payments

NEOBANKS & FINTECH: Ride-hailing apps are becoming the Uber of Fintech

Steve Jobs defined a key distinction that stuck with many entrepreneurs -- is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that Fintech product is being transformed into a platform feature by non-Fintech players -- specifically ride-hailing apps like Uber, Lyft, and Grab. 

These ride-hailing giants have built their empires by making the burden of payments a truly seamless experience for their customers. Which is why the potential for them to expand into Fintech and financial services far outweighs the need for new forms of transportation -- autonomous human-carrying Uber drones or Lyft trains. The kicker being that their robust platforms and/or large customer bases create ripe cross-sell opportunities. 

Take Grab -- the $14 billion-valued ride-hailing giant that acquired Uber's Southeast Asia business last year. Since then, Grab has faced growing competition from Go-Jek -- its +$9 billion-valued rival who is backed by Google, JD.com, and others. Forcing Grab to earmark financial services as a core pillar of its strategy for regional dominance over Go-Jek and financial incumbents who are disadvantaged by the lack of financial services infrastructure and unified credit scoring. Since then, Grab has partnered with Mastercard to launch a prepaid card to target the unbanked, spun out its own financial arm -- Grab Financial Group, which brings group payments, rewards & loyalty, and insurance to its drivers and customers, and recently announced a co-branded credit card with Citi. 

Uber's initial foray into financial services was the launch of Uber Cash -- a digital wallet allowing credit to be added in advance via prepaid cards. Since then, the popular ride-hailing app has partnered with Venmo for payments, Finnish-Fintech Holvi for offering financial services access to its drivers, Flexible car-leasing startup Fair for car leasing, a credit card in partnership with Barclays for loyalty and promotions, and a recent hiring spree showing signs of a potential New York-based Fintech arm -- much like that of Grab's. One of the interesting outcomes from such an arm would be the potential for a native Uber bank account, which would help remove the ride-hailer's reliance on the existing banking system -- Card processing fees alone cost Uber $749 million in 2017 -- to get paid and pay its drivers. Such a move would see Uber partner with cheaper and more agile low-profile FDIC-insured banks such as Cross River, Green Dot, or Chime, rather than have its own charter or partner with larger institutional banks. This is likely, as US-based ride-hailing companies such as Uber and rival Lyft have come under scrutiny by lawmakers to consider their drivers as employees rather than "independent contractors". Both Uber and Lyft argue that such a move would be cripplingly expensive -- Quartz estimates the cost to be $508 million and $290 million respectively. Our question is, to what extent would native bank accounts offset these potential employee-related costs?

Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems.

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Source: Grab (via Business Insider), Grab Financial (via TheDrum), Uber (via Business Insider), Uber Credit (via Techcrunch), Uber-Lyft wage concessions (via SFChronicle)

PAYMENTS: E-Commerce sales growing at a "solid" 12.4% vs. Retail's 2%. What is driving this?

Last week was made great by the release of Mary Meeker's Internet Trends report. If you haven't seen the 2019 version yet, what are you waiting for? Time to read 334 slides in 30 minutes. The key takeaway we remember from last year was the broad digitization of commerce, with E-commerce living in the web and in our mobile apps, plus the augmentation of the physical space with embedded digital commerce. See entry 1 above. 

Ecommerce is still very much a highlight of this report. Specifically, the fact that US ecommerce sales growth is noted as being “solid”, reaching 12.4% year-on-year growth in Q1 of 2019, up from 12.1% in Q4 2018. Similarly, physical retail sales are noted as “solid”, albeit growing more conservatively at 2%. Additionally, customer acquisition costs were found to be rising to unsustainable levels.

What we found most interesting about the reported ecommerce growth in 2019, is its sources where not only from the expected channels i.e., offline sales shifting to online, or search-directed sales on ecommerce websites. Rather, Meeker’s report tells a story of retail becoming a feature that is integrated into apps and services of every kind, and ecommerce reaching new communities and demographics: (1) Social apps -- like Kakao, Line, and Instagram are increasingly integrating transaction and ecommerce features. The monetisation of features embedded in large scale attention platforms makes sense.(2) Ecommerce platforms are making delivery a focal point of their offering. Much of the friction on these platforms lies in the delivery phase of the customer's journey with either cost or time creating negative experiences. Data-driven and direct fulfilment is growing rapidly with agile and low cost third-party platforms -- such as Rappi -- helping to remove such friction points. Enabling local merchants to expand their online presence, and improve access of their ecommerce platform to customers in entirely new and traditionally inaccessible markets. (3) Online grocery formats in China are competing for consumer wallet share. Here, Meeker showcases the sheer variety of grocery retailers competing using different formats for customers to access them i.e., digital-only stores, physical stores with a native digital app, digital-only stores that leverage a franchised community of retail partners to provide the goods and deliver.

It's always good to know we were right. As our 2019 predictions state "customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date". We'll take that!

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PAYMENTS: Chinese WeChat Pay follows Alipay into Western Markets, which could mean tokenized digital finance for all

New attention platforms create the opportunity to re-negotiate market share and consumer behavior in open frontiers. Mobile commerce leverages the increasing attention spent by users in phones to design elegant and high-conversion shopping experiences for anything from clothes to food. Nowhere has this been more successful than China where such shopping and lifestyle experiences are augmented by financial services after the onboarding of a few million customers, making the experience stickier -- a great example of this is China's version of Uber called Didi Chuxing which sells insurance, loans, and wealth product to its 550 million users via its app.

