Which hill are you climbing?
“They laughed at Columbus and they laughed at the Wright brothers. But they also laughed at Bozo the Clown.”
- Carl Sagan
Recent News
With the ongoing issues with Wirecard, concern has shifted to the fintechs that use the service, a list that includes ANNA, Soldo, Stocard, Revolut and Curve accoridng to Altfi. Curve sent notifications to customers late yesterday afternoon announcing “Curve transaction and money transfer services will be temporarily suspended with immediate effect” whilst Revolut sent out a reassuring message that services have been switched away from Wirecard and there should be no impact on customers.
Mastercard agreeing to buy data aggregator Finicity for $825m this week is a reaction to Visa buying Plaid last year for $5.3bn and is set to further deepen Mastercard’s open banking work. Finicity works with banks and fintechs to enable the seamless flow of customer data. The API space is very hot currently as it is the main route for non-banks to access customer data. Whilst banks have been forced to make APIs available in Europe under open banking, no such regulations exist in USA and currently companies like Plaid predominantly use a technique called “screen scraping” to get customer information. This method is less secure and more resource intensive for banks to deal with so a shift to APIs is inevitable, with more acquisitions in this space likely. The list of API startups is long!
Payfone has raised $100m from Apax Partners and Blue Venture Fund joining existing investors which include TransUnion, Wellington Management, Verizon and Amex Ventures. Payfone specialises in real-time identity authentication and verification, serving financial institutions and health insurers. With more financial services shifting to digital and mobile devices, being able to verify the identity of the person trying to access an account is vital to preventing fraud. Their fraud prevention services are provided by APIs and create a trust score. Currently there are a few competitors but co-founder Rodger Desai has spoken about forming a consortium, competing with credit unions, for a more industry wide solution, so it was interesting to see TransUnion on their cap table. The solution also has privacy concerns and could be an impediment to future growth if consumer backlash grows.
Checkout.com recently raised a $150m Series B round with a $5.5bn valuation, making it Europe’s joint hightest valued fintech, a crown shared with Revolut. Series B funding was led by a US hedge-fund Coatue and existing investors, including Insight Partners, DST Global and Blossom Capital. Out of the two, I personally would put my money with Checkout.com given negative news surrounding Revolut and the oft fickle nature of the consumer.
Whatsapp has launched payment services in Brazil where it has 120m monthly active users. This demonstrates the continuation of the embedded finance trend where non-financial companies offer financial services and has the possibility to upend the payments space. The serivce will allow users to send money to each other and buy from local businesses. Consumers, linking their whatsapp account to a Mastercard / Visa credit or debit card, can use the service free with businesses paying 3.99%. Users in Brazil were already able to see catalogues and stock links from SMBs in the app as well as directly asking them questions. Whatsapp has 2bn users and the potential to be able to send money instantly via a Facebook controlled payment rails could be a game changer. The remmitances space is ripe for disruption and Whatsapp undoubtedly has an eye on the space. Mastercard and Visa will also benefit in the process, as usual! What could up-end these two financial giants I wonder? If Facebook had a mobile wallet type account, like Venmo, that allowed you to pay people and buy goods, could it replace a traditional bank account and a need for a Visa/Mastercard branded card?
Continuing the embedded finance trend was the announcement by Amazon that it was partnering with Goldman Sachs to give merchants revolving lines of credit through the latter’s Marcus brand. In a rare ceeding of control, Amazon will allow Goldman to do the underwriting. Goldman CEO David Soloman said in January that the firm wanted to become a “banking-as-a-service” for companies and what better place to start than Amazon. Goldman seem to be one of the banks that “gets” the potential of fintech and through partnerships with leading brands like Amazon and Apple, will profit handsomely. Shopify is taking a similar approach into embedded finance by providing customers with fianancing for purchases with its “Shop Pay Installments” product and “Shopify Balance”, a debit card for merchants.
