WhatsApp Payments Halted in Brazil, Checkout.com is Worth $5.5 Billion, Wirecard Misplaces $2 Billion
Today, we’re joined by Lex Sokolin to talk through a few recent events that are indicative of what’s important in fintech right now.
WhatsApp launches payments in Brazil and is unceremoniously shut down by the central bank a week later, MasterCard buys Finicity to protect itself against Visa’s recent acquisition of Plaid, Checkout.com continues its largely silent meteoric rise in payments, Softbank-backed, DAX 30 index component Wirecard “loses" $2 billion from its balance sheet and files for insolvency, Upgrade raises $40 million at a $1 billion valuation to extend its personal credit offering.
Full transcript:
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
I'm glad to be back. Another fantastic week in the land of FinTech.
Will Beeson:
It's been a great week, and lots to discuss. I say we dive right in. So to start, the rise and fall of WhatsApp payments in Brazil. WhatsApp launched payments in Brazil, I think it was maybe just last week. And then yesterday, I believe, at the time of recording, the Central Bank of Brazil stepped in and shut it down. And I think it basically told Visa and MasterCard that they needed to not process any payments that were originated via the platform. And they clearly came down hard with the intention of completely halting payments on the platform. And I don't think they even gave much of a reason other than that they want to ensure transparency, and competitiveness and openness of payment systems in Brazil. What do you make of this?
Lex Sokolin:
There are so many good angles to this. I think the first foundational angle is about Facebook Pay and about Facebook having this co-opetition with Shopify. And an in prior episodes, we talked about how Shopify was the footprint for lots and lots of small businesses, and launched its own application shop where it essentially co-opted the brand. And then built into that small business bank accounts, accounting features and other financial attributes. And similarly, Facebook launched a comparable e-commerce or mobile commerce experience, social commerce experience across Instagram and its Facebook properties. And underneath the purchasing of goods, underneath the commerce on those footprints was Facebook Pay. And so Brazil was on the receiving end of Facebook Pay in the sense that Facebook partnered with local banks, Banco do Brasil, and Nubank, Sicredi, a payment processor called Cielo, and so partnered with a lot of local financial players ... Nubank we know is a great FinTech player, to pull in payments into its app and into a pretty large footprint.
Lex Sokolin:
And then to be unceremoniously shut down, whether it's because of the threat of tech companies taking over financial services, or the impression of that happening, or not getting the right permission, it's very interesting that it's the card networks that essentially pull the plug on money movement. And so that brings to a second point about the ability of any party, Central Bank or regulator to ... in the social media world, you would call this de-platforming. So to turn off the business, to take away the customers, to by decree, make very uncommercial an investment opportunity just to de-platform Facebook after even working with all these local players. And this is one of the themes that, given my work in the crypto ecosystem, that I hear all the time how important it is to build money movement, and banking and investing rails that are decentralized and permission less. And the core bit is exactly that nobody can turn off your application just because they think you shouldn't be going to customers. So I think is just a very rich example from which to learn.
Will Beeson:
Yeah. Picking up there though, it's kind of interesting to just think through a little bit, because sure, I totally appreciate the early wave internet thinking and the early wave crypto thinking around, actually there should be stores of value that are independent of governments and regulators. There should be means of exchange that are independent of regulation. And in fact, you can point to helicopter money and the CARES act and other approaches to Coronavirus and implications on wealth gaps, and acid inflation, and various things and say, "Either I do or I don't feel good about central government manipulation of currency." But at the same time having a stable, open and accessible financial systems around the world is crucial to sustained economic growth and development and some sort of central regulatory oversight.
Will Beeson:
In many cases, it would feel like a great thing. It's interesting, and perhaps the part that jumps out most to me about this is not knowing exactly what happened behind the scenes, but you have a massive company that engages with a bunch of regulated banks inside Brazil and incumbent players to launch something real. And almost immediately it's completely shutdown. Was no conversation had with regulators who clearly have a vested interest in money movement, especially in a country like Brazil, where I believe all payments have to flow through the central bank in a model which is different than the model in the US, and Europe and other countries? Was no conversation had?
Will Beeson:
And then I guess where my mind goes from here is, okay, so what are the implications for Libra? On one hand, if you're Facebook you're like, "All right, you know what? This is great. Let's build our own cryptocurrency because then they can't shut us down." But actually the government backlashed when that idea was first floated last year, I guess it was not good. And it's just tough to imagine if even WhatsApp payments using existing regulated card rails were not palatable to the Brazilian government, why a new payment mechanism with less immediate roots into traditional rails, that would be more palatable?
