Neither a borrower nor a lender be | A tour through Upstart’s S1

Upstart Holdings, an online lender recently filed their S1. This is the first blog post that I have collaborated on. It was too good to pass up collaborating with another Rohit :). Y’all are in for a treat, it’s a 2-Rohit’s-for-the-price of one analysis!

What is Upstart?

Upstart is an online consumer lender and a lending technology provider. Their core differentiation is that they use Artificial Intelligence for lending decisions. Upstart claims that this results in automated disbursals, higher approval rates, better risk-adjusted performance, and reduced fraud. Their main customer interface is via its website http://www.upstart.com and through bank partners. Currently, their cloud lending platform is available only in the US. Software is eating the world, but in a financial services business, the product is always money. Upstart is an online lender first. They have operated a lending platform for years and now pivoting to providing a SaaS (ish) platform for banks.

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End of the Line | Lessons from the fall of AT&T

Book review time! Some lessons learned from reading the End of the Line: The Rise and Fall of AT&T by Leslie Cauley . How I got to this book is an interesting story in itself. I’m a huge Twitter consumer (I read a lot, but barely tweet) and Post_M is one of my favorite accounts on Twitter. She tweeted a video of a talk with Liberty Media’s CEO John Malone, which I watched and started going through the rabbit hole of more John Malone talks on Youtube and one of the videos recommended this book. The cable industry was never on my list of things that cared about, but thanks to Twitter and Youtube and a book recommendation – I learned a lot! The internet is truly a wonderful place.

Jedi or Empire | Buy Now Pay Later competitive dynamics

We’ve been taking a journey through the BNPL space, we looked at the history, the product, and the go-to-market. I’d like to close the series with a view on the competition and where I think the industry is headed. Warning speculative discussions and opinions ahead.

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To market to market | How do BNPL players go-to-market?

Continuing the deep dive on the BNPL players, the next thing I wanted to look at is their go-to-market strategies. How do they get their customers? Links to Part 1 and Part 2. A word of caution, all the research and numbers are from an outside in perspective and based on publicly available information. There is a possibility that I’m completely wrong in my analysis!

My simple mental model for go to market is,

  • Who is the target customer? Are there many target customers?
  • What is the narrow sub-segment of target customers?
  • What is the value proposition and positioning for this customer?
  • What are the channels that are used to reach out to this customer? Is there a low-cost acquisition channel in the mix?
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What’s in a name – A deep dive into the BNPL product offering

Part two of the deep dive into the Buy now pay later (BNPL) market. In part one we dug deeper into the core product and its history. In this post, I dig deeper into the value proposition of the product.

A common misconception about this market is that it exists only to serve only the needs of the consumer. It exists only to make consumption easy. This is wrong. This a two-sided platform product. This product exists to help both sides of the transaction – merchants, who sell items and the consumers who purchase them. The fundamental axiom in use here is that extending credit greases consumption. Consumption for consumers is revenue for merchants. By offering various credit constructs and financing options to your customers you are enabling them to buy more of your products. This increases your revenues as a merchant. There is immense value in this product as a conversion tool.

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The song remains the same, a look at the Buy Now Pay Later (BNPL) players

Affirm filed for an IPO last week. I’ve wanted to do a deep dive into the BNPL segment and Affirm’s filing is the inspiration that I’ve been waiting for!

Let us start at the very beginning. Once humans came together in groups, the concept of lending aka credit has been willed into existence. The very earliest example of lending dates back to over 4,000 years ago in Mesopotamia, 2,000 BCE, where farmers bought seeds on credit and repaid the debt after the harvest. Pre-industrial revolution most economies were rural. Lending was like having a tab at your corner store. All underwriting was social and very few folks wanted to risk being cut off from the local economy by defaulting on their debt. All credit was local.

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Old ideas, new packaging – is embedded finance worth the hype?

Sooner or later, everything old is new again

– Stephen King

The thesis expressed today is that financial services are no longer a separate vertical component in consumers’ life. Consumers are going to be better served where they already hang out. So the natural extension for business with a large number of customers is to start offering financial services to their user base. In this model, financial services transition from a vertical component to a horizontal capability that all businesses will offer to their users. Hence the popularity of the term embedded finance.

Is this thesis valid? I’ve been thinking about this for a few years and this post is an attempt to work out a mental model and answer this question.

Short answer – this thesis is wrong. Long answer- it’s nuanced.

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Adventures in underwriting, competitive advantage edition

Every business will eventually have to get into the financing business. Financing is a fancy word for lending and it has been around since the dawn of civilization. In this post, I will attempt to describe a simplified mental model for lending.

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Credit: Scott Adams

What is lending at its core?

Lending is a contractual relationship between two parties. One of them has something that the other needs. The lender, who has the thing and the borrower, who wants the thing. Since the dawn of mankind, the thing to want is productive assets. You start with borrowing a plow, borrowing some land, borrowing some seeds – you get the idea. As mankind progressed and the next abstraction of money came into being, money is the asset that everybody wants. Money is the path to get to productive assets. The lender of money wants to get compensated for giving his asset to the borrower. He is giving up the use of the asset and needs an incentive to compensate for the lost opportunity cost – this is the interest. Every contractual relationship has to have a time frame specified. In lending, this construct is described by the repayment term i.e over what period of time does the lender get their money back.

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Good Business, Bad Business – Fintech edition

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. – Warren Buffet

As I age in the business world, I have internalized this buffet quote. I superficially understood it early on in my career, but now I understand it! With fintech as the backdrop, this post is a view of my mental model on business models and gross margins in general. What makes a good high gross margin business?

Let’s start with a 30,000 ft view of what forms a business. Businesses exist to provide value to a set of customers via the products they create. A firm solves a need and customers pay them to solve that need. At its core, a company is a machine that takes raw ingredients (physical widgets, human capital, and intellectual capital) and transforms them into products that customers pay for. Raw ingredients cost money (cost centers) and customers pay money (revenue centers) for the finished product. A good business, in the long run, generates a consistent profit i.e (revenue – cost) is a positive number. Profit takes various forms such as free cash flow, EBIT or EBITDA – but the simple model holds, value creation only happens when what you get for the product is higher than what it costs to make it.

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Money often costs too much – a look at Adyen (ADYEN:EN)

“Only two ways to make money in business: One is to bundle; the other is unbundle.” – Jim Barksdale

In the last post, I talked about the history of merchant acquiring and how the industry evolved. This post talks about the natural progression of the trend and the rise of the full stack acquirer.

A quick recap

The core jobs to be done for merchant acquiring is to enable a merchant to accept credit card payments. It started with one institution, the bank, and then unbundled into a plethora of entities. We now have a complicated ecosystem consisting of the card networks, issuing banks, acquiring banks, payment processors, and the alphabet soup of PSPs and MSP’s. Merchant acquiring transitioned to being a commodity business and scale became king. The need for scale caused the companies to grow via acquisition. Continue reading “Money often costs too much – a look at Adyen (ADYEN:EN)”