Fintech Digest from Autonomous ?NEXT -- Blending Neobanks into Cryptobanks; PayPal Plus Acorns Looks like Asian Fintech; Billions for Zelle in Payment

Hi fellow futurists -- here are our top 3 favorite thoughts. Traveling back to NYC for Thanksgiving brought out a lot of payments and banking ideas!

Blending Neobanks into Cryptobanks.  

Revolut is adding 3,500 people a day to its digital bank, reaching 1 million accounts, because it will provide the ability to store Bitcoin this December. The startup does not yet have a banking license.

The concept of neobanks or challenger banks is notoriously imprecise, blending in somewhere between online banking, mobile apps, digital lending and personal financial management. Here's a try: neobanks are (1) primarily consumer focused, often with integrated budgeting, (2) mobile or chatbot first, and (3) replicate the use-cases of deposit savings, lending, and money movement. That doesn't mean they have bank licenses or need them. Plenty of tech startups can build user experiences, and API those into financial backends from firms providing bank-as-a-service. Apple did this, for example.

Adding to the complexity is the emergence of cryptobanks, a set of institutions trying to replicate the functionalities of traditional banking services for crypto consumers and investors. And these things will blend together soon enough as you can see in the charts below from Financial Technology Partners and Slava Solodkiy. While neobank darling Monzo has raised EURO 71mm (and let's not forget Transferwise's $280mm), cryptobanks are on the path to raise $150mm this year according to Slava. If the trajectory follows ICO funding in general, we would see an exponential rise in financial institutions dedicated to crypto. Oh wait, we already do.

The reason that neobanks have taken off in Europe, but not in the United States, is because international money transfer can be priced at near-zero by digital challengers, pushing out the incumbents. And that matters in Europe in a way it does not in the US. A 3% credit card markup added to a 3% foreign exchange markup makes for expensive international travel. In the US, this is nearly irrelevant, which is why much more time is spent on personal financial management and roboadvising. But once we get to crypto, watch two things: (1) the use of cryptobanks in failing third-world economies, and (2) the toll booths along the crypto/traditional economy border. Hats off to Revolut for leading the way.

Source: FTPartners, Slava Solodkiy

  PayPal Plus Acorns Looks like Asian Fintech. 

PayPal was going to be the money of the internet, but instead it became the payment mechanism behind e-commerce (see Peter Thiel on Bitcoin). From that position, it grew to 6 million merchant accounts and 203 million consumer accounts, and hedged the future by buying Venmo. That may be impressive, until you compare its $94 billion market capitalization with that of Alibaba, a $500 billion behemoth that owns Alipay and multiple vertical and horizontal adjacent businesses in e-commerce and fintech.

But for regulatory barriers, PayPal has the potential to get closer to the Asian conglomerate. Investing $30 million into Acorns, the microinvesting app, and now partnering with it to provide piggy bank services to PayPal customers is the first step. While Acorns has "only" 2.4 million accounts, at an average of ~$1,000 each, consider YueBao. The money market fund plugged into Ant Financial is now the world's largest, with over $200 billion in assets. 

This approach is the right strategic direction for building a scaled fintech company that is customer centric, rather than product centric. The customer journey starts with payments, then savings, then investments for the future, and finally retirement. PayPal has a large built in consumer base, and this deal shows Acorns participating earlier in the client funnel. It also shows that Acorns is a tech company first and an investment company second, and its technology enabled product can be integrated into other ecosystems. We would not be surprised to see similar integrations with other payments providers, or messaging providers like Facebook Messenger.

Source: CB Insights / Tearsheet, Disruptive Finance

Billions for Zelle in Payments. 

Let's bring this payments story home. Payments is the life blood of the economy. It is the signifier of a positive utility exchange between economic participants. Value transfer over the blockchain is the chassis on which digitization will be built over the next 20 years. Digitization of an object, like a physical record into digital music, is not sufficient because it does not emulate the properties of human commerce. Truly digitizing payments and the accounting properties around them unlocks a creative space that was previously unavailable for technology growth.

It is still possible that the financial incumbent banks will win, the way they have subsumed the Fintech wave. See for example Zelle, the consumer payments app and inter-bank digital payments rails built by bank-owned company Early Warning to combat PayPal-owned Venmo. For the third quarter, Zelle announced 60 million P2P transactions worth $17.5B. In October alone, Bank of America saw 5 million Zelle transactions worth $1.5B from 2.5 million users. The trend is up. But for some context, Asia fintech claims 90 million users for Baidu wallet and 450 million users for Alipay (Ant Financial) as of 2016. And they are coming to the UK, Europe and the US.

Can public cryptocurrencies, like Bitcoin, Ripple and Ethereum get there? Though scale continues to be a problem today, leading to Bitcoin developer infighting that could have existential consequences, answers are being developed. For a taste, dive into Vitalik Buterin's description of how a technology called sharding can help complex smart contracts function as fast as Visa transactions while leveraging crypto validation. To the uninitiated, the sound like science fiction. But isn't the whole thing science fiction anyway? So what does all this tell us about firms like Visa and Mastercard? That the value-added services, like consumer rewards and implicit credit insurance, are paramount. And that the core payments rails are under attack.

Source: Youtube & Vitalik Buterin, Trust Nodes

Thanks for reading!

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