Issue #19: Affirm Could Be Listing Soon, Monzo Sees Losses Double And It's A Copernican Revolution In Banking

👋 Hi, FR crew. I hope you’re all keeping well during these crazy times. Also, a special shoutout to all my fellow Melbournians - please stay safe and sane during stage 4 lockdown 🙏

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Let’s start with some news from me to kick off this week’s issue of FR. Starting next week, I’ll be posting two issues of FR per week. Yep, I’ll be inking more stuff for you all to consume.

1️⃣ Weekly News

Every Monday, I’ll be sending out an industry news focused issue. It’ll cover all the significant happenings from the world of fintech from the previous week along with the usual FR analysis of why it matters. This will be a shorter newsletter designed for those just looking to consolidate their consumption of fintech news into one weekly source.

2️⃣ Fintech Deep Dives

The second weekly issue will be sent out on Wednesday, and it’ll be an analysis piece. It’ll be a deeper dive into a particular subject or topic from the world of fintech. I have a bunch of topics that are sitting on the back burner, ready for some attention. Expect more detailed coverage of topics and even the odd hot take 🙊

Also, if you think someone in your network would get value from my weekly missive feel free to share it with them by hitting the button below \(^-^)/

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🆕 Thirsty for more fintech news? In this new section, I’ll be dropping more links to fintech news that I think you’ll want to get around. Enjoy!

Apple might be thinking of putting a PoS terminal in your pocket with the purchase of Mobeewave for $100m. This week Varo officially became a bank. Aussie banks aren’t all that good at mobile banking (probably not news for my Aussie readers). Amazon takes a step in the direction of regtech with this fraud detection product for merchants (spoiler: it’s basically Stripe Radar). WhatsApp gets compliant in India. Now let’s see if they can bring a payments product to market - because Brazil didn’t go all that well. Galileo gets friendly with Plaid. Quickbook is low key getting into SME banking. Marqeta inks a deal with JPMorgan to be its virtual card issuer. Lastly, good news for all the management consultants reading this, you don’t have to have worked at a bank to start a fintech 😅

In another solid week for fintech fundraising, 27 transactions raised $430m in capital this week.

🧠 Thought Machine Raises An Additional $42m

This week cloud-native core banking player Thought Machine announced an additional $42m to their series B round of financing. This adds to the $83m they raised in March and brings the total size of the round to $125m. The round was led by Draper Esprit and included participation from Lloyds Banking Group, IQ Capital, Backed, and Playfair Capital.

🤓 My Take: Core banking might not be the sexiest fintech vertical, but over the last few years, it’s seen a massive uptick as every bank in the world moves to a cloud-based/ hybrid architecture. In fact, there probably isn’t a bank in the world that isn’t in the middle of some form of core banking “transformation project.” This has seen some fierce competition emerge in the category with players like Mambu, 10X, and FinXact taking market share away from legacy providers (e.g., SAP, Oracle, Infosys, et al.). In fact, unless you live deep in banking enterprise sales, it’s hard to appreciate how competitive this vertical is getting.

Thought Machine, which was founded by an ex-Googler, has been on a tear recently with customers like Lloyds Banking Group, Atom Bank, and Standard Chartered Bank, all implementing their core banking solution. Although it’s a vertical most don’t pay attention to, I think that will change as we seem more core banking players venture into adjacent products like Open Banking APIs.

💰 Circle Raises $25m From Digital Currency Group

Long time player in the crypto space, Circle, this week announced they’d raised $25m from the Digital Currency Group (DCG). The money is part of a deal that will see Circle partner with Genesis Global Trading (a DCG company) to grow their US-denominated stablecoin, USDC.

🤓 My Take: I know I usually don’t talk a lot about crypto in FR; however, I thought I’d take this opportunity to touch on an area of crypto that is quietly gaining more mainstream adoption.

For the uninitiated, a stablecoin is (as you’d expect from its name) a cryptocurrency that has a stable value. If you’re mildly acquainted with the world of crypto, you’ll know that one of the critiques the sector has faced is the price volatility of coins. Specifically, this is one of the more common criticisms you hear from those explaining why Bitcoin will never be mainstream.

Much of the more recent interest in stablecoins has surrounded Facebook’s involvement in Libra and numerous central banks looking at implementing their own stablecoin inspired digital currencies. However, quietly in the background, the market for stablecoins has been going gangbusters. In fact, in 2020, there was 12 billion in dollar-denominated stablecoins in circulation. Interestingly, this now represents one of the largest areas of blockchain usage and transaction volume.

Circle has been aggressively divesting its assets in non-USDC businesses to further focus on their stablecoin products. Although they are still relatively far behind rival Tether (based on market cap) Circle has been pushing more products to market and recently announced its USDC business accounts and API. It’ll be interesting to see if this extra money will help them catch up to Tether.

