Digital lending is the most profitable fintech model; Big techs in finance: why they deserve attention; Crypto insider trading;
In this edition:
- Stripe launches App Marketplace, is it another move towards building a business super app?
- Web3 app download on the rise
- Stripe and now Plaid is expanding beyond their core product
- Crypto insider trading
- Cross-border Payments: Problems and Expectations
- Digital lending is the most profitable fintech model
- LUNA reboot plummets over 70% just hours after debut
- Big techs in finance: why they deserve attention
- A framework for navigating down markets: Scenario Plans
Stripe launches App Marketplace, is it another move towards building a business super app?
App Marketplace, is a new offering where Stripe will both provide access to third-party apps, as well as scripts created by app publishers, users and Stripe itself, that incorporate those apps with Stripe. It potentially represents its biggest leap yet away from payments.
The Marketplace is launching with 50 apps that Stripe’s customers are already using as part of their marketing, payments and business development stacks, such as DocuSign, Dropbox, Intercom, Intuit Mailchimp, Ramp and Xero. There will be more added over time.
Initially, scripts incorporating those apps with Stripe will be free to use — the aim is to get some critical mass around usage, so barriers are low — although given it’s a marketplace, and that it will try to encourage more third parties to build apps for that ecosystem, Stripe might in the future incorporate charging for some of those scripts. Third-party apps that are part of those scripts and are paid services, meanwhile, will charge customers directly if those users are not already subscribers. But as with the scripts themselves, Stripe might also, over time, also bring new payments on to its own platform as well.
And perhaps most interestingly of all, while initially the idea will be to create scripts for some of the most common usages, in theory those scripts can cover any kind of business flow that sits naturally with Stripe, even if it doesn’t involve Stripe services themselves.
The launch of the Marketplace is coming on the heels of a few other product launches that Stripe has made in recent months that have taken the company beyond the services that helped to make its name, namely an API that was largely used to make it easier for merchants and others taking card payments online to do so (even the company’s name, Stripe, is a reference to the magnetic strip on the back of payments cards). That has included making long-awaited strides into cryptocurrency; Connections, a Plaid-like service to help customers pull in financial data from bank accounts; and most recently an ETL product to funnel and analyze Stripe data more effectively in Snowflake and AWS Redshift warehouses.
To be fair, the company has for years been making small moves to expand it beyond payments into adjacent areas like tax calculations, money advances and even business incorporation. This new wave of tools however represents very large financial infrastructure plays that speak to how the company is looking to fully fill out its outsized valuation, these days perhaps an even more important task given what is happening both the public and private funding markets.
Web3 app download on the rise
The number of apps describing themselves and/or marketing themselves as “web3” is growing. Apptopia data indicates this trend started in 2020 and ramped up in 2022. The number of Web3 apps available for download is growing almost 5x faster in 2022 than in 2021. Year-to-date, apps available for downloads are up 88%.
Google Trends data has picked up on this as well, with searches for web3 stabilizing at a higher level this calendar year. What is web3? It’s what people are calling a soon to come/partially here evolution of the internet that is based on decentralized blockchains and open protocols. You can learn more about what web3 really is here, from The New York Times.
Take a peek at the image below. A good chunk of the apps describing themselves as web3 have to do with payments or storing value. Money plays a big role in web3 because the idea is that each individual owns their time, content, products, NFTs, etc. For example, Facebook today can monetize your data and in return, you use the platform for free. Web3 proponents would argue it is not actually free, you are providing Facebook with your data and so you should actually be compensated for that.
Even though the number of apps marketing themselves as web3 is going up, performance of crypto and NFT marketplace apps — massive components of web3 — is trending downward. For example, NFT marketplace apps OpenSea and VeVe are down 90%+ off their highs. As a grouping, the top 50 crypto apps have seen downloads fall 64% since November.
There are web3 apps growing at a rapid rate. Twig is one of these apps. Its App Store description says the app is “powering the Web 3.0 green payment infrastructure.” The company offers people cash instantly for the goods they’re willing to sell. Twig delivers users a Visa branded debit card which it sends users’ funds to when it agrees to purchase their clothing and electronics.
