Fintech ?? Food - Jan 31st 2021

Hey everyone ??, thanks so much for coming back for more brainfood. A space to learn in public and hopefully process everything happening in fintech.

This week the Gamestop rant is a long one! But there's also so much fintech goodness to unpack this week. Clubhouse does fintech, Stripe makes all the investments, Nubank is massive & Plaid deposit switching. ??

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Weekly Rant ??

Gamestop. Economic Populism and how Robinhood weaponized the Occupy Wall St movement

What happened with Gamestop is the beginning of economic populism. Robinhood weaponized the occupy wall st movement, social drove viral interest, and nearly everyone hates Wall St and Robinhood.  

There's a lot to unpack here, political, economic, social, and technological, but understanding how all these themes come together is crucial to understand the future of fintech.

What happened to Gamestop 

At the start of January 2021, Gamestop traded at $18; by the 28th Jan it closed at $364. The story goes that users of the subreddit r/wallstreetbets drove the price rise.  

The Redditors had four primary weapons.  

1. Deep analysis of Gamestop strategy (and its potential value):  A point missed in the mainstream media is r/wallstreetbets analysis is deep and has sense. The argument went that Gamestop would revamp its stores around e-sports and switch to become the premier online video game retailer in the booming video game industry. It might not work, but it is playing towards trends. 
2. Robinhood and the Call Option:  A Call Option allows investors to bet that a stock price will increase. The option gives you the right to buy stock in the future at a set price. If you purchased a $1 stock for $10k and it doubled, well done, you doubled your money.  But if you bought $10k of call options at 10x leverage, you just 20x your investment.
3. Anti-wall St sentiment: Since the Global Financial Crisis in 2008, wealth inequality has increased, and a generation of young adults saw their parents lose out as Wall St got bailed out. The middle class has hollowed, opportunity has decreased, and the anger from Occupy Wall St hasn't gone away. It got stronger.
4. Memes:  A meme is an incredibly efficient way to communicate an idea. Gen Z is especially effective at communicating in Memes. It may baffle most boomers, but don't confuse the humor with not having a point.  Memes are this generation's punk or hip-hop.

With these weapons, r/wallstreetbets began meme'ing and identified Gamestop as a target stock for growth.

Redditors spotted Gamestop was.

• Potentially undervalued
• Being "shorted" by a large "Wall St" hedge fund called Melvin capital
• If they could push the price up, they'd trigger a "short squeeze" that would both rocket the price up further and cause significant damage to Melvin capital in the process

Melvin Capital is a hedge fund with $12.5bn assets under management. Melvin had placed a bet many months ago that Gamestop would decrease in price.  The size of the short position adopted by Melvin capital (and others) resulted in more than 139% of existing Gamestop shares being shorted, making Gamestop the most shorted stock in the world.

The Redditors believed this did not represent value for the stock and was unfairly punishing a company amid a potentially positive turnaround. The Redditors posted analysis, bought call options, and memed anti-Wall-St sentiment. Then, the price began to rise steadily until a massive jump on 25th Jan.  

The Redditors had done it. They'd triggered a short squeeze.

Like the Redditors who had bought options, Melvin had gone short (betting the price would go down). Like call options, put options operate on leverage and borrowing. If the price had gone down, Melvin would earn the difference between what they borrowed and the current price. When the price didn't go down, Melvin had an obligation to buy a significant amount of shares at a much higher price. This massive stock purchase at a higher price would trigger a further run-up in the Gamestop stock. That's what happened.

The Gamestop price's huge run-up caught the attention of mainstream media, and culturally aware meme-lords like Chamath and Elon Musk amplifying the buying frenzy. The attention drew more investors to the Robinhood app, buying Gamestop and further pushing up the price.

Then Robinhood suspended trading Gamestop stock.

