Fintech ?? Food - Stripes difficult teenage years

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Hey Fintech Nerds ??

How is it February already?

It’s so exciting to see a UK-based Fintech company like Monzo regain its mojo. 2.5x revenue and the path to profitability is the good news we needed in a cold winter for Fintech. And while we’re not out of the woods with recession risk (it could get worse before it gets better), there are so many lessons to learn from the phase of the market we’re in.

Fintech Spring is coming.

So let’s get to it! Here's this week's Brainfood in summary

???Rant: Stripe’s difficult teenage phase. The Rant this week was one I agonized over. I’ve always said when asked that Stripe was my favorite Fintech company, but lately, it’s felt a bit “me too” in its product launches. I don’t think that’s a bad thing, and I think it’s an opportunity for growth in the next phase of life.

?? 4 Fintech Companies:

1. Keyzy ?- Rent-to-own (UK)
2. Blockpliance ?- Source of Funds checker
3. Panacea Financial ?- Banking by Doctors for Doctors
4. Much ?- "A plan for your paycheck."

?? Things to Know:

1. Marqeta acquires Power for $275m . Power is pitched at non-finance brands and offers an all-in-one solution from program setup to customer support and compliance. ?? Growth issuer-processors want to win at embedded finance. These companies are now selling to enterprises and need to focus on scale and reliability?without missing?the embedded finance opportunity.?
2. Monzo 2.5x'd revenue and is on the path to profitability . ?? Monzo is?still?the benchmark financial product experience.?I still show people "how Monzo does X" as a case study for a great product. It's good to be a bank in this macro environment. FT journalists used to joke that Monzo was the bank that didn't want to be a bank (and lend). That's changing, and they're now benefiting from their balance sheet. The moral of the story is it's hard to become a digital?bank, but the path to making it is extending into SMBs and lending

?? Good Read:?Crypto Money Laundering in 2022 by Chainalysis . Financial Crime rose by 68% in the past year, driven mainly by hacks and over half off-ramped via centralized exchanges. ?? Despite the scary headline, law enforcement has proven much more effective at seizing Crypto funds laundered than TradFi, with more than half recovered. Compare this to TradFi, where less than 1% is recovered!

Weekly Rant ??

Stripe's difficult teenage phase

Stripe was once one of the most valuable private companies in the world, the benchmark in how to do products and?the?case study in how Fintech is disrupting financial services. Stripe was the candidate to become a "Big Tech" with an enterprise value alongside Google or Meta.

Today it is valued lower, looking for funding, canceling projects, and laying off staff.

What happened?

Stripe became a teenager.

Founded in 2010, Stripe is now 13 years old and facing a world that is more complex than the one it experienced as a youngster. Like all teenagers, it’s forging a new identity as a grown-up and finding its way.

Now several things are happening to it at once:

1. Stripe grew up with its customers and could do no wrong in its early years
2. Market conditions and its customers changed
3. Stripe's growth is now from enterprise customers, a different beast compressing margins and forcing them to adapt.
4. Tech debt is rumoured to be mounting as the company begins to age
5. Geographic expansion is hard, creating cost and complexity.
6. Product line expansion is hard, and not everything has been as successful as their core business because "Stripe did it."
7. M&A hasn't been a driver of growth in the way it was for Google or Meta

In this Rant, I want to unpack all of those and pontificate wildly about what Stripe could do next.

I should point out before I do this is incredibly easy to do when I don't have to wrestle with the complexity of a business with billions in revenue and thousands of employees. I have the utmost respect for the?team in the arena .

Stripe's growth phase ??

Stripe was (and perhaps still is) the default payment acceptance product used by developers and builders in the early stage of a project or business. Their simple pricing, clean APIs, and ability to hide complexity from customers are exceptional.?

Many have written about Stripe's history, and I won't try to do that all here. Instead, I'll point you to?APIs all the way down by PackyM ?and?Stripe thinking like a civilization ?as required reading.?

But TL;DR, Stripe's core product is payment acceptance, and around that, it has built a series of other solutions (checkout, billing, company formation), all with the mission to "grow the GDP of the internet." The idea being if commerce on the internet grows, so will Stripe.

Assuming you are familiar with Stripe, it's worth recounting why everyone in tech seems so obsessed with them.?

