Issue #61: Compound Launches DeFi-as-a-Service For Fintechs, Codat Secures The Bag, And Apple Wants To Replace Your Wallet

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📣 The News Grab Bag

Chime still leads the pack ⚬Aussie bank, Westpac, to pay $87m in compensation to customers ⚬ JP Morgan acquires OpenInvest ⚬ Gusto tries its hand at being an infrastructure providerAfrican fintech startups are diversifying to scale up ⚬ EFTPOS Australia rolls out its digital identity solution Rapyd is acquiring Valitor for $100m ⚬ Lanister is back in the news ⚬ How BNPL became the most lucrative four letters in fintech ⚬ Walmart’s Money Card Is Now A Checking Account: Does It Matter? ⚬

📈 Notable Funding Announcements

It was another big week of funding announcements in the world of fintech. In total, 64 funding rounds were announced, totalling $2.3b.

🧾 Codat Raises $40m In Fresh Funding

This week Codat announced that they’d closed a $40m Series B funding round led by Tiger Global. The round also had participation from existing investors, Index Ventures and PayPal Ventures.

🤓 My Take: At every SME, information sits in a disparate set of databases (including spreadsheets) that at different points in time need to be combined for things such as taxes, loan applications, third party DD for a fundraise, and the list goes on. Moreover, this data is usually in a variety of formats — CVS, PDF, Word or even in an online app. While for fintech startups, accessing this data has been challenging to say the least.

There’s no doubt that the ability to bring all this information together neatly is getting easier with more companies than ever providing APIs for nearly anything you need. The ability to make better decisions on lending through tapping a Xero or MYOB feed or adding value to customers by pooling data from accounts into a single view is definitely becoming easier due to Plaid and Tink et al.

In fact, the flood of data available is posing a new challenge for some fintech startups. For example, if you’re an SME neo bank, the ability to provide transaction data feeds for your customers and directly syncing that to their Xero, MYOB, Sage or Quickbooks etc., account is table stakes today. While if you’re a lender, you’ll likely want to pull data from a growing range of sources. This could include accounting software and directly from the transaction source (i.e. Stripe, Paypal, Shopify, Gumroad etc.). Maintaining all these connections is not only time consuming, but it’s also rarely additive to the customer experience.

In part, this is why we’ve seen the rise of middleware players in fintech. In the accounting software example above, the integrations might seem trivial, but the maintenance overheard creates a cost that most fintech startups don’t want to bear. Middleware players like Codat have figured out is that you can abstract all these integrations up into one set of neat API calls, companies are more than willing to pay to have this problem taken off their hands — and pay handsomely they do.

Beyond solving a problem that most companies really don’t want to spend time or resources on, it provides a great wedge into providing other services. From a strategic perspective, being a middleware provider can be a great place to ‘land’ and then expand from. If a company is already consuming a range of services via your API, the ability to expand revenue is not all that hard — it much easier to convince a customer to call another endpoint versus socialising a whole new product into the development team. A case in point is what we’re seeing in the open banking space, where the likes of Truelayer are moving both vertically through enrichment services (i.e. customer verification) and horizontally by offering more products (i.e. PIS).

Although under-discussed, being a middleware provider in the fintech infrastructure stack is exactly where you want to be.

💎 Karat Raises A $26M Series A

Last week Karat, a credit card focused on the creator economy, announced they’d closed a $26m Series A funding round, $11m of which was in equity and $15m in debt. Union Square Ventures led the round. The funding round also had participation from GGV Capital, SignalFire, and more than 20 initial Karat users.

🤓 My Take: Outwardly, Karat might feel like a niche proposition. In fact, I imagine when they were fundraising, most investors asking, “but how big is the TAM for creators?” — and no doubt for most VCs, this would’ve been a rhetorical question vs a genuine enquiry.

The non-intuitive answer is “bigger than you’d expect”. Having said this, the question's premise also misunderstands the real problem being solved and how ubiquitous the problems associated with trying to get credit for a company are.