Cue outrage, disbelief, and thousands of 1-star reviews for the Robinhood app. Robinhood put out a vaguely worded press release about how they could no longer offer Gamestop stock purchases because of S.E.C. rules. Redditors were having none of it, and this is when the story caught fire. We had seen parabolic runs in stock prices this year (e.g., Hertz), but the Robinhood move seemed to anger everyone.

Why did Robinhood stop Gamestop buys?

On 28th Jan, Robinhood put out a blog post called "Keeping customers informed through market volatility." It talked about how important it is to stay informed and provided links to its learning portal; it also said, "We continuously monitor the markets and make changes where necessary."  I've read the blog post 8 or 9 times and cannot find an actual explanation.  This poor communication was compounded by their C.E.O. appearing on T.V. and managing to spend four minutes saying absolutely nothing.

A day later, Robinhood put out a much better explanation. Robinhood is a registered broker-dealer. As a broker-dealer, it has to place deposits at a clearinghouse. A clearinghouse is a central depository for securities (where the stocks live). They keep a record of which broker holds which stock on behalf of which beneficial owner. 

The short version of what happened is Robinhood's clearinghouse increased its deposit requirements by 10x.  To meet these requirements, Robinhood had to both stop trades, or it would have gone insolvent.  

On the face of it, that makes sense, but there's a twist.

Robinhood is "free" because you are the product being sold.

When you buy a stock on Robinhood, Robinhood sells that order information to a Wall St firm called Citadel. Seeing the buy order, Citadel can "front-run" the retail investor and buy the stock in front of (or before) you do. As a result, you end up with a slightly worse price than Citadel did. Robinhood had been selling its order flow for years.

This hadn’t caused much controversy.

Then Gamestop happened.

A twist you couldn’t make up.

Remember Melvin Capital? (The fund that had gone short on Gamestop)

Melvin was in significant trouble, and who stepped up to help? You guessed it. Citadel. The firm that r/wallstreetbets had been fighting was saved by the firm making money from the r/wallstreetbets traders all along. 

It may have been a rational decision by Citadel to invest in a fund that historically had done well but was a victim of circumstance, but it didn't look like that.  It looked like Wall Street was working together. 

This is where the story crossed over and captured the imagination of the entire world. Regardless of your political affiliation, nearly everyone saw this as the evils of Wall Street.  

Wall St vs Main St.

The outrage was compounded by commentators and C.E.O.s on mainstream business news (like CNBC) calling what r/wallstreetbets did "market manipulation," and regulators should introduce further regulation.  

Wall Street never calls for regulation; in fact, it spends billions pushing for the opposite to happen.  Regulation typically benefits incumbents far more than the person on the street.  These comments play into a sense of unfairness, where Wall Street can "get away with market manipulation," but if main-street tries to fight back, they call for regulation.

Perhaps the soberest take on the risk to main-street was by the Raymond James C.E.O., who noted that while main-street can win when a price goes up significantly, they're less able to absorb shocks when the price goes down. It's with this logic that after the Great Depression, the current system of regulation was introduced. In effect, only those who can afford to lose their capital had been allowed to take risky bets.

On the one hand, you have consumer protection from significant potential losses. On the other, you have only the rich able to get richer in the financial markets. It's a hard line to balance, which was a reality until Robinhood introduced free options trading.

My take

Is it market manipulation? The obvious answer is yes. Redditors are colluding to raise the price of a security. The technical answer is no. Under section 230, both Reddit and Redditors are protected by free speech. What the Redditors did is a symptom of a bigger problem.

The world is angry because we financialized the economy and sold out the middle class.

The populism we have seen in politics comes from the anger of wealth inequality. That wealth inequality is driven by an economic policy that targets low inflation and rising asset prices. The anger also comes from Wall Street's unfairness in getting a bailout while the middle class is hollowed out.

Mainstream, neo-liberal economic policy is slowly becoming political and social vandalism. It trades short term gains (through money printing and stimulus) for long term social problems.  This is why young people prefer Bitcoin to Gold, Tesla to Ford, and Meme's to politics. When you look past how flippant "lol nothing matters is" on the surface, you have a generation of people losing trust in institutions.