We have highlighted before how eCommerce giant Alibaba's financial arm called Ant Financial has partnered with 7,000 Walgreens locations in the US on accepting Alipay. The business rationale is that Chinese tourists abroad are used to paying with QR codes on their mobile phone and do not have credit cards. This initiative would make the lives of that target audience easier. Tencent's multi-purpose messaging, social media and mobile payment app WeChat Pay seems to be following in its competitor's footsteps, announcing its plans to grow its cross-border business into Europe, in hopes of capitalising on over 16 million Chinese tourists who visit the region each year. The Chinese mobile payment app has already begun to expand its list of merchants within Europe with two of the first examples being Paris-based department store Le BHV Marais, and Schiphol Airport in Amsterdam.

But why should WeChat Pay bother with Western markets? Firstly, 32% of the transactions made by tourists abroad were with a mobile phone in 2018. Additionally, 90% of Chinese tourists admitted that the lack of merchant support in destinations abroad prevented them from using mobile payments. Therefore, growing its merchant network abroad will help boost volumes by a considerable amount. Secondly, mobile wallets pose a direct threat to card networks competing in Europe such as UnionPay, Visa, and Mastercard, who miss out on large chunks of transaction fee revenue as more consumers are enticed by WeChat Pay and Alipay's attractive fees, ease of use, and overall stickiness. In China, such benefits have culminated in 92% of consumers using either Alipay or WeChat Pay. 

Another point we love to make is that the presence of such QR-code based payment platforms would train western staff in retail locations to use QR-codes to process value transfer. Tokenized digital finance enabled by QR-coded mobile wallet platforms -- from key management to open banking to cryptocurrency -- becomes second nature to these new consumer bases. So would it be wrong to cheer these platforms on?

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Source: Autonomous NEXT Analysis (2019 Payments Report), 2018 Trends for Mobile Payment in Chinese outbound tourism (Nielsen), ChinaDaily (Article), Airport Review (Article)

INNOVATION & PAYMENTS: Divvy’s $200 million raise proves that all is not what it seems in Fintech

We love relating FinTech to the fabled analogy of six blind men describing an elephant solely on touch -- each man taking a narrow perspective to describe what is in their hands but never considering that there is more i.e., One feels a rope because he grabbed the tail, another a spear because he grabbed its tusk. As a result its easy to assume that the Fintechs involved in addressing an industry solution from their own narrow perspective, create significant barriers to entry for any additional player seeking to enter that market. In this sense, if retail banking was the elephant's trunk then who out of Starling, Monzo, or Revolut are using the best descriptor (neobank solution) for identifying it? What about enterprise expense tracking? You may recall a Fintech startup called Brex -- who provide a corporate credit card for small businesses, which consolidates spending and expenses across the entire organization and leverages existing corporate spending behavior to offer higher credit limits. i.e., attacking the problem vertical-by-vertical. Brex is often likened to another enterprise expense tracking platform called Divvy -- who recently secured a $200 million Series C funding round.

Whilst Brex takes a top-down approach to enterprise expense management, Divvy takes a bottoms up approach -- attacking the problems of: (1) limited access of corporate credit cards across an organisation due to trust, (2) enterprise expense management software being inherently complicated and manual, and (3) a single-view enterprise subscription management solution i.e., a single view of all the software/tools your business subscribes to and the status, cost, and terms thereof. Divvy does this by providing teams and individuals with access to their budgets for projects, campaigns, and day-to-day expenses, essentially providing access to slices of the firm’s credit to employees. Its product is aimed at whole companies, instead of just regular recipients of corporate cards (executives, founders, etc.). The point here is that enterprise expense tracking can be deemed a saturated market with companies like Brex offering novel and innovative solutions that would be tough to compete with. However, Divvy seems to have found such a unique way to describe the same part of the elephant as Brex, that backers forked out an additional $200 million for further exploration of it. In the end, the winner is not the company that best describes what it believes to be touching, but rather why it is even touching something in the first place i.e., addressing a customer need.

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Source: Hans Moeller Illustration, Divvy (homepage), Divvy (Brex comparison)

VIRTUAL REALITY: Enterprise applications of VR prove we are on track for a $200 billion mixed commerce market by 2025

We stand by our position that mixed reality seems to be headed more towards large, enterprise use-cases like city planning, construction, low skilled worker on-site instruction for utilities or manufacturers, and the military. Yet among young consumers, the behavior of buying digital goods in video games, and the associated monetization of content from video games using channels like eSports continues to be a powerful secular trend. Billions of revenue are generated by free games that only sell cosmetic in-game objects. See, as proof points, the fast growth of Twitch users and the $1B+ in revenue Fortnite made from microtransactions. Last week, Facebook doubled down on the former enterprise-centric use case for mixed reality -- announcing its Oculus device-management subscription for enterprise users. The subscription will cost $180 per device per year and promises "a dedicated software suite offering device setup and management tools, enterprise-grade service and support, and a new user experience customized for business use cases" (see here). Evidently, companies deploying mixed reality solutions generally see better customer retention, satisfaction and operating metrics. Take VR surgical training platform OssoVR -- who claim to have witnessed a 230% improvement in performance by surgeons training in VR. Whilst Walmart admits to VR training boosting employee confidence, retention, and overall training test scores by 10-15%. And let's never forget the VR training platform for cooks in fast-food giant KFC's Chicken Mastery program -- the nightmare-sh and BioShock-esque “escape room” replete with narration from an omnipresent, mildly demonic Colonel Sanders. Apart from giving trainees a mild post-traumatic stress disorder, the training platform (on average) reduced instruction time by 60%.