STEPN, a health & fitness apps, just launched in February 2022 and has had a strong start. It describes itself as “a Web3 running app with fun game and social elements.” Users can collect NFTs by running outdoors.
Stripe and now Plaid is expanding beyond their core product
In conjunction with its “Plaid Forum” event, the startup today unveiled a number of “product enhancements and new initiatives,” which include moving into identity and income verification, fraud prevention and providing new tools for account funding and disbursements. Its first major expansion since its 2013 inception.
The move comes two weeks after payments giant Stripe announced it was encroaching on Plaid’s territory with a new product of its own. The news positions Plaid even further into direct competition with Stripe as the two fintech giants are increasingly offering more and more of the same services.
In a blog post entitled “Ushering in fintech’s next phase,” Plaid CEO and co-founder Zach Perret noted that the majority of Plaid’s network traffic has run through direct bank APIs that are made possible through bank partnerships and Plaid Exchange, a data access offering that is used by over 1,000 banks and fintechs to deliver API-based data access to their customers.
But now, the company has expanded its data connectivity offering to include Core Exchange, which Perret said offers banks, fintechs or “data partners” another way to “securely” share data when using Plaid.
The move into identity verification is not at all a surprise considering that Plaid shelled out $250 million in January to purchase Cognito, which offered ID verification, along with help with thorny issues like KYC rules and anti-money laundering requirements.
Beyond those new offerings, in what is perhaps the most surprising new news to come out of the company today, Plaid said it is also hoping to turn new users into active customers through account funding, which will give people a way to pay, or be paid, for goods and services.
Finally, the company believes it is now offering risk-based tools designed to help lower risk and fraud in account funding and transfers via ACH. Its new Signal (transaction monitoring) offering for example, uses machine learning to analyze more than 1,000 risk factors and provide scores and insights that Plaid says provide “more certainty that a transaction will settle,” so a company can accelerate access to those funds without increasing risk. Early customers, Plaid claims, have seen “significant reductions” in unauthorized returns and NSF fees.
Crypto insider trading
Here is the crypto insider trading scandal that one actually sees, repeatedly:
1. There is some crypto project. Maybe it does something, but this is irrelevant to the discussion.
2. What is relevant is market depth: If you can sell the project’s token to more people, then it will be more valuable. In particular, if it is listed on one of the big cryptocurrency exchanges, the price will go up, because more people will buy it, independent of any considerations about what the token actually does or whether the project will ultimately succeed.
3. The project’s token gets listed on a big exchange.
4. While the listing is being considered, but before it is publicly announced, somebody — presumably an insider of the project or of the exchange — buys a bunch of tokens.
5. The token lists on the exchange, the price goes up, and the insider gets rich from her well-timed token purchases.
In a sense this is novel and interesting because crypto tokens are (at least sometimes) not securities, everything happens vaguely offshore, and the law of insider trading in this area is underdeveloped and arguably unclear.
It is also interesting because the insider trading tends to occur on public blockchains, which means (1) everyone can see the concentrated well-timed trades right before the listing event but (2) you can’t necessarily tie the wallet doing those trades to the actual person involved (to see if it’s an insider, etc.).
But the inside information is always fundamentally about the exchange, not about the project. The core inside information is never “the fundamental value of this token has increased,” always “we can sell this token to more people.” It is a dispiriting sort of insider trading.
Inside trading:
Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance — the world’s largest cryptocurrency exchange by volume — said in a blog post that it would list Gnosis, allowing it to be traded among its users.
Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.
Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000 — netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading.
There is nothing particularly novel or interesting about this; this is just insider trading. Just normal insider trading. Illegal stuff! But normal.
Cross-border Payments: Problems and Expectations
Traditional B2B cross-border payments tend to be slow and opaque, which affects businesses and the cost structure of remittance service providers.
Cross-border payments can be streamlined and sped up by leveraging modern tools such as distributed ledger technology (DLT), which can complete transactions within minutes or even seconds.
