Issue #28: Banks ❤️ Mainframes, Airwallex Adds $40m To Their Series D, Open Banking In The UK Hits A New Milestone and What's Next For Marcus?

👋 Hi, FR fam. I hope you’ve all kicked off the first week of October right. It’s crazy to think we’re in the final quarter of 2020. Wild, just wild.

Let’s start this week’s issue of FR with the launch of a new challenger bank in the US.

The influencer playbook was pulled out by teen-focused challenger bank Step, who officially launched last week. They called on TikTok star, Charli D’Amelio, to help spread the word about their $100k giveaway. Apparently, after D’Amelio’s push on social media, the app climbed the Apple AppStore chart to land in at #17 in the finance category. Not too shabby.

📣 The News In Brief

Your loyalty points could be tradable soon (and no, a blockchain wasn’t required 🙊). How Square’s share price gets to $375. BitMex founders are in trouble with the CFTC. Fintechs Should Sell Financial Health, Not Financial Services. What? A fintech unicorn created by an old bank. The FDIC warns banks about the consequences of not adopting tech solutions. Charting COVID’s impact on fintech. Another example of how #EverythingIsFintech. Alibaba wants to sell your house online for you. Banks still love those mainframes 👇

📈 Notable Funding Announcements

This week fintechs globally raised a total of $522m across 26 deals.

💸 Airwallex Raises Another $40m

Last week Aussie fintech unicorn, Airwallex, added another $40m to their balance sheet. The additional funding was an extension to their $160m series D funding round. The extended round had participation from Skip Capital and Square Peg Capital.

🤓 My Take: When we talk about cross-border payments, most of us instinctively think of the consumer market for remittances. I get it. We’ve all experienced sending money to another part of the world only to find a large chunk is taken in fees and then a portion being wiped out by spread. It’s the worst.

However, in the context of international money movement, the C2C segment only forms a small chunk of the total flow of cash globally. As you might expect, the world of B2B cross-border payments is magnitudes of order larger than the consumer side of the coin.

As you can see from the table below, courtesy of our friends over at McKinsey, the B2B segment of the market carries $133t of payments and generates $149b in revenues for the facilitators of those payments.

Beyond the sheer size of the segment, what makes it even more interesting is that it’s incredibly fragmented (more so than on the consumer side) and is still dominated by incumbents banks. What this has meant for B2B customers is that they’ve generally had to endure poorly designed products that are inelegantly tied to their everyday business banking or have had to manually move money to third party Money Transfer Operators (MTOs) to try to get a better rate. If you run a company that transacts internationally, you know this is a whole mood.

It’s worth pausing here for a second. It’s easy to read this and automatically jump to ‘when disruption, tho?’ However, part of the challenge with B2B cross-border payments is that it bundles all the complexity that is fintech into one vertical. Not only do you have to deal with numerous regulators in every jurisdiction you move money to, you have to deal with local banks, you also have to deal with monolithic tech incumbents (namely, SWIFT) while serving a demanding customer segment and all on razor-thin margins.

As with all big market opportunities, it comes with its challenges. However, the multiplicative challenges associating with executing in this space mean that to the winner come the moats - and this is why we’ve seen startups like Airwallex secure the bag. Along with investors, incumbents have also been keenly watching the vertical for acquisition fodder.

For example, see the table below (again from McKinsey) for some of the M&A activity in the B2B segment that has occurred since 2018.

Now back to Airwallex. They offer ‘boardless’ accounts for businesses so they can transact internationally at what are generally better rates. As the M&A data above shows, a business that reaches scale in this sector can be incredibly valuable. So it probably comes as no surprise that Airwallex has raised $400m (from the likes of Sequoia (China), DST and Salesforce Ventures) to go after the B2B market.

As you might expect, with the size of the prize and the pace at which we’re seeing companies become global earlier in their life cycle, the SME segment of the market is growing incredibly fast (with CAGR of 5-10%). This puts startups like Airwallex and Transferwise (who also offer a very similar product) in the right spot at the right time. Now it’s just a matter of who can execute.

🖼 RallyRoad Bags $17m In Their Latest Round

Last week RallyRoad announced a $17m Series B. The round had participation from Porsche Ventures (yep, that Porsche), the Raptor Group, Global Brain and Alexis Ohanian.

🤓 My Take: Since I last wrote about the fractional ownership space back in June (see issue #12 of FR), the market has picked up even more steam. Since then we’ve seen more “IPOs” and new types of assets being fractionalised and sold to millennials hunting for alpha.

In the case of RallyRoad, they’ve now reached 200,000 users who have collectively ploughed money into 120 “IPOs” - which equates to more than $15 million worth of assets. While Masterworks, a fractional art ownership platform, has also seen an uptick in interest from those wanting own a piece of a Banksy or Warhol. According to reports, Masterwork has been adding 10,000 new users a month during the pandemic and has gone on to acquire 15 artworks for a total of $31.8 million since March (compared with five in the previous two years).