In financial services much of the framework-setting falls to a centralized function, whether that's a Chief Investment Officer creating portfolios or a more decentralised one i.e., branch or advisor office role assisting in the task of consolidating accounts, or discussing mortgage finance options. Yet realistic presence and emotional resonance, via a truly immersive experience, still matter. Facebook Reality Labs, recently announced, that it's working on this -- bringing full-body avatars to its Oculus experience. Will this allow us to emotionally connect with others in a virtual setting or merely remind us that virtual worlds have no place for such complexity? Either way it's important to note that in our latest payments report we estimated the install base for AR/VR active devices to reach 1 billion by 2025, fueling a revenue pool for mixed commerce of $200 billion at the same time. Seemingly, we are on track.

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Source: Oculus for Business, KFC Virtual Training Room (Youtube), Facebook Full body VR (via CNN)

INNOVATION & PAYMENTS: Tesla entering the autonomous vehicle "space race" does not bring us closer to a Utopian future, yet

It's difficult to ignore the utopian dream of riding shotgun in a fully autonomous vehicle whilst chuckling at the seemingly prehistoric ideas of road rage, congestion, and side-mirrors. Yet, upstarts dedicated to making this dream a reality ingest massive amounts of venture funding with little return. Take transportation-on-demand app Uber -- who recently raised $1 billion for its Advanced Technologies Group (ATG) from Softbank, Toyota, and auto-parts manufacturer Denso (here). The aim of the investment is to accelerate the development and commercialization of automated ridesharing services, especially given that the company blames the bulk of its estimated $702 million net loss this quarter on costs attributed to human drivers (here). Question is, how sophisticated the software has become since the 2018 incident in which a driverless Uber vehicle struck and killed a pedestrian? Interestingly, Alphabet-backed and Uber-rival Waymo, boasts racking up over 10 million miles worth of autonomous driving data as a hedge against such fatal incidents. Up until last week, Waymo prided itself as the only upstart to have launched a dedicated commercial driverless car service (Waymo One). Enter electric-vehicle giant Tesla -- who promised an all-electric, 1 million car fleet of self driving Tesla taxis by the end of 2020. Some, of which, will come from existing Tesla's on the road -- which will be used as autonomous taxis when their owners do not need them. This is noteworthy because Tesla has amassed over 1 billion miles worth of 'Autopilot' data, which was used to build their latest custom-designed artificial intelligence driving chip -- claimed to allow Tesla's to pilot themselves. The only missing pieces to the puzzle are (1) regulatory approval for such vehicles to legally operate and (2) "feature-complete" software to prevent any life-threatening incidents, both of which are assured to be ready for 2020 year end launch. 

Whilst there's no doubt that we have a "space race" type scenario between digital transportation upstarts: Waymo, Uber, and now Tesla -- all competing to arbitrage a phone's GPS to deliver custom mobility solutions with greater precision and experience than a human transaction can. There is concern around the impact that autonomous taxis will have on the existing infrastructure, especially what they will do in-between customers: park, go home, or drive around aimlessly. All of these have significant congestion implications. Such implications could incentivise upstarts aimed at offering an aggregated view of transportation options available to customers, such as CityMapper -- whose latest subscription offer 'Pass' -- exemplifies how to take this one step further by building an instantiated financial product on top of abstracted digital infrastructure (here). Until then we will continue to dream.

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Source: BusinessWire (Uber's Advanced Technologies Group $1 billion), Waymo, Techcrunch (Tesla Ridesharing App), Techcrunch (Uber vs. Tesla), Gizmodo (Citymapper Pass)

NEOBANKS: T-Mobile offers a bank account with all the perks

Following a soft launch in November 2018, T-Mobile has officially taken its Money checking account live for all T-Mobile customers in the US. The telecommunications company has joined forces with digital-only MobileBank who is operated by Customers Bank. Yes, you have to be a T-Mobile customer to take advantage of the account, but it does come with some competitive perks such as: 4% yield per annum on balances under $3,000, full mobile platform payment (e.g., ApplePay or GPay) support, and comes with a Mastercard. There are no minimum balance requirements and no fees to keep it open, however, because T-Mobile Money is not supported by a major bank such as BoFA, it is likely to incur ATM fees. Such perks are indicative of a focus towards a younger market who like the idea of high annual percentage yield, whilst keeping the overall account balance low due to lower incomes -- hello Goldman's Marcus. So why is this notable news? Whilst telecommunications companies offering financial services in the US is not necessarily new, with examples like 2013's "Softcard" (originally called "Isis") - a mobile payments system created from the unique partnership of Telcos -- AT&T, Verizon and T-Mobile with Financial Service companies -- Mastercard, Visa, and AMEX, which subsequently failed due to low customer adoption. We should see more resiliency from the T-Mobile Money account as MobileBank gives T-Mobile an out-of-the-box solution to offer to their 73 million strong US customer base without the need for large capital outlays or significant risk exposures to do so. However, regulatory risk is a major factor at play here, which could be financially crippling if something were to go wrong at a time when T-Mobile Money is regulated as a Financial Services Provider.