Lex Sokolin:
Yeah. And think I am making a super narrow point about the equivalent of the card network. The equivalent of the Visa and MasterCard being permission less rather than some store of value or some monetary assets in particular. So going to Libra, imagine a world where the stakeholders in Libra are not Shopify, it's the American central bank, the Federal Reserve, and the European Central Bank, and the French central bank and the UK authorities. And they are the ones that are contributing a money base into the Libra consortium and they have full oversight of it. And what travels on those rails is just a central bank digital currency or some sort of stable coin, like a private money pegged to traditional dollars or euros.
Lex Sokolin:
And so in that case, Brazil would have to call up the US and say, "Shut down your digital money so that your tech company can't facilitate private peer to peer money transfers in our geography." And all of a sudden, that sovereign clash becomes a lot more interesting than a government flexing on a card network and threatening it in a particular jurisdiction. And I think that's where it would come to a head.
Will Beeson:
Right. So switching gears and picking up the next most interesting piece that we saw, and it's related to card networks actually. So MasterCard acquiring Finicity. I hadn't heard of Finicity, shame on me. I think MasterCard paid a billion dollars for it and they believe Finicity was founded in the Mint era or internet 1.0 era to, I think for credit purposes help with data availability. And they've basically kind of grown into an open banking play. This is MasterCard's defense against the Visa acquisition of Plaid. Insight into this one?
Lex Sokolin:
So I think today a lot of our conversation is going to be around payment rails and credit, which is actually the most profitable part of FinTech and I think it continues to be so as evidenced by these exits. The wealth tech exits are not putting up billion dollar numbers for better or worse. The neobank exits aren't even existing, but the data aggregation ones are looking pretty strategic to the card networks. And a reminder the card networks trade at somewhere about half a trillion in market cap, $300 billion, $500 billion. So Visa is the size of J.P. Morgan and is eight times the size of Goldman Sachs just to give a flavor for the relative power of these things. So if you look at the costs, the billion dollars relative to the overall enterprise value of these companies, throwing that money down to do a defensive bet against a core existential threat is actually really, really cheap.
Lex Sokolin:
And I'm not surprised to see MasterCard make a purchase. I am surprised just how fast they did it, which gives full credit to financial technology partners, the investment bank on the deal, for taking probably an opportunity and a FOMO moment for MasterCard and finding a good target. And so if you look at Finicity, I met the team in a prior role in the Robo-advisor world when we were looking at data aggregation for financial planning and net worth statements. And it's a great team, they've built a solid business. They were founded, as you said, in '99 and kind of went through multiple data aggregation turns. So the competition with Yodlee, competition with Plaid, every 10 years, a new set of entrance. And the tilt for Finicity was around credit decisioning. So data aggregation, not for the data sake to authenticate into something the way that plaid started out, but to help companies make underwriting decisions, which is a very natural fit.
Lex Sokolin:
And they got a nice check, I think a $40 million check from Experian, the credit bureau, and going down that path. I think it's really interesting how these exits happen and how a company like that, whether it's running at $40 million of revenue or $100 million of revenue, and they have 500 people so it's quite large, how a company like that ends up exiting in a completely different industry for strategic reasons that I'm sure they could not have anticipated, but at the same time unlock so much value. So I'm psyched for the team. I think it's a great company and I'm very interested to see how this fight plays out between Visa and MasterCard.
Will Beeson:
Yeah. Well, with sexy neobanks and crypto stuff, it can be hard to sustain enthusiasm for data aggregation, but I do look forward to watching this component of FS infrastructure evolve, the Plaid acquisition by Visa and now this acquisition by MasterCard and the competitive pressures that card networks are under in the face of alternative payment methods, I think is going to lead to, in coming years, three to five years, very interesting new developments and new functionality. So I think it's going to be exciting.
Lex Sokolin:
Yeah. A parting thought on this, which is, right now open banking has been kind of neutralized by the networks, but it's only going to get cheaper, and easier and faster to build the equivalent of a Plaid, or Finicity or a Yodlee. And so I don't think we can be in a world where the card networks keep acquiring competitors, and their competitors because if you use open banking for money movements, you destroy interchange fees, and therefore, you don't have a network economics anymore. So I really wonder how for the longterm the sector is going to play out because the smart money says we're going to have lots and lots of more data aggregators coming.
Will Beeson:
There's even a bank owned one in the US. I forget what it's called, but it's basically like the Zelle equivalent of Plaid.
