Issue #30: Another Unicorn Is Born In India, Stripe Drops $200m in Africa To Buy Paystack And Why Apple Hasn't Replicated Alipay's Success
👋 Hi, FR fam. I hope you’re all staying safe and sane out there.
This week I thought I’d kick things off with a great Twitter thread from Frank Rotman of QED on challenger banking. I highly recommend reading the whole thread - but if you do end up skim reading it, I’d recommend checking out points 14, 15, 21, 26.
📣 The News In Brief
Are banks socialist collectives? Revolut is looking at getting a state banking charter in California. Everyone loves buying stocks - especially if they’re under $5. Oops, Klarna is in trouble for sending emails to people who weren’t their customers. Killer Mike gets bitten by the challenger bank bug. We may have hit peak challenger bank card with this woody creation. Here are 5 bank and fintech partnership ideas to generate revenue. Chase makes moves in the teen banking space. Here is part 2 of last week’s article recommendation from Redpoint Ventures on the finance stack. Also, European investors have gone from B2B curious to B2B leaning.
📈 Notable Funding Announcements
Fintech never sleeps and last week was no different, with companies globally raising a total of $621m across 25 deals.
🦄 Razorpay Becomes A Unicorn
🤓 My Take: It’s no secret that the Indian fintech market is going gangbusters. In issue #25, I discussed the growing interest in equity market investing in India - which is very much a developing story. However, the real growth segment for fintech in the country to date has been payments.
Razorpay plays in the increasingly competitive gateway space, which has become more important to many merchants in India during 2020. As you might expect, as activity in the segment has increased, so too has capital. In fact, of the now five Indian fintech unicorns, three play in the payment gateway space (Paytm, Billdesk and Razorpay). Unsurprisingly, Paytm is the dominant player in the vertical with their massive installed base across all the sectors they touch - which is a recurring theme in many Asian markets where conglomerate entities leverage their economies of scope to achieve dominant positions in the payments sector.
As you can see from the data below, players like Razorpay are still small compared to Paytm and what is becoming an increasingly legacy option in Billdesk (check out their website to see what I mean). Like in many other markets, as more digitally native companies start their lives online and others rapidly push to improve their digital presence, the market demand for more modern gateway solutions is rising.
In the case of Razorpay, they’ve brought some big Stripe energy to the market by offering a developer-centric product that is resonating with other Indian unicorn startup likes of Flipkart, Oyo, Zomato, Swiggy, and Byju - who are all customers. Beyond this, they’ve also branched out into neo banking and lending with their RazorX and Razor Capital products.
Given that FR’s readership leans heavily towards Western fintech markets, it’s worth also mentioning Stripe in the context of India since we’re talking about payment gateways.
If you were to listen to tech Twitter, you’d discount the likes of Razorpay as regional anomalies. The reality is, for most of the world, payments are incredibly regionalised, and gateways are no different.
Although rarely talked about, as it’s startup heresy, the Stripe bear case is punctuated by the fact that most of the ~7.5b people living outside the US who might go on to start businesses online are unlikely to use Stripe when they start for the simple reason that it probably isn’t available in their country - after all, stripe currently only serves 42 countries globally. For example, in India's case, it’s still only available in “preview mode.”
More broadly, this is even more likely to be the case in Asian markets where super apps dominate, and the payment channels are embedded in the app. This presents a real challenge for Stripe as it attempts to grow its reach into other geographies. However, as I discuss below, Stripe looks to be countering this through direct investments and acquisitions.
🥡 Takeaway: Don’t sleep on what’s happening in the Indian fintech space. Also, if you’re an investor, this is another great example of why asymmetric bets in the payments sector can still make a ton of sense - especially in growing markets.
🔋 Extend Announces $40m Series B Raise
🤓 My Take: Embedded finance is by far and away the hottest buzzword in fintech at the moment. However, most of the examples we see used in presentations on the topic or Medium posts tend to be very payment-centric, with few discussing other opportunities for the average merchant or SaaS company to embed financial services products into their offering.