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Source: MarketingDigest (SoftCard), CookiesandClogs (Isis), T-Mobile Money

CRYPTO: Coinbase's new Visa debit card wants to assimilate cryptocurrency and fiat accounts

We still believe that the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). And in our write-up of Samsung's crypto phone gamble, we stressed that there should be no difference -- from the customer view -- in using a credit card in a digital wallet, and using a self-custodied digital asset. Well it seems the folks over at Coinbase were paying attention, as last week the crypto trading website unveiled a Visa debit card that lets users buy things with fiat money converted from cryptocurrency stored in their online Coinbase wallets. Users can take advantage of the full neobank treatment with Coinbase's app providing nifty visualisations on your spending behaviour, and security controls such as disabling the card if it gets lost or stolen. The card will only be available in the UK, with a wider European release to come later this year. UK users can expect to be charged a 1 percent transaction fee and a 1.49 percent conversion fee, totalling 2.49 percent for every transaction using the card (2.69 percent in Europe and 5.49 percent elsewhere). These fees seem high when we compare them to the C2B credit card transaction fees for US-based retail and online merchants at 2.2 percent and 2.52 percent respectively, per $100 transaction -- as outlined in our latest Payments keystone report. The big question is -- is this new? and our answer is not really. Revolut, amongst others, has offered the ability to make transactions using cryptocurrency for well over a year, however, the merchant doesn't actually receive bitcoin, rather the app does a conversion back to fiat to make payment. From a transaction standpoint, we see Coinbase as no different, as they are simply taking exchange custodied wallet holdings and converting them at the spot rate to make payments. Cryptocurrency-native transactions are difficult because the distributed ledger (Blockchain) requires each transaction be verified through network consensus before it is finalized, which for Bitcoin is 10 minutes -- imagine waiting 10 minutes for the credit card machine to print the transaction slip?. What is notable about Coinbase's card is that it helps cryptocurrency adoption by assimilating one's crypto holdings at Coinbase with their fiat holdings at a bank, promoting a better user experience than before.

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Source: Coinbase (Coinbase Card via Twitter), ComputerWorld (Coinbase Card)

PAYMENTS: Visa plays deal or no deal with the Competition and Markets Authority (CMA) over Earthport

Earlier this year we touched on the $250 million acquisition of UK-based B2B cross border payment giant Earthport by Visa. To refresh your memory, click here. The acquisition came after a drawn out pricing battle between Mastercard and Visa who are desperately seeking to harness the expanded networks of Earthport to improve their 17% and 7% respective growth rates within the cross-border segment - based on those numbers we can see why Visa won the bidding war at a $320 million offer (28% higher than the original). But such developments have recently attracted the attention of the Competitions and Markets Authority (CMA) of the UK to investigate the potential monopolistic power Visa would hold if such an acquisition were to take place. And we don't blame them, as such a network effect could see Visa receive a hearty slice of the potential +$200 billion up for grabs to companies seeking to improve cross border B2B payments, remittances, and the unbanked, as detailed in our latest payments report. Furthermore, companies like Earthport were built to create an international interbank money movement platform more efficient than Swift and cheaper than the credit rails. Giving this network back to the “Networks” makes it hard to see how anyone can beat them at their own game. 

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Source: Visa (Q1 2019 Earnings Call)

BIG TECH: Apple's Credit Card, Google's Digital Gold, and IBM's Crypto Custody show the reckoning is here

After years of existential angst from finance executives about the big tech companies entering financial services, it is time to pay the piper. Excuses like regulatory cost and complexity, strategic disinterest, and complexity of products are incrementally falling away each and every day. Across every single vertical, something is nipping at the banker's ankles. The splashiest announcement came from Apple, which launched a credit card backed by Goldman Sachs (the storied mass retail financial firm!) and transacted over the MasterCard network. You can sign up for the card directly from your phone, which integrates it into Apple Wallet and Apple Pay, and provides a 2% cash back on all transactions made with ApplePay. There are no fees on the card other than an interest rate on credit.

For Apple, this financial product is one of a thousand features within their platform. It is no more or less important than music, video, news, email, or podcasts. The presence of credit makes customers more sticky within the ecosystem, offering 3% cash back on all Apple purchases. For Goldman, this is a leapfrog into the consumer market, riding a much better recognized and respected retail brand. Finance for the wealthy is just not cool anymore in the era of Bernie Sanders and Alexandria Ocasio-Cortez.

Meanwhile in India, Google and Facebook are battling with Paytm over payments. Facebook's rumored cryptocurrency will target sending remittance over WhatsApp. Google, on the other hand, is working on a service to add a savings account to money movement. This account will be backed by custodied gold, and may include expanded wealth management products -- from mutual funds to insurance -- in the future. None of this should be surprising, as Chinese tech companies have been providing mobile search bundled with online shopping, saving, investing and payments for the last five years. These Asian companies are moving into Europe and the US, sometimes by investing in neobanks or through acquisitions. Our American tech companies are moving into Asia.

