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Last week Robinhood IPOed and this week Square bought Afterpay. As the pandemic continues to accelerate the shift to digital, new financial services are also seeing accelerated adoption. The tension between old finance and new finance has never been as apparent, as Fintech continues to evolve and receive funding (from older financial institutions and not VCs…oh the irony) while traditional finance tries to keep up.
And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
Square to Buy Afterpay for $29 Billion to Tap Younger Users - Bloomberg
Square will spend about 25% of its market cap to buy Afterpay, a buy now pay later (BNPL) company based in Australia. This is fantastic news for the BNPL space, as earlier this month, Apple had announced that it’d be providing a similar service called ‘Apple Pay Later’ with Goldman Sachs. BNPL services have been growing dramatically since the pandemic and are appealing to all consumers. But it is most popular with Gen Z and younger millennials as it erases the need for a credit card, which mirrors Afterpay’s performance as it has noted that 85% of customers make payments with their debit cards.
Robinhood’s Stock Jumps, Reversing Faltering IPO Debut - WSJ
Robinhood finally got its IPO pop. After four miserable days of trading well below its offering price of $38, shares of the stock have since soared and closed yesterday at $70. $HOOD saw so much action (share transactions were 20 million on Monday, 94 million on Tuesday, and 172 million yesterday) that Nasdaq believed there was too much volatility around the stock and halted trading three times on Wednesday. Why is the stock popping? No changes have happened to the company to spur these buys, showing that the vehicle that was once responsible for all the Q1 meme stock overdrive may have become a meme stock itself.
New Crypto Bill in US Is the Most Comprehensive Yet - Coinbase
The most significant government and crypto stories revolved around a trio of Congressional hearings on crypto seven days ago. By last Thursday, Congress introduced two new bills seeking to enforce regulations on the industry in different ways. The first bill, the U.S. Senate’s trillion-dollar bipartisan infrastructure effort, broadened the definition of “broker” to include tax collection of crypto, which the bill believed was substantial enough to generate at least $28 billion in tax revenue for this infrastructure bill. That $28B in tax revenue is the first time the government has acknowledged crypto meaningfully, similar to when Floyd Mayweather boxed MMA fighter Conor McGregor and acknowledged him by saying, “I'm the IRS, and I'm gonna tax your ass.” The second bill introduced by Rep. Don Beyer (D-Va.) is a much more comprehensive effort to regulate crypto. The bill looks to assign U.S. regulatory bodies to clarify how businesses register themselves. The bill also identified that digital assets and digital asset securities would fall under the regulatory remits of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
2 Takeaways
The pandemic has permanently changed how we buy things
In the past, most American consumers relied on credit cards to make purchases. Before the pandemic, buy now pay later (BNPL) services had emerged but were much more niche and targeting younger generations. During the pandemic, however, consumers who started buying online for the first time, buying more items, or buying more expensive items realized and benefit of BNPL. In 2020, Klarna saw 987,000 new users sign up for the service between March 1 and July 30 (a 200% YoY improvement), while Afterpay gained over one million customers between March 11 and May 20. The rise of BNPL may seem incoherent to older cohorts, but it makes absolute sense for younger millennial and Gen Z consumers who came of age amidst the Great Recession and saw the havoc created by loans and credits. But everyone loves nice things, and for the digitally native consumer, there was a significant need to finance the purchase of those nice things without taking out a loan. That logic may not add up for my older readers, but this makes more sense for the younger millennials and Gen Z consumers, as around 85% of customers make payments via their debit cards. The seeds of distrust that stemmed from 2008 created the opportunity for BNPL, but BNPL isn’t a one-off thing; it’s an indicator of where Fintech will usurp traditional finance as new financial consumers mature into the future buying generation.
New Fintech is creating new and exposing existing network effects of traditional finance
Financial systems always thrived on underexposed network effects. For simplicity, the underlying way consumers can transact relies on three players, customers, merchants, and banks. The problem is that without credit cards, the transactions between merchants and consumers become strained as consumers may not be able to purchase from the merchant if they don’t have the funds. In a credit-fueled world; banks provide the credit, credit cards offer the infrastructure, merchants pay around 3% of their sales so that consumers buy things from the merchants. Enter any part of that flywheel, and you’ll see it spin faster and faster. Most consumers never need to notice or understand this system, so it's been spinning for a while and has allowed consumer spending to make up more than ⅔ of the national GDP. Credit cards have benefited from the networked relationship between banks, merchants, and customers for the longest time. With distrust in credit cards and banks, consumers are now looking elsewhere, especially as new Fintech companies arise, hoping to provide new services for the new consumer. As much criticism and grief, it rightfully has earned, Robinhood did democratize the stock market, as it signed up 11M users during the pandemic. By introducing free stock trading, they were critical in the retail investor boom we’re currently seeing. Memestocks and WallStreetBets became possible due to Robinhood, and we see a new kind of network effect come into play. New consumers are creating new networks with the rise of Fintech apps like Venmo, Square Cash, Lemonade, Klarna, and so many others. It’ll only be time before either new finance or old finance will start to capitalize on those network effects.
1nsight
The younger generations look at finance differently, so finance companies are bundling and unbundling services to meet that need
The aftermath of the 2008 recession changed the concept and notion of finance for so many consumers. Publications always highlight the impact it had on Gen Z and younger millennials, but the consequences of 2008 impacted Gen Xers, Boomers, and millennials in profound ways. Fintech has been such a hot topic because what happened in 2008 exposed the flaws in the old financial system. The pandemic, which accelerated the shift to digital, has only added fuel to that fire. With that, we’re seeing the great unbundling of financial services. BNPL companies like Afterpay, Klarna, and Affirm are unbundling the credit cards relationship with merchants. Open banking services like Plaid allow companies to work directly with banks cutting out the need to work directly with the bank. Wealth management companies like Wealthfront and Betterment give everyday consumers access to advanced accounting and investment strategies that were once only accessible to the uber-wealthy. Money transfers are being usurped by services like Venmo and Square Cash, letting users cut out the middle man and making it easier than ever to send money.
The underground network that built the traditional financial system is slowly getting unbundled from their use case. Square buying Afterpay is the start of the new bundling we’ll see from Fintech that will create a new financial system for consumers. I haven’t even broached the topic of crypto. Given the shift to digital that will only continue to accelerate due to the pandemic, and the change in consumer expectations, it’ll only be a matter of time before the new bundles make the old bundles look like silly money. Merchants, brands, and companies need to be aware of these changes because soon, we will no longer be accounting for transactions and dollars as we once did. As Congress and the SEC try to create rules and regulations for crypto, companies like Amazon are already plowing ahead to release their digital currency, which will require an entirely new way to evaluate and account for Amazon. The current crop of Fintech companies is just making services that fit into the traditional paradigm created by finance to give merchants, banks, and accounting services ease of mind that nothing is different. Still, as we see Square bundle Afterpay with their POS systems and Square Cash (which also gives you a bitcoin wallet), Fintech’s trojan horse has already been planted. It’s only a matter of time before they take over.