Don’t get me wrong, an ISV adding payments to their offering (à la Mindboby) is a great way for many SaaS players to capture more of the revenue that flows through their platform. However, under-discussed are all the low hanging fruit opportunities for SaaS and e-commerce players to integrate FS offerings. Product offerings like Extend are a great example of this.
For context, Extend offers a digitally native way for the e-commerce players to offer extended warranties on their website. Think Stripe for extended warranties.
Extend’s customers include the likes of Peloton, iRobot, and Harman / JBL. In terms of the business model, the merchant collects the full price of the protection plan at the time of sale, and Extend then bills them for the cost of the premium plus a service fee. While on the backend, Extend handles the claims via their chatbot.
Although products like Extend aren’t all that sexy to talk about, the reality is that these are the types of offerings that will likely be the gateway drug for many companies as they look to explore embedded finance opportunities.
🥡 Takeaway: For all the talk of how big embedded fintech will be, it’s companies like Extended that will be the way many SaaS and e-commerce players dip their toes into the embedding finance waters.
☝️ Things You Should Read About
At first blush, this seems like an unfair comparison, and on the numbers it definitely is.
As of late 2019, Bain & Company found that only 9% of American consumers had adopted Apple Pay while 81% of Chinese consumers used Alipay.
In many ways, this outcome is a function of how the two markets have developed and that payments were a part of Alibaba’s roadmap from early on (Alipay was launched in year 4 of Alibaba’s history).
However, at their core, the strategies both companies have deployed are very similar - leverage a giant installed base of customers for distribution and monetise on transactions. Both are simple models executed in vastly different ways.
Apple attempted to use its sheer size to brute-force it’s ways into markets. In some markets, this led to pushback from banks and other FSIs. For example, in Australia, three of the four largest banks sought regulatory relief to banded together so they could collectively negotiate a deal with Apple. As you can imagine, this strange collective bargaining arrangement was denied by the local competition regulator. However, this action is indicative of how many legacy FSIs feel about having to pay the Apple vig for the use of Apple Pay (which, as the article notes, amounts to roughly 0.15%).
In contrast, the story of Alibaba’s strategy with Alipay was initially around using it to drive value for merchants. In so doing, they were able to build a strong base of merchants that accepted Alipay. As the article notes:
From 2014 to 2018, the number of merchants that accepted Alipay went from approximately 1 million to 30 million, meaning roughly 70% of all merchants in China accepted the platform.
It’ll be interesting to see how both move forward with their platforms. In the case of Alipay, I think of particular interest is how they capitalise on what has become an alternative payment rail to the schemes (amongst all their other fintech aspirations). While in the case of Apple, I’m particularly interested in seeing how they expand Apple Pay’s reach with new product offerings like Apple Cash Family.
🥡 Takeaway: Apple and Alibaba both saw the opportunity to take advantage of their size and scale to move into the payments space. However, they took vastly different approaches that have both worked exceedingly well. Again, it shows the wide range of approaches that can be taken when it comes to growing an embedded fintech offering.
Firstly, let’s start with what an amazing outcome this is for the Paystack team and the Nigerian fintech ecosystem. More broadly, if the acquisition number ends up being $200m+, this will be the largest acquisition of a Nigerian startup ever. 🎉
It’s fair to say that many of the big boys in the payments sector have had their eye on companies like Paystack for a while. In the case of Paystack, their last round of funding might have been led by Stripe (which we’ll come back) but also had participation from Visa and Tencent. Interest in the company comes on the back of Africa's amazing growth in terms of digital payments adoption. More broadly, in the region, we have seen other companies being acquired (most notably Sendwave, which was reportedly acquired for $500m earlier this year by WolrdRemit) and invested into by the incumbent payments companies as they try to keep their pulse on what’s happening in the African fintech ecosystem.