One thing to note with the two fundraises above are the presence of non-traditional investors in later stage VC rounds. PE firms, asset managers and hedge funds are not usually typical investors but the lack of returns elsewhere and large amounts of dry powder has meant these investors are broadening their horizons and is a growing trend that I believe will continue.
What I’ve read/listened to this week
One of my favourite weekly newsletters is from Benedict Evans, a former a16z partner, and I got time to circle back to one post from May titled “Not even wrong: ways to predict tech”. A very insightful post looking through the lens of a VC when evaluating a new technology. Asking deeper questions to ascertain why the circumstances that currently make a product or technology unviable will change in the future or why user’s behaviour will change are far more insightful. Evans says to look for a breakthrough of principle and for technologies with a “clear and obvious path to make it better”. This reminded me of previously reading about the practice of brainstorming all the reasons why your idea or business might fail. This identifies the key challenges and highlights the fundamental leap of faith you are asking investors to make, enabling you to prioritise the biggest challenges and provide evidence to investors of how they are being solved. Some of these challenges should form KPIs for the business to track. A similar practice to what we learn in my Lean Launchpad class.
Chris Dixon, an entrepreneur and current investor with a16z, wrote back in 2009 about “climbing the wrong hill”, a classic problem in computer science which he relates to someone working in finance but with a long-term goal of working at or founding a tech startup. The lure of finance is strong and among ambitious people there is a tendancy to keep trying to move up, along this small hill, forgetting about the long-term goal, which is the larger hill. Dixon notes that behavioural economists have shown that people overvalue near term rewards over long term rewards, especially ambitious people. Younger people are better of meadering in your early career and when you find a bigger hill, don’t waste time on the current hill no matter how luring its rewards. This REALLY resonated with me, coming from a career in finance and I guess I would describe my pursuit of an MBA as meadering trying to find the larger hill, despite being in my thirties.
Tyler Griffin from Financial Venture Studio proposes the separation of banking into two types of businesses, those where capital matters, and those where it doesn’t. He predicts traditional banks will dominate those areas where capital matters but tech companies will dominate everything else. The consequences being consumers will see the cost of financial services decline but they will have to pay for difference services separately. He describes the “confuseopoly” of having products and services bundled together, not knowing how much each initially costs and a great unbundling will occur with each product/service forced to stand on its own economically. I generally agree but I believe that in lending as an example, where capital does matter, technology has a very important role to play in the distribution and underwriting processes meaning technology companies will still have a significant role to play. You could argue that banks might not be needed as the middle-men and lending will become more P2P. In the UK we have never had to “pay” for banking in the form of a monthly fee for a current account but maybe that will start to change with the unbundling. I would predict the take-up of such a product would be quite slow.
Startup of the week - MishiPay
With shops rapidly moving to accept contactless payments due to COVID-19, the use of cash is diminishing in society. Merchants are trying to establish ways of conducting business with the least physical contact possible. Estate agents are doing virtual property viewings and even some car selling has gone remote.
MishiPay is a self-checkout technology allowing users to scan the barcode of a product on their phone, pay using a credit card or Apple/Google Pay and to then walk out of the store with the security device on the product disabled.
They’ve raised a £3.5m Series A in September 2019 from Amex Ventures, Commerce Ventures and existing investor Nauta Capital as it looks to expand further across Europe and into US. The presence of Amex ventures should provide a strategic partner with limitless resources and expertise in the payments space.
It enables merchants to increase conversions of customers who are put-off by queues and free’s up in-store workers to provide more value to customers. Analysts estimate on average 5 abandoned baskets of €40 each per store per day, resulting on an average revenue loss per day of €200. Considering the number of stores across the globe, this is a huge problem, not to mention paper receipts and the problems with returns and refunds. Current merchants of MishiPay include Decathalon and MediaMarktSaturn.
Automated checkout and cashier-less technology is the future and with a quick integration with existing infrastructure, MishiPay is well place to take advantage.