All The Fintech - 10.10.19 - The start of the midgame for fintech companies

This year has been really interesting as I believe we’re starting to see the mid-game strategy of several fintech companies making their moves from mono-line product offerings to try and become end to end platforms with a variety of new product offerings. The typical high growth playbook in fintech has been identifying a differentiated product wedge, acquiring as much scale (aka user whether they be business or consumers) as quickly + efficiently as possible, and investing into newer product offerings to cross-sell. The tech multiple assumption built into these companies is partially built on the belief that they’ll be able to retain the users they’ve acquired with the initial product and convince those users to run a majority of their financial lives on the platform.

In just the past week, we’ve seen Brex launch their B2B cash account, Robinhood re-announce their high yield checking + debit product, and Credit Karma launch a high-yield savings account. In the past quarter, Stripe publicly launched their corporate and capital program, Betterment announced their high yield savings (Wealthfront did so already in Feb), and Sofi even forayed into crypto trading. In my opinion, the key difference between a true platform company vs a company with multiple products is the ability to leverage a single view of the customer to offer differentiated and unified product experiences vs silo’ed data views of the customer for each individual product offering. Each product should also contribute meaningful + high signal data back to the platform, thus creating a product feedback loop as well as platform lock-in.

For example in Brex’s case, the cash account allows them to expand their addressable market outside of companies they currently know how to underwrite for revolving credit to any business that needs a bank account - this also unlocks additional revenue streams such as durbin-exempt interchange + other financing options (Brex Capital anyone?), with the end goal of becoming the end to end platform to run a business on top of. For Robinhood, a cash management account encourages users to keep funds in the platform which ideally leads to more trade volume, more premium subscriptions, and that sweet interchange + net interest income revenue. Interestingly enough, the fee landscape in consumer brokerage is also finally shifting with 6 of the largest brokerages announcing in the past two weeks that they’re now offering zero-commision online trades, wiping a combined $20B in market cap.

Time will tell as to which initial product wedge brings in the ideal, lasting customer and which companies can successfully build out a growth platform - in B2B there’s been success in building out platforms with companies like Square (initial wedge: payment processing + merchant underwriting), Shopify (initial wedge: online storefronts), and even Wave which H&R Block picked up this year (accounting). On the consumer side, it’s still early days of the mid-game :).

On the enterprise side, there’s also been a movement of financial institutions trying to move to a platform approach driven by technology rather than a sales team. My favorite early barometer to test for data silos with any financial application is simply going through onboarding for one product (e.g. savings) and then opening another product a few days later (e.g. brokerage) to see how many data points are repeated - more often than not I have to completely re-onboard. “Disruption” of financial services can perhaps be distilled down to - can emerging fintech companies use technology to create a full-service, platform business for their users faster than large incumbents refactoring/rebuilding silo’ed products, users, and data? The honest answer is probably involves some winners and losers (and partnerships) on both sides and I’m excited to see it play out as a consumer!

Related reads:

CB Insights has a fun read on fintech startups and where they got their initial users

Brendan Dickinson distilling his framework on fintech companies -

Recently, I’ve begun to think of fintech within a new framework: financial platforms, financial product manufacturers and financial infrastructure providers. Financial platforms earn a customer’s trust by solving an immediate pain point and leveraging that position to take over more of their financial life. Financial product manufacturers create and distribute new (or traditionally offline) financial products. Financial infrastructure companies build the connective tissue of a modern financial ecosystem.

Some (somewhat accurate) information on the Durbin Amendment -

All The Fintech - 8.18.19 - Apple Card playing the long game

Hi everyone! If the format looks new, it’s because I recently moved over to Substack as I was having issues with my previous newsletter app, so here’s to hoping that VC money gets put to good use :)

In other news, I finally got an invitation to apply for the Apple Card and wanted to put some quick thoughts on paper, especially as I’ve been reading a lot of other interesting takes.

Quick thoughts:

1) Mobile only signup flow - This is the first time I’ve been able to apply for a name brand credit card via mobile end to end and although the internet apparently wasn’t too impressed, I actually think Apple + Goldman have set a new standard for mobile onboarding for a financial product. Some things I noticed during the onboarding flow - no need for full social security, just a confirmation of last 4; dynamic KYC depending upon what information they were able to pull (e.g. not all users needed to take a picture of a physical ID); name, address, email already pre-filled from iCloud account; instant underwriting + provisioning of a virtual card in minutes.