Let's round out the whole thing with IBM, the OG of American tech companies. Several young firms like BitGo, Gemini, and Kingdom Trust have all built custody for crypto assets, including a notable recent announcement from Trustology about bringing custody to the iPhone. But IBM is now moving into the space, leveraging its expertise from working on enterprise blockchain projects via Hyperledger. What's important to understand is that financial products -- including their embedded capital, credit and investment risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to hold, analyze, report on, and safekeep our money. Among the incumbents, Goldman, JP Morgan, BBVA, Santander, DBS, BlackRock, Schwab, Fidelity, NASDAQ, ICE and several others get it. So many others think it is a false alarm. Which side are you on?

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Source: Apple Card (ForbesBBC), Coindesk (Trustology iPhoneIBM), Deal Street Asia (Google Gold)

PAYMENTS: Is Digital Banking hurting the Underbanked?

Here's a conundrum. You don't have a bank account and therefore cannot set up a digital payment option. Now try ordering and paying for an Uber! This example reveals a simple truth: digital services -- and in particular digital financial services -- can be regressive (benefit the haves, hurt the have-nots). As countries like the United Kingdom, China, India and the Nordics move towards demonetization, driven by technology and policy, the social and structural implications of getting rid of cash could make things a lot worse for the most vulnerable. Based on a recent UK report linked below, lowest grade workers and the unemployed use cash 49% of the time for their purchases, while those in the highest professional occupations use cash only 39% of the time. And conversely, card use is split at 37% (low income) vs. 44% (high income).

Weird. Fintech is supposed to be a democratizing force that allows anyone, regardless of account size, to access quality financial product. Let's stick with the UK for a clean analysis. If you look at penetration of mobile devices, 85% of the populace owned a smartphone in 2017, massively up from 52% in 2012. So that means, generally speaking, most people have some payment-enabled digital hardware that they can lug around in their pocket. And yet that device is not the financial key (yet) for the unbanked and underbanked. Why? One hypothesis is to look closer at the rails on which money travels, and their interoperability.

The first is paper cash. It requires no intermediaries, at least in concept, and therefore 100% of the population is able to "self custody" a little bit of it under their bed, and use it for commerce. The second is banking. Banking intermediates the financial system, and allows for modern services to function and thrive. But it also has an onboarding cost, set by the banking industry's risk tolerance, set by the legislator and the regulator, which may be prohibitive to some share of the population. It excludes "bad risks" by design. Banking also introduces costs into moving money around, which must be covered through business activity, and often warps into unethical economic rents (i.e., overdraft fees). When we talk about mobile payments, what we are really talking about is extending the banking system into the population that has adopted mobile phones -- and this excludes unbanked mobile users. As homework, we suggest the reader think about WeChat (mobile UX, media industry intermediation, government rails) and Bitcoin (mobile UX, hardware industry intermediation, blockchain rails) as being a solution to avoiding the regressive outcome. 

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Source: Access to Cash (Report), Consultancy UK (2017 mobile penetration), Latin America's Banking Revolution (Euromoney)

PAYMENTS: Walgreens, Brex and Citymapper use financial products to make digital commerce physical

First you take a traditional physical industry, and make it digital. Walmart turns to Amazon. Taxis turn to Ubers. Next, you take the digital environment -- online shopping, expense management software, maps and navigation -- and re-instantiate it back into the physical world. This is how you get weird results like augmented commerce, where retail locations of physical stuff grow augmented reality overlays to create omni-channel data tracking for a company's AI. Take for example Walgreens rolling out Cooler Screens digital windows for its shopping venues. The monitors replace fridge doors, displaying products in an idealized state, with (potentially dynamic) digital prices prominently designed. You are interacting with an app, or maybe a website, on a door behind which lies the ice-cream you want to buy. Let's repeat that. A website is in front of you, an ice-cream is an inch behind the website, the website watches you with cameras, records your reactions, advertises things at you, and sends everything to the cloud. Enjoy your online in-store experience!

Or let's take transportation. There are the digital upstarts, arbitraging a phone's GPS to deliver mobility with greater precision than a human transaction. From Waymo, Ofo, Lyft, Uber and Lime littering our phones with icons of summonable critters, to manufacturers like Citroen creating mobile-app connected vehicles like the Ami One, transport is mobile and on-demand. So what's the next meta game? Check out CityMapper, a mere-mortal mapping application focused on beating Google and Apple at giving directions for city travel. The app is not original, but well executed. It charts out public, private and pedestrian modes of getting from here to there with time estimates, and does so locally on a device, which means no internet connection required. After acquiring a userbase for aggregated directions, they are now launching aggregated transportation through a subscription offer called Pass. This physical card costs £30 per week, and includes public transportation, bikes, and ride-sharing, with loyalty points on top. Here is an instantiated financial products that sits on top of abstracted digital infrastructure.

Another Silicon Valley favorite is fintech start-up Brex. It provides a corporate credit card for small business, which consolidates spending and expenses across the entire organization and leverages existing corporate spending behavior to offer higher credit limits. It's never been easier to give WeWork employees their own spending account, and track just how much Starbucks they drink. The interesting thing about Brex isn't that it's a card -- banks know how to issue credit to businesses, despite what the startup may tell you. The interesting thing is that the expense management software for the business owner is the primary proposition (we think), leveraging modern data aggregation into expense management and credit permissioning. The accounting industry got digitized (e.g., Wave and Quicken), and now is instantiating itself back in our physical world through a smart card and financial product. This opportunity to bridge software into the physical world with finance, and payments in particular, is an area we are are thrilled to see develop further.

