Issue #40: The Future of Fintech Is Here (It's Just Not Embedded Everywhere), Fast Raises Another Round And Byte Dance Gets Into Payments
👋 Hi, FR fam. I hope you’ve all had a great week.
Before we dive into this week’s news and my 4th prediction for 2021 (yes, we’re almost done with the predictions), here’s a Dogecoin ditty that's sure to earworm you this weekend. Apologies in advance to all those who have to endure you humming this banger all weekend.
Prediction #4: The Future of Fintech Is Here, It's Just Not Embedded Everywhere
🥡 Takeaway: Fintech will be more embedded than ever in 2021 — but not in the way you think. Forget about the big lift items, like becoming your own payfac or issuing your own cards. The real embedding of fintech will be much more boring and revolve around the SME. In 2021, we’ll see a massive uptick in the mundane implementations of fintech like BNPL and product insurance that will drive topline revenue for the average business owner.
If you believe the embedded fintech maximalists (I think they’re first cousins of bitcoin maximalists), “everything is fintech,” and it’ll be embedded everywhere. Although I like to tweet it as a meme, it’s clear something is happening with how financial services are being delivered and, more importantly, where they’re being delivered.
There’s no doubt that the way we interact with financial services is changing. The need to interact with a bank to interface with the financial system is slowly morphing into dealing with financial services in the context that it makes the most sense in.
For example, if you’re a merchant using Shopify to sell your wares, your financial world exists on that platform — not at your bank. So it makes sense that the ‘job’ of banking is done on Shopify’s platform. More specifically, it makes sense that you pay suppliers via the platform, that you check your bank balance there, and spend using a debit/credit card directly tied to your Shopify account balance.
For the platform, this opens up a new stream of revenue while at the same time enhancing the user experience. As Andreessen Horowitz noted in their piece on vertical SaaS and fintech, incorporating a fintech product could “increases revenue per user by 2 to 5x versus a standalone software subscription”.
In fact, I think, it’ll feel strange not to do your “banking” directly in the place where you actually manage your business in the coming years. On this, I agree with the embedded fintech maximalist.
In 2021, we’re going to see more big-name vertical SaaS players introduce FS products into their offering — that’s not controversial and was already well and truly happeningin 2020. What I think will be more interesting to observe in 2021 is the places where embedded offerings become ubiquitous.
It’s not all that interesting to talk about BNPL as an embedded offering now, namely because it’s become so ubiquitous in some countries. However, the ability to provide (in substance) short-term loans at scale to customers only a few years ago was not really possible. The same is slowly happening across other FS products that are well suited to the checkout — with insurance being a great example (which I wrote about in issue #30, wrt to companies like Extend).
To open the aperture a bit, an implementation that you might think about as checkout adjacent is the 1Password’s disposable card feature (powered by Privacy.com). Although it isn’t as sexy as a metal card with a company logo, it highlights how we’re likely to see embedded fintech become commonplace in the products we use daily. Namely, it’s started with the checkout and is slowly creeping into narrow value additive implementations.
The flashy and splashy announcements about SaaS startups becoming fintech take up the headline, but the real embedded fintech revolution is happening at the retailer level. Yes, it’s fairly boring and looks benign, but this is where we’ll continue to see embedded fintech take hold — bottoms up with your average SME being the big winner as they embrace new ways to grow their top line.
📣 The News Grab Bag
Wirecard claims another scalp, this time it’s at BaFin ◌ The Roaring Kitty Rally ◌ TrueLayer looks to launch its own payment rails ◌ VCs continue to rush into BaaS ◌ Coinbase announces its listing directly on the NASDAQ ◌ Stonks only go up, right? ◌ Clubhouse wants to become a fintech ◌ Aussie banks are spending more on technology, which obviously equates to being more innovative😂
📈 Notable Funding Announcements
It was yet another big week for fintech fundraising. This week 55 financings events were announced totaling $2.4b.
🏃♂️💨 Fast Rips Down $102m In A Fresh Funding Round→
Checkout as a service provider, Fast, last week announced they’d raised $102m in a Series A round of funding. The round was led by Stripe, who also led their $20m Series A.
🤓 My Take: Let’s start with the obvious; a delightful checkout experience is a feature, not a company. Now that we have that out of the way let’s dive into why this round of funding could still make sense. But before we do, let’s take a short trip down memory lane.
In 2017, Amazon’s monopoly over 1-click ordering expired, and the Amazon of 2017 looked very different from the online retailer back in 1997 when it obtained the patent.
What had become clear was that the patent's lasting impact was much larger than just making it easier for Amazon customers to restock on toilet paper quickly. The real, lasting impact was the massive amounts of data it was able to obtain about its customers and specifically capturing their identity. As Wharton professor Kartik Hosanagar noted in a 2017 article:
No other retailer has that kind of a database of customer payment and preference information.
The 1-Click process' convenience had allowed Amazon to show customers that there was good reason for them to hand over their credit card details, along with their address and, importantly, the data associated with their buying patterns.
Ultimately, this is why Fast could work. Yes, it’s a data play disguised as a checkout product. In fact, I assume a slide in their deck says something to the effect of “imagine what we could do if we had all the transaction and customer data? Just imagine”.
Now most of you already know, the checkout is a hotly contested spot in not only e-commerce but payments too. After all, he who controls the checkout owns the customer and as you’d probably guess there are many companies who want to own the customer. There are direct competitors like Bolt (who recently raised $75m), and then there is Shopify, who take payment speed really, really seriously (interestingly, they use Stripe as their processor). Then there are the countless PSPs who all offer out of the box checkout solutions, the BNPL player (cf. Klarna Checkout), and… the list goes on. You get the picture; the checkout is literally the Hunger Games of the payments sector.