2) First class mobile experience - To my knowledge, there’s actually no web interface for the card so the only way to manage payments are via the wallet or over phone if necessary. This is super interesting - a truly mobile first / only approach towards financial services. This fits into Apple’s strategy to continue to push adoption of mobile payments, but will be curious to see if Apple does end up releasing web features - maybe something built into Safari? They’re also real subtle on trying to make the Apple Card your default payment mechanism with specific call to actions + making their wallet experience first class vs everyone else. Apple + GS have built a first class product experience combing hardware, software, and plastic (I guess metal now) and I think there’s significant demand for this, particularly with subprime / near prime financial products.

3) Apple Card is to Apple as Amazon Prime is to Amazon - I don’t expect the card to be meaningful in regards to revenue for Apple for many years, rather it’s all about lock-in into the ecosystem. If users adopt the Apple Card as their primary payment mechanism, it makes it literally impossible to switch from an iPhone to any other mobile device. I wouldn’t be surprised to see a lot more tech companies attempt to accelerate their payments / fintech strategy as a result - everything becomes payments with a large number of users, unique platform, and long enough time horizon.

4) It’s not about the rewards - I’ve read a ton of tweets stating how the card isn’t that great since the cashback doesn’t compare with cards like the Chase Sapphire Reserve, Amex Platinum, etc. I think this misses the point - I would have been extremely surprised if Apple + GS immediately came out with an aggressive cashback mechanism out of the gate especially since almost everyone is eligible for the card. Cards with 2% cash back and above tend to be for people with good credit - cards such as Citi Cashback, CapOne Savor, etc all generally require a credit score of ~700+. The Apple Card has an extremely wide band of credit that they’re accepting - subprime, near prime, and prime all with different credit limits + APRs.

Since they’ve already removed most of the fees that subprime cards often view as profit centers, Apple + Goldman probably already has significant exposure trying to making profit off interchange + interest vs balancing default rates across such a wide spectrum. I wouldn’t be surprised to see the rewards structure change over a longer time for different demographics once GS is able to build out their risk curve. The first card I was ever able to get was a Discover Charge card since I had no credit history and that came with 1) no cash back, 2) a poor product experience (I still don’t get what I should be generally paying…), 3) low merchant acceptance - the Apple Card is 100x superior to anything being offered in that space.

5) Low acquisition cost - There have been some articles that state that the CAC is ~$350 per card and to be honest, I would question that data point. Apple + GS don’t need to do any direct mail, online advertising, etc - all they need to do is send a notification via your Wallet. There’s never been a financial product that has had the ability to get such wide distribution on day 1 and that’s what makes the card extremely exciting. The ability to own the experience end to end with such scale is very interesting…

6) Instant cash back moving liability off balance sheet faster - Unclaimed rewards are increasingly becoming a cause of concern for large credit card programs. For example, JPMorgan’s credit-card holders had accrued $5.8 billion in rewards they had not yet redeemed as of Q3 2018 and a lot of this is due to the product experience (as well as users stashing points for different experiences). By keeping the cash back experience simple and instant, there’s almost no reason to hoard points on the Apple Card - it’ll be interesting if there will be more tie-ins to Apple Cash to try and drive further usage of Apple’s P2P payments too.

Anyways, let me know what y’all think - if I’m totally off base, other viewpoints I missed, etc - keep the feedback coming! And look forward to the next one where I attempt to go deeper on Strong Customer Authentication aka the reason why processors and merchants are stressing out over in Europe…

All The Fintech - 8.5.19 - RBS "Free" Fintech Cash Money

Hi everyone! A couple of weeks ago, I had the chance to meet a bunch of people and companies in the UK (thanks to everyone that made connections over Twitter too) and I learned quite a bit about how different the fintech landscape is compared to the US. One of the more amusing discoveries was regulatory related - after commenting at a happy hour that there were a ton of London Tube and bus advertisements from fintech companies focused on the SME space, I learned about RBS' Remedies Fund competition that just recently closed (link).

TLDR - As part of conditions attached to the £45bn government bailout of the Royal Bank of Scotland during the 2008 crisis, RBS initially attempted to sell and spin off a portion of its SME banking business. However, plans soon fell through and an alternative agreement was put into place where RBS would contribute £775m into an Remedies Fund that would be administered by a body that's independent from the government and RBS. £425m were given out as award to help challenger banks developer their own offerings while the other £350m was put into an incentivized switching scheme to try and get up to 200k RBS business clients to switch their accounts.