Stripe is the developers-first payments company that grew with its customers by fixing broken payments infrastructure with taste and panache.

1. Stripe is a canonical developer-first company.?The first insight is that pre-Stripe, accepting payments online meant becoming a "merchant of record" or using PayPal's branded experience. Becoming a merchant of record is a complex and slow process often only done by large retailers. And, back then, PayPal wasn't as developer friendly as it is today (since its acquisition of Braintree).

Pre-Stripe engineers in payments were "back office," not the customer.

Stripe reversed that and put engineers front and center.

2. That grew with its customers.?Stripe didn't sell to companies' finance teams; it lets people pay on the internet with 9 lines of code. This approach allowed them to win high-growth tech companies as clients, many of whom are now household names like DoorDash and Etsy.

3. By fixing irrational and broken payment infrastructure.?Payments are easy;?edge cases are hard.?

Everything in payments is edge cases.?

Most people build a payments business to move money without realizing that they will have to battle fraud, money laundering, regulation, chargebacks, and banks with systems that randomly break.?

For example, payment systems use a standard file format (e.g., ISO8583), and this standard should be interoperable. Except it isn't. Every bank has implemented it differently, meaning Wells Fargo might?only accept it if you have a field filled but not on a full moon.?

Banks and other payment players will sometimes reject a payment because there's an error or their system is coded poorly. What worked yesterday doesn't work today, and to a developer, it's not obvious why. Stripe would quietly fix these quirks of the payment system without developers noticing by obsessing over detail.?

Operators in payments call this "building waterfalls." If the first attempt didn't work, next try another bank, and if that didn't work, then try the next one. And so on. This approach not only reduces the amount of work a developer has to do, but it also reduces their ongoing maintenance. As PackyM put it, Stripe became the payments team you hire via an API.

The payments industry pre-Stripe just accepted these issues because, as experts in the complexity, "that's just the way it is" becomes a cognitive bug. In 2010, Paul Graham called this "schlep blindness " in a classic blog.

4. With taste and panache.?Some of the one-liners are infuriatingly brilliant.

The company's mission is to "grow the GDP of the internet." Listening to either of the founding Collison brothers speak is an exercise in pausing, making notes, pressing play, and repeating for me.

(In fact, I started Brainfood after a podcast binge featuring Patrick Collison in 2020 to capture the notes. True story)

I think it was Bryne Hobart who once said of Stripe, "it takes a lot of effort to make this feel effortless," and that's spot on. That's why techies love it. But then product people and designers always talk about how Stripe's execution has a sense of taste and quality.?Like any high-quality physical item, people who know what they’re looking for can feel that effort when interacting with Stripe products.

If tech had a north star, "emotional favorite," in 2019, it was Stripe (and I'm on record saying they've been my favorite for those reasons, so yes, I'm biased like some weird sports fan).

But success hides bugs.?In your prime, you can do no wrong.

In a market with cheap funding, revenue growth, and so much?love, you could argue that Stripe was heading into "The Fall" ?stage of the company lifecycle.?

When people begin to age, the initial signs aren't apparent in their actions or bodies. Aging starts in their minds with subtle changes in attitude, goals, and outlook on life. This is also true for companies. When an organization starts to age, its leaders' attitudes, outlook, and behaviors are the first place the symptoms appear.

The leaders of The Fall companies are starting to feel content and somewhat complacent. This attitude has been developing for some time. The company is strong, but it is starting to lose flexibility.

I wouldn't dare accuse?anyone?of complacency. But the point here is it's a byproduct of aging and success.?

Could that have happened to the mighty Stripe? Maybe.

Market conditions ??

A year ago, Stripe raised $95bn, bringing it close to the top 20 global banks and headed toward the rare heights of Visa and Mastercard by market cap. In 2021 companies rushed to the exit as valuations hit all-time highs, but Stripe didn't. Since then, the market has crashed and has not been kind to Fintech stocks like Robinhood.?

They missed the IPO window.?

Stripe doesn't have a cash or runway issue (far from it, it had $12bn of revenue and was EBITDA profitable in 2021), so why is it looking for funding?

There are reports Stripe is trying to raise privately at a lower (~60bn) valuation?and has told its employees it has set a?12-month timeline to go public ?if it doesn't raise again. Long-term employees with options and equity potentially face a large tax bill. But a new funding round or IPO would pay for that.