📉 Monzo Sees Losses Double Despite Revenue Bump

Monzo dropped their annual report last week, and the media proceeded to roast them for the increased losses they sustained during the 2020 financial year.

According to the report, their pre-tax loss for the year more than doubled as compared to the 2019 financial year - £115.4 million as compared to £50.7 million. This was despite a significant bump in revenue and customers. The increase in their overall pre-tax losses, in part, was driven by their expansion into the US, where they’ve also applied for a national bank charter.

Beyond the growing losses, the thing that caught the eye of many was the comment from the director’s report around Monzo’s future:

Due to these obstacles, the Directors recognise there are material uncertainties that cast significant doubt upon the Group’s ability to continue as a going concern. The financial statements do not contain adjustments that would result if the company was unable to continue as a going concern.

This statement very starkly put into focus the challenges many neobanks face in the current climate. Despite reports that customers are moving in droves to digital payments, the reality is that this is a tough time to be running a challenger bank. In Australia, we recently saw the closure of Wildcard, and others have struggled with capital raising during the pandemic. We’re just starting to see the impact the pandemic is having on consumer banking, and it’s likely we’ll see more neobank casualties along the way.

💳 Affirm Prepares IPO That Could Value Fintech Firm at Up to $10 Billion

After a massive week for Affirm with the announcement that they signed an exclusive tie-up with Shopify for North America, rumors abounded that they’re looking to list. According to this article, they’re working with GS to work through the listing or even potentially selling to a SPAC.

As I noted last week, BNPL is running hot at the moment. Afterpay stock is sitting at near all-time highs along with other locally listed players, ZIP and Openpay. I’m eagerly awaiting the Affirm S-1 to see how it compares. Given that Affirm started as an e-commerce BNPL solution, they’ve been positioned exceptionally well for the uptick in online purchases during COVID-19.

Also, if Affirm does go out at a $US10bn market cap, it’ll be interesting to see how the market prices Afterpay - who are likely 2x as big in terms of their footprint and priced at around $US14bn market cap.

🤔 I Don’t Think those Words Mean What You Think They Mean – Redefining Customer Convenience in the Age of Embedded Financial Services

This is an interesting piece on how banks are being challenged in a world of embedded finance. It’s well worth a read if you work at a bank and want to have some sharp comments at your next ideation session.

Notably, I think the piece highlight some important trends we’re starting to see take hold. With the rise of BaaS, banks are fast becoming the dumb ledgers where money is held but not where the relationship with customers is being built. It’s clear that most banks have already lost Gen-Z to the neobanks and BNPL players, and this is only getting exacerbated by the fact that any company can now become a fintech. As banks try to be more “customer-centric,” they’re being outmaneuvered by the nibble fintech startups who are hyper-focused on a particular segment from day one.

🏗️ The Next Generation of Fintech Infrastructure: How API Platforms are Disrupting Banking & Payments

This is an excellent piece on the state of fintech infrastructure and well worth a read.

One of the more interesting points made in this post relates to what we’re starting to see in the PayFac vertical.

In the Payment Facilitation (“PayFac”) ecosystem, two sets of winners are likely to emerge: (1) existing PayFacs (e.g., Stripe, Square) who provide payment solutions to customers below a certain size, and (2) Payments-as-a-Service (“PaaS”) companies (e.g., Finix) enabling software customers to become PayFacs themselves as they reach a scale worthy of that investment.

Like most, I’m a big fan of what Stripe has done to make taking payments online seamless. However, one of the existential threats they face is from the emerging PaaS players. Just as taking payments online was once an expensive process that was made exponentially more accessible by the likes of Stripe, Adyen, Braintree, et al., the same will likely be true over the coming years for becoming a PayFac.

Currently, it makes sense to look long and hard at becoming a PayFac at +$100m in say GMV, but that could fall dramatically in the coming years as more players like Finix enter the market. Being able to move 100bps of payments revenue to your P&L will be hard for many to ignore. Also, tied to this, I think we’re likely to see a behemoth of a payments company built in the PaaS space over the next few years.

As I’ve noted in previous issues, I think Bain Capital puts out some great content about trends in fintech. Another fund that has published some pearlers is QED. For those who haven’t heard of them, they’re a fintech-focused fund that has put money into some of the biggest names in fintech. Their portfolio includes the likes of Credit Karma, ClearScore, Nubank, SoFi, and Klarna.

So this week, I dug up a deck from QED’s managing partner, Frank Rotman (who you should follow on Twitter) to share. It’s a great read about what is broken in banking and what some of the fundamental beliefs that need to be challenged internally for incumbent banks to compete against the new wave of fintech startups. Also, I love the name of the presentation - “The Copernican Revolution in Banking.” Enjoy!

📈 You can 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 me@alantsen.com and @alantsen on the Twitters.

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