Fintech alone can't fix this. Fintech abstracted the pains of the existing financial system and created a better experience. Fintech is a 1.5 technology.

Defi and Crypto are remaking financial markets with new infrastructure. It's early, and like all early infrastructure, it's messy, optimistic, and weird. Defi also offers 12% savings rates on U.S. dollars and is driven by builders' global community.

It's time for policy to catch up.  

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4 Fintechs ??

1. Sivo - Risk scoring and debt funding for fintech (U.S.A)

• Debt financing is the unloved cousin of V.C. funding. Not as fashionable, but every bit a part of the furniture. The problem is, especially for fintech businesses, understanding the actual risk takes time and effort by banks. Banks see every customer as a snowflake and haven't productized their risk models. So is doing just that. As every company becomes a fintech, Sivo could be well placed for much faster and lower-cost funding.

2. Kevin - Square for Eastern Europe

• Square's offering for small merchants has proven wildly popular in the U.S. In Europe, there are several alternatives, but overwhelmingly the market is still dominated by incumbents. Kevin aims to change that by focussing on unloved (and, in my opinion, underpriced) but growing markets in Eastern Europe and expanding from there.

3. Spinwheel - Manage student debt as an API (U.S.A.)

• Everything is a fintech API. Student debt is a massive problem. Put the two things together, and you have a recipe for helping younger consumers via any experience. There are many payroll cards (e.g., Branch), Neobanks (e.g., Current), and non-banks now aiming to deliver younger consumers' financial services. Spinwheel has plenty of potential customers.

4. Creed - Auto Carbon offsetting & P.F.M. (U.K.)

• Become carbon neutral for as little as $1.50 a week. Offset all of your expenses and get all of the benefits of being better with your money over time. There's plenty of budgeting apps. There's plenty of apps that help you see your carbon impact. This is the first I've seen put those two together in a P.F.M. At last!

Things you should know ??

1. Clubhouse is fintech (kinda)

• Clubhouse, the real-time podcast with an audience app taking the world by storm (one notification at a time), announced new funding at a $1bn valuation. Clubhouse will add creators' ability to get paid, set up subscriptions, tipping, and ticket sales. It will also set up a creator grant program.
• ?? My Analysis: Clubhouse is to podcasting, what twitch was to youtube before youtube live. Imagine if twitch had embedded finance three years ago. This makes so much sense in the lockdown, boredom, creator economy.  
• ?? My Analysis: If Clubhouse offers Stir-like creator tools they have a real shot at some of the major platforms like Spotify. Creators still have to do much of the leg work to build their business. Why not bring that together.

2. Stripe has been busy

• Stripe led a $102m funding round for fast.co, the one-click checkout experience taking over Twitter and the world. It also led to an investment into check to embed payroll in other vertical SaaS systems. So while Gousto and Square offer payroll for merchants generally, the vertical SaaS for yoga studios or pizza shops cannot offer the same experience. Where Argle and Finch offer payroll data via an API, Check offers headless payroll and tax management as an API.  
• ?? My Analysis: The one-click checkout button space is getting crowded.  Fast and Shop Pay help with conversion and growing G.M.V., but I worry about a race to the bottom with the checkout button wars. Chasing G.M.V. can create the wrong behaviors.  We're in the merchant honeymoon for one-click buttons, but consumer fatigue or backlash could be coming.
• ?? My Analysis: Vertical SaaS embedded finance is a complex web and layer cake. It feels like there's space to roll all of this stuff up, and I'm not surprised. Stripe is looking at that given its core customer base.  Check is a logical extension of Stripe Treasury style offerings.

