Payment Wars: Revolut to take on PayPal & Apple. Here's what everyone is missing 🧠; Goldman Sachs again reminds us that FinTech is hard 😳; FTX's war chest is about to get even more solid 💸

You're missing out big time... Weekly Recap 🔁

Sep 18, 2022

👋 Hey, Linas here! Welcome back to a 🔓 weekly free edition 🔓 of my daily newsletter. Each day I focus on 3 stories that are making a difference in the financial technology space. Coupled with things worth watching & most important money movements, it’s the only newsletter you need for all things when Finance meets Tech.

If you’re not a subscriber, here’s what you missed this week:

As for today, here are the 3 FinTech stories that were making a huge difference this week. This probably was one of the most interesting weeks in the space this year so far, so definitely check out all the above stories.

Payment Wars: Revolut to take on PayPal & Apple. Here's what everyone is missing 🧠

The news 🗞 British Super App wannabe Revolut has entered the one-click checkout game with the launch of Revolut Pay. The news was first reported by Bloomberg and sparked a lot of discussions within the FinTech community.

I believe everyone is missing the big picture here, so let’s take a closer look.

The USP 🥊 Revolut customers can now check out in one click on any site where Revolut Pay is available. Non-Revolut customers can do the same once they save their card details to Revolut Pay. All customers can earn cash back on purchases.

The commercials 👉 Revolut will charge businesses a roughly 1% fee for the service, and it will pay them within 24 hours, which Revolut claims is faster than other checkout providers.

If we have learned anything from the struggles of Bolt and the fast failure of Fast, one-click checkout as a standalone business has no moat (but it’s a different case for Revolut). More importantly, both PayPal PYPL -0.43%↓ and Apple AAPL -0.11%↓ are the ones who should worry the least about Revolut Pay (all the magic happens somewhere else).

Here’s more on that, what everyone’s missing + the takeaway:

✈️ THE TAKEAWAY

Here's what everyone is missing 🧠 First things first - the rise of e-commerce and growing demand for convenience were the key drivers for one-click checkout to take off. The key reason this payment method is gaining steam is that it adds complementary (sometimes - marginal) value on both sides of the purchasing chain: (1) for customers, one-click checkout gives a more seamless buying experience (you can avoid inputting your personal information thus saving time & effort during checkout) while (2) for merchants, it simply means higher conversion rates (it helps them bolster sales by removing many of the friction points that result in cart abandonment). But the problem with one-click checkout is that it’s a really tough business model - it has no real moat, so it’s all about scaling and scaling fast. And scale is often very difficult in payments. Given that Revolut already has some scale (it counts 20M retail & >500k business customers), it’s a bet worth taking. Also, it complements the neobank’s earlier push into retail payments tech - in July it launched a card reader. Hence, offering notable perks to both consumers and merchants can help Revolut stand out from the strong competition. On a macro level, the product is all about Revolut’s quest to diversify its revenues and build a stronger presence in the payments sector. Zooming out and looking at the competition, we must note that PayPal was the one that helped popularize one-click checkout and has a loyal base of close to 400M users. PayPal also has a checkout rewards system, which can make it even harder for Revolut to compete with the payments titan. Apple is a completely different beast playing this game on a totally different level. So where’s the magic then? 🪄 It’s Cash App/Cash App Pay. Having one of the strongest FinTech ecosystems globally, Block/Square is the real force to be reckoned with.

Bonus: Too fast, too luxurious: lessons from the failure of Stripe-backed Fast

PayPal's biggest threat is coming from around the Block & it's called Cash Pay 💳

Revolut to battle Square, PayPayl & SumUp with their POS reader 💳

Goldman Sachs again reminds us that FinTech is hard 😳

The news 🗞 The weakest American borrowers are starting to miss payments and default on their loans, and that is showing up at a surprising place: Goldman Sachs, CNBC reported.

More on this 👉 Goldman Sachs’ Apple Card business has a bad-credit problem, according to competitor JPMorgan. In 2019 the investment-banking giant triumphed over established card companies to become Apple's card issuer. That didn’t seem to age well…

Over a quarter of Goldman’s card loans have gone to customers with credit scores under 660 (aka: fair to poor). More importantly, Goldman’s loss rate on credit-card loans is the worst among major US card issuers and “well above subprime lenders," JPM said.