To be fair, if Fast can parlay their Twitter following and free hoodies into merchants signing up by the truckload, they could be in a powerful position to be the hub for e-commerce and other identity products (eg. login). Having said this, the initial fight in one of the most crowded and tight margined segments in fintech is a streetfight I think is going to be hard to win — no matter how much money you have in your coffers.
Side note, I’m interested in seeing how taking Stripe’s money impacts the flexibility that Fast has to do simple things like dynamic routing, fraud management, and omnichannel support. To make this more concrete, what if Stripe decides to do BNPL-as-a-service and customers want Afterpay? That CVC/Corp Dev money is sweet, but it always narrows the scope of your product in the long run. It’ll be interesting to see how they play it.
Regardless, I can’t wait to see how the checkout Hunger Games play out.
💰 Check Raises $35m From Thrive and Stripe→
Embedded payroll platform, Check, this week announced a $35m Series B led by Stripe and Thrive Capital.
🤓 My Take: Firstly, can we acknowledge that Stripe’s Corp Dev team is doing some serious spending? I get interest rates are low, but damn they’re active.
As I noted in issue #31, the employee benefits space is a great wedge into building a broader financial relationship with a customer — whether that’s a bank like relationship or a more atomised product offering. Having said this, the inverse might also be true. Specifically, bringing payroll to a product could be a massive value add to a SaaS offering that, for example, works in a marketplace setting. Why build tax filling and remittance when you can use an API call?
As noted above, most view embedded fintech as simply payments and issuing. However, many problems are still dealt with in the ‘wrong context,’ and payroll is another great example.
☝️ Things You Should Know About
🤝 NAB Acquires Aussie Neo Bank 86400 →
Firstly, shoutout to the 86400 team on the outcome! To get to a liquidity event in challenger banking is incredibly hard and speaks to the quality of what they’d built. Congrats, 86400.
For context, 86400 (for the uninitiated, that’s how many seconds there are in the day) was a challenger bank founded by Cuscal (a BaaS’ish provider) and eventually went it alone and became an Authorised Deposit-taking Institution (ADI) back in 2019. In terms of the size of their customer base, according to the press release announcing the deal:
… as at 15 January 2021, 86 400 had more than 85,000 customers, $375 million of deposits, $270 million in approved residential mortgages and 2,500 accredited brokers
The acquisition is particularly interesting as it’s NAB’s “online bank,” UBank, which will be subsuming 86400. Now technically, UBank is a division of NAB and isn’t a standalone entity. Another way to cut this is that an incumbent bank bought a challenger bank to augment its own challenger brand. I know, I’m confused too.
In many ways, you can see how it makes sense — buy a ground-up digitally native bank and put some distribution behind it and see where it can go. On the other hand, it feels like NAB could be building a turducken bank.
It’ll be interesting to see how NAB tries to thread the needle on integrating a challenger bank into its digital bank offering, which in turn is connected to its aging infrastructure. I truly hope they show it can be done.
I’m also interested to see how the Aussie competition regulator approaches this deal, as we’ve seen some silly remarks coming from the ACCC on the topic of banks acquiring fintech companies.
So with the untimely passing of Xinja (RIP) and now 86400 being gobbled up by an incumbent bank, what does this mean for Australia's neo bank sector? I hate to disappoint, but I’ll be covering that in a subsequent stand-alone piece on the state of challenger banking Down Under. Don’t worry, it’ll hit your inbox soon.
🕺 ByteDance Launches Douyin Pay→
It wasn’t all that long ago that one could validly argue that Alipay and WeChat Pay (in that order) had won the $US27 trillion payments market when it came to the payments segment in China. According to iResearch, combined, they hold ~95% of the market. However, with a changing ‘regulatory climate’ in China, this could end up being the right time for ByteDance to move into the payments space.
DanceByte has a strong presence in e-commerce with their live e-commerce platform serving around 400m DAUs. This provides them with a strong base of customers they can use to grow Douyin Pay. More broadly, it feels like it’s game on in China when it comes to several areas of fintech, and the upstarts could have an opening with the changing sentiment towards Alibaba et al.
🎧 Podcast Recommendations
Last week marked the beginning of the Q1 reporting season in the US. So to kick this week’s podcast recommendations off, here are some “fintech” adjacent earnings calls you can add to your podcast rotation.
🛒 Amerian Express Q4 earnings call
🏦 Capital One Q4 earnings call
One last recommendation for this week is a podcast from the Village Global team.
Investing in New Asset Classes and The Future of Venture with Ali Hamed and Brian Harwitt → Alternative asset investing has seen a huge rise in popularity over the last 12-18 months. In this ‘pod Ali, Brian, and Eric discuss the changing landscape for the alt asset market and why it’s heating up. Well worth a listen.
🛠️ Jobs Of The Week
Last week we launched the Fintech Radar Jobs Board, and we had some amazing job opportunities sent across from readers of FR. Here are a few that you can checkout at jobs.fintechradar.co
🏹 Archa, an Aussie SME challenger bank, is on the hunt for a product manager. You can find details regarding the role HERE.
💸 Cash advance app, Earnin, has several roles open currently. You can find details regarding them all HERE.
🏗️ Decentro, an API platform for banking integrations, is also looking to fill several roles. You can find details regarding their open roles HERE.
☝️ Don’t forget if you have an open role you’d like to have added to the FR Jobs Board, feel free to flick a link of it across (just respond to this email). We’ll be adding them for FREE for the next month, so don’t miss out on listing that job opening at your company.
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