On 2.2.19 - it was announced that Metro Bank, Starling, and Clearbank won the initial first three grants (£120m, £100m ,£60m respectively) while the rest of the funds were dolled out in themed pools to variety of fintech companies, with the final pool prize winners to be announced on August 19th. For all intents and purposes, these prizes represent effectively "free cash" as their is no equity or repayment terms associated (to my knowledge).

Regulators in the UK and EU seem very much incentivized to increase competition in financial services, but it seems a bit similar to the US where while they're not afraid to jump in and shake things up, details on exact technical execution start to get a bit fuzzier when deadlines approach. Putting Brexit aside, when it comes to building across the EU + UK, each market is extremely different across a wide variety of factors and does require somewhat localized approaches to each. Nevertheless, this does imply that there's ample opportunity for companies that can figure out how to effectively navigate through each market and create seamless, unified experiences, particular for B2B.

In other news - I'll probably be moving my newsletter over to substack in the next few weeks in an attempt to pressure myself to blog a bit more :) - look out in your inbox for a new one soon! I'll leave you all with a great tweet on fintech by A16Z's newest partner below.

All The Fintech - 5.31.19 - On co-branded credit cards

I have historically been a semi-loyal United flyer, mostly due to the fact that Newark is the closest airport to where I live. However, over the past few months I been flying on a few different airlines and while the experiences have all been quite varied, there’s one thing that’s been extremely consistent: the co-brand credit card signup broadcast in-flight.

Naturally, this got me thinking more about co-branded cards and exploring what are the primary business drivers. It turns out the numbers are pretty eye opening. For example, United Airlines - “in the year ended December 31, 2018, 2017 and 2016, the Company recognized, in Other operating revenue, $2.0 billion, $1.8 billion and $1.7 billion, respectively, related to the marketing, advertising, non-travel miles redeemed (net of related costs) and other travel-related benefits of the mileage revenue associated with our various partner agreements including, but not limited to, our Chase co-brand agreement.” It turns out, a big drivers for airline company profit comes not from selling tickets, but rather co-brand credit cards.

But Charley you may ask, how do companies make money in a co-brand relationship? I decided to spend most of my flight back from SF doing some more research and breaking it down into 5 main revenue drivers for most co-brand programs for card issuers (like Chase or Amex) and co-brand partners.

1) Signup Payouts

Whenever someone signups for a United MileaguePlus card with a flight attendant, United gets a healthy signup bounty from Chase, which probably explains why announcements have become so prevalent.

2) Fee Rebates

For every credit card swipe, the merchant typically has to pay interchange on that transaction with a large portion flowing to the card issuer. However, whenever someone spends with a co-brand card at the partner (for example, using Citi’s Costo card at Costo), the issuer [Citi] will issue a fee rebate for “on-us” transactions, thereby enabling the parnter [Costco] to capture a greater share of the transaction as revenue! This often leads to co-brand partners creating unique incentives to encourage more spend since they make more money off those transactions.

3) Revenue Sharing

This is where things start to get really interesting in my opinion - a lot of co-brand card deals have a rev share agreement where if the card-owner spends at other merchants, incurs interest, fees, etc a portion of that revenue will be sent to the co-brand partner! This aligns incentives for both the issuer + co-brand partner to encourage spending for all transactions, not just at the partner.

4) Advertising + Data Sharing

This is a bit indirect, but companies do put a significant dollar value on being able to advertise each other’s products and share user data between the issuer + partner. The partner also often gets aggregated data from the issuer for marketing + demographic insights and behaviors.

5) Selling Miles

Finally, this is a bit unique to travel cards (still figuring out if hotel cobranded cards work like this too…) but airlines such as United will establish a significant contract to sell MileagePlus miles to its co-branded credit card partner, Chase. This ends up being a huge other revenue line item for United from Chase! In United’s 10k, they identified the following significant revenue elements around their co-brand partnership: the air transportation element represented by the value of the mile; use of the United brand and access to MileagePlus member lists; advertising; and other travel related benefits. 

