Fintech ?? Food - 14th Feb 2021

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Weekly Rant ??

There are three categories of people observing crypto

1. True believers
2. True haters
3. The center ground

Category 1 & 2 are as annoying as each other and seem to be forever at war. Crypto haters cannot find value in any aspect of crypto or accept alternative world views. Crypto believers cannot find value in the old world of finance.

Sure, the price could be (and probably is) another parabolic bubble, but the price is an unhelpful distraction.  So are conversations around "power consumption." These topics play a role in getting attention for crypto, but they also create noise. Noise distracts from what is important.

Crypto's growing center ground

But the center-ground is growing. Whether it is for speculation, inflation hedging, or just marketing with each passing year, the arguments about Bitcoin have faded as the world got used to it being there. It didn't die, it wasn't a fad, and now there's some smart money moving towards crypto.

In the book by Geoffrey Moore from 1991, Geoffrey argued a chasm exists between the early adopters of a technology (innovators / early adopters) and the early majority (pragmatists). Various parts of the crypto ecosystem are at different stages of "crossing the chasm" or not.

Has Bitcoin crossed the chasm?

I believe Bitcoin first crossed the Chasm when Square Cash App added the ability to buy Bitcoin. As a non-crypto-first app, its sole purpose was not buying and managing crypto but solving other customer problems. As Bitcoin moved from being a destination and became just a part of the menu, it quietly became acceptable.

So now Tesla buying Bitcoin, BNY Mellon offering crypto custody, and every company under the sun "supporting or offering crypto later" is because they see the early majority has arrived.

What is next to cross the chasm?

There are several candidates, but here are my top few.

1. Defi as a speculative asset or consumer-grade investment
2. Stablecoins as a payment method
3. Non Fungible Tokens (NFTs)

Will DeFi cross the chasm?

Assets like Aave, Uniswap, and YFI all support cryptonetworks that are much more complex and dynamic than their older cousins like Bitcoin or Eth. Decentralized finance networks have a suite of products like lending aggregation, yield generation, insurance, and more. Traders can combine lending these products to generate significant returns. Traders can also connect the DeFi services across networks different networks to create complex yet profitable outcomes.  

Traders have done this in capital markets for decades, but now software is eating capital markets. Defi is turning trading, trades, and trading venues into software primitives. 

DeFi networks are controlled by their token holders, who submit and vote on proposals that govern the entire ecosystem. No one entity controls these networks, and often the less control the founder has, the more enthusiasm the DeFi traders and enthusiasts will show a new token and network.

With modern wallets like Argent, Blockfi, or even the browser-based MetaMask trading, pooling or farming these tokens is relatively simple.

These wallets also often add a simple "earn" or interest-bearing like feature, where assets like Bitcoin will yield up to 5% APY and stablecoins like USDC up to 12%. The rates are offered by wallet providers who then actively trade in the DeFi markets.  In effect, consumers' returns in these services look a bit like buying a NASDAQ ETF, reasonably low risk, but not as low risk as a bank savings rate.

But with bank savings rates so low, would this sort of feature cross the chasm?

Maybe. It's not as far fetched as you might think. Services like Fold.app and Coinbase offer debit cards with interest-bearing savings and the ability to spend directly from a USDC holding.  If you're a young engineer working at a tech company, would you want to be paid in USD to a bank account or in USDC to a wallet and have that make 12%?

There has been a slew of payroll APIs and apps launching into fintech in the past year, and if any one of them added USDC / wallet support, things could happen pretty quickly.  Increasingly the world of "APIs for everything fintech" could create an on-ramp to living in a crypto ecosystem in a way that is backwardly compatible with old finance.

DeFi trading may not cross the chasm as quickly.  While there are plenty of bots, funds, and trackers that may get easier to use, DeFi trading is like the capital markets, probably best left to those who have the risk appetite and capital to absorb the scale and potential losses.  However, unlike the old world capital markets, if you're smart enough and liquid enough as of today, there is no barrier to entry. I worry, though, that we could see a regulatory backlash if there aren't some levels of controls to prevent harm to the mass market.

Will Stablecoins cross the chasm?

On the surface, Stablecoins sound great, move value globally near-instantly at almost zero marginal cost. To date, their primary use case has been in the crypto economy to avoid having to deal with the complexity (and slowness) of the existing financial system.  Stablecoins are a neat abstraction from the financial system for crypto traders.

Quietly, other use cases are emerging (like getting paid in a stablecoin or for international payments). These volumes are still tiny compared to other payment methods but show some real promise.

As with DeFi savings, we're seeing some innovators use this product, but it hasn't made it to the early majority yet. I wonder if, by the time it does, you won't even realize you're using crypto. Services like Sila Money are "just a better USD payment rail."  Given how broken (and massive) B2B payments are, could stablecoins become an alternative for Wire, ACH, and the emerging types of RTP? 

In short, yes.  But it feels a few years off.  

But again, fintech could have a role to play here. Imagine if Modern Treasury (the service for managing B2B payments favored by startups) added stablecoins? There's likely limited demand today, but tomorrow?

