Plaid is rumored to have raised a massive post-visa-breakup funding round last week. Since lending is something that I get excited about in fintech, here are some product suggestions and ways Plaid can spend that money! Want to own these ideas? Also listed as an NFT, Start bidding!
To organize our discussion, it is helpful to have a mental model of the core constituents of any lending business.
What follows below is an outline of the use cases and opportunities in each area and initial ideas on how Plaid can solve those use cases. Plaid has the opportunity to be the core provider of data to every lender on the planet. This is the north star worth shooting for.
“Did you hear about the accountant who became an embezzler? He ran away with the accounts payable!”
Bill.com is an AP automation company that makes it easier to manage the accounts payable and receivable process for SMB’s. This blog always likes to dig deeper, so let us start at the basics, what are accounts payable and receivable?
A good mental model for companies is to think of them as product transformers. They take inputs (raw materials) and transform them into outputs (products). Value is created when the finished products can be sold to the consumer at a higher price than the cost it took to procure and transform the inputs. Inputs for one company can be outputs of another company – its specialization all the way down.
“The greatest trick the Devil ever pulled was convincing the world he didn’t exist”.
The last few weeks have been interesting in markets and it’s time for my (short) take :). The best take on this topic is Matt Levine’s Money stuff newsletter. My take is about risk which is core to finance. I highly recommend my favorite book on this topic – Pandora’s risk for an excellent introduction to risk and how to think about it. Risk in the finance world is always about loss of capital. At the end of the day, finance is about money and the golden rule of money is to never lose it 😂. Every financial transaction we undertake has a risk of capital loss. These last few weeks have been a crash course in counterparty risk (DTCC clearing et al).
Lending is as old as money and Embedded lending is the meme of the day. In this post, I unpack my thinking and thesis on where embedded lending needs to end up. But first, always start with the basics.
What are the fundamental building blocks?
The core components of a lending business are Demand, Supply, Underwriting/pricing, Loan servicing, Payments and money management, and Legal and compliance.
Demand and supply: In our economic model capital is the grease that drives the entire economy – it is one of the required inputs for the economic machine. The need for access to capital is the demand side of the lending business. To satisfy this demand for capital, you need a supply of capital to lend to the borrower.
Underwriting: The demand for capital and the supply of capital makes a market and the clearing price for this market is the price of the capital i.e the interest rate. This price is set by the underwriting function. Its core role is to set the amount if any should the borrower be able to obtain (loan amount) and at what price (interest rate).
As we enter the last few weeks of 2020, I want to take stock of how this blogging experiment has been faring.
I started this year with a simple objective, write consistently week after week. Looking back at the metrics, this consistency habit has paid off in spades. The post count for 2020 was 40 posts (almost one every week!) which is almost double the 22 posts written in 2019. In terms of page views this has been a stellar year, dare I say hockey stick growth! The page views for 2020 came in at ~12.5K YTD growing 3X over 2019 (4.1K views). Visitors also grew 2.7X to 7.1K visitors in 2020.
In the last post, we explored what drives an economy (spending) and the levers that a government can use to restart the economy after a crisis (monetary and fiscal). Since 2008 monetary policy has paid the dominant role, but in 2020 fiscal policy is finally making a comeback. Fiscal policy has a direct impact on consumers’ lives as the main objective is to get cash into consumers’ hands so that spending continues unabated.
How to get cash to citizens?
It is logistically impossible for a government entity to show up at every citizen’s doorstep with a truckload of physical cash. Besides the obvious problem of logistics, there are also problems with confirming identities and physical record-keeping. Especially when governments are handing out money, they want to be very particular that only their citizens are getting the cash and there are no cases of freeloading (via fraud, etc). Direct transfers are a politically charged issue – there are always allegations of a slippery slope, nanny state, and communism that get thrown around! You have to get this part right.
It’s a question I’ve been brooding about ever since the European central bank announced its digital euro project. But first, let’s take a walk through memory lane and establish some concepts and abstractions to build upon.
Humans at our core are consumers and consumption is central in our economic model. Consumption drives everything. We have needs and wants and we want them fulfilled. Businesses are the organizational unit that builds the goods to satisfy these needs and wants. They produce the goods that customers want. Money is the grease that makes this machine work, it’s the unit of exchange. At steady-state consumers need to have a source of money which is either from some form of employment (trading time for money) or via borrowing (trading collateral for money i.e credit). Consumers can either save, invest, or spend the money that they have. Savings and investment are just steps on the way to spend. The end state is always to spend down the cash and exchange it for goods and services.