It’s a weird reason to raise, but it’s also very Stripe somehow. Stripe doesn't want a morale issue, especially amid layoffs and a need to double down on productivity.

Like many of its peers in the tech industry, Stripe may have over-hired and bloated in the hubris of the 2021 tech funding boom. Investors and the market are now looking much more for solid earnings and profitability than raw growth. In an internal letter seen by journalists Stripe also outlined the need to bring back a "grinding" culture that works longer hours or pushes to do more with less.?

Stripe's core customers in the tech industry are under cost pressure. The same sector that was Stripe's growth engine is now buying value, not just convenience. As the entire tech sector valuations plummet, they're pushing their suppliers hard on pricing. Stripe's sticker price for accepting card payments is higher than some competitors, but it always justified that with a service that?just worked?and reduced developer effort.

Now that kind of offering is increasingly table stakes.

In recent weeks Stripe announced it is now partnering much deeper with Amazon (a famously cost-obsessed business) to process payments for the e-commerce giant.?Stripe is responding to this by increasingly developing the ability to go enterprise and with product extension to create a more rounded service offering.?

But enterprise is a different beast.

Selling to an enterprise creates new challenges. ??

With clients like BMW, Apple, Walmart, and Target, Stripe can claim a meaningful presence in the enterprise segment. But enterprise is a different game entirely.

A single deal can net a massive volume of payments with a company like Amazon. The famously frugal Amazon knows this and will push for a much lower unit cost. They'll also have much broader requirements on security, legal, audits, and even?service-level agreements . The lower unit cost, plus the higher cost of serving that customer, can make the deals less profitable.

More traditional businesses born before the internet have a different culture and set of expectations to digital companies.

A sale can take 12, 18, or even 24 months from the first interaction to signature and might require a team of salespeople. Often an enterprise will put out a "request for a proposal" (RFP) and create a competitive process between multiple providers.?

The RFP will involve the sale of multiple products, describing not just how they work but the benefits and how they integrate with a prospect's existing infrastructure. The providers must provide pricing upfront and may be invited to the client site to pitch in person.

This is a very different go-to-market from "here's your code and documentation." Enterprise has historically been more of a strength for a company like Adyen, but that's not to say Stripe can't adapt. Far from it.

Enterprise buys?value, not just price.

Payments are moving from a back-office function to a strategic priority.

In the digital world,?embedded?payments drive revenue and overall company performance. Checkouts that convert better mean more revenue, fewer payments failing mean more revenue, and less fraud saves cost. Performance matters, and that's what Stripe's agonizingly thoughtful approach to building products makes them great at.

Some enterprise buyers are changing and becoming more technically sophisticated and value the quality and performance Stripe can offer for the same reasons early-stage companies do. A well-crafted payment product reduces maintenance costs and has fewer errors.?

The enterprise market may be coming to them.

And Stripe may meet them in the middle.

Stripe's "global businesses"?marketing page ?is particularly telling. It speaks to “revenue optimization,” has a case study from Ford, and describes its sales call to action as "speak to an expert." This isn’t language for developers; it’s a language for corporates.

Product extension breaks focus. ??

There's a tension in all businesses between becoming more efficient in the core business and driving growth through new products.?

And Stripe has a?lot?of products now. From company formation (Atlas), revenue dashboards, integration, tax reporting, corporate cards, debit cards, banking-as-a-service, payouts, checkouts, and even embedded carbon offsetting. It also competes with entire Fintech infrastructure categories like open banking and e-KYC.

On the surface, Stripe is all things to all people.

Reality (as always) is murkier.?

While some of these products are earlier in life, others struggle for traction. Anecdotally, I've had a few operators suggest, "nobody is issuing Stripe for issuing." Another product lead told me they signed up for a newly launched product "mostly for the PR value, but it's not very good."

The health warning here is?these are anecdotes, and they're one-sided. If you look at Stripe's issuing page, there are some fantastic logos, and everything is executed with Stripe's sense of taste and quality.

The problem with many of these products is they're "me too" offerings.

What makes many new products compelling is that?Stripe made them. Rather than the products themselves being innovative or unique in some way. Contrast that with Atlas or Climate, which were real game-changers when they launched.