Cross-border Payments — Ripple
All members of RippleNet are connected through Ripple’s standardized technology, xCurrent, which enables banks to message and settle the transactions of RippleNet’s members at an increased speed and with efficiency.
Ripple: Creating an Open-Source Payment Solution
• Ripple operates as both platform and currency, and is an open-source global exchange that allows parties to exchange anything of value without requiring trust accounts
• xCurrent, Ripple’s cross-border payments product for banks, offers an alternative to SWIFT for moving payments between banks and payment providers in different countries
• Ripple has the potential to disrupt the cross-border payments space as a transaction can be settled within 4 seconds or less.
Digital lending is the most profitable fintech model
Contribution per user (ARPU less the annual cost of servicing) and contribution margin (as % of revenue) is highest for fintechs in the lending segment. These fintechs usually offer lower interest rates than traditional retail banks but can still generate strong margins due to their low cost operating structures, making lending the most profitable product for fintechs. This also explains why payments giants (eg Alipay, Paytm) tend to expand into lending once they have achieved sufficient scale in the payments arena. That said, lending fintechs carry credit risk and may also be more prone to stricter regulatory oversight.
In contrast digital banking businesses have the lowest contribution margin (3% and US$2 per user) as the industry is relatively at an early stage of growth; pricing could be aggressive and the activity per user might be low. However, this should improve over time.
By market, Chinese fintechs are most profitable and this was also indicated by our broader study of over 100 fintechs’ profitability situation. Listed fintechs in China have an annual contribution per user of US$130 (versus a median US$25 for our sample) and a contribution margin of 43% (median 30%). In contrast, Indian fintechs are incurring contribution losses on each customer served. This, in our view, indicates the low pricing power of fintechs and intense competition, which is forcing companies to follow aggressive pricing strategies.
The customer payback period
The customer payback period is calculated as the customer acquisition cost divided by the annual contribution per user. A 10-year payback period for companies that currently have negative contribution margins. The payback period can help investors gauge the overall robustness and profitability of a fintech’s business model relative to peers.
The median payback period for our sample is about three years. By product, investechs and lending fintechs have the quickest payback; these companies are able to recover the costs to acquire customers in about a year. Payments fintech tend to have highest payback period; this is because ARPUs tend to be low while significant marketing spend is required to attract new users. Again, this explains why payments fintechs tend to diversify to lending or investment products once they achieve scale.
Turning to markets, Other Asia has the quickest payback period; companies like Bank Jago (Indonesia) and Kaspi (Kazakhstan) have high contribution margin relative to their customer acquisition costs. In contrast, India and LatAm seems to spend heavily to acquire unprofitable customers.
LUNA reboot plummets over 70% just hours after debut
After peaking at $19.54 earlier on Saturday, it’s been mostly downhill.
Terraform Labs early Saturday launched a new version of the Terra blockchain, “Terra 2.0,” with freshly minted LUNA tokens.
Roughly 12 hours later, LUNA (labeled LUNA2 on some exchanges) had shed almost 73% of its initial value, trading as of this writing for $5.18, according to data compiled by CoinMarketCap. It peaked earlier at $19.54.
LUNA tokens became available for trading at the Bybit cryptocurrency exchange about 10 minutes after launch, and about an hour later, KuCoin Exchange also announced it was enabling LUNA trading.
Currently, LUNA is traded across seven different exchanges — Bybit, Kucoin, Kraken, MEXC, OKK, Bitrue, and BingX — according to CoinMarketCap. None of the exchanges have enabled LUNA futures trading.
Terra CEO Do Kwon was mostly quiet on Twitter today other than retweeting announcements from exchanges.
“Credibility is the ultimate currency,” tweeted Binance CEO Changpeng Zhao shortly after Terra 2.0 debuted. (Binance was among those offering support for Terra’s new blockchain, however.)
Other Twitter users said they were sticking by the original LUNA, since renamed Terra Classic (LUNC) and referred to by some as LUNA Classic, which is down 29% over the past 24 hours to $0.00009031, according to CoinMarketCap. LUNC peaked last month at $119.18 before a historic crash that wiped out tens of billions of dollars in value.
