Issue #15: Data Is Becoming The New Salt, Unit Economics In Lending And ASX Delays DLT Implementation By A Year
👋 Hi, FR fam. I hope you’re all staying safe.
Update: Lemonade Pops Off
Lemonade listed this week to a massive pop. In first day trading, the insurtech startup’s shares were bid up 130% by investors hungry to grab a piece of the neoinsurer. The stock ended the day trading at $67.46, which translated into a $3.7b valuation - which was well above its 2019 funding round valuation.
If you’re keen to know more about Lemonade's business model, check out my teardown of their S-1 filing.
Data Is Becoming The New Salt
This week marked an important milestone in Australia’s open banking journey with the launch of the Consumer Data Right (CDR). On 1st July, the first phase of the regime was rolled out, and Australia officially joined the EU, UK and Mexico as a jurisdiction with a regulated open banking regime. For those who have been paying attention to what’s been happening down-under, the regime is, in fact, much broader than just banking data. Over time it’ll grow to encompass energy markets, telecommunications, and possibly superannuation (for my US friends, these are 401(K) accounts).
In phase 1 of the CDR, the regulatory plumbing for data sharing to work across several industries has been built - which is no mean feat. Yes, there is still a long way to go. For example, there still isn’t a mechanism for intermediatory access, it only covers the four largest Australian banks (to be fair, that covers ~80% of the market), there are only 2 data recipients on the register on day one and write access is not even contemplated in the current roadmap. However, the foundation has been laid for a regime that will likely be highly influential in other markets as the template for not only open banking - but building an open and accessible data economy.
So what now? What are the killer use cases for open banking? Well, let’s starts with this:
“Information about money has become almost as important as money itself.”
—Walter Wriston, CEO/Chair, Citibank,
This famous quote from Wriston (which is inscribed in the lobby of New York's Library of Science, Industry, and Business) describes the transition we’ve gone through with data in financial services. For the most part, banking has been transformed into bits and bytes. However, these critical pieces of binary are locked away in vast data lakes owned by banks - not in the hands of consumers. Regimes like the CDR help release this data and turn it from being the oil of the new economy to salt.
Before the 20th century, salt was a rare commodity. Its rarety resulted in it being used as a currency, and its value has even incited protests. However, this all changed when it was synthesised and its production industrialised. Salt became cheap and abundant. The same thing is happening to banking data - it’s becoming more available and is moving from a rare commodity that a few control to being accessible to all innovators.
So what’s the killer use case? It’s the industrialisation of data and freeing it from the silos it has historically resided in. Banking data is moving from being rare to being abundant. The optimisation of its movement is now what the CDR (and like regimes) will need to focus on - an increase in velocity of movement is vital (thus intermediaries, write access, etc.). However, that will come as will the innovators ready to build products that will change how you interact with your financial world.
💰 Notable Funding Announcements
Globally fintech financing was slightly up this week, with 41 funding announcements totalling $318m.
☝️Also, worth noting that June 2020 was the most active month for fintech financing rounds since September 2019 - which was definitely a surprise to me.
🤓 My Take: This deal was one I got a bunch of inbound emails about - so clearly there is interest in what Zeller is up to.
Looking at their website and parsing the media information from the launch, it seems they’re going to be offering a full-stack solution to businesses - from payments (looks like EFTPOS terminals, to begin with) through to accounts and cards. To say this is ambitious is an understatement. To understand why I'll provide some context to the payments industry.
I'll start with a gross oversimplification of the industry; digital payments can be broken out into card-issuing and merchant acquiring. These two sides are bridged by the payment networks/schemes that sit in the middle. On the acquiring side, when a business wants to accept payments, they can work directly with a merchant acquirer (e.g., a bank that provides this) or an ISO (independent sales organisation) - who is essentially a third-party reseller. Alternatively, they could work with a Payment Facilitator (e.g., Square) - who is essentially a layer that sits on the merchant acquirer. Then there is the issuing card side, which is a whole other ball game. To simplify things, this involves working with Issuer Processors (e.g., Marqeta, Tsys, Galileo, and i2c), the schemes, and settlement banks. You’re probably starting to see the emerging complexity - these are two vastly different businesses. This is why you rarely see them being combined into one. Think about this; Square didn’t launch Square Cash till year 4 - which is a vastly simpler product as compared to a business banking account.