Alex Johnson of Fintech Takes said it looks like "Stripe is just throwing ideas at the wall to see what sticks."?

If companies genuinely buy from Stripe just for the PR, Stripe isn't selling products. It is selling marketing. That would worry me.

It makes sense that the Collisons are reported to be casting a critical eye on products and looking at what needs culling. The Information also said that the same is now happening with large internal infrastructure projects.

If I had to debug what's happening, the engineering culture that helps tech companies grow in their early years becomes a strategic error as they age. A good friend of mine once described the curse of the engineer as "We don't need to buy this; I could build it if I just had the resources."

Stripe never struggled for resources.

But it doesn't always mean?they?should build it (or even sell it).

I think, on some level, the company gets that (they're not trying to launch BNPL, for instance), and a lot of what they launched had a good degree of customer demand before they did it. But the point remains. Sometimes?not doing something?is the right strategic choice.

Tech debt can happen even in "tech companies." ?? ??

Innovating in a scaled business is hard, no matter how high-tech.?

The core infrastructure of these businesses is much more modern than a bank, but it's also starting to show its age. I spoke to one engineering lead of another Fintech company founded around the same time as Stripe, who explained the challenge facing companies of that vintage.?

In the ~2010 time frame, the infrastructure and tooling engineers take for granted today didn't exist. Some companies built an infrastructure for Microservices, and another even built a GitHub equivalent. I don't know if Stripe has?these particular issues?or something else.?

However.

The Information ?reported Stripe did spend a significant amount on a project to refactor the internal core code base. It later scrapped the project for not achieving results in a sensible budget or timeframe. That kind of thing always happens in a big bank, but it shouldn't happen at a tech company.

This project is an example of where engineering culture clashes with the complexity of operating at scale. While the engineer says, "we can build it," reality bites back, "not without handling this laundry list of edge cases first."

Even with the giga-brained Collisions at the helm and an incredibly high talent bar, edge cases are hard, and getting older sucks.

Going global in payments is myth. ??

Most "global" companies aren't global.

Email is truly global. It's a protocol; it's the same everywhere.

Visa isn't global.

With 2 billion cardholders and ~250m merchants, Visa is accepted in ~197 countries, but in parts of India, Africa, and Asia, you need another payment method to function.?

Stripe's marketing says they can accept payments from 195 countries and are available to businesses in 47. But the reality is Stripe has a limited presence in LATAM, APAC, and the middle east. In countries like India, many local competitors support a much wider array of payment types.

Stripe isn't the monster you're used to outside its Atlantic hub of the US and EU. That's probably not a bad thing (those are big markets), but if Stripe is going to have the enterprise value of Google or Meta, then it needs more market access.

Perhaps the answer isn't just building Stripe everywhere.

The M&A hasn't driven step-change growth. ??

Where's the M&A?

Google and Meta are both case studies for well-timed M&A. Google acquired Youtube and Maps, and Meta may have made two of the greatest acquisitions of all time in Whatsapp and Instagram. Youtube and Instagram, in particular, have become key growth engines for both companies.

At $8bn in quarterly revenue, Youtube is not only a massive business but also more than 10% of all revenue for the group. Instagram has become a critical source of revenue for Meta, who lost younger users from the core product in markets like the US, where advertising drives their revenue.?

More than revenue, both Instagram and Youtube make those businesses culturally relevant for the next generation.

Of course, this analysis is easy in retrospect. Stripe has started to acquire for geographic expansion, having bought Paystack in 2020. Paystack could be considered a "Stripe for Africa" as a very similar business externally, but under the hood, it manages local integration, payment types, and nuances differently.??

In the two years since, Stripe appears to have left Paystack alone to continue to operate the business, which is quite like how Youtube and Whatsapp were largely left alone and un-integrated for many years. It takes time to do these things well. Unlike those acquisitions, however, this is more about geographic reach than the product.

Other geographic acquisitions are the obvious next step, but at-scale Fintech payments businesses don't come cheap these days.

In terms of product, Stripe did acquire TaxJar (now Stripe Tax) and companies that help with dev tooling. But there are no signs of something they've acquired meaningfully changing their business in the next 3 to 5 years (except maybe Paystack).

One thing Stripe has demonstrated time and time again is patience.?