Will Non Fungible Tokens cross the chasm? 

All the tokens we have talked about so far are fungible. One bitcoin is replaceable for another; one eth equals the same as another eth. But if we consider art, one art piece isn't equal to another unless it is a replica. And, if you have a reproduction, it isn't as valuable as "the original."

Tokens that aren't fungible create new opportunities for the digital world.  In the digital world, the default is to create a copy or centralize. For example, if I send you an email with a spreadsheet attachment, you now have an exact copy of that spreadsheet but not the original. If we both work in a Google Sheet, there is one original, but it is controlled by the centralized company that runs the service; we can't easily take that sheet from its source without changing it (from Gsheet to XLS, for example).

The physical world has a model for decentralized trading. Things like baseball cards, limited edition movie posters, limited-edition sneaker drops all have been wildly successful.  Some even have centralized exchanges. But this doesn't work as well for digital because whatever is created can't be "owned" in a permanent way (recorded somewhere for all to see) and decentralized.

Then came the cryptokittie. If you owned a cryptokittie, it was yours whether the provider (Dapper Labs) continued to exist or not. Unlike, say, a sword for your favorite video game character, where if the servers go down, your investment is gone.   Cryptokitties were fun but slow and hard to use, so they lost favor.

Since then, new digital art marketplaces like Superrare, Rariable, and Decentraland have risen to prominence through late 2020. Like cryptokitties, the art on these services is mostly traded or bought by the crypto community's innovators, but these services show promise.

Then there's NBA Topshot.  The creator of the cryptokitties Dapper Labs (covered later) launched NBA Topshot, which has managed to capture the imagination of people who care about sports but don't care about crypto. NBA Topshot captures short clips of a moment in NBA history as a limited edition, of which there can only ever be so many originals owned.

Like a baseball card, you own those moments, regardless of whether the servers go down.

Maybe, just maybe, NFTs have crossed the chasm. And that's interesting.

4 Fintech Companies ??

1. Tillit - B2B E-commerce payment acceptance (EU)

• Tillit is very similar to Balance, which broke cover last week. Stripe checkout style experience but for B2B payment types (e.g., business customers can check out in e-commerce with Invoice, Card, Installments). Tillit also gives buyers flexibility (like payment terms and giving employees individual accounts and expense management).
• The Accounts Payable / Receivable space has been white-hot in the last year, but B2B e-commerce has mostly been left to payments and expenses cards like Ramp or Brex.  Tillit claims a 20% increase in order frequency from their tool, and the B2B BNPL solution increases conversion by up to 50%.
• The European B2B payments landscape has some massive companies (like checkout.com and Adyen) that went global. I'm not saying Tillit is the next one of those (the European B2B payment space is also crowded), but I like this theme.  Europe has account-based, open banking payments coming to e-commerce while B2B e-commerce checkouts are taking off. Interesting no?

2. Tomo Credit - Credit card for immigrants and thin files

• Tomo Credit is a "credit card" to help first-time borrowers build a credit history. The twist is it uses their cash flow and not FICO score.  Users make payments on a seven-day automatic payment schedule with no fees or APR added.  The 7-day cycle is neat; it creates short cycles to see which users are delinquent and not.  It likely also suits workers who get paid weekly (i.e., immigrants).
• The nature of credit requiring a FICO score is so very antiquated. I remember my friends at Airescore sharing data with me that 2 in 10 people are a "thin file" in the UK; of those, at least 50% are creditworthy. The economic opportunity of including these people is massive in addition to being the right thing to do.
• I wonder who will launch something like this next; it feels natural for credit karma or nerd wallet.  Can't get a credit card? Build your credit here on this card until you can. Credit builders are an interesting acquisition route.

3. Alloy Automation - Zapier for E-commerce

• Alloy Automation (not to be confused with Alloy) provides a suite of tools to allow e-commerce site builders to automate their marketing, fulfillment, and operations.  Alloy Automation is more specialist than Zapier as a no-code tool, and unlike Shopify flow is available on any e-commerce platform.
• Alloy Automation made me think of Primer (covered a few months ago on BF), which does no-code workflows for e-commerce payments. Primer and Alloy combined would be interesting.

4. LiveFlow - The spreadsheet first dashboard for CFOs

• LiveFlow lets finance teams create a budget in a spreadsheet interface, but connect to their actuals in the bank, accounts platform, and payment platform.  This creates a real-time view of budget vs. actuals, real-time P&Ls, real-time cash flow, and more—no need to generate reports or input to spreadsheets or even run macros.
• Finance teams love spreadsheets. The spreadsheet is so hard to compete with because it's incredibly powerful. LiveFlow is interestingly leaning into this.  It seems every week another "CFO data dashboard" appears, but the clarity of the LiveFlow offering is interesting. 

Things to know ??