Lex Sokolin:
Yeah, the one [crosstalk 00:00:14:05].
Will Beeson:
Watch this space. Checkout.com the payment processor, which no one seems to know much about a part from those who use it and people that are deep in payments and then in that case, they know everything about it because it's by all measures a champion in the space. They pop up, it seems like every couple of years now with some massive raise at a massive valuation. Most recently they tripled their valuation to nearly $6 billion, which is a lot of money. And also a little back of the envelope, math here suggests that they were valued at $2 billion before that, which is a massive valuation. And I think the first time I came across checkout.com was when they announced this kind of Dark Horse "Series A". I think it was like $250 million at the time, maybe two years ago.
Will Beeson:
Yeah. Technically Series A was the first time I think they'd really raised any outside money, and it was after like eight years of operation. From memory, they're kind of a straight up Adyen competitor or even on the record describing themselves as such but high level takeaway for me here, the fact that yet another company who is solving largely the same or at least similar problem to Stripe, and Adyen and a number of incumbent payment companies and is nonetheless raising at $6 billion, just speaks to the size of this opportunity. And I think that's clear to everyone given all the activity in this space, as you mentioned, payments are along with credit. One of the two places where FinTech really drives value creation. But Checkout.com, what do you make of that?
Lex Sokolin:
I love it. I spend so much time making really complicated logical frameworks for how the future is going to look like and why if this happens, then this happens. And if this happens, then this happens and therefore. And it's nice to see a business that just makes sense and simply does well the thing that is commercially viable. And for the listeners, we've mentioned Stripe, we've mentioned Adyen. We will mention Wirecard. But if you dig into what it really does is a combination of payments processing technologies that makes it easier for an e-commerce provider, i.e a merchant in the old language, to get paid for their business. So there's a bundled gateway. There's a payments processor. I think there's a partnership with merchant acquirers, and I think it's multi geography. And so there's complexity about who can integrate, and how, and what the payment methods are and so on.
Lex Sokolin:
And so Checkout.com wraps all of that together. Structures it, puts it into an API and I believe has a tilt towards larger enterprises, so bigger customers, not like the Shopify footprint, but the larger ones. At least that's my sense. And the end result is they make money and they make money because if you think about global commerce, even with Amazon, even with Tencent, and Ant Financial, and Alibaba global commerce is probably somewhere around 8% e-commerce and the rest is still terrestrial physical footprint, or maybe it's moved up to 11 or 12 or 15, going primarily through the growth in China. And so there remains this incredible market share of trillions of dollars in GDP. And this is a clean bet executed against a clean theme, having operated for eight years by a strong team. For me at least it's a call in my mind to simplify the stories we tell ourselves and just pick something that works and do it well.
Will Beeson:
Speaking of clean, Wirecard, they just...
Lex Sokolin:
You take this one, you just take that one out.
Will Beeson:
So there are reports ... no, more than reports. Their auditors ... now I blank the name, maybe EY, basically refrained from approving their or signing off their accounts, 2019 accounts, which were already well overdue. Basically because they couldn't find $2 billion that should have been on the company's balance sheet. This follows years of concern, I think dating back to maybe 2008, then concerns again arising in 2016, and most recently 2019, the Financial Times taking a pretty aggressive stance against Wirecard and reporting on suspected fraud in Asia, I believe within Wirecard. Wirecard denied all of those allegations until now when ... I think as of this morning, they've filed for insolvency. So a company that started out in the gambling and adult entertainment space ended up supporting a bunch of FinTech and other card type offerings, and I think more recently has maybe gone pretty heavy into the crypto space.
Will Beeson:
So talk about a ... I don't want to say fall from grace because there have been so much concern around the business for so long now, but the CEO has been arrested. The COO was fired with no explanation. And you have the German minister of the economy basically saying, "We could have expected this sort of scandal to happen anywhere except Germany." And it's clear actually that Germany has taken this extremely seriously as a potential blow to its reputation as a regulatorily sound jurisdiction. Wirecard was a member of the DAX top 30 companies. I think they displaced Commerzbank, one of the large incumbent German banks, and were listed alongside Volkswagen and Siemens, and some of the biggest, most renowned German companies. So talk about news that's fundamentally shaking the German economy as well as our lowly FinTech industry.