Stripe also does its own thing. It’s a part of the mystique and, frankly, the kind of thing not enough companies do, like investing in an alternative to college (the Lambda school) and having its own book publishing company.

Stripe is a prolific venture investor with investments as varied as Monzo in the UK, Rapyd, a cross-border payments company, and Truelayer, the European open banking company. If Stripe acquired Rapyd and Truelayer, it would become a major player in payouts and open banking.

But it doesn't have to.?

If revenue is growing, the company is profitable, and it can own a piece of potential valuable future partners, it can be patient. The bigger question is whether its investors and staff have anything like the same level of patience.

The "down round" sounds bad on paper, but it is more due to how nuts funding was in 2021 than a company lacking fundamentals.?

The tech market correction is a forcing function, bringing the best out of founders. Meta is getting more efficient, and the market loves it; Coinbase stock is up 95% this year after two rounds of layoffs.

Which made me wonder.

What might a leaner, meaner Stripe do next?

Where next? ?? ♂?

Let's assume a company that by all accounts appears to be profitable raises another $1bn or so and retains its key talent. Then it has several growth options.

1. Geographic expansion
2. Product expansion
3. Moving down the stack
4. Infrastructure upgrades

All of these options should drive the core business. Payments. At its heart, Stripe's business model is monetizing the movement of money and?usually?accepting that money on behalf of a merchant. Everything else funnels to that ultimate goal. Yes, Apple sells services and makes payments, but it does so to maintain its dominant device and ecosystem position.

Stripe adds open banking or issuing or credit because it extends what its payment clients require. But step-change next moves should drive the core business the most, rather than nibble at the edges.

1. Geography, Stripe has bets in Paystack and Rapyd, so some bets are placed. But what about India? Alongside Nigeria, India is one of the world's most well-positioned engines of growth for the next 3 decades.?

Stripe does have a presence in India, but it's a long way from dominant vs. Razorpay or PayU. Stripe's default is to continue to build and expand what it offers across all its markets, but maybe M&A is the play.

Razorpay raised at $7.5bn in 2021 (but today might go a bit cheaper). Some mixture of stock and cash would make this a monster Fintech deal that adds market presence, payment types, and a whole suite of features Stripe doesn't have. Facebook acquired Whatsapp for $19bn in 2014. Whatsapp is now the growth engine for Facebook with payments and commerce in markets like LATAM and India.?

2. Product.?It's hard to think of a product Stripe doesn't already offer. The trick here is to kill underperforming products and stop anything that feels too "me too." Stripe builds everything as an extension for its core payments offering and is often driven by customers.?

The most significant new customer segment driving volume is enterprise.

Stripe has started to build revenue optimization and enterprise features, which is a function of something bigger than a product. A shift in go-to-market. Most of the comparison sites suggest Stripe doesn't offer multiple merchant accounts. Multiple accounts and complex approval workflows are a must-have for many enterprises that want to maximize currency efficiency.

It is possible to build your way around just about anything with Stripe's APIs, but traditional enterprises might not want that.?

3.?Moving down the stack.?The move to enterprise makes me think it's time to reconsider the core innovation; Stripe shouldn't always be the merchant of record and move down the stack. This would be complicated since Stripe has deep multi-year partnerships with processors, acquirers, and banks. It's also?why?their product is often so much simpler to use than competitors.

But Stripe is already great at elegant abstraction; why shouldn't it offer multiple accounts? Perhaps more interestingly, imagine what it could do if it became an acquirer processor instead of abstracting them.

For acquirer processing, there are M&A possibilities. Companies like Moov are now full, modern de-novo acquirer processors and yet give developers and engineers ultra-modern tools to configure and build products as they see fit.

Stripe issuing is ultimately?another?middleware provider in a world full of Banking-as-a-Service platforms. But there are ultra-modern issuer processors like Lithic and Highnote who offer tons of developer flexibility to create innovative and unique products.?

4.?Infrastructure. Just as Facebook had to figure out how its ad tech played alongside Instagram and Whatsapp, if Stripe acquired companies in other Geo's or further down the stack, they'd have to stand back to understand how it all fits together.?

They'd need a clear picture of the goal and why it's the right goal. I'm questioning if the company that fixed finance by abstracting it is the right future strategy. If it is, then rebuilding a leaner, meaner Stripe in its previous business model makes sense.

