Consumers bounded rationality problem
A fundamental challenge of consumer fintech
Tweet of the week 🦉🏆
The above is one of the fundamental challenges not only in financial services but also more broadly in behavioural economics. How do we incentivise long-term thinking and encourage good decisions that benefit us long term at the expense of short term gratification? There are inherent human biases that cause us to act in irrational ways when evaluating decisions whose impact takes a long time to show. Bounded rationality is the technical name given to the idea that when it comes to making decisions, humans make suboptimal solutions due to the tractability of the problem, the cognitive limits of the brain and the time available to make a decision. It is this idea that humans make shortcuts with decisions, that behavioural economists such as Daniel Kahneman and Amos Tversky have worked on to try and increase the effectiveness of decision-making.
Nobel prize winner Richard Thaler had some suggestions in his excellent book Nudge, such as automatic enrolment in pension plans. One thing the recent $GME saga highlighted was how exciting trading stocks and ₿ can be in the short term. The wild price swings provide much entertainment and are amplified due to the pandemic. But it has always been easier to get consumers to look past making seemingly boring long term investments in funds for the day trading of stocks. It just isn’t sexy to boast about saving £100 this week into your retirement fund or that you earned a 0.84% return last month.
This is a fundamental problem and I hope something that fintech can solve. I am sure there are a few companies working on this and I would love to hear from you if you are! I have one coming up as a Startup of the Week soon so watch out :)
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Funding 💸
There were 40 deals in the fintech space across the US and Europe with total investment of $500m since last Monday. Some highlights are below.
🇪🇺 Klarna is rumoured to be raising $500m at a $30bn valuation which is just below the valuation of public market rival Affirm.
🇪🇺 Circula, an expense management platform, raised $5.2m in funding from Capnamic Ventures, Wenvest Capital and Main Incubator.
🇪🇺 Libeo, an invoice management company, has raised €20m in funding from DST Global, LocalGlobe, Serena Capital and Breega Capital.
🇬🇧 Monzo is raising £50m funding from existing shareholders and new investor Octahedron as it hits 5m customers, 70k business users and 100k paid users.
🇬🇧 Wombat, the investment platform has raised a $2m seed led by Fuel Ventures and included notorious fintech investor Chris Adelsbach.
🇬🇧 Capital raising platform Hubx closed a $5.5m round led by Basinghall Partners and included Barclays Ventures.
🇬🇧 Venture firm Finch Capital closed its third fintech fund, raising €150m as it continues acquiring minority stakes in fintechs.
🇬🇧 UNIPaaS raised $10m from TPY Capital, FJ Labs and angel investors for its white label payments solution.
🇺🇸 Public.com, a Robinhood rival, is raising $200m led by Tiger Global at a $1.2bn valuation.
🇺🇸 Stir raised a Series A from Andreessen Horowitz at $100m valuation.
🇺🇸 Blair, an income-share agreement provider, has raised $100m in debt to fund ISAs at its partner institutions.
🇺🇸 Ramp, the corporate card startup, has raised $150m in debt from Goldman Sachs. The funds will help Ramp fund its customers corporate spent at scale.
🇺🇸 Credit card startup TomoCredit raised $7m from Passport Capital, Ulu Ventures, Strong Ventures and Barclays.
🇺🇸 Houston based Fair, an ethical challenger bank and financial services platform raised $20m.
🇺🇸 Mesh Payments has raised $13m in a round led by TLV Partners.
🇺🇸 Cloud core banking provider Nymbus has raised $53m from Insight Partners.
🇺🇸 Human Interest raised $105m in debt and equity led by Glynn Capital and included Slow Ventures and Uncork Capital for their SMB 401k platform.
🇺🇸 Opportunity Financial is going public via a SPAC by merging with FG New America Acquisition Corp.
🇺🇸 Capitalize raised $12.5m in a Series A round led by Canapi Ventures and also included Greycroft, Walkabout Ventures, Bling Capital and RRE Ventures.
