#225—Where fintech goes next

Also, Greg’s take on Tornado Cash guidance

Sep 26, 2022

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.

This week:

Where fintech goes next
Greg Kidd on the US Treasury’s Tornado Cash guidance
This week in digital identity
This week in stablecoins
Stuff happens

1. Where fintech goes next

It’s a tough time for fintech. Those that went public recently are well off their highs. And with the Fed digging in its heels, there’s no obvious respite around the corner. The grow fast and figure out profits playbook is out the window.

These conditions also favor the incumbents—big banks, which are in the business of selling debt, and debt’s only getting more expensive. They also have the firepower to take advantage of opportunistic acquisitions while being pros at compliance and regulations.

And regulators are also taking notice. We shared the other week that the OCC is taking a more careful and stringent view of bank partnerships with fintechs:

Small banks that partner with fintech companies can expect more governmental scrutiny of those arrangements, industry observers said in response to a recent enforcement action against a community bank in Virginia.
Under a public agreement last month with the Office of the Comptroller of the Currency, Blue Ridge Bank in Martinsville must bolster its oversight of fintech partners and improve its controls for the prevention of money laundering.
…
"There's every reason to believe it's symptomatic of wider increased scrutiny, at a minimum from the OCC," said Jason Mikula, a former Goldman Sachs executive who writes the Fintech Business Weekly newsletter on Substack.

So where does fintech go from here?

Simon Taylor, who writes the excellent Substack newsletter, Fintech Brain Food, has an idea in a recent post (via /gregkidd).

First, some quick answers to the biggest questions and themes around fintech:

Was Fintech propped up? When growth is the metric, VC cash is the fuel. Fintech companies over-hired and over-marketed to gain market share.
Is it regulatory arbitrage? The Durbin Amendment became a game changer. Fintech companies benefitted from regulatory arbitrage to bootstrap growth.
Fintech companies do much more than consumer Neobanks. Not all Fintech is created equal, and the category winners are monsters that have changed the finance landscape. So the criticism that it’s “all regulatory arbitrage” isn’t fair and doesn’t apply outside the US.
Are the products the same? It depends on what you mean by the word "Product." Fintech companies technically offer "the same financial products" as banks, but I have an issue with how bankers define "product."
When you unlock an industry in the US, you unlock its capital globally. Fintech growth unlocked growth capital globally and across the entire financial services value chain.
Will the good times for banks return? Banks are having their moment in the sun. Interest rates are rising, and banks are set to benefit, but I think they might waste it.
But Fintech is just getting started. In this new reality, there are new opportunities.

Second, fintech infrastructure is only getting more robust and specialized. The result is that that finance is getting better. Taylor explains:

The entire customer lifecycle and value chain now has an army of specialist Fintech providers. Customer onboarding, UX, compliance, fraud, AML, payments, ledgers, accounting, and reg reporting. If it happens in a Fintech company, an API-first company offers it.
It's also becoming increasingly specialist.
KYC isn't enough anymore. Take Middesk and Detected, who do KYB and onboarding specifically for business customers of a Neobank or a non-bank.
"AML" isn't enough anymore. Knowing who your customer is, doesn't mean you'll stop them (or others) from laundering money or committing fraud. Oh, and if you're in Crypto, it gets even more complicated. So there's a slew of specialist Crypto forensics companies with $1bn+ valuations like Chainalysis, Elliptic, and TRM.
These companies wouldn't exist if there wasn't demand for their product.

Third, fintech’s inherent advantage is the ability to focus on customer needs versus financial products when compared to incumbent banks:

If you define what banks sell as "regulated financial products," then yes, what the Fintech companies (or companies who embed finance) do is distribute a regulated financial product slightly differently.
But.
How someone at a consumer tech company thinks about a product is markedly different from what most banks do. In fact, banks now have a thing called "digital product managers" for people who think in customer terms instead of financial product terms.
On some level, this split makes sense. Financial services regulation and infrastructure is complicated, and having someone with deep expertise there is helpful in a large enough organization.
But my issue is one of culture.
The regulated financial product has nothing to do with solving the customer problem (or job-to-be-done).
And that's the real insight.
If your goal is to sell more mortgages and attract more deposits, that's very different from a company that launches with "get paid early" or real-time payments as their wedge feature. Or take the corporate spend management cards, receipts that just work.
These experiences are grounded in solving the customer problem first and monetizing second.
Incumbents can eventually copy+paste all of these experiences and even M&A their way back into relevance. Still, there will always be space for nimble, smaller companies to solve the pain incumbents don't see.
Yes. Incumbents and Fintech companies "sell the same product," but I can wear the same shoes as Serena Williams; it doesn't make me good at tennis.

Finally, the real edge will exist in the approach to regulations:

Greg from Sardine said something a few days ago that stuck with me.
“The Fintech companies that go on to make it huge are the ones that figured out Fraud and Compliance.”
And it's so true. Not all Fintech companies are good at compliance, but some are really good. The tools, techniques, and processes Fintech companies use today will become industry standards.
Incumbents can learn from this, and as we enter a correction, Fintech companies will increasingly focus on fraud, compliance, and risk as a key strategic advantage.

Taylor’s entire newsletter is worth checking out.

Relevant:

2. Greg Kidd on the US Treasury’s Tornado Cash guidance

Here’s Protocol Fintech:

“These guidelines are very narrow,” Greg Kidd, founder of VC firm Hard Yaka, told Protocol. But, he added, the clarification on dusting and “the notion that OFAC won’t prioritize enforcement against these marginal circumstances" are positive steps.

Relevant:

Crypto Pushes Back on Tornado Cash Crackdown

3. This week in digital identity

GlobaliD’s identity evangelist Vadim Slavin: Implications of Privacy Concerns for Web3 Identity Platforms
GlobaliD 101: Reusable Identity
GlobaliD Meet the Team: Nikhil Khare, Product Manager
Via /vs—Prepared Remarks of FinCEN Acting Deputy Director Jimmy Kirby During the 2022 Federal Identity Forum & Exposition (FedID)
Nigeria Reaches 90M Digital ID Registrations as Database Capacity Issue Looms

4. This week in stablecoins

Jamie Dimon on stablecoins (via Protocol Fintech):

JPMorgan Chase’s Jamie Dimon said he thinks CBDCs are a fair idea, but doesn’t expect the Federal Reserve to implement its use smoothly. He described the Fed as less nimble than private institutions, and ill equipped for something so technically complicated. “You’re not going to see the Fed running call centers,” he mused. “There’s a lot more to banking services than a token that moves the money.”
Specifically, Dimon said he was wary of the Fed’s ability to manage fraud, risk prevention and regulatory responsibilities like the Community Reinvestment Act. (He also threw out there that he considers other cryptocurrencies, like bitcoin, to be “decentralized Ponzi schemes.”)

Relevant:

USBC

Discussion about this post

USBC

#225—Where fintech goes next

Also, Greg’s take on Tornado Cash guidance

1. Where fintech goes next

2. Greg Kidd on the US Treasury’s Tornado Cash guidance

3. This week in digital identity

4. This week in stablecoins

5. Stuff happens

Discussion about this post