3. Nubank is quietly the worlds most successful Neobank

• Nubank raised $400m at a $25bn valuation (that's not far off Stripe's last major valuation). Nubank came into a market that had very little in the way of truly digital offerings, where banks competed for the affluent customer base.  
• ?? My Analysis: Part of why Nubank is doing so well is that the Brazilian market was so unbelievably broken for the mass market.  Inflation is high, customer service was shocking, and lending APY rates had been staggeringly high.  
• ?? My Analysis: Nubank's execution has also been exceptional. Most Neobanks either build a great brand or build a lending business. Nubank has done both. Combine this with a low C.A.C., a 100% digital experience, and a market where interest rates allow for profitable lending if you can build the right models and you have a recipe for success.  

4. Plaid does direct deposit switching

• Plaid Deposit Switch makes it faster / easier for users to change the destination of their paychecks. It works by connecting to the payroll or employer account and creating instant funding. It won't work with every employer or payroll service but is still in beta.
• ?? My Analysis: The dirty secret of Neobanks has been they're usually a second account. One-click to switch where your paycheck goes makes a ton of sense.  We may look back on this product as the beginning of the end of it being hard to switch banks.If Plaid can make it easy to change auto-pay and recurring payments, it would be something.

Good Reads ??

1. Fintech & the creator economy (a16z)

• Fintech is now purpose-built for creator communites. Stir builds financial tools especially for creators (like revenue splits for collaborations). a16z compares Neo banks to commodity products (get paid early, cash advances, savings).
• Brands like Step, Yotta, and Current are appealing to Gen Z.  Gen Z's aspirations is less Rolex, and more F.I.R.E. Creators aren't there to help you do marketing. Creators and their audience are a part of the product.  
• ?? My Analysis: My co-founder Jason Bates (fmr Monzo CCO) always talks about the difference between commodity products & digital services.  Going deeper into the niche problem space of creators and their audience is how you add more value. Differentiation is not about what % APY you have; it's about how many adjacent problems you can solve.  

2. Walmarts fintech Teardown (Jason Mikula) 

• Walmart partnered with A-list V.C. firm Ribbit to create a fintech. Walmart has had many attempts, including a loan charter and Walmart Money card with Green Dot.  
• The Moneycard appears to be a Walmart logo on a Greendot product. AMEX Bluebird, a prepaid debit card aimed at low-income segments. Partnerships with Capital One (with 5% in-store cashback).  
• All of these partnerships seem to have failed to deliver a significant benefit for Walmart to date beyond historic "cobrand" and affinity style products. With a lot of false starts, maybe Ribbit will help this product cut through?
• ?? My Analysis: Compare this with the aspirational brand of Step.  The Walmart brand doesn't scream premium. Walmarts previous efforts come across like a card for poor people.  It will be interesting to see if Ribbit can help Walmart go in another direction. 
• ?? My Analysis: Ribbit is an incredible V.C., but handling the complexities of large corporate decision making is an art that I'm not sure most V.C.s are ready for. (I know this cool challenger consultancy who could help, though ;).

3. The value chain of the open Metaverse (PackyM)

• The Metaverse is the Ready Player One world made real, where all games and media exist in an open and connected way, like how the internet moved from networks to the internet, but with media.  Packy talks about how Web3 and decentralized finance bring an economy to this virtual world.  
• If Web 1.0 was homepages and email, web 2.0 is social and platforms, web 3.0 is a world without platforms extracting value. Non Fungible Tokens (N.F.T.s), create a way to have digital scarcity on the internet. 
• ?? My Analysis: Digital scarcity matters. Historically if I sent you a word document, now you had a copy, and I had a copy. But if I send you a Bitcoin, you now have that Bitcoin, and I no longer do. This means you can have limited edition digital content, art, or even 20 second N.B.A. moments that only you and ten other people can have at one time.  Interoperable digital worlds need interoperable economies.
• ?? My Analysis: The Metaverse and the Defi world are incredibly early, confusing, and hard to use for most people. But the same smart money that bet on web 2.0 15 years ago is betting on web 3.0 now.

Tweets of the week ??

That’s all folks ??