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.

Continue reading “Good Business, Bad Business – Fintech edition”

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)”

Fintech is dead, long live fintech

Everything is fintech is the meme of 2020 in Silicon Valley and beyond. The nerds that we are :), we spend a lot of time digging deeper into this topic in the fintech pm group. The banter back and forth is the reason why I am super bullish on this small curated private community. This post is an attempt to describe my framework.

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Credit: Scott Adams

How should we think about everything is fintech meme? Continue reading “Fintech is dead, long live fintech”

Access to the central bank, the final frontier for fintech?

I’ve been spending some time thinking about the long term implications of increasing central bank intervention (primarily the US Fed), and how that changes the landscape of banks and fintech. What follows is an attempt to flush out an idea of how Fed intervention is good for fintech in the long run.

I have a simple framework to think about how banks work. Banks have two sources of profit, user profit, and risk profit. User profit is what customers are willing to pay for services that provide value. Some examples are, charging for managing your investments, the entire process of giving you a loan (origination fee), converting currency, processing payments, etc. Risk profit is what banks earn by the nature of providing maturity transformation and inventory facilities. Some examples are loans (compensated for taking credit risk) and market-making (compensated for taking inventory risk). Continue reading “Access to the central bank, the final frontier for fintech?”

To travel is to live – A journey through Booking Holdings (NYSE:BKNG)

I’m a broken record on this topic :), reading 10ks is the best free learning tool if you want to understand how businesses work. We have a 10K a month group as part of the Fintech PM guild and this month we tackled the travel behemoth, Booking Holdings.

What is Booking holdings?

Booking Holdings is the holding company for a constellation of brands and is an Online Travel agent company (OTA) that primarily serves the international market (Ex-US). It was previously known as the Priceline Group, renamed to Booking Holdings in 2018, and is listed on the NYSE (BKNG). The founding of the company has its roots in the acquisition of booking.com by priceline.com in 2005. They are headquartered in Amsterdam with operations in multiple countries. Their main brands are Priceline, booking.com, Kayak, OpenTable, and Agoda. In 2019 they did ~$15B in top-line revenue and their current market cap is ~$62B. A majority of booking.com revenue is driven by hotel bookings. Continue reading “To travel is to live – A journey through Booking Holdings (NYSE:BKNG)”

No place like home – A look into Zillow (NYSE:ZG)

I’ve often talked about 10K’s as being the perfect way to get up to speed in a new industry. Once a month a few of us PMs get together and do a deep dive on a particular company via its 10k. We call it our “10K a month” club :). Drop me a note if you want to be added to the group, the more diverse viewpoints the better the learnings! Last month we researched and chatted about Zillow. Highlights from our conversation follow. Continue reading “No place like home – A look into Zillow (NYSE:ZG)”

Dear Tech CEOs, start learning about the history of finance | History repeats edition

A16z’s Angela Strange has a very correct take on where financial services are heading. In the future, every company will need to offer financial services in order to compete. Complete vertical integration from click to purchase reduces the most friction for the user, which leads to the best customer experience which leads to a competitive edge. For companies, this is a source of extra high margin that can offset their low margin core business. It also makes the users more sticky – why go anywhere else? I recommend watching the entire presentation in full, very spot on where fintech is headed!

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Strategy vs tactics – why do we get it wrong most of the time?

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The difference between strategy and tactics is the most misunderstood phenomenon. 90% of the time the two are conflated. I recently read (twice, its that good!) the book 7 Powers: The foundation of business strategy by Hamilton Helmer. I highly recommend getting the paper copy of the book to make notes on and see the visuals. I plan to write some posts applying some of the concepts to industries I’m familiar with, but for today I’d like to talk about a basic framework, two sentences that illuminate the difference between strategy and tactics Continue reading “Strategy vs tactics – why do we get it wrong most of the time?”

Lessons learned in SMB fintech

In the last post, I highlighted that SMB’s are mostly a long tail business with a majority of the market at the smaller end of the spectrum. An insight that I did not appreciate going into this market is the amount of sensitivity to price. The statement that “There are three things that are most important in SMB, price, price and price” is 100% true! With most small businesses being small and not really in it to grow this price sensitivity makes a ton of sense. So if you are a startup in this space you come across an interesting squeeze. Continue reading “Lessons learned in SMB fintech”