๐ Investment and startup ideas - Embedded Finance
๐งโโ๏ธ BNPL is dead, ๐ Long live cross-border payments
As a former banker focusing on innovation, I have always been on high-alert when it comes to echo-chamber discussions regarding financial services. Most of us active in the fintech space have a tendency to think that everyone wakes up thinking not only about banking products, but also about the innovations their bank is offering. However, the reality is: people donโt care about their bank, they care very much about their money, but they really donโt care about their financial institutions. Which is exactly why I think embedded finance is more than ever an area of growthโฆaka an area of potential financial returns for investors and entrepreneurs alike.
Scarlett Sieber and Sophie Guibaud just published an excellent book on that exact topic โEmbedded Finance; When payments become an experienceโ. The book was released at Money 20/20 Europe last week and the topic of embedded finance was also front and center during a couple of panels. I highly recommend the book and, if you enjoy live events, my experience at Money 20/20 Europe was actually nothing short of excellent!
I wrote an article on the topic of embedded finance 2 years ago and thought it was time to revisit it. Not only because of the progress we saw since 2020, but also because of the correction in valuation some of these business models have seen recently, which was highly justified from my POV.
One of the areas of embedded finance that has seen incredible (stupid?) valuations, with firms such as Affirm and Afterpay, is Buy Now Pay Later (BNPL). BNPL is, as the name explains it quite well, an installment type of loan, sometimes interest-free.
I have never been a big fan of BNPL. I remember being on a panel a couple of years ago discussing that topic and my co-panelists were raving about its benefits to the consumers. When I suggested the drawbacks of the product, they looked at me like I was on drugs (which I was not!). After articulating the risks related to over-indebtedness, as well as over-consumption and the associated damage to the environment, I could see some kind of lightbulb coming up in the eyes (or maybe they were the ones on drugs).
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In addition, letโs be realistic, this is a business model that only works when the economy is in growth mode with extremely low interest and default rates. No need to have a PhD in finance to realize that the financials were not sustainable in the long-run. And 2 years later, here we are, with companiesโ valuations imploding and on-going federal investigations. Which I believe is absolutely deserved. As a household we actually bought put options on Affirm that have been doing quite well, thank you very much!
Investing is as much about avoiding dogs than picking winners. And more and more it is also about timing.
Angel investors could have been very successful with an early investment in a company such as Affirm (assuming the VCs coming after didnโt dilute them) and an exit at IPO. Retails investors could also have been very successful by timing the market - investing at IPO and selling at the peak However, I personally donโt like to invest in businesses when I donโt believe in their business models. The idea of trading on momentum and then passing it on to someone when the music is still playing is not my version of investing. To each its own. Many professional investors are actually playing that game to the detriment of retail and angel investors, directly or indirectly.
A more interesting, sustainable and value added area of embedded finance is payments, particularly cross-border payments. Whether we are thinking individual remittances or business transactions, cross-border payments have been a sore point for everyone alike across the globe.
As an immigrant, I remember very well the costs and difficulties associated with sending money from Canada to France 10 to 15 years ago. Even just a few years ago it took my mother weeks of gymnastic to access a transfer I sent her via PayPal (which was way below the $10K red flag). It seemed that my retired mother was deemed a money-laundering risk by the over-zealous French PayPal compliance officers.๐
These experiences led me to invest in 2015 in a company that at the time was called Regalii and was facilitating bill payments from immigrants to their country of origin. The company eventually pivoted to offer Payments-as-a-service capabilities and were bought in Dec 2021 by Mastercard. Their book of business included blue chip clients such as, Uber, Santander, 7-Eleven, Walmart, BBVA, and Rappi. If you are interested in knowing more about Arcus (former Regalii), you can read and watch an interview I made with the co-founder and CEO Edrizio De La Cruz.
As an investor or entrepreneur, cross-border payments is indeed still an area that has great opportunities for financial returns. And keep in mind that these opportunities are not just in North-America! Cross-border payments in Africa, in the Middle-East and in Asia are massive, while the overall population is underserved and underbanked / unbanked, making it a huge market.
Despite the valuation rerating in fintech and tech in general, great, long-term, sustainable investment opportunities still exist. Now is the time to really fly for quality in business models, while keeping in mind the recession that we will likely enter soon.
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