1. MoneyLion files SPAC

• The Neobank has agreed to go public through a merger with bank check firm Fusion Acquisition Corp valuing the combined company at $2.4bn.  MoneyLion had raised $270m to date and claims 1.4m customers. 2020 revenue was $76m, and their plan to grow revenue is, unsurprisingly, cross-sell.
• ?? My Analysis: MoneyLion bases its user growth projections on adding crypto, BNPL, and investing features over the coming 12 months, keeping its CAC low and its ARPU in the $148 region. Interestingly 81% of revenue today comes from instant funding and "tips."  Tips are low key a killer revenue feature (0% lending if you "tip" your lender,") but you have to wonder how long it is until regulators or consumers backlash if something goes wrong.  Calling it a tip doesn't make it not lending. Cokie has a great take on FTT here.  The numbers are ambitious, and competition is coming.
• ?? My Analysis: This is interesting timing as Chime is hitting its stride, and a new wave of Neobanks like Current, Point, and HM Bradley capture the imagination of the US market. We also see digital community banks like Daylight and Greenwood play into the underserved and overcharged communities.  MoneyLion's promise to be less elitist rings a smidge inauthentic, and competitors are coming.  But more products for the underserved and overcharged is good, so I hope I'm wrong here.

Major h/t to Jason M for some of the thought starters above.

2. Stir raises at $100m

• Stir, the startup that helps creators (video, audio, writers, performers) manage their income via ads and direct payments, has raised a round valuing it at $100m. Stir brings together revenue, audience, and merchandise data across all of their apps and tools (e.g., Youtube, Shopify, Spotify, Twitch, and more).  
• ?? My Analysis: Anything creator economy is ??, with Karat the Neobank for creators also rumored to have raised. 
• ??My Analysis: Creators have a unique set of problems. Creators occupy a space between small business owners, e-commerce store owners, brand managers, and creative.  Stir is interesting because it aggregates several platforms solving the creator job-to-be-done across those services (either with their platform or "drops").

3. Dapper Labs raises $250m

• Dapper Labs, the maker of NBA Topshot, is set to raise $250m led by Coatue. The raise comes as NBA Top Shot has caught the sports card collector community and NBA players' imagination.  
• Dapper Labs famously built cryptokitties on the ethereum blockchain before creating its own "flow" blockchain service. Flow describes itself as the blockchain built for the next generation of apps, games, and the digital assets that power them. Flow is used by the NBA, UFC, Warner Music Group, and Ubisoft.
• ?? My Analysis: Flow is interesting because it splits a miner's role into four different parts 1) Collectors 2) Execution 3) Verifier 4) Consensus.  Dapper has made the technical trade-offs a highly specialized team focussed on executing for a use case would make. Instead of battling the technologies, builders can focus on execution.
• ?? My Analysis: NBA Top Shot allows fans to collect 10-second clips of a fantastic moment in the NBA. What value does that have? The same as a baseball card.  It's an original, it's one of a limited edition, and it's tradeable. People want that.
• ?? My Analysis: Where this gets interesting is when you think about content and the Metaverse. If you've not gone down the rabbit hole yet, the Metaverse is like if the Ready Player One movie came to life. Except rather than one megacorp running the VR economy, all content is tradeable in the way a physical object is, between any game, IP or platform. Web 3 and NFTs separate the content from the platform, and that feels like an inevitable trend.

Good reads ??

1. Affirm Modelling Loan Repayment behavior

• Affirm breaks down how they measure and manage loan performance.  Initially, their loss modeling curves looked very familiar to anyone in lending; by age and FICO score, the principal loss amount increased over time.  The blog post talks about why Affirm adjusted to model expected repayments for each loan.
• Affirm modeled repayment behavior as a state machine.  The state machine replicates historic delayed payment models (1-30 day, 31-60 day, etc.), but by measuring each loan individually, Affirm has built a sizeable, per loan (rather than aggregate) data set.  Over time Affirm was able to model the probability that a loan would transfer state for each given age. Affirm then translates these state transition probabilities into cash flows. The result is a clear view of total loss and total cash flow month by month and more accurate predictions in which loans will charge off.
• ?? My Analysis: Banks are very good with data (e.g., Capital One) won't find this data-driven approach a surprise. But for most big banks, what Affirm did is Alchemy. Most banks are at the mercy of their systems and can't access or manage the data in the way Affirm did.
• ?? My Analysis: To build accurate models, it's clear a large amount of data is still essential. Merely having access to a consumer's bank account data alone won't give companies a credit model edge alone; they need to see many of them through the cycle.  (That's why Tomo's credit 7-day cycle was interesting)

h/t Mengxi Lu

It's been a busy week in fintech! If you missed any of it, check out Nik Milanovic's This Week in Fintech for the headlines of the past week:

• Stripe, Shopify, Fast, and everyone in between are competing to own the online consumer checkout.
• Klarna is launching a bank in Germany and looking to raise $500 million at a $30 billion valuation.
• Brazil's Pix real-time payment system entered the first of four launch phases.
• Bank of America and Plaid partnered on a user data integration.
• PayPal is adding new banking, offers, and crypto features to Venmo.
• Marcus re-launched in the UK and wound down Clarity Money.
• And Nigerian banks are shutting off access to fintech services as regulators continue to quell financial innovation.

Where're tweets of the week?

Check them out on the substack link

That’s all folks ??