Issue #8: OnlyFans Is Pushing Fintech Forward, Amazon Is A Vendor - Not A Techfin And Let's Talk 'Platforms'
👋 Hi, FR fam. I trust everyone has had a great start to the week and is keeping safe.
In case you missed it, over the weekend, J.K Rowling made the mistake of saying 'bitcoin' on Twitter - which is crypto Twitter's summoning charm. As you'd expect, all the weirdos came out (including Elon Musk) to coin'splain it to her. The outcome was total hilarity.
🆕 My Aussie fintech startup database
Last week I opened up my database of Aussie fintech startups to the Fintech Radar community. It's a list of 200+ fintech startups that you can search by vertical if you ever need to do some quick fintech Google-Fu.
You can find the database HERE.
👯♀️ How companies like OnlyFans are pushing fintech forward
If you ask most fintech industry insiders which companies are pushing the sector forward, they'll likely come back with the name of a challenger bank or an online lender. They'll probably regale you with tales of how commission-free trading or lower home loan interest rates are increasing competition in financial markets. They might even go so far as to tell you these startups are the Avant-Garde of the new financial order. They're probably unlikely to come back with OnlyFans.
For the uninitiated, Onlyfans is a subscription-based creator platform that is best known for its abundance of adult content (to be fair, it's apparently also popular with fitness influencers). It's entered the zeitgeist recently due to a confluence of factors that have worked in favour of many entertainment sites (well, except for Quibi), and it's ridden this wave to some impressive growth numbers. The following tweet from Yoni Rechtman of Tusk Ventures captures the growth nicely.
Those are some impressive growth numbers, and when you layer on the fact that the platform is less than five years old, it's even more impressive. Also, for the investors reading (who probably can't invest due to the vice clause in their LP agreements), they haven't taken any known external funding.
Part of Onlyfans' success has been its very reasonable take rate of 20% and the ability for each creator to set their monthly subscription fee (as long as it's between $4.99 - $49.99 per month). Yes, the distribution of revenue earners is skewed heavily to the right of the normal distribution with a fair degree of kurtosis. In other words, there are some mega earners on the platform, while most make modest - if any - income from their thirsty pics.
So what's this got to do with fintech? Much like any other marketplace, they give up a substantial part of their economics to payment processing. In fact, according to an interview in the NY Times early last year with Mark Stokely (CEO of OnlyFans), they give up around 40% of their take.
In the context of OnlyFans, it's probably even more acute an issue as it's likely they have an upper limit on the amount a creator can charge because their payment facilitator (called a payfac in payments land) has enforced one. So not only are they forced to absorb an effective take rate of 12%, but their product is also potentially impacted by working with a payfac. To be sure, any platform that has adult content on it is always going to struggle with payment processing, and there is a whole boutique industry around catering to it - which is itself fascinating. However, as the dollars get large enough, and the infrastructure gets better, the incentives will shift to in-housing payments.
Many other platform businesses have also cottoned onto the fact that they can capture more of the economics by becoming payfacs - and we're not talking marginal changes to a company's contribution margins. In some instances, they're magnitudes of order increase on a net basis. For example, see the following extract from a section in Lightspeed's (a Canadian PoS startup) IPO filling where they describe their move to becoming a payfac.
This is the part where people interject and explain to me why companies tend not to become payfacs - i.e., because of fraud and compliance. However, what's different this time (which can be famous last words) is that the companies who are going to benefit most from in-housing are (i) digitally native, (ii) already likely deal with complex global regulatory regimes (e.g., Uber or Airbnb) and (iii) are doing large enough GMVs where the economics are just too big to ignore.
The rise of financial infrastructure-as-a-service for everything from payments through to insurance is only going to push every sector to look at how they recapture the money they've traditionally lost to rent-seeking incumbent financial services vendors. Moreover, just like we've seen challenger banks benefit from the banking stack being unbundled, we're also likely to see companies like OnlyFans benefit from it too - these will be the positive externalities from the SaaS'ification of banking infrastructure that will create new revenue streams for platforms. In the same way, most in startup land don't talk about having their infrastructure in the 'cloud' - they just do - we'll stop talking about embedded fintech and it'll just be another platform companies use to monetise their audiences.
However, it's not going to stop there; many fintech startups will soon be turning their attention to other sectors as they realise that if they can do transaction monitoring for a bank, they can also likely do it for other platforms too. So the wheel will turn and fintech will move forward.