If it's not, there are plenty of options.

Timing is everything ?

Stripe doesn't?have?to do anything.

But the market correction in tech could make for great timing.

If the IPO market is closed, how many great companies are out there that could be available for investment or M&A? And how does this position a very patient Stripe when the IPO market opens again in ~2 to 3 years?

And one guy pontificating on the internet shouldn't change their mind easily because they know the pressures they face far better than I do.?

But Stripe has been my "favorite" Fintech company for at least a decade for good reasons. I wouldn't bet against them doing epic things.

Just not as all things to all people.

But as the lean mean, payments machine.

ST.

h/t?Mary Ann Azevedo ?and the Information for some of the ideas in this blog post

PS. The infuriating thing about writing a weekly post is that these rants are never as fully formed as I'd want them to be; I'd love to come back to this as an essay and analysis later on if anyone wants to collab :)

4 Fintech Companies ??

1.?Keyzy ?- Rent-to-own (UK)

Keyzy acquires properties on its customers' behalf, then rents the property back to them for 3 to 7 years. The renter can buy the house at today's price at the end of the term and pays a fixed rent for the duration. The renter potentially keeps the price appreciation (if there is any). The user journey requires the application to select an available home, connect via open banking and then move in.?

???This is how rent-to-own should work.?If the user can't afford the house after the rental term, they keep the upside of house appreciation. Keyzy converts 25% of rental income into a deposit on its users' behalf. They're essentially using the house as a security to lend to renters, who pay the cost of the mortgage and potentially buy the house from them later. The downside here is in 3 years Keyzy could suddenly hold a large property portfolio and be unable to sell if the economy doesn't recover.?The renters pay a one-off ￡2,000 ($2,479) fee, so if they can get to 1k customers per month, they'd make ￡2m ($2.47m) MRR.?

2.?Blockpliance ?- Source of Funds checker

The Blockpliance API provides an instant score based on a proprietary algorithm for a given wallet address.?There's also a ledger navigator, which provides a way to visualize links between wallets and trace the source of funds.

?? There are many well-funded incumbents in this space (TRM, Chainalysis, Elliptic, etc.) who do this and a lot more. Their opportunity may be geographical and working with smaller companies that can't afford the more comprehensive solution sets.

3.?Panacea Financial ?- Banking by Doctors for Doctors

Panacea provides student loan refinancing, practice loans, working capital, and help with equipment financing or expansion. The service comes with a checking account, and a 4% APY savings offer.?

???Historically, SMB lending was one size fits nobody.?Specialist lenders emerged who would focus on a given geographic strength (e.g., farming). A doctor, vet, or dentist has no single geography, they're everywhere, and their problems are similar. Panacea is a?Primis Bank ?division (a fully FDIC-insured bank with a capital B) listed on NASDAQ and founded in 2005.?

4.?Much ?- "A plan for your paycheck."

Much is an open-banking-driven PFM where users can connect their account, create a budget, and Much creates a plan that is "based on previous spending patterns). It uses a freemium model and charges $7.99 a month to unlock bill pay, unlimited goals, and access to events.

???There are?so many?PFM apps?for Much to stand out; its automated plan based on previous spending needs to be a killer feature.?

Things to know ??

1.?Marqeta acquires Power for $275m

The all-cash deal could be worth up to $275m if milestones are hit for the Credit-Card-as-a-Service company. Power is pitched at non-finance brands and offers an all-in-one solution from program setup to customer support and compliance.?

???Power is leaning into a trend. Everyone in Fintech is trying to win at credit and lending.?Credit cards are more profitable than debit cards but are also more complex. Power is a natural extension of the modern Fintech boom.

???Growth issuer-processors want to win at embedded finance.?Issuer processing became a sleepy, almost commodity business until the ~2010 Marqeta, Galileo, and GPS wave of companies came along. They won the Fintech wave of companies (e.g., Square, Chime, Revolut), but the big new growth opportunity is embedded finance. These companies are now selling to enterprises and need to focus on scale and reliability?without missing?the embedded finance opportunity.?