🇺🇸 MoneyLion is going public via a $2.4bn SPAC at 16.5x 2021 earnings and with 1.4m users. See Jason Miklua’s breakdown of the deck here
Embedded Finance
🇪🇺 Societe Generale has told its 40,000 employees they can permanently work from home two days a week.
Challenger Banking 🚀
🇪🇺 European BNPL giant Klarna has launched consumer bank accounts in Germany as it seeks to expand beyond its payments roots into providing a full suite of financial services.
🇪🇺 Ikea has bought a 49% stake in Ikano Bank as it seems to offer banking services online and instore.
🙌🏻 FATP Take - An interesting move by the Swedish furniture retailer but it would seem like a good distribution channel for credit and a potential physical location for branches. Loans for larger kitchen or bathroom renovations could also persuade customers to spend more.
🇬🇧 Monzo recently released from beta its automated billing updater, which updates your new card details at all merchants that support the service. Helping merchants and customers alike! It also hired Carol Nelson to turn around its US operations.
🇺🇸 Everyone hates IRS payments but with Jiko’s debit card, a customer was able to make a $4.7m payment to the IRS and receive $47,000 cashback according to PR Newswire
🇺🇸 PayPal is adding Honey integrations into Venmo in a move to make it closer to a neobank which will also include budgeting, savings and cryptocurrency.
🇺🇸 Zeta has launched Joint Cards, a banking solution for couples, on Product Hunt. This is part of an evolving trend of the socialisation of financial services beyond a single user’s experience.
Traditional Banking 🏦
🇺🇸 BNY Mellon is utilising Google Cloud for help with its treasury market settlements in a boost for the tech giant’s focus on financial services for its cloud product.
Fintech Infrastructure 🚧
🇺🇸 Equifax has acquired its long time partner AccountScore as it seeks to combine its traditional credit bureau information with bank transaction data.
Payments 💰
🇺🇸 Shopify’s payment tool Shop Pay has expanded to merchants on Facebook and Instagram and marks the first time Shop pay is available outside Shopify.
🇺🇸 Affirm had its first earnings call and reported +55% GMV, +52% active customers (at 4.5m) and 2.2 transactions per active customer. However its Q3 GMV is expected to decline from $2.1bn to $1.80bn-$1.85bn which sent shares ~-9%.
🙌🏻 FATP Take - Affirm also mentioned its aspirations to build on its PayBright acquisition to remove friction from purchase processes in general, a $7.6trn market compared to $600bn in just eCommerce.
Regulatory Corner 🔎
🇺🇸 Robinhood is entering the lobbying space in order to protect its business model according to CNBC. Its new in-house team is targeting the Wall Street Tax Act of 2019 and its 0.1% excise tax on financial transactions. This occurred in the week that the family of Alex Kearns, a 20 year old Robinhood customer took his life after he mistakenly thought he had lost $730k on the platform.
🇺🇸 Big banks are fighting back against the uneven playing field they are competing on due to the Durbin amendment. Banking giants want to cap the revenue that tech firms collect from debit cards with the same limits that they face.
🙌🏻 FATP Take - The Durbin Amendment provided an exemption for banks with assets <$10bn for the limits it imposed on interchange. Whilst the exemption was meant to help merchants reduce costs and enable smaller banks to better compete with larger banks, the creep of big tech companies into this space and taking advantage of their partnerships with smaller banks would seem to be an unintended consequence that banks want stopped.
Longer reads 📜
The battle for the checkout - yours truly
The SPAC Boom, Visualised - Elliot Bentley, WSJ h/t to Matt Austin
How Bill.com, the boring bookkeeper of fintech became one of 2020’s hottest stocks - Jeff Kauflin, Forbes
The Arc of Institutionalisation - Michael Sidgmore
Crypto’s growing center ground - Simon Taylor, Fintech Brain Food
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Michael