By Alex Johnson
3 Fintech News Stories
#1: Lilly, Revisited.
In my last newsletter, I wrote a bit about a new fintech company called Lilly, which is focused on helping consumers invest for retirement through, among other things, channeling the money they earn through cashback credit cards into IRAs.
In researching the company, I noticed that its terms of service contained some references to crypto and stablecoins, which gave me a bit of heartburn. After reviewing the terms of service, I wrote:
OK, this sounds way scarier and more complex than I thought or that, quite frankly, it needs to be in order to fulfill the brand promise that Lilly is making to customers.
I don’t know if Lilly is yield farming with customer deposits (although I can’t imagine why else they would be converting funds to USDC or where else this unspecified interest is being generated from), but regardless, I shouldn’t be having to wonder about this at all! There is a simple, non-scary way to solve this problem!
Well, as it turns out, Lilly isn’t doing anything with crypto or stablecoins! They are, in fact, solving this problem in the simple, non-scary way that I figured – linking to card accounts via Plaid, notifying customers whenever they have earned cashback, and making it push-button easy for customers to move that cashback into their IRA.
According to Lilly’s founder Kori Handy (who was nice enough to reach out to me and give me an update), Lilly’s terms of service hadn’t been updated in a while, and the references to crypto and stablecoin were from a much earlier (and very brief) iteration of the product.
I was delighted to learn this (crypto and retirement accounts don’t mix well, IMHO), and it was a nice reminder for me of the usefulness of Occam’s razor – the simplest explanation is often the right one.
Also, a quick reminder to all the early-stage fintech founders out there – update those terms of service!
#2: Klarna Kosmanauts
Klarna is trying to attract a new set of customers:
Klarna’s open banking unit, Klarna Kosma, has unveiled an initiative to help startups develop Proofs of Concepts in the e-commerce, data analytics and fintech space.
The “autopilot” initiative will let a selection of startups as well as more established firms access all the Klarna Kosma products and 15,000 banks for three months, free of charge.
Klarna says it hopes this will accelerate open banking innovation by providing players in the space with a zero-cost product development ‘sandbox’ built on the world’s largest bank aggregation platform.
I’ll be honest with you; I didn’t even know Klarna had an open banking unit.
It does! Kosma is a direct descendant of SOFORT, an open banking payment service provider that Klarna acquired in 2014.
Today, Kosma is a European open banking platform in the vein of a Tink or TrueLayer. It was launched in March of 2022, apparently as a diversification strategy for Klarna, which has had a … slightly rough last couple of years.
With this “autopilot” initiative, Klarna is clearly trying to attract early-stage fintech companies and non-finance brands to build on top of it rather than its better-known competitors. I get why this is a priority for Klarna, but I’m not super optimistic. It’s really difficult to operate two completely different businesses under one company, especially when the competitors of one business are the prospective clients of the other.
#3: A Middle Path Between DeFi and CeFi
Visa is working on a way to enable automatic recurring payments for self-custodial crypto wallets:
In a new technical paper, the researchers investigate how to bring the commonplace automatic recurring payment option to the world of crypto and blockchain.
This, the paper says, “is not a trivial task on a blockchain like Ethereum”, adding: “For self-custodial wallets where the user has sole control over the wallet and private keys, automated programmable payments that can pull payments automatically from a user’s account at recurring intervals requires engineering work.”
Visa’s answer is a smart contract application that allows a user to set up a programmable payment instruction that can push funds automatically from one self-custodial wallet account to another at recurring intervals, without requiring the user’s active participation each time.
It relies on a concept known as “Account Abstraction” (AA) which makes user accounts on Ethereum function more like smart contracts by allowing a user to have programmable features embedded into their wallets.
In the wake of FTX, the question that everyone in and around the crypto ecosystem is wrestling with is, what is the appropriate degree of centralization for mass-market crypto products?
If 2022 taught us anything, it’s that a fully centralized platform presents certain risks (those risks are ameliorated if the centralized platform is a licensed and closely supervised bank). And yet we also know that fully decentralized crypto products, which require a great degree of work from individual consumers to manage their own wallets and keys, are a long way from seeing mass market adoption. Most consumers will always gravitate to convenience above all else.
This line of thinking from Visa suggests a middle path, one in which consumers maintain control of their keys, but layers of abstraction are built on top in order to enable the types of convenient, hands-off financial transactions that consumers expect.
This is all very early, obviously, but it is interesting!
2 Fintech Content Recommendations
#1: What Can We Learn from Barnes & Noble’s Surprising Turnaround? (by Ted Gioia, The Honest Broker) 📚
This story is about a 136-year-old company that, after many failed attempts to keep up with its technology-centric competitors, finally figured out how to thrive by getting back to basics and doing what it does best.
Feels like it might be applicable to banking and fintech.
The absolute best part of this story is the importance of genuinely loving what you do (particularly if you are a CEO). Obviously, this is critical in creative fields like literature and music, but I think it’s relevant to businesses in every industry. We just saw the results of Southwest Airlines moving from Herb Kelleher (who genuinely seemed to live for getting people to their destinations cheaply and on time) as CEO to James Parker and then Gary Kelly, both of whom were former CFOs and, by all appearances, more passionate about quarterly earnings than the business of operating an airline.
#2: My 6 Predictions For Fintech In 2023 (by Rex Salisbury, Cambrian Ventures) 📚
I’m going to sit out the predictions game this year. I’m honestly not very good at it, so I will leave it to others.
And I’ll bring you the best ones I find.
First up – Rex.
His predictions are excellent and have a central theme running through them – fintech has become a mature industry, and that maturity will profoundly shape the trends and priorities of the broader ecosystem. This will mean more repeat founders and more companies focused on solving less obvious but critically important B2B plumbing problems.
1 Question to Ponder
If an experienced early-stage fintech operator was looking for a change of pace and wanted to jump into a product strategy or business development role at a more mature, established company that was looking to import some fintech brain power, where should they look?
I was thinking maybe one of the more innovative super-regional banks in the U.S.? Or maybe one of the card networks?