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.
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).
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.
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.
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?
“I’ve never seen a monument erected to a pessimist.” – Paul Harvey
We live in interesting times, the world around us seems to be constantly on fire – physically and metaphorically. It’s gloom and doom all around. Morgan Housel touches on this extensively in his latest book,The psychology of money. He makes a convincing argument on why pessimism appeals to our emotions more than optimism. We tend to be more fearful than optimistic as losses hurt more than happiness from gains.
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.
An antipattern that I see in startups constantly is Senioritis. This normally happens when the startup finds some success and wants to upgrade its product and engineering teams. Typically at this stage, new leaders are hired and there is a we need to grow up vibe. These new leaders typically are hired from established companies/startups and bring with them their approaches. Continue reading “Premature optimization is the root of all evil”→
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