💰 Notable Funding Announcements
Globally fintech financing had another solid week, with 38 funding announcements totaling $606m this week.
Verteva, an Australian' home loan disrupter', this week announced that they'd raised $33 million (likely to be a combination of equity and debt). According to their LinkedIn page, "Verteva combines the best of technology, data-driven insights, and cutting-edge digital customer journeys to radically re-shape the home lending customer experience for the better."
🤓 My Take: This is becoming a reasonably crowded space in the Australian market, with several players piling in. Also, I think you can expect even more heated competition with the challenger banks all eyeing off this lucrative space (for example, 86400 is already offering loans). Although the market is big enough to sustain multiple new entrants, the challenges will come as the economy declines over the next few quarters - not sure I'd be wanting to start a lender as we hit record highs in unemployment. Timing is everything, and this might not be the time for another lender.
Member Exchange (MEMX) this week announced a $65m round of 'strategic financing' with participation from BlackRock and Wells Fargo.
🤓 My Take: Memx secured SEC approval in May of this year to become the 15th US stock exchange and is planning to launch in the third quarter of 2020. Nine founding members wholly own the member exchange. These members include Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS, and Virtu Financial. It's a who's who of Wallstreet.
A majority of the equity exchanges in the US are controlled by ICE, Nasdaq, and CBOE Global Markets and this new entrant is sure to mix things up in the closely held US equities market. Further, the concentration of equity markets is a broader global trend that might be about to change - and a trend I'm personally watching closely.
📧 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 firstname.lastname@example.org and @alantsen on the Twitters.
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According to the article, Monzo is looking to raise £70-80m in a fresh round of funding. However, the round is likely to come at a cost. Specifically, a ~40% discount to their previous round's valuation.
The article points to the fact that Monzo may have come in hot in their previous round and that this is simply a correction to the loftier valuation they were able to garner in a frothier market. Which is probably true.
I expect to see more neo bank down rounds this year (or heavy investor protections inserted into deal terms). Here in Australia, I've been hearing rumors about an Aussie challenger raising on a similar haircut. It's most definitely getting tough out there for neos.
The most common narrative told by consultants to FSIs about big tech entering financial service is that they're the ones to watch. The reality is most have to date only lightly dipped their toes into the water and, for the most part, have been happy to throw a thin layer of UI onto the payments experience.
This piece proposes an alternative narrative and one which I think is more believable. It suggests that we're more likely to see Amazon et al become vendors vs. competitors. It's well worth a read.
The 'rationalisation' of the fintech industry is a hot topic at the moment. There is no doubt we'll see some fintech unicorns get taken out by the current market conditions. The most obvious first port of call is the competitive SME lending space. OnDeck is symbolic of the struggle the vertical is facing. As the article notes:
In the first quarter of 2020, [OnDeck] reported a $59 million loss on flat revenues of $111 million, mostly because an alarming COVID-19-related spike in loan delinquencies forced it to boost its reserve for credit losses. It has also tapped $987 million of its $1.1 billion credit facility in an effort to stave off a liquidity crisis. Employees have had their hours cut, and with On Deck’s shares now trading below a dollar…
Having said this, we're also likely to see some smart FSIs take this as an opportunity to go on a buying spree that could help them leapfrog their competitors. Actually, who are we kidding? Most will be tending to their backyards and figuring out how they find more COBOL developers.
Insurance is still one of the sleepiest financial services industries around. They still abuse customers with PDF forms and have internal systems that make banks look like cutting edge tech startups.
As this piece outlines, there is still a tremendous amount of opportunity at almost every layer of the insurance stack for startups to attack. For example, just as we've seen embedded payments allow ISVs to take back some of the economics of payments, we're also likely to see more players start to offer tailored insurance for their customers as insurance-as-a-service infrastructure becomes more prevalent - think Square offering business insurance to merchants through their apps.
🥶 From Cold Storage
Last week, I tried to turn the tide on the abuse of the word 'moat', this week I turn my attention to the word 'platform'.
If you haven't read Ben Thompson's series on aggregation theory, you should do so immediately - it'll change the way you think about the tech industry. One of the best pieces in the series is 'the Bill Gates line'. In it, Thompson succinctly explains what a platform is and recites a classic Bill Gates yarn about the time Chamath Palihapitiya pitched Gates on Facebook.
"I remember when we raised money from Bill Gates...and Gates said something along the lines of, 'That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.'"
I sometimes miss the old Bill Gates.