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Source: Slate (Cooler Screens), Engadget (Citroen),  Techcrunch (Brex), CityMapper (Pass)

PAYMENTS: Ant Financial's $700 million for pushing into the West, which could help Square and Lightning

We're on a payments kick, so let's highlight some further developments. The first is Ant Financial -- the world's most valuable Fintech company -- spending $700 million to acquire WorldFirst, a UK paytech "startup". That's a sizeable check, but WorldFirst is a 15-year old firm with 600 employees and $10 billion of volume per year. Put another way, WorldFirst is like a B2B version of Transferwise (or Revolut if you like), eliminating FX spread and other money movement cost for cross-border payments. Compare and contrast to our JPM coin discussion above. The secular growth in global value chains (i.e., Chinese manufacturers on Western retail attention platforms) is the main driver for a business of this nature.

This is so strategic, in fact, that Amazon has a proprietary FX service for international merchants on its own ecosystem as well as another partnership with Western Union called PayCode. Remember that in a platform-first world, native economic activity between platform participants is the main vector, and this stuff (i.e., finance) is just the derivative. As another interesting permutation, Ant also is partnering with 7,000 Walgreens locations in the US on accepting Alipay. The business rationale is that Chinese tourists abroad are used to paying wth QR codes on their phone and do not have credit cards. This initiative would make the lives of that target audience easier.

It would also train American staff in retail locations to use QR codes to process value transfer. We've already discussed Amazon and European banks trying to push the West towards such methods of payments, but American consumers (other than at Starbucks) are endlessly allergic to modern mobile wallet adoption. However, once you do teach Americans to leave cards at home and use phones to pay via app, tokenized digital finance -- from key management to open banking to cryptocurrency -- becomes second nature. Put another way, a QR code on WeChat is a token for a single purchase. A QR code for Bitcoin is your public address, allowing money transfer with a very comparable user experience. Another proof-point: Square has the most popular personal finance app called Cash on iOS, and Cash will support Bitcoin off-chain money movement service called Lightning. Square has lots of point of sale devices tethered to phones running mobile software. How hard do you think it will be to let that software read Lightning invoices with QR codes?

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Source: Financial Times (Ant Financial), TechCrunch (WorldFirstWalgreens), Company Websites, Autonomous NEXT (Amazon QR Codes), Coindesk (Square and BTC Lightning), Consumer Reports (Cash App)

PAYMENTS: $3 Billion revenue video game Fortnite used for money laundering using in-game currency

Human nature does not change. We can have arcane towers of financial services and regulatory architecture, but the outcomes are a rhyming echo of our DNA. Let's start with this: Fortnite, a virtual place where 200 million people spent time playing a game in 2018, earned $3 billion for its parent company. The video streamer most popular for playing Fortnite on (essentially) TV earned $10 million for the entertainment he provided to 20 millions followers. One of his videos gathered nearly 700,000 views -- for comparison, Conan O'Brien gets about 1.3 million per night.

Fortnite makes money by selling cosmetic upgrades to players, and since they inhabit this rendered world like any other social network, our dopamine center and social pressures motivate purchases for status. Given the payments infrastructure of this game and its virtual currency (not on the blockchain!) are comparatively weak, criminals have started using in-game value for money laundering. A report from The Independent linked below finds that stolen credit card credentials are being used to purchase game currency and then cashed out at discount on eBay. Additionally, over 50,000 instances of online scams related to the game made their way to social media per month. Welcome to the Internet, everyone! We can't help but remind you that Steve Bannon (yes, that one) and Brock Pierce (EOS, Tether, Puerto Rico, etc.) once ran the largest World of Warcraft virtual money exchange.

So should we bring down the financial regulators on Epic (the maker of Fortnite) as hard as New York state came down on Bitcoin companies with the BitPay regime, freezing innovation? Should KYC/AML be required for all video games? Under the Chinese model, Tencent's "Honor of Kings" mobile game generates $2 billion in revenue per year and is under the same strict government control/license as financial products. Players are checked against a registration database to control for age and name, and (we expect) the play time data flows into a social credit score. But recent studies of KYC/AML policies persuade us otherwise. When looking at the amount of criminal proceeds actually seized by authorities based on those policies, the amount is less than 1%. The cost may not be worth the outcome.

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Source: Fortnite (IndependentSlateBitcoinist), Fortune (Streaming), Interest.co (Ron Pol on AML ineffectiveness), GamesIndustry (Tencent database), AML fines 

ONLINE BANKS: $22 Billion from Fiserv for First Data, creating a Public Banktech utility

In one of the most massive Fintech headlines in recent history, core processing company Fiserv is buying merchant acquirer First Data in a $22 billion stock deal. Much of the thinking about the combination is about scale (12,000 financial services clients plus 6 million merchant locations) and synergies ($900 million in cost, $500 million in revenue). The combination is well engineered in a spreadsheet, and has the strategic rationale of defending a competitive position by vertical consolidation -- "if we own all the Payments and Banking products, we'll touch all the clients". Some folks also mention the pressure on revenues across the industry, as Fintech start-ups create transparency and competition in the space. Consolidating business lines in such an environment makes sense, though perhaps this is an afterthought at the scale we are talking about.