Out of 1 billion new LUNA tokens, only 21 million were airdropped on Saturday and added to the circulating supply, according to CoinMarketCap. The rest of the tokens will be airdropped in phases.
Big techs in finance: why they deserve attention
Big techs are increasingly making inroads into finance. While big tech firms do not operate primarily in financial services, they offer them as part of a much wider set of activities. Big tech firms’ involvement in finance started with payments, where they have reached a substantial market share in some jurisdictions. They soon expanded into other sectors and are now also involved in the provision of credit (particularly consumer financing and microloans with shorter maturities), banking, crowdfunding, asset management and insurance.
While financial services currently do not contribute a substantial amount to big techs’ overall revenues8 and mostly play a subordinated role in their business model, this has the potential to change rapidly due to their unique features and they could quickly become systemically important — or “too big to fail”. Four features stand out.
- First, big techs are exploiting activities with strong network effects. As such, they benefit from competitive advantages stemming from the so-called data analytics, network externalities and interwoven activities (DNA) loop. Once a big tech has attracted a sufficient mass of users on both sides of its platform, network effects kick in, accelerating its growth and increasing returns to scale. Every additional user creates value for all others — more buyers attract more sellers and vice versa. The more users a platform has, the more data it generates. More data, in turn, provide a better basis for data analytics, which enhances existing services and thereby attracts more users.
- Second, significant network effects may enable big techs to become gatekeepers, allowing them to leverage their dominant position in a given market to exert influence over its functioning. This may include control over who can enter the market, who receives what kind of data and how the market operates. Their sphere of influence in one market often extends to other markets connected to it.
- Third, big techs have a large and captive user base at their disposal. Extensive customer networks, coupled with low online acquisition costs, bring with them the ability to scale up quickly in market segments that are outside their core business. For example, it took Ant Financial’s Sesame Credit 11 months to reach 100 million users; its money market fund Yu’e Bao took 20 months.
- Fourth, with big data as their lifeblood, it is not surprising that big techs devote significant resources to developing or acquiring state-of-the-art technologies.10 After all, access to large troves of data generates value only if it is matched by technological capabilities to analyse it. Big techs use the insights derived from data analytics as a basis for developing novel services, including for hard-to-reach market segments, or enhancing the user experience and speed of existing ones.
A framework for navigating down markets: Scenario Plans
Burn multiples and valuation multiples tell you how efficiently and how much you need to grow, respectively. However, when the fundraising environment changes and getting capital becomes more uncertain and more expensive, you also have to carefully watch your cash balance and manage your runway.
Scenario planning is helpful for considering how macro events — wars, supply chain issues, inflation — could impact performance metrics, like growth and CAC. Keeping a close eye on cash outlay and having scenario plans will enable you to quickly adjust spending and investment in response to performance.
At a minimum, we recommend planning for the following three scenarios:
1. Base case: 80% confidence plan that you know you can hit with good burn multiple efficiency. In response, you’re slowing down or holding flat on customer acquisition investment and operating expenses (opex). Revenue growth will be below your operating plan from 6 months ago, but you will improve efficiency and absolute cash burn.
2. Best case: ARR growth and burn rate is likely at or better than your operating plan from six months ago. You’re growing highly efficiently, don’t anticipate runway concerns, and can increase opex and customer acquisitions investments.
3. Worst case: You need to slow burn significantly and lengthen your runway. You plan to grow ARR at the level you know exists, even if you dramatically cut sales/marketing spend. You may need to reduce opex, including headcount, for survival.
Once you have these plans, assess where you are on a quarterly or monthly cadence, and then adjust your spending and hiring accordingly. While we hope you are headed towards the best case scenario, if you find that you are heading towards the worst case scenario, there will likely be difficult decisions to make–do you need to layoff employees? Do you need to raise debt or a down round? There is no one-size-fits-all answer to these questions, and if you find yourself facing them, it’s time to turn to the advisors who know your business best and can help you chart a course to survive.