Having said this, to the extent you can thread the needle on making both sides work, you build several compelling strategic advantages. One distinct advantage being the transaction data from the terminals, which can allow you to price risk more accurately (think: Square Capital or Paypal Working Capital). Also, there is a view that if you offer accounts, you can convert these customers into depositors - in the long run, this should reduce the cost of capital. In Australia, there is a good comp for this in publicly listed Tyro. In Tyro’s case, they did ~$11bn in transactions last year and hold about $29m in deposits - this gives you a rough sense of the conversion ratio (HERE is a good summary of Tyro’s FY19 results for those who don’t want to read their financial statements). Also, you’d imagine having a company open a bank account with you is easiest when it’s just starting. However, Zeller has noted they’re more interested in serving the middle market - meaning they’ll be going after customers who already have a banking relationship that they’ll need to displace.
As I’ve said in previous issues, I think the SME banking space is incredibly ripe for disruption. It’s great to see more competition enter the market, and I’m looking forward to seeing what the Zeller team build.
BaaS provider, solarisBank, this week, announced a €60m series C round. The round was led by HV Holtzbrinck Ventures with participation from Vulcan Capital, Samsung Catalyst Fund, and Storm Venture, amongst others.
🤓 My Take: It’s interesting to see this round come through with all the craziness surrounding Wirecard swirling in the market. To be fair, solarisBank is a vastly different proposition. However, it’s good to see investors still willing to back BaaS providers.
One thing that stuck out to me about the round was the valuation. The reported valuation was €360m - which felt a little on the low side as compared to other rounds for BaaS providers recently. Having said this, a straightforward answer might be that it was mainly a debt-based round 🤷♂️
📰 Articles Worth Reading This Week
Lending business can be tough to do due diligence on - especially for non-specialist investors. The broad framework that I’ve found helpful is what I call the ‘holy trinity’ of factors - meaning you generally want to see (i) some sort of CAC advantage (because banks will always outspend you), (ii) a risk modeling advantage (i.e., what do you see that others don’t?) and (iii) a cost of capital advantage.
This article talks to why there needs to be some nuance in thinking through points (i) and (iii). Basically, don’t consider them in isolation. It’s an excellent read that helps better frame up the value of understanding ROE in the context of a lending business.
This probably isn’t all that surprising to those who have been keeping an eye on this ‘digital transformation’ project.
According to other reports, Computershare (the incumbent registry system used by the ASX) was seeking a two-year delay on the implementation of the new DLT system. This was in part due to what they referred to as a “lacked clarity” regarding the new DLT implementation. Some of the concerns they have raised surround the technical specifications and the fee structure of the new service.
This project feels like it’s quickly turning into the never-ending digital transformation project. Good luck, ASX!
In what feels like a rare occurrence, an incumbent bank has acquired a challenger bank. Société Générale this week announced they’d purchased Shine, a French freelancer focused challenger bank, in an all-cash deal. According to the article, the acquisition was a healthy €100 million. This isn’t a bad outcome when you take into account Shine had raised €10.8 million before the purchase. Not a fund returner, but I assume there’ll still be a nice closing dinner.
Interestingly, Shine was using Société Générale’s BaaS solution, Treezor. I’ve always thought that one of the second-order benefits of banks having a BaaS offering is market intelligence for things like acquisitions.
👮♂️ A (Brief) Thought On Regulation
I thought this might be an interesting thread to (briefly) pull on to close out this week’s issue of FR.
In the US, the Office of the Comptroller of the Currency (OCC) has been floating a new startup payments charter (to be fair, it could be broader than that). For context, in the US, if you’re looking to operate a payments business, it’s highly likely that you’ll be regulated on a state basis. For many of us from jurisdictions where federation worked the way it was meant to for FS law (i.e., it was consolidated at a Federal level), the natural reaction is that having a single Federal regime makes sense. However, this thread shows this might not, in practice, end up being the answer. It’s a super interesting read.
📈 You can check out Radar, an open database of Australia's fintech ecosystem. You can find it here → 📡 SideFund Radar
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