???This acquisition potentially gives Marqeta a leg up at credit and embedded finance.?Once an issuer-processor goes public and has to focus on reliability, innovation, and feature velocity will take a hit. Power acquiring something like Power short circuits that. Smart M&A. I'm increasingly thinking "API first program management" is a great feature rather than a business

2.?Monzo 2.5x'd revenue and is on the path to profitability

UK digital bank Monzo* grew revenue to ￡440m ($542m), with 7m consumers and 200k business accounts. It has been cashflow positive since October 2022 and expects 2023 to be a full-year profit. Competitor Starling hit profit in July 2022 with its 3.5m consumers and a heavier focus on SMB lending. This set of results is a substantial turnaround from the "material uncertainty" it reported for its future in the 2020 annual report.?

*I have a very small crowdfunding investment in Monzo

???Monzo is?still?the benchmark financial product experience.?I still show people "how Monzo does X" as a case study for a great product. In their crowdfunding update this week, they mentioned they're #1 in user ratings for all finance apps, and I'm not surprised. The mobile UX in finance has leveled up in the past decade across incumbents and Neobanks. Still, Monzo can reasonably claim their product and "brand feel" is a USP driving 90% of customer acquisition via word of mouth. Its problem wasn't the product; it was profit. They were?too?nice.

???Monzo is benefitting from Brexit.?Most of Monzo's revenue is?interchange ?which the EU capped at 0.30% under PSD2; however post-Brexit, Visa and Mastercard increased interchange rates for cross-border transactions. Its users prefer Monzo to incumbent banks as a travel card because of its ability to act as a second account.?

???Monzo is benefitting from product extension.?350k users now subscribe, paying at least ￡5 a month for extra features, and 200k SMBs now use the service. Flex the "pay later" product is also a gentle way to enter lending and is exceptionally well executed. Starling kickstarted its path to profit by extending into SMB banking, and the UK market doesn't have many best-in-class product experiences compared to global peers (except for Starling).?

???It's good to be a bank in this macro environment.?FT journalists used to joke that Monzo was the bank that didn't want to be a bank (and lend). That's changing, and they're now benefiting from their balance sheet. Banks can monetize their deposits better and charge more for lending when interest rates are higher. Monzo is now the UK's 7th largest bank, and if they can start to peel away the monthly salary (direct deposit), they'll be a massive threat to the incumbents.?

???The moral of the story is it's hard to become a digital?bank, but the path to making it is extending into SMBs and lending. I'm pleased to see Monzo still ranks as voted the #1 startup to work at and to have gotten there with its culture and?feel?mostly intact. The sheer amount of incumbent banker sneering and schadenfreude in 2020 when Monzo struggled was toxic and hard to take. The number of CEOs and execs who looked down their noses at Monzo (at its peers) should take notes.?

???When will they IPO??Listing in the UK this year as a profitable bank might be a good idea. Wise is out there?crushing it,?and Starling appears to be shaping up for its exit, so maybe. But maybe there are better offers on the table from private markets??

Good Reads ??

1.?Crypto Money Laundering in 2022 by Chainalysis

Chainalysis estimates that $23.8bn of Crypto was laundered in 2022, a 68% increase over 2021, with roughly half being sent to centralized (regulated) exchanges. Much of the rise can be attributed to large-scale hacks, with evidence pointing to state-sponsored hacking groups in North Korea using these to fund illicit activity. Chainalysis points out that sanctions are ineffective, given North Korea is an uncooperative jurisdiction.?

Criminal account balances, however, have dropped by more than $10bn due to price volatility and "large, successful seizures by law enforcement."

???Crime is why we can't have better on and off-ramps.?All of the friction in finance comes from managing risks like money laundering. It's naive to think we will ever live in a world where?not?doing that is an option, or something users want. Moving money between fiat and Crypto is actually very simple. Doing globally in a fast, safe way and?just works?is a minefield of edge cases and regulation. Those best at managing risk can build better on and off ramps.

???Compare these numbers to TradFi.?Yes, the Crypto markets are much smaller than global financial markets, but we never hear about large successful seizures of criminal funds. The data shows the opposite (as I wrote last week ).?

???Data wins arguments.?It's still commonly believed "Crypto is all for criminals," but the data consistently shows that is not true. Chainalysis points to at least $7bn of seizures in the past two years. If $23bn was laundered, let's assume prices roughly halved to $11.5bn, leaving ~$4.5bn of illicit funds not recovered (yet), then that's 60% effective. Much better than 0.05%!

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