Oh the other hand, competitors like Bank of America enjoy repayment rates at or near record levels.

✈️ THE TAKEAWAY

FinTech is hard, folks 🤷‍♂️ With inflation at a 40-year high and unemployment ticking up, the weakest American borrowers are starting to miss loan payments, and this is hurting GS. Goldman CEO David Solomon is under pressure to produce profits at Goldman's consumer-facing business (which makes up 18% of its total revenue). The Wall Street-centric bank expanded to consumers in 2016 with its high-yield Marcus savings account. Then Apple Card supercharged its retail reach. Despite growing revenues, the consumer division is on track to lose $1.2B this year, and Goldman has been forced to set aside more reserves in case of future loan losses (if there’s a deep recession, even more $$$ will be needed). Hence, banks with more subprime exposure will feel the hit first, and GS could be one of them. This is yet another reminder that FinTech is really hard.

Bonus: Goldman Sachs' Marcus shows just how difficult FinTech really is 😔

FTX's war chest is about to get even more solid 💸

The scoop 👀 Crypto exchange giant FTX is raising capital and there’s talk of a possible acquisition, a report from Coindesk said citing a source familiar with the matter.

More on this 👉 According to the publication, FTX is evaluating several possible takeover candidates, some of which are companies operating retail-trading platforms. Negotiations are reportedly in preliminary stages.

It’s worth noting that FTX is seeking the same $32B valuation it was assigned the last time it raised money early this year if it does a capital raise. That’s pretty huge given its rival Coinbase is currently worth just more than $16B.

✈️ THE TAKEAWAY

Something’s cookin’ 👨‍🍳 If you are following the space, this should come as no surprise. As I said back in August, FTX is definitely going to make an acquisition soon, and it’s probably going to be a gigantic one. There are several reasons for that. First, its US crypto exchange is very small - with just 212,000 monthly active users it falls way behind Coinbase which counts 9M MAU. Second, FTX's average trading fees are less than 0.05% compared with 0.35% and above for Coinbase. So when you think about it, FTX doesn’t really need Celsius, Huobi, BlockFi, or Huobi - what it needs is its users. And a big influx is definitely underway. In fact, given that FTX CEO Sam Bankman-Fried already has a tie to retail trading after personally buying a 7.6% stake in Robinhood HOOD -6.06%↓ in May, they should just buy it and never look back.

Reread: FTX is Crypto’s Berkshire Hathaway while its CEO is the new J.P. Morgan 🎩

Brutal Robinhood layoffs & yet another red flag for stock trading FinTechs 🚩

🔎 What else I’m watching

ECB in action🔥 In its 24 years of existence, the European Central Bank (ECB) had never before hiked interest rates by the amount it did recently. To tamp down record inflation in the eurozone, the ECB raised interest rates by 0.75 percentage points, its second rate hike this year and likely not the last. The aggressive move parallels actions by the US Federal Reserve, which seems poised to boost interest rates by 0.75% for the third time this year. What does it mean for FinTechs? Read here.
FinTech M&A on the watch 👀 Global Fintech M&A rose sharply in the first half of 2022 with 591 recorded deals, as bargain hunters shop around for deals at discounted prices. Figures collated by M&A and corporate finance advisory firm Hampleton Partners show a 46% increase in 1H2021 numbers (406 Fintech deals), and a massive 70% increase in 1H2019 pre-pandemic figures (348 Fintech deals). Meanwhile, valuations remained steady: 1H2022 saw the trailing 30-month median revenue multiple at 3.1x - broadly in line with the levels seen in the past two years. Watch this space!

💸 Following the Money

Web3 game development studio Revolving Games raised $25M in a funding round. The company will use the capital to develop scalable decentralized game experiences for in-house titles with global franchise partners.
EQT Growth launches with a €2.4B fund. The growth-stage sister of Sweden's EQT Ventures has an enormous wallet to give European scaleups the funding they need to go global.
Diamond Standard, a startup that aims to tokenize diamonds, raised $30 million. Diamond Standard says that tokenizing diamonds opens up the rare mineral as an asset class, providing a new store of wealth to both retail and institutional investors. Diamond Standard is "aggressively hiring" and plans to use the fresh capital to expand production capacity and accelerate distribution.

👋 That’s it for today! Thank you for reading and have a relaxing Sunday! And if you enjoyed this newsletter, invite your friends and colleagues to sign up:

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