Lex Sokolin:
My take on this is kind of twofold. Number one is, innovative or experimental payments techniques or setups growing out of the adult content industry, or at a crypto, or gambling sites, or cross border, international contractor sites, that actually I have no spin on. I think often that is a place where there aren't good payments solutions, you have complex problems with lots of international customers trying to do stuff, and you have weird complexity and no service providers. And so of course, somebody is going to fill the gap and build solutions. And as those companies grow up, they will go into more and more traditional areas and bring some type of innovation. If you think about YouTube and all sorts of things that we now enjoy on the internet, they had their start in illicit activity, whether it was the internet as for porn or whether it's stealing MP3s through Napster, all that stuff is at the root of kind of the churning engine of innovation. So that's not on its own I think. That doesn't color anything for me about the company.
Lex Sokolin:
What does color things for me as a company is, you really don't have to do this. It's a real disappointment when we have outcomes like this and it seems something like every 10 years. So we've got Enron, and then we had Bernie Madoff, and now 10 years now we've got Wirecard. And it's just never worth taking the shortcuts because most financial flaws are really transparent, and it catches up with people and whatever rewards they thought they had from cheating are never worth the price they end up paying. So I think it's a real disappointment that a business that could be really helpful for innovations, including in the crypto space is now permanently damaged in its reputation and in its growing concern because of these unethical choices that have been made across the way.
Will Beeson:
All right. So last piece that maybe we can pick up. Upgrade. A personal lender/challenger bank, because who isn't, raised $40 million at a $1 billion valuation. And this is the return of the Lending Club founder after leaving that company in not perfect circumstances. Here we are back to-
Lex Sokolin:
We are really tying things together. The bridge here has been the sort of, you don't have to do it the wrong way, even though LendingClub certainly wasn't egregious in the way that Wirecard appears to be or reportedly is. It did lead to the CEO leading LendingClub ... similarly the same thing happened in SoFi, the same thing happened with Zenefits, and I think this efforts of, move fast and break things that Facebook seared into our collective psyche has led to some bad outcomes.
Will Beeson:
Once bad outcomes now good outcomes because now the new company Upgrade, which lends money to consumers, is valued at a billion dollars.
Lex Sokolin:
Yep, absolutely. These things not scarlet letters, so people can have multiple chances. And at end of the day, upgrade is a commercial success. Last year, they ran at $60 million in revenue, this year they're probably going to be over $150 million in revenue. I have a lot of admiration for being able to build a company that grows in this manner. It's really hard. I think it's very unique. And so it makes sense for the capital markets to reward the company by funding a continued path. The one aspect I would ... and I guess this was a surprise to me so it's a lesson I keep going back to is OnDeck, which is a darling underwriter for small business, which during the COVID shock was hit very badly because the portfolio of small business loans was in meaningful portion wiped out.
Lex Sokolin:
So OnDeck started as a FinTech story, underwrote a lot of loans, created technology to make it efficient, and seamless and as good as possible, partnered with banks, went public at an over a billion dollar valuation, and now is worth maybe $60 million after a lot of these loans have been under pressure. And so this is the devil's bargain with these lending companies, is that in the early years they're going to print revenue because the revenue is a fee on the money that you give away. And then in the later years, it's the question of whether those loans will get paid back, or if they're going to sour and frankly you just don't know for half a decade.
Will Beeson:
I guess the other interesting piece around this upgrade raise for me is that it is led by Santander InnoVentures, So Santander's a corporate venture arm. I actually connected with Manuel Silva who runs investments for them recently in an episode that we'll publish in the near future. We talked a little bit about views on digital banks and Manuel's preference for digital banks that lead with lending. It's certainly a view that we've heard voiced increasingly of late as the glean wears off of the checking account plus debit card free banking model, which has yet to show a proven path to profitability. So this is in a sense FinTech for adults, an experienced founder, not a 23-year-old leading with the product that makes money regardless of what sorts of considerations or concerns there are about the strengths and weaknesses of consumer lending as the kind of core value prop.
Will Beeson:
But it makes money and investors like that, and the market likes that and here we go. So we'll watch this evolve and we'll see where it goes from here. I guess parting thought for me on that one is we will see to what extent other digital bank type offerings start rapidly getting into credit. It's pretty clear that the tide is turning, that lending is now viewed in many cases as core to the model, profitably as core to the model and let's expect ... I don't want to say pivots, but very quick product roll outs around lending from the larger digital banks around the world.
Lex Sokolin:
Absolutely.
Will Beeson:
Lex, great to connect with you. Thanks for the insight as always. I look forward to doing this again soon. Lex Sokolin, thank you very much for joining us today.
Lex Sokolin:
My pleasure. Talk soon.
