Are we rational?
If a rational consumer were armed with perfect information, would they choose your product?
I really like this quote from Frank Rotman of QED Investors in his 2018 Copernican Revolution paper. How many founders can truely say that their product is the best out there for consumers?
Recent News
Hot off the press this morning was news that Wirecard’s auditors found €1.9bn missing from its bank accounts. Its shares were down more than 70% in two days and its Chief Exec has resigned. Was it just the auditors that noticed or did no-one internally figure it out?
Yesterday Bloomberg reported American Express had received approval to offer bank card clearing services in China, the first licensed foreign payments network to process local currency transactions. Big, positive news for the company and a welcome change from the negative impact from COVID-19 on payments volumes. The chinese mobile payments market is $27tn, however 90% of cards are debit cards. Think of the spending power of chinese consumers if they binge on credit at similar levels consumers in the West do.
On the same payments theme, the UK Supreme Court upheld an earlier Court of Appeal ruling against Visa and Mastercard that their Multilateral Interchange Fees are anti-competitive. Although fixed since 2016 at 0.3% per transaction and 0.2% for debit cards, pre-2016 these were as much as 1%. This could be a huge blow to the two largest payment networks, especially if this is the start of further legal woes in other markets.
What I have read/listened to recently?
Santander recently launched PagoFX, its competitor to Transferwise. Banks don’t have a great reputation for building their own technology in-house as they don’t think like tech companies. Sifted reports that Santander is trying to take a startup approach to PagoFX with its hiring and has also used external advisors with experience in helping large organisations incubate innovation. It will be intersting to see what happens after a year or two when the companies priorities shift. Are all internal stakeholders aligned on its mission? Sifted also noted that the idea came when executive chairwoman Ana Botin was shown Transferwise by her son. Not a great sign if her son knew about a competitor before she did!
Also from Sifted last month were comments from former entrepreneur Hugues Le Bre, who sold his almost profitable challenger bank to BNP Paribas back in 2017. He claims this is no longer a realistic exit path for challenger banks. With the large valuations of Monzo and Revolut largely precluding them from acquisition by a major bank, it leaves IPOs as the most likely exit opportunity for investors. However the IPO landscape has shifted. High-profile issues with WeWork and Uber coupled with COVID-9 have placed more emphasis on profits, as public investors seem far less willing to continually bankroll loss making startups. The elusiveness of profits at most challenger banks means the future doesn’t look bright.
Fintech Takes produced a great piece about creating fintech solutions that actually help customers. They highlight the $8.3tn opportunity that is the US GDP of those aged 50+. This largely ignored and growing sector has not had much focus due to misconceptions about their lack of use of technology. But maybe entrepreneurs are not asking the right questions of what these customers want, opting to go after the easier Gen Z or millennial crowd. A very compelling read.
I finally got around to listening to Anthemis’s Embedded Finance:Digital Transformation webinar which was a very interesting discussion with experts from Ping An, Munich Re and Anthemis sharing their insights. I completely share the vision of those on the call of a world where financial services are distributed through non-fintechs. Imagine a retailer, like John Lewis, where you buy a lot of your home furnishings and electronic goods from. They could offer you contents insurance at checkout as they know what valuables you have in your house, their purchase history and value, data points which come in handy at the time of a claim.
For me, tying in the thoughts of Frank from QED, banks will largely be relegated to a behind the scenes player providing the back-end for other companies to distribute products. This has started to happen with some banks using this strategy, such as Evolve and Cross River Bank. This suits banks core capabilities and leaves the customer experience to companies and brands that have better relationships and better knowledge of customers. Looking at companies with the highest NPS, you have to scroll down to number 30 for the first financial company, which is Visa, and 37 for the first bank, HSBC. Banks should stick to what they are good at.
Diversity
What VC firm wouldn’t want an 11.5% increase in the success rate of acquistions or IPOs? Or an increase of between 26%-32% in an investment’s success? Diversity is the answer. Not news to anyone but to actually get quantitative data on its impact via HBR is very meaningful. Diversity has huge effect on collective accuracy and objectivity, analytical thinking, and innovativeness according to the article. A must read for any investor.
Another must read for VCs to take action is the Techcrunch article from BLCK VC. A powerful call to action for VCs to discuss, donate and diversify. It starts with data. A more impactful read if you take it in first-hand.
Venture
For those starting out new roles in the VC space, I thought this summary of how to thrive in your first year was really interesting and super helpful. In essence, its a call to be a leader. You may think to wait until you have had time to understand the landscape but firms want employees to come in with energy and to hit the ground running. Take advantage of the “new starter” aura.
Startup of the Week - Codat
Codat is a London based fintech that collects all relevant financial data from the different systems an SMB might use and builds it into an API which connects with banks and insurance companies to speed up decision-making. Think of it as the Plaid of the SMB space.
They closed a $10m funding round from Index Ventures earlier in the week as it looks to expand to the US.
APIs in the aggregation space are a hot space in fintech currently. Plaid was acquired by Visa for $5.3bn, and in Europe, Yapily ($13m), Tink ($100m), and Truelayer ($35m) have all raised large amounts in the past year.
Investors see these companies as being key to the embedded finance / fintech as a platform service whereby non-fintechs start selling financial products. Information is key and these APIs will be used to supply the information used in making lending and insurance decisions.