Money2020 Recap: Crypto, Infrastructure, Community Banks
Monzo Looking to Raise £300m, Revolut's Mexico CEO, DOJ Probing Visa's Fintech Payments
Hey all, Jason here.
This should be hitting your inbox around the time I touchdown in London Heathrow on my way home to the Netherlands. It has been a crazy, hectic but fun and productive week. I’m wrapping up this issue sitting in the lobby of my hotel in LA — the capstone to a week of fintech meetings, panel discussions, happy hours, and dinners. This was my first Money2020 (well, in the US anyway), and I wasn’t quite sure what to expect. The event exceeded my expectations, and I’m looking forward to next year’s.
You probably noticed an email on Thursday from me, which contained the first episode of the Fintech Recap podcast, recorded live at Money2020 (if you missed it, you can listen to it here.) Many thanks to Alex Johnson for inviting me to participate and the team at Money2020 for hosting us!
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Money2020 Recap: Crypto, Infrastructure, Community Banks
What a week. Six days in Las Vegas is about six days too many for me. But it was worth it to attend this year’s Money2020. And it seems a lot of folks shared that sentiment, given by the length of the line at Starbucks in the Venetian.
Here are some of my key take aways from the expo floor, a number of panels, about 30 one-on-one meetings, not to mention various happy hours, dinners, and chance encounters.
Crypto Crypto Everywhere
Crypto was definitely a dominant theme at the show. Throughout the venue, on the stage, in conversations, crypto was inescapable. While there isn’t universal agreement on all crypto use cases (is it an investable asset? currency? NFTs? DAOs? etc.) there does seem to be a rapidly coalescing consensus around crypto, and, specifically, stablecoins’ potential in payments — something evidenced by announcements like Mastercard’s recent move to partner with Bakkt to offer crypto functionality to banks and merchants on its network.
My biggest take away from the event about crypto writ large is the speed with which it is becoming mainstream. For years, establishment banks were content to ignore or downplay the threat from fintech startups — a narrative that only began changing more recently, as industry stalwarts like Jamie Dimon recognized the threat (and opportunity) and began reacting. Comparatively, industry interest in an adoption of crypto by “TradFi” players has moved at lightning speed.
It’s Infrastructure… Year?
I think I heard the phrase “picks and shovels” no fewer than a couple dozen times last week. Judging by the number of fintech and crypto “infrastructure” companies at the event, the gold rush is in full swing. Venture capital has poured into the space, with numerous X-as-a-Service companies coming out of stealth or raising rounds recently.
Examples of offerings in the broader “infrastructure” space include Banking-as-a-Service companies like Unit, Synctera, Railsbank, and Nium; KYC/AML-as-a-Service, like Alloy; fraud screening platforms, like Feedzai; Cards-as-a-Service companies, like Marqeta, Galileo, Deserve, and Zeta; open banking platforms (Plaid, MX, Finicity); payroll APIs (Argyle, Pinwheel, Finch); and so on.
The allure of the “picks and shovels” story is that the companies look more like software companies, where there may be higher upfront costs to build a technology stack or platform, but marginal costs to sell to the next customer are (relatively) low, making for a business with higher margin revenue that is more scalable.
Infrastructure businesses often also boast some amount of network effects, whereby the quality of the product improves as more customers are onboarded (think Stripe Radar, where more customers = more data = better fraud screening.) Contrast this with many “fintech 1.0” companies, that offer financial, not software products — loans, checking accounts, credit cards and the like.
Still, if infrastructure is in high gear now, I’m skeptical that all of players will strike gold. There’s a finite number of customers for these services and thus a limit on the number of infrastructure companies that are supportable in a given segment. I can imagine the market is big enough to support more than one payroll API player, for instance — but is it big enough to support 5? 10?
Community Banks & Credit Unions
I was pleasantly surprised by the number of conversations I had with folks from or about smaller, local community banks and credit unions. The US remains a highly fragmented retail and SMB banking market, with around 5,000 banks and another 5,000 credit unions. A key asset small banks have long relied on — their geographic footprint — has long been in decline.
The pandemic accelerated this trend, and, perhaps, forced small banks to rethink their strategy and position in the market. I heard a number of ideas and approaches small banks are considering; a common theme was streamlining operations to focus on a specific segment where they had a unique competitive advantage. For instance, in a specific industry (eg, agriculture or construction) where they have differentiated expertise. Because small banks lack the technology resources of large banks, leveraging vendors and partnerships was also a common refrain for developing the capabilities their customers expect.
While leveraging their other key asset — their banking license — is a topic that came up, I would argue the constraint that exists for infrastructure providers exists here as well. What is the ‘right number’ of partner banks to offer debit card programs, like Bancorp and Stride? Again, it’s more than one, but (presumably) fewer than 5,000.
Pursuing a “partner bank” model has worked well and driven strong ROE at banks that were early to the game, but executing such a strategy still requires resources and technological sophistication (eg, software developers, product managers), areas that are likely to continue to be a challenge for many small banks.
(Admittedly, there’s a selection bias in that these folks were attending Money20/20, but still anecdotally interesting.)
Monzo Looks to Raise £300m, Revolut Is Losing Its US CEO But Gets One for Mexico
Down but not out. Monzo, which recently withdrew its US charter application and saw its valuation decline considerably in a pandemic-era down round, is reportedly looking to raise £300m at a valuation of £3-4 billion — a substantial jump from the neobanks last raise at valuation of just £1.1 billion. The news comes amidst raises — and ballooning valuations — from neobank peers like Revolut, Chime, and Varo (I wrote about this last week here.)
Meanwhile at Revolut, US CEO Ron Oliveira is set to leave, The Block is reporting. Revolut launched its US product in March of 2020 — just as the COVID pandemic was beginning to grip the country — and, as of yet, it has failed to make meaningful inroads in the country. The company isn’t giving up on the potentially lucrative US market. It has launched its so-called US-Mexico remittance corridor, cut crypto trading fees, secured its broker-dealer license, and is in the process of applying for a US bank charter.
While its US CEO is on the way out, Revolut has appointed a CEO to get things up and running in Mexico — former RappiPay exec Juan Miguel Guerra. Launching in Mexico is aligned with a key component of the company’s US strategy of attracting users by facilitating remittances between the two countries at no cost and at the ‘real’ exchange rate.
DOJ Probing Visa on Fintech Relationships: More ‘Collusion’ than Disruption?
As part of its ongoing antitrust investigation, the Department of Justice is looking at Visa’s relationships with fintech companies like Square, Stripe, and Paypal.
Specifically, DOJ is looking at financial incentives Visa paid to the companies and whether such incentives discouraged the companies from using other card networks or money movement mechanisms. According to the Wall Street Journal (emphasis added):
“Visa has at times offered to lower fees or give other rewards in exchange for fintech firms sending more transactions over Visa rails rather than other networks or technologies.
Pricing arrangements of interest to the Justice Department include one where Visa offered financial incentives to PayPal, according to people familiar with the matter. Investigators are looking into whether those incentives convinced PayPal to encourage people to make payments via Visa-branded cards, some of those people said.”
CBInsights: State of Fintech
The latest research report from CBInsights on the global state of fintech investing is well worth a read. It provides hard and fast numbers on what has been a furious couple quarters of fundraising, M&A activity, and public market exits.
Other Good Reads
Making Financial Services Easy to Code (a16z)
What’s a DAO? (Intelligencer)
How Brazil’s Nubank Became a $30Bn Fintech (FT)
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