In the case of Karat, I assume part of what they’re solving is the challenge that many self-employed people face when trying to get a corporate credit card. If you’ve ever applied for one, you’ll know that if your business doesn’t fit into cookie-cutter rubrics that banks use to assess a company’s eligibility for a corporate credit card, it can be tough to obtain one. As USV notes in their blog post announcing the deal:

Many [creators] lack access to credit, loans, and a business bank account.  Some float five-figure sums for production costs on PayPal.  Others are unable to prove income requirements to secure a lease.  What’s more, the metrics that define a sustainable digital business – subscription growth, audience engagement, longevity of brand deals, platform diversification – exist in the public eye, but are left on the table by traditional financial institutions.

However, this isn’t only an issue for big-name YouTube creators. Think about the numerous independent businesses that identify as creators — the Etsy jewellery store owner, the Twitch streamer or the teacher on Teachable.

Although this isn’t a groundbreaking strategy, after all, this is the same thing Brex did with ventured backed startups, it does highlight the glaring gap in the market for propositions that meet their customer where they are when it comes to assessing their financial circumstances.

☝️ Things You Should Know About

📈 Compound Launches Treasury So Every Fintech Can Become A Defi Company

For those who missed this, DeFi protocol Compound last week announced the launch of a Treasury product that will offer “…non-crypto native businesses and financial institutions to access the benefits of the Compound protocol”. More specifically, the product will allow FSIs and fintechs (who I think will be the first users of this) the opportunity to earn 4% APR on funds deposited into their Cpound Treasury account. That’s right, no faffing around with wallets or private keys. Just deposit USD into an account, and Compound does the rest.

What’s interesting about this is that it’s a major step in bridging the gap between DeFi and traditional financial markets. In fact, it might be the ultimate DeFi mullet — fintech in the front and a DeFi party in the back.

Don’t be surprised when you see a slew of neo banks start to plug this product into their product mix and pass on the yields to their customers (with a small clip of the ticket for them, obviously). In fact, Current recently Tweeted they’re already working with Compound to bring this product to the market — so we might see this in the wild fairly soon. I can’t wait!

Apple Wants To Replace Your Wallet

If you’ve been paying close attention to what Apple’s been doing with payments, this probably comes as no surprise. Having said this, Apple’s ever-expanding appetite to own every touchpoint in the consumer wallet probably gets less attention than it deserves.

Those who were paying close attention to all the happenings at WWDC21 probably noticed that Apple announced (for US users) the ability to use their iPhone as digital identification in select US airports. More specifically, users will be able to scan their driver’s license in specific states across the US and upload it to their iPhone — where it’ll be encrypted and stored in the phone’s secure enclave.

Adding identity is a clever play by Apple and one that makes logical sense. Personally, I’m interested to see if Apple takes the next logical step and move into the world of KYC/AML by offering an SDK for user identity. I’m guessing it’s only a matter of time before they do.

👴 How Western Is Union Fighting Back Against Fintech Startups

I thought this was an interesting read about Western Union’s efforts to modernise its offering. There’s no doubt that the remittance game has changed substantially over the last decade, and companies like Western Union have had to shift their product offering to be more digitally focused.

It’s easy to laugh at incumbents when they reference modernisation efforts that include moving to the cloud. However, the reality is players like Western Union are still behemoths in the world of remittance. As the article notes:

In 2020… [i]ts overall digital money transfer revenues — including and its digital partnership business — climbed by 38% to more than $850 million, up from over $600 million in 2019. 

Having said this, there is no shortage of competition in the cross-border money movement segment. It’ll be interesting to see if these efforts keep Western Union at the front of the pack or whether the young upstarts overtake them. Obviously, I’m betting on the latter happening 😉

🎧 Podcast Recommendations

This week’s podcast recommendations span the world of emergent fintech markets through to emergent fintech products. Enjoy!

🌍 Building trust infrastructure for underserved SMBs in Africa with Hilda Moraa from Pezesha → This podcast is a fascinating look into how the African fintech market is evolving, the open banking trends that are emerging in Kenya/East Africa and the long term opportunities for fintech companies in the region. It’s well worth a listen if you’re interested in learning more about the region.

🌊 Interview with CTO, Trevor Marshall On Current's products and crypto strategy

Ok, this isn’t a podcast but it’s a great interview with Current’s CTO, Trevor Marshall. Given that Current this week announced that they’ll be working with Compound (see the above story on Compound Treasury) to introduce high yield DeFi products to their customers, this is a timely interview that delves into how Current is thinking about crypto. Well worth a watch!

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