It’s easy to discount this sector as a fad (and it well might turn out to be), but it seems that at the moment there is plenty of interest in people owning a part of these rare collectibles. For example, as this Bloomberg article noted, one user of Masterworks spent more than $200,000 on shares of six artworks on the platform over the past year. It looks like a rising asset tide is lifting a bunch of ships.

Bonus: If you’re interested in learning more about RallyRoad, have a listen to this recent podcast with Rob Petrozzo, Co-Founder and CPO at Rally Road.

☝️ Things You Should Read About

💷 UK Open Banking Hits Two Million End Users

Last week the UK’s Open Banking Implementation Entity (OBIE) announced that the number of people using open banking enabled products had hit the two million mark (according to data provided by the CMA9). More interestingly, the announcement went on to note that this was up from a one million six months ago.

Depending on your vantage point, this might not seem like a lot of users interacting with Open Banking. According to this data, this would mean only ~3% of those living in the UK are using an Open Banking enabled service - after 3 years since its implementation. Which is probably well below where many had anticipated Open Banking would be at this point in its lifecycle.

To be fair, this is based on CMA9 data. So it doesn't include the challenger banks - many of whom have been native users of Open Banking for a while now. Also, it’s worth noting that some of the sexier functionality - like payment initiation - is still relatively new.

In comparison, as this Fintech Futures article points out, South Korea has hit the 20m mark in terms of subscriptions to open banking services. Although not a fair apples-to-apples comparison due to the different ways consumers in each market interact with financial services, as rightly pointed out in the piece, I think it does point to how long the road to mainstream adoption of Open Banking will be in many countries.

🏦 What’s Next For Marcus?

As most readers of this newsletter will know, Marcus has been one of the few success stories when it comes to an incumbent bank offering a new consumer-facing proposition. In a market that is littered with half-hearted efforts and embarrassing failures (RIP JPMorgan Chase’s Finn), Marcus has been an outlier. Even in the broader challenger space, it has done incredibly well. As this American Banker article notes, Marcus now has 5 million customers, which puts ahead of both Varo (2.5 million) and Current (1.5 million) and not far behind Chime (8 million).

Beyond the success of Marcus, their consumer banking aspirations have led them to partner with the likes Apple, Amazon, Walmart and JetBlue - who have all leaned on GS as their BaaS partner/liquidity provider of choice. These partnerships, along with Marcus’ success has meant they’ve been able to amass deposits in an economically efficient way. As GS’ CFO, Steven Scherr notes:

For every $10 billion in new deposits, Goldman can reduce the cost of capital by $80 million.

Last week Goldman Sachs announced that Harit Talwar, who headed up Marcus from its inception, would move into the role of chairman of Goldman's consumer business. In this great interview, Talwar shares some views on what’s next for GS’ consumer banking aspirations. Well worth a read.

🎮 🎮 Multiplayer Fintech

This piece by the team over Braid is a great take on the idea of ‘multiplayer fintech’.

For some context, the world of finance is one of the few sectors that has remained stubbornly ‘single player’. As the article points out, most of our other software tools have increasingly moved to be multiplayer; while in the world of personal finance, it has remained isolated from our other interactions.

To be fair, for the vast amount of things we do, this makes total sense. Also, talking about money still has a certain amount of stigma attached to it in many societies. So where does building a multiplayer experience make sense? Here are two examples from the article which I think hit the nail on the head:

…regular shared transactions such as a group of adults supporting their elderly parent are more complicated than they need to be. They usually involve one person collecting and tracking the payments and then sending money to the parent.

Or a creative project like a new podcast. There’s no need for a business bank account necessarily, though having one person track the expenses through their personal account is arduous. Pooling together an initial investment and then spending directly out of the pool allows for effortless tracking and transparency around exactly how much money is left in the budget.

Also, I highly recommend checking out the article on ‘Squad wealth’ that they reference in the piece.

🎧 Podcast Recommendations

Time for some 🔥 podcasts for you to add to your weekly rotation.

Investing During the Global Crisis with Alfred Chuang and Chris McCann of Race Capital → Some great content in this pod that covers more than just fintech. Also, you should check out Chris McCann’s blog for his fintech sector break downs - like this one on banking infrastructure.

Fintech for Gen Z and Millennials → Another banger from the team over at A16Z. Well worth a listen as they discuss how fintech can cut through bureaucracy, downsize student debt, and optimise a consumers’ financial futures #EverythingIsFintech.

❤️ Show Some Love For FR

📈 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 and @alantsen on the Twitters.

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