Now let’s come back to Stripe (who are getting a bit of a run in this week’s newsletter). As the article notes, Stripe has been on a bit of a tear trying to expand its footprint globally - they’ve expanded to an additional 17 countries over the last 18 months. As they’ve no doubt realised, their playbook is quickly being copied in other markets and to get a foothold in those countries they need to move faster.
In this regard, their move from global expansion to global acquisition mode makes a lot of sense. Having the war chest they have at their disposal (and I’m thinking cash plus equity in Stripe) will prove to be a powerful tool they can use to help scale globally faster. I think we’ll see them really step on the gas to get to markets where winners are starting to develop - especially across Asia and the Subcontinent.
Also, a quick request. Can more companies please create heartwarming acquisition videos like this one? 💚 💚 💚 💚
🥡 Takeaway: This is a great outcome for the Paystack team and the Nigerian fintech ecosystem. The acquisition also highlights how Stripe is changing gears and moving to acquire mode as it really tries to step on the gas with its global expansion plans. Watch out for more acquisitions by Stripe - especially in Asia and the Subcontinent.
This is a fascinating story that I think is being under-discussed.
By way of background, TD Bank has begun legal proceedings against Plaid for trademark infringement. At first blush, this probably doesn’t seem like a big deal. After all, these disputes commonly come up when a company uses another brand’s insignia on its website or product.
However, in this case, the issues go beyond this and might prove problematic for Plaid if they lose the case.
The crux of the matter is how Plaid Link serves up the log-in screen to a customer looking to allow a third-party to access their accounts. Specifically, TD Bank’s President and CEO, Greg Braca, notes in their press release on the litigation:
Plaid's intentional, unauthorized use of TD's name, trademarks and logos is deceptive. By mimicking TD's login screen, Plaid creates the false impression that consumers are engaging directly with TD Bank or entering their banking credentials into TD's secure digital and mobile app platforms or a platform authorized by TD, when that is not the case.
You can see in the gif from Plaid’s website below how this looks from a customer’s perspective.
According to the article, in response, Plaid notes that:
We were surprised by TD Bank's decision to file suit in the midst of good-faith discussions, which are still ongoing, Plaid enables consumers to connect their own bank accounts to the fintech apps they choose. Plaid is not using TD Bank's trademarks in an unfair way.
I don’t propose to discuss the merits of the case - as I really don’t know enough about US trademark law to comment. However, it seems this could present an issue for Plaid and other data aggregators, for that matter, if TD Bank were to win the case. Specifically, limiting how an aggregator can present the log in detail could impact everything from conversation rates to the trust people place in these third party providers.
I imagine Plaid’s new daddy comes in to remedy the issue, as I’m sure Visa doesn’t want its latest star acquisition embroiled in an energy-draining legal dispute.
If we give TD Bank the benefit of the doubt for a moment and assume their grievance truly comes from concern around protecting their customers, I still find the whole matter slightly concerning for the industry. Let’s hope this is settled and that it doesn’t embolden other incumbents to raise similar concerns with other data aggregators.
🥡 Takeaway: This is probably a case worth keeping an eye on, as it might have some second-order effects on data aggregators if TD Bank wins.
🎧 Podcast Recommendations
This week I have two podcast recommendations for your auditory enjoyments.
Building Wealthfront and Benchmark Capital - Andy Rachleff → It’s actually crazy to think that Andy Rachleff was the co-founder of Benchmark and then founded Wealthfront while he was retired. That’s one hell of an ‘act two.’
This podcast is the perfect intersection of VC and fintech mixed in with some other nuggets of advice from Rachleff. Goes without saying this is a must-listen this week.
Creating new products, ft. Razorpay's Harshil Mathur → Following on from Razorpay’s Series D capital raise announcement, I thought I’d include a podcast with the co-founder of Razorpay, Harshil Mathur. If you’ve been sleeping on the Indian fintech ecosystem this is a good starting point to get yourself woke to what’s happening.
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📈 You can check out Radar, an open database of Australia's fintech ecosystem. You can find it here → 📡 SideFund Radar
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