Issue #11: Pitching A Neobank GTM Strategy, Varro Raises $240m, Zip Acquires Quadpay And The Sudden Rise of CoF

👋 Hi, FR peeps. I hope you’re all keeping safe during these tumultuous times.

Before we jump into this week’s issue, just a quick reminder about the time a guy wrote a valid cheque on a fish to protest the condition of the roads outside the front of his business. Nice one, Randall!

🏊‍♀️ Challenger Banking: A Shallow Dive Into Go-To-Market-Strategies

This week I had challenger banks on the mind. After doing a deep dive into an early-stage challenger bank proposition as part of a due diligence exercise, I was reminded that several assumptions are made about what makes for a compelling proposition to investors in the vertical. So this week, I thought I’d take a shallow dive (as opposed to a deep dive 😂) into go-to-market (GTM) strategies in the vertical and why it is critical to have a differentiated approach. Also, hopefully, this helps those pitching a challenger bank proposition to differentiate their startup from the pack.

Anyone who has looked at the vertical knows the challenges in standing up a neobank are manifold. There is the question of how you’ll navigate the regulatory landscape; will you take a regulatory heavy approach (i.e., get full banking license), or will you partner with a bank, or will you start with an SVC? This, in turn, has an impact on how you architect your technical stack and who you use to do payment processing, card issuance, core banking, KYC/AML/CTF, and right down to who prints your cards. Also, it obviously, goes without saying that your GTM strategy should also inform the choices you make on the regulatory approach and the vendor stack you choose. Then there are all the other things associated with running an early-stage company like hiring (and firing), fundraising, and the list goes on.

However, bringing a challenger bank to market is no longer unchartered waters. In most jurisdictions, there is a consensus on the regulatory approach that works in bringing a challenger banking proposition to market, the vendor stack that works best in the early stages, and resulting trade-offs that you’ll face as a result of these choices. Don’t get me wrong, there are still many ways a company can innovate on the ‘plumbing’ - but the point is that you don’t need to. If you talk to the right people and ask the right questions, most of the groundwork is well understood by those who have walked the path before you. Moreover, this is becoming more commoditised by the month. Conversely, what is becoming more complicated is the GTM strategy and associated tactics - this is where I believe there is still a bunch of innovation that can occur. More importantly, this is where early-stage neos can differentiate.

If you speak to those who have successfully brought a challenger bank to market (and I’ve talked to a fair few now) and study the GTM strategies of each you’ll notice many similarities between the approaches they've taken - they’re customer-centric, they build communities, they transparently price their products and serve those who have been left behind by the incumbents. However, many founders take these as tactics - not as the shared fabric between all neobanks and why they have become a ‘thing’. To be honest, being ‘community-driven’ is not a GTM strategy, it’s table stakes.

For this piece, I don’t propose to do a teardown of every challenger bank and their GTM, but I do want to caution against the approaches that I tend to see in most decks that don’t tend to be compelling to investors.

🙅‍♂️ Don’t copy someone else’s GTM playbook and try to replicate it in another market: Once a startup has rolled out a successful playbook those tactics become table stakes (yes, everyone does give-get referrals) and more importantly these are non-differentiated - meaning you don’t stand out from what is already a crowded market. If you’re not convinced, think about this: Revolut’s GTM playbook has worked incredibly well in every market across Europe, yet in Australia, the same tactics have resulted in them being ranked the 118th most downloaded app in the finance section of the Aussie Apple App Store. Even a neobank with 10m users globally using the same playbook hasn’t been able to replicate their success in the Australian market. Differentiate, don’t replicate.

🙅‍♂️ Understand the maths and why you’ll defy the numbers: This seems obvious but is fairly consistently underestimated. Most think they’re the exception to the rule - and to be fair, you do need to be the exception to make a challenger bank work—however, the starting assumptions matter. Any investor worth their salt knows the baseline cost to serve and the industry CACs/payback periods. It matters that you can articulate how and why your approach will be less than the industry averages. To help, here’s an excellent recent piece from ARK on some baseline numbers. Having said this, there is a ton of literature out there on banking CACs.

Have an uncommon insight into your market or customer: This is harder than it sounds. Having a genuine insight into the market and customer problem tends to be where most great GTM motions start. Just like Revolut and Transferwise saw the exchange rates as a great wedge in the European market and Square’s Cash App found the underbanked in the US, a great challenger bank proposition needs to find its heretical idea before it is the orthodox. It goes without saying that testing this insight is key and determining whether it will hold - but in the early stages, a unique insight can be a big differentiator.

Over the next few weeks, I’ll be publishing more short pieces like this that dive into specific fintech vertical through an investor lens. If you enjoyed this piece, hit the ❤️ button above.

💰 Notable Funding Announcements

Globally fintech financing experienced a down week, with 24 funding announcements totalling $477m.

US challenger bank, Varro Money, this week announced a $241 million Series D round of funding. To date, they’ve raised $419.4 million.

🤓 My Take: As with most other challenger banks raising at the moment, this funding round will, in part, likely be to help them weather the economic downturn. In the case of Varro, the issue is broader given the fact they are approaching the final stages of securing their national banking charter in the US.