I’m really curious if there are interesting co-brand opportunities for a lot of the new fintech credit cards that are starting to hit the market. Co-brand partners have also gotten a ton of market power over the past few years and have been able to dictate the terms from the issuer - case in point, Amex losing Costco to Citi which was a huuuge deal. It’ll be interesting to see if there will continue to be other big moves with several of the big co-brand card agreements coming up!

For some more fund co-brand readings, see below.

https://fin.plaid.com/articles/what-are-co-branded-credit-cards

https://www.bloomberg.com/news/articles/2015-04-17/costco-seen-paying-almost-zero-to-accept-cards-in-citigroup-deal

https://viewfromthewing.boardingarea.com/2015/04/18/how-much-citibank-and-visa-actually-overpaid-to-win-the-costco-business-away-from-amex/

https://www.bloomberg.com/features/2015-how-amex-lost-costco/

https://www.travelweekly.com/Travel-News/Airline-News/Airlines-credit-cards-in-arms-race-to-profits

https://ir.americanexpress.com/AsReportedViewer/Index?KeyFile=27932563&Page=asreported

https://thefinancebuff.com/anatomy-co-branded-credit-card.html

All The Fintech - Neobanks - 4.12.19

The So What

2019 looks to be shaping up to be a very interesting year for fintech - particularly in regards to “neobanks” which got me thinking, what the heck is a neobank anyways? Well thankfully there’s already a wikipedia page with an attempt at a definition: “a type of direct bank that is 100% digital and reaches customers on mobile apps and personal computer platforms only.”

In 2018 - 2019, we’ve seen some big ‘unicorn’ valuations for a variety of neobanks in the US + abroad including ChimeRevolutN26, and most recently Monzo (“rumored”). So what’s the big deal? I thought a quick comparison between Chime vs Chase could be interesting…

Chime

Founded in 2013 by Chris Britt and Ryan King, launched in 2014. On Sept 2017, announced their $18MM series B with 500,000 bank accounts opened and expecting to reach $1B in transaction volume by the end of the year.

Less than a year later on June 2018, Chime announced their $70MM series Cwith a $500MM valuation with over 1MM+ opened accounts, adding >100k new bank accounts / month, $4.5B in transaction volume, and saving accounts holding about $150 million (implying an average of $150 / account) - all with just an 80 person headcount.

Less than a year later on March 2019, Chime announced their $200MM series D with a $1.5B valuation with over 3MM opened accounts, adding 200k new accounts / month - all with just a 120 person headcount.

CAC and LTV strategy aside, Chime has been able to quickly acquire users with a highly effective, lean, technology enabled team and that rate continues to accelerate. The longer term bet is that as their users continue to engage with Chime and move from underbanked, they’ll continue to transact using the debit card on larger transactions (interchange revenue), deposits under management will continue to increase (deposit revenue), and Chime will continue to offer other financial products (fee based revenue).

Chase

One of my other favorite things to do (sorta joking but not really…) is reading through investor day presentations by large FIs to get a sense of what their strategies are. Banks are unique in that because they’re so large, their development + product strategies are typically set years in advance so what’s generally stated to Wall Street gives a glimpse into the next few years’ priorities.

Chase’s investor day presentation had some really fun stats, including…

Scale

Chase banks 62mm households and 4mm SMBs, which represents ~50% of US households. Out of their total consumer base, 22mm are active on mobile (active being defined as users of all mobile platforms who have logged in within the past 90 days, which is also a very interesting way to define that KPI…). This gives Chase the largest active mobile customer base amongst US banks as well as the fastest-growing mobile banking customer base. Chase has also been #1 in new primary bank relationships in 2018 with 9% of the retail deposit market share, and has issued over 99MM debit and credit accounts.

In regards to digital channels, Chase has opened 1.5MM deposit accounts since Feb 2018 to Feb 2019 and the average deposit across all consumer accounts is $527.

TLDR

While Chase’s Community and Corporate Banking division does have a much larger and more sophisticated business with credit cards, home lending, etc - it’s still really quite impressive to see what growth a tech-first neobank such as Chime can accomplish with 120 people vs Chase at 140,000 people. There are obviously nuances and lots of questions still to be answered about long term viability and whether the growth rate is sustainable, but increasingly so it does feel as though large banks are realizing that all of these upstarts could actually affect the bottom line and the need to focus on product quality is all the more important - and makes these unicorn valuations seem a little less out there :).

Chase Key Business Drivers

Deposit growth rate at 6% CAGR

Focus on mobile engagement

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