this would do well in the US.

2.?Stake.Rent ?- Cashback on Rent?

Stake is a Visa Debit card program with standard Neobank features (like getting paid early and reporting rental payments to credit agencies). The twist is the card pays cashback that delivers an average 8% increase in savings and adds 43 points to the credit score. Landlords get a 35% reduction in late payments and an 18% increase in renewal conversions.

?? You love to see it. The cashback defaults into a savings buffer, which helps renters with any unexpected costs. It's also a great way to help landlords win new renters or retain existing ones. Their?analytics page ?is super interesting, with case studies showing increased occupancy. My concern is the business model, cashback plus card swipe fees is getting funded by someone. I imagine that's the property operators, but what are the margins? I guess we'll find out soon. Their Series A was in 2022.

3.?Shareholder Voting Exchange ?- Buy or sell shareholder voting rights

SVE is a market for the votes a registered shareholder receives with a stock purchase. For example, an owner of 100 TSLA shares might also receive 100 votes for the AGM. These votes often occur by proxy, and most smaller holders don't think about them, but they can be very valuable to a large or activist investor. Users sign up by linking a brokerage account, verifying ownership of votes, and then they receive bids. Users can also bid for and exercise their votes directly through the platform.

???This is an interesting way to generate a higher return from stock you own but rarely vote with.?Only other shareholders or the corporation you bought shares of can acquire votes via the platform, so this isn't a new asset class. I'd love to see this become an API and a way to generate more yield from passive investments a consumer already owns.

4.?Finster ?- GenAI for financial markets data

Finster aims to tackle investment banking analysts' research and financial modeling tasks. The team is ex-JP Morgan, Deepmind, and Meta AI. The team is still early in their journey, so it's unclear how the product will function.

???One heck of a team. Let's see if they can do it.?Fit's into a broader thesis about "Fintech is eating capital markets." I wonder how often someone was an analyst for 12 months at an investment bank and then quit to build something like this.

Things to know ??

1. Stripe passes $1trn in payment volume

In addition to the milestone Stripe noted in their annual letter, they’ve been cash flow positive, and their payment volume is up 25% YoY. Much of this growth is coming from enterprise customers.

?? Being cashflow positives means they can focus on building for the next decade instead of rushing for the exit. The recent “funding” rounds make a lot more sense in that context. It’s not just employers who have enjoyed secondary market sales. Stripe is setting itself up to stay private as long as it damn well chooses and has complete optionality.

?? Software and the internet are eating the physical world; as they do, the internet's GDP grows. Stripe highlights robotics, farming, and carbon removal as growth sectors in its client portfolio. Would you imagine farming as a growth sector for Stripe even three years ago?

?? Stripe’s enterprise clients are more likely to grow with them than convert to them. Stripe’s biggest enterprise clients are some of the biggest companies born in the past decade and a half. The more price-sensitive retailer on razer thin margins might be less likely to choose Stripe than, say, Adyen or Chase. But Stripe doesn’t need to win there to keep growing. They’re a call option on the internet itself growing.

?? Stripe’s risk is trying to be all things to all clients. Companies naturally reach a phase where they want multiple PSPs or a specialized tokenization, billing, or fraud engine that suits their use case. Stripe is designed to cross-sell more Stripe, not be the marketplace for other things that compete with their value-added services.

?? Products not mentioned at all. Stripe issuing, BaaS, Radar, Terminal, Capital, Treasury or Identity. These products have some good logos and big names, but is the product blitzing working or a distraction? I guess it depends on whether you’re building to IPO next year or grow over 10. It feels more and more like the latter.

?? The annual letter is well worth a read for payments nerds. It neatly articulates payments as an R&D and optimization problem, and Stripe’s approach to using software to solve that. It’s also a rare leader that creates this kind of letter. Jamie Dimon is another example. What’s funny is I can’t help but read it in John Collison’s voice.

2. The UK to make it’s RTP Faster Payments slower to combat fraud

lol. Under the proposed legislation, banks and payment companies will be given up to 3 days to hold a payment and investigate if they suspect fraud or a scam. This follows scams becoming the #1 crime in the UK and a higher volume than card fraud. The legislation is intended to be live before October 7th, when a new 50/50 liability model for sending and receiving banks and companies comes into force.

?? Faster payments means faster fraud. Instead of Zelle, CashApp, or Venmo, instant account-to-account (A2A) payments dominate in the UK for peer-to-peer or paying small businesses. These payments are free to users, move funds instantly, have almost no refunds, and historically have very little fraud control. This makes it ideal for scammers who trick users into sending money and can quickly move those stolen funds 2,3 or 4 times to be incredibly hard to catch.

?? This delay is obviously sensible but will increase the costs for all involved. The new liability model forces the whole market to invest in better fraud controls to avoid losses. Combine technology and staff investigations with possible new losses in liability for fraud, and everyone’s costs increased. It’s very likely that it will turn into fees somewhere along the line.

?? Everyone gets into payments wondering why they aren’t cheaper and instant. Then everyone discovers risk. Card payments always seem expensive, and the idea that payments could be made slower than an email seems stupid. Until you realize fraudsters are smart and humans can be tricked. Payments are easy; risk is hard, and everything in finance is risk.

3. Bitcoin and ETH hit fresh all-time highs after the UK opens the door to exchange-traded Crypto.

Bitcoin broke above $72,000 and ETH above $4,000 following news that the Financial Conduct Authority (FCA) would “not object” to requests that want to create exchange-traded notes (ETNs). Only professional investors can buy these ETNs, and the news follows the US

?? People only talk about crypto when the price rallies. Crypto never went away; most people just lost interest. In the meantime, companies like Blackrock have begun to allocate Bitcoin to their “balanced” index ETFs. This news from the UK means UK-based funds and index products could do the same.

?? Outlets reporting the rally linked the UK’s announcement to the price move; I don’t think it is. Two things are happening. Firstly, the macro is risk-on with the AI boom, and secondly, the Bitcoin ETF inflows are genuinely massive, driving up the price.

?? Memecoins are exploding. Boden and Tremp rallying (Biden and Trump memecoins). These seem obviously pointless. BUT. They also show that people are willing to trade ideas and memes. As ridiculous as that sounds, in the age of social media, post-truth, and AI-generated content, knowing what the world cares about has value.

?? I hope memecoin mania doesn’t turn into consumer scams. The last bull cycle saw a lot of consumers lose out. We have a more mature industry with bad actors washed out (or in jail). But let’s never forget the hygiene. Never invest what you can’t afford to lose.

Good Reads ??

The wrong side won at Boeing

You might wonder why I'm featuring a blog about Boeing in a newsletter about Fintech, but the lessons are clear.

When everything needs a business case nothing makes sense. If a company reduces every argument down to only what can be modeled on a spreadsheet, it stops growing.

Dan Davies - "Back of Mind"

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(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees.?

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(3) Any companies mentioned are top of mind and used for illustrative purposes only.?

(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held?

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