There are two angles we want to consider. The first is that enabling financial technology -- i.e., the infrastructure needed to manufacture something financial -- trends towards both utility and monopoly over time. It is a utility in the sense that it should be dirt cheap, easily available, and nobody in their right mind would want to rebuild one (also note utilities are public, as in owned by the government). It is a monopoly in the sense that a single player should win the whole market, consolidate all the costs, and charge only at the margin. As technology evolves, the threat of entry by new players like Alipay and Whatsapp is almost as scary as the actual entry of such players. The infrastructure provider would be wise to compress their own margins to make entry by smarter, faster, better players unattractive. A corollary to this line of thinking is that the long tail of small banks and credit unions rent software from utilities, while firms like JP Morgan and Goldman Sachs get to hire AI PhDs from Google. 

The other lens to think about is where the innovation and associated growth happen. We recently re-discovered 2015 slides from venture firm Andreessen Horowitz, which showed how the flow of investment value in technology -- i.e., the investment returns for taking on some risk -- are happening in large part in the private, and not in the public markets. Said another way, private market valuations no longer have a meaningful ceiling (thanks to SoftBank and Tencent), and therefore private investors get to capture all the capital gains from fintech disruption. To go public merely is to monetize those private gains, whereas in the past going public meant getting capital for growth. That means we expect Payments and Banking industry innovation to stay private, and for large players like Fiserv and First Data to rent or acquire them, rather than lead and source them. 

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Source: Business Wire (Press Release), Andreessen Horowitz (Presentation on Venture), Company Websites for screens

PAYMENTS: Earthport selling to Visa for £200 million to solve cross-border payments

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One of the first big Finance bets on the Internet was payments. Fast forward 25 years, and we're still talking about payments. But let's set aside PayPal and its early penetration of eCommerce in favor of the enterprise. One such company is Earthport, founded in 1997 and focused on simplifying international money movement. Unlike the correspondent banking set-up and SWIFT, where money bounces between international banks like a plane ride with 5 layovers (wire instruction messages being the equivalent of your traveling luggage), Earthport built lots of local bank accounts across the world and centralized the counterparty. 

Twenty years later, it is in 200 markets and compliant in each regulated jurisdiction. As you know, that compliance is hard and expensive. For whom is the solution designed? Think about businesses paying international contractors, whether other SMEs along the supply chain, or remote workers. Or think about Transferwise, which rented the Earthport network to get its low-cost remittance product up and running. Impressive traction, you would say? 

Well, the market says it is only worth $40 million in revenue and $250 million in acquisition price. That is roughly 15% of the latest valuation for TransferWise at $1.6 billion. Even worse, it is a mere 1.6% of the $14 billion market cap for Ripple's cryptocurrency (and maybe unregistered security) XRP, supposed to be used for cross-border money movement. Same requirements for compliance, same underlying problem being solved, different generation of technology and entrepreneurs. While Visa is getting a neat capability, we can't help but scratch our heads at why Earthport didn't turn out to be a bigger deal.

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Source: The Block (Ripple class action), Crowdfund Insider (Earthport), Transferwise Graphic (By EdMercer - Own work, CC BY-SA 4.0), Penser (Ripple Graphic)

2019 FINTECH PREDICTION: Collision of Fintech Bundles and Pivots to New Channels

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Unicorn fintech startups like Robinhood, Acorns, Revolut, Monzo, N26, Betterment, SoFi, Lending Club and others will all converge on the same multiple financial product offering across lending, banking, payments and investments. This is driven by the need to cross-sell new revenue in order to justify high spending on customer acquisition. Large financial incumbents will be following the same bundling playbook through their mobile apps, intensifying the progress of Goldman Sachs, JP Morgan, UBS, DBS, BBVA and Santander along this axis. Tech and finance (as well as incumbents and startups) will all be pursuing the same customer-centric solution for the digital consumer. Great for the customer.

As a result, customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date. As a result, at least one unicorn will implode when the cross-sell does not materialize. Most likely this will look like a devaluation of the equity component in the capital stack, such that new money is raised to maintain profitable marginal operation, but the hundreds of millions already invested in the business are mere sunk cost.

New revolutionary entrants will use channels that are foreign to existing Fintechs and financial incumbents, like video, Twitch, Discord or AR/VR. One example would be credit-as-a-service, similar to Stripe payment-as-a-service, built into a B2B customer journey. Another would be native payment systems for digital experiences and environment. Yet another idea could be social currency within chat streams for video gamers. It will be foreign territory for many, and the key to success is correct market timing balanced with adoption.

Source: Images from Pexels, 2019 Keystone Predictions Deck

2018 FINTECH PREDICTION IN REVIEW: Augmented Commerce

Here's what we said would matter in the past year year:

Let’s go out on a limb, with that limb being a 3D rendered object in virtual reality. We think there’s a storm brewing in digital goods spilling out into our real world (think Crypto Kitties), and physical goods becoming virtual (think Ikea). Machine vision combined with Whole Foods, Amazon’s augmented reality app, and the iPhone X signals to us that a new type of commerce is emerging. Symptoms like the dominance of eSports and the popularity of sponsored SnapChat filters will only increase, and lead to new purchasing and payments experiences. Financial companies will miss this completely.