Having said this, Varro seems to be growing at a solid clip - even during COVID-19. According to reports, they now claim ~2 million banking and savings accounts. Further, they note account growth is up 60%, spend is up ~1.5x, and deposits are up by roughly 3.5x for H1 2020. It’ll be interesting to see how they use the capital in the coming months as the challenger banking space continues to heat up in the US.

Aussie listed buy now pay (BNPL) later player, ZIP, this week announced a ~$200m PIPE deal and the acquisition of Quadpay in a $400m all script deal.

🤓 My Take: Although I usually talk about fundraising in this section, this deal was too interesting not to add to the mix.

The capital injection is a cleverly structured private investment in public equity deal (PIPE deal) funded by US privet equity shop, Heights Capital Management. According to reports, it’s structured as $100 million in convertible notes and $100 million in warrants to be issued over a specified period. I’ve heard talk around these deals getting popular in the current climate as a quick way to inject money into a listed company - despite the potential for them to dilute existing shareholders - but this is the first one I’ve heard of being done in Australia. It’ll be interesting to see if more listed companies follow this route.

Along with the capital, ZIP also announced the all script acquisition of US BNPL player, Quadpay. The deal values Quadpay at ~$400m, which is a fair chunk of change for a 2-year-old company that has “1.2 million downloads”. Although the BNPL space has been running hot for a while here in Australia, this deal sets a high price comp for transactions going forward - which I’d be guessing many targets will be pointing to as a baseline for negotiations.

📈 Don’t forget to check out Radar, an open database of Australia's fintech ecosystem. You can find it here  📡 SideFund Radar

📧 Feel free to flick me an email if you have any exciting news you'd like me to share with the FR community. I'm and @alantsen on the Twitters.

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📰 Articles Worth Reading This Week

🏹 How Robinhood Convinced Millennials to Trade Their Way Through a Pandemic →

⚠️Warning, this is a long’ish read.

For those unfamiliar with Robinhood, this is a great read that covers the company’s journey to becoming the app that has become the stonks purchasing app de jour for millennials.

It’s been interesting to see how quickly Robinhood has become an “obvious” opportunity, with many trying to copy the commission-free trading app’s model - including most incumbent trading houses. Yet back in 2012, when Robinhood was founded, the idea that you’d offer a commission-free, mobile-only app (this particularly) for stock trading was a non-obvious idea that few believed would gain any market traction. Fast forward eight years and the critical insight that the Robinhood founders had about reducing barriers to entry (cost and immediacy of access) for casual traders has become a cult hit.

There are some excellent lessons in this story.

💳 The Rise Of Card-On-File Commerce →

If you’ve used an Uber, you know what card-on-file (CoF) refers to. It’s not new but is it’s getting a lot more attention in the US in a post-COVID-19 world as some merchants experiment with CoF payment flows.

By way of background, the US has an incredibly low level of contactless payment penetration. The data, pre-COVID, was that 38% of merchants in the US had contactless payments available (this has risen slightly post-COVID to 46% ) - compare this to Australia where contactless is available at 80% of merchants in meat space. The other thing that makes CoF attractive is that it allows for other payment modalities - including debit, which can be magnitudes of order cheaper in specific markets.

As the article points out, there is an emerging opportunity for new customer experiences that take advantage of new CoF - imagine an Uber-like experience at your local hairdresser. Although most gravitate towards the futuristic Amazon Go experience as the way this will play out for in-person commerce, the first wave of opportunities post-COVID will likely be providing the basic CoF infrastructure for high trust relationship-based businesses with repeat customers. It may sound like an obvious opportunity; however, the execution is incredibly hards as Square Wallet showed.

🦠 Covid-19 Has Scrambled Fintech's Winners & Losers. Here's The Short- & Long-Term Outlook →

The fintech landscape has shifted dramatically over the last few months, and this is a good overview from CBInsights of the potential short and longer-term impacts it could have on the industry.

One that I’d add to these is financial services infrastructure (beyond payments). Many FSI incumbents are looking at ways to accelerate their innovation/modernisation projects and are (finally) turning to fintechs to help speed things up - expect this vertical to continue to run hot this year.

🎧 Podcast Worth Listening To

This week I’ve added some podcasts episodes worth checking out.

🏦 Powering 95% of US Digital Banking with Galileo (Rebank: Banking the Future) → According to Galeleio’s CEO, 95% of US challenger banks use their infrastructure. This is an impressive stat and probably puts into perspective the $1.2b SoFi acquisition. Also, worth listening in for the discussion on Galileo Instant - some fascinating use cases are raised.

📈 Innovation Isn’t Voluntary with Jim McKelvey, Cofounder of Square (FYI - For Your Innovation) → A interesting listen for those who are keen to hear more about McKelvey’s story. Also, he drops some real nuggets about the challenges Square faced in the early days - and how they overcame them. For example, how they did absolutely nothing when Amazon entered the market 😲

🚘 The Future of Wealth Management and Self-Driving Money with Chris Hutchins (Village Global's Venture Stories) → This is probably one of the hotter topics in consumer fintech at the moment. In this episode, Chris Hitchins (who’s company, Grove, was acquired by Wealthfront) goes into a fair degree of detail how self-driving money might manifest in fintech products we use today.