How did we do? Not so great with the timing of the theme. While we continue to think that augmented reality, machine vision and edge computing will be combined by Amazon, Alibaba and other retail tech giants into digital shopping experiences in a physical space, this certainly has not happened yet. Tests for a cashier-less shopping experience are happening, as is the gradual but certain adoption of mixed reality on iPhones and Android devices, but we have not seen a consumer tipping point. The $125 million funding of Trax by Warburg Pincus is a start.

If anything, mixed reality seems to be headed more towards large, enterprise use-cases like city planning, construction, low skilled worker on-site instruction for utilities or manufacturers, and the military. However among young consumers, the behavior of buying digital goods in video games, and the associated monetization of content from video games using channels like eSports continues to be a powerful secular trend. Billion of revenue are generated by free games that only sell cosmetic in-game objects. See as proof points the fast growth of Twitch users and the $1B+ in revenue Fortnite made from microtransactions. In addition to being trained to value imaginary objects, they are also being trained to use virtual currency issued by brands.

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Source: 2018 Keystone Predictions Deck, Trax via Bloomberg, Twitch data via SuperData/Nielsen

ONLINE BANK: Killing the Banks Softly with Plaid, Cross River, and Open Banking

A great set of symptoms this week for the theme of banking-as-a-service / open banking. To recap, due to regulations like PSD2 or plain old web-forced transparency, banking information and products are getting popped out from behind the curtain and made to compete within the foreign land of tech platforms (i.e., App stores and e-commerce). This means prices falls and economic rents go to fewer winners that have strong APIs, integrations, and a nimble balance sheet. The long tail of banks evaporates into commodity providers as their regulatory and distribution moat falls away. Maybe true, maybe just a fun story!

Symptom number one is the $100 million raise of Cross River Bank, of which 75% came from private equity firm KKR. Cross River provides the balance sheet to Affirm, Coinbase, and TransferWise. Those companies in turn are building credit-as-a-service into points of sale (think Stripe), custody and banking for digital assets (dozens of millions of users), and the destruction of international money transfer margins. Finance is correctly integrated as a product/feature within a much more meaningful and long customer journey. This means customer ownership leaves the product manufacturer and goes to the point of actual economic activity.

Symptom number two is the $250 million fundraising into Plaid, a data aggregation company, backed by Mary Meeker as her coup de grace from Kleiner Perkins. Remember Europeans, there is no PSD2 in the US, so we have to screen scrape the information out of the protesting bank hands. In the early 2000s, a number of data aggregators were built, the winners of which were Yodlee (bought for $500mm-ish by Envestnet), ByAllAccounts (bought by Morningstar), Finicity and a few others. Plaid's venture valuation of $2B+ boggles the mind, but the answer is in the product. It powers authentication and banking detail provision -- not "personal financial management" only -- for the hungry host of Silicon Valley. Any tech startup that wants your bank account and routing number goes to Plaid, not to Yodlee. Thus is built a major open financial data infrastructure for tech companies in the US. And in Europe, open banking is progressing bit by bit, with the largest incumbents opening the door to barbarians. It's a fun story.

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Source: Payments Source (Cross River), Open Works (APIs), CNBC (Plaid), Fortune (Plaid) 

PAYMENTS: Can Facebook be trusted to provide Whatsapp Payments to 200 million users in India?

Facebook's hair is on fire again. A set of company emails from around 2015 have been acquired by a UK parliamentary committee, despite being sealed by a court in the United States. The emails were on a private computer of a person of interest (Ted Kramer, CEO of Six4Three) who was traveling in the UK. The sovereign issues are interesting in themselves, as global technology companies stretch across jurisdictions to be subject to the laws of each one of them. Case in point is the US arrest of the Huawei (massive Chinese phone manufacturer) CFO in Canada as part of a feud on intellectual property and selling goods to economically sanctioned countries like Iran. So, if you're running a tech company with global impact, maybe just telecommute lest you be snatched by a regulator.

What we learned from the emails is that Facebook acts like a monopoly, using its control over APIs and data to (1) starve or (2) reward players that help cement its position at the center of the attention economy. It is ruthless in its taking and leveraging of customer data, it does so with minimal warning, and it is largely unconcerned about the social consequences unless they have negative PR implications. What else is new ? It's a successful capitalist organism following its incentive structure. But from this vantage point, let's take a look at Whatsapp in India.

Whatsapp has 200 million users in India, and like several other tech companies, wants to power payments to this population. It has formally written to the Reserve Bank of India to get permission. Why do we think India is a better target for tech company wallets than the West? A few reasons. The first is the large percentage of the population that is unbanked, and therefore not served by a financial incumbent, but served by a chat app. The second is the cost of customer acquisition is far lower when a user is already captured, vs. when you have to convert them cold. And third, consumer preferences have not been set with "good enough" services as in the West, and China's example shows the way. A takeaway concern we have is around Aadhaar, India's digital government identity. If Facebook can't be trusted with data we permission it to store, can it be trusted to ingest the equivalent of Social Security numbers?

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Source: Guardian (Huawei arrest); Slate (on Facebook emails), CNN (Facebook), Telegraph India (Whatsapp)