Goldman Sachs Was The Sucker

3 Fintech News Stories

#1: Consortiums are Cool! 

What happened?

First, this from Sardine:

Sardine today announced the formation of SardineX, an industry-wide, independent consortium to curtail payment fraud by bringing together established financial institutions and emerging fintech organizations to establish trust across multiple payment rails. Founding members include Chesapeake Bank, Visa, Airbase, Blockchain.com, Alloy Labs Alliance, iLex, and Novo, with more members expected to join in the coming months.

Then this from Unit21:

Unit21 has raised $45 million in a Series C round to grow the Fintech Fraud DAO consortium.

The funding is being used to support a collaborative approach to addressing fraud and money laundering, and the consortium is experiencing a surge in participation, the risk and compliance infrastructure company focused on financial crime

So what?

Last week I wrote about Plaid’s new fraud data consortium, Beacon, and now we have another new Consortium (SardineX) and a fresh round of funding for an existing fintech fraud consortium (Fraud DAO).

Feel the momentum!

The question is, how do we parse out the differences between these consortiums?

Here are the key areas to look at:

• Ownership & Governance. Think of this as a continuum. On one end, you have a consortium that is fully owned and operated by a for-profit company. This is, I think, what Plaid is doing with Beacon. On the other end of the continuum, you have a fully distributed network where each member has equal ownership over the network and influence over how it is governed. This is the vision that Unit21 is pursuing and the reason why they structured their consortium as a decentralized autonomous organization (DAO). Sardine, from what I can tell, is on the Unit21 side of the continuum (independent consortium where all members are equals), but not quite as far down the true decentralization path (I personally don’t understand why a DAO is valuable in this use case, but I digress).  
• Monetization. All of these new consortiums are being built, at great expense, by VC-backed fintech infrastructure companies. They are not doing all this out of the goodness of their hearts. So the question is, how are they going to make money? Are they going to charge a fee for members to participate? Are they going to charge members when they access data from the consortium? For the consortiums with distributed ownership and governance, what special benefit does the organizing company get? Are the consortiums a distribution channel for their other fraud management and compliance products? Are these companies using the data generated by their consortiums to develop new analytic models and other products? 
• Membership. Folks who work in fraud prevention like to talk about how their job is inherently non-competitive. Fraud is everyone’s problem, and companies should cooperate to prevent it. This is true for banks and customer-facing fintech companies, but it’s not true for the vendors serving them. Data-sharing consortiums depend on network effects, so the competition for members is fierce. It’s a winner-take-most opportunity. And judging by the information that is publicly available, I would say that Sardine is currently in the lead. Plaid, as I mentioned last week, doesn’t have an especially impressive roster of founding members (though obviously, they have a big overall network to recruit from). Unit21 has been around longer and has a more impressive roster of members (including Gusto and Drivewealth), but they seem to be intentionally excluding banks (which I think is a mistake). SardineX, like Beacon, is new, but it seems to be taking more of a network-of-networks approach, recruiting members like Visa and Alloy Labs, which (presumably) can bring their own members to the table.   
• Data. A foundationally-important question in the design of fraud data consortiums is what data do you collect from members? Do you ask members to report instances of fraud, categorized by type, like Plaid is doing? This approach provides specific intelligence, which is extremely useful. However, you run the risk of polluting your data with bad signal if contributing members don’t categorize and report fraud instances correctly. Or do you collect a broader swath of identity, behavioral, and transactional data, as Unit21 and Sardine are doing? This approach puts more of the onus on the companies using the data (perhaps increasing the need for sophisticated fraud analysis tools?), but it minimizes the risk of reporting and interpretation errors.     

#2: Goldman Sachs Was The Sucker

What happened?

Goldman Sachs is continuing to reverse course:

Goldman Sachs is trying to end its partnership with Apple.

The Wall Street firm is in talks with American Express to take over its Apple credit card and other ventures with the tech giant, according to people familiar with the matter.

Goldman went public with plans to scale back its consumer business late last year, but it appeared committed to the Apple relationship. The bank recently extended the partnership through the end of the decade, agreed to support Apple’s “buy now, pay later” offering and launched a bank account with the tech company.

Now it is in talks to offload those businesses and its credit-card partnership to Amex, according to people familiar with the discussions. Goldman has also discussed transferring its card partnership with General Motors to Amex or another issuer, some of the people said.

So what?

There’s an old proverb in poker – If you’ve been playing poker for 30 minutes and you can’t identify the sucker at the table, get up. You’re the sucker.

I think this is a pretty good summary of Goldman Sachs’ consumer lending adventures. 

We can land the Apple partnership? Awesome! Do whatever you have to do to get it! 

We can beat out Barclays for the GM portfolio? Fantastic! Make the bid!

We can acquire Greensky for *only* $2.24 billion? And the partner at McKinsey who’s advising us thinks it’s a great idea? Let’s do it!

It’s fun to sit down at a poker table with a big stack of chips and chase bad hands and try to bluff your way out of them, but there’s a reason that good players don’t play that way.

In 2016, Goldman sat down at the table across from Barclays and American Express and JPMorgan Chase and Capital One and started outbidding them for all of the attractive-looking consumer lending opportunities. Seven years later, they’re getting up and walking away from the table. 

It’s the right move.    

#3: I Wish Interchange Would Go Away

What happened?

Navan made an interesting move:

Navan (formerly known as TripActions) offers both a corporate card as well as a subscription to its software. In a twist, the company today is announcing the launch of a new product called Navan Connect, which it describes as a patented card-link technology that gives businesses a way to offer automated expense management and reconciliation without having to change their corporate card provider. For the initial launch, Navan has partnered with Mastercard and Visa, with plans to announce additional network tie-ups in the near future.

So what?

It’s worth reviewing the history here.

Navan started as a travel management company in 2015. It didn’t expand into expense management until 2020, when all corporate travel suddenly stopped (due to COVID-19), and the company had to find a different product area to invest in.

Navan’s corporate card and expense management solution has been hugely successful, but the purpose of the product was never to generate revenue. It was to help Navan fully deliver on its core mission – making corporate travel painless, for both employees and finance teams.

How do I know this?

Because Michael Sindicich, GM of Navan’s Expense Management business, told me so in a Fintech Takes Podcast interview. I asked Michael what one thing in fintech he would change if he could wave a magic wand. Here’s what he said:

I wish interchange would go away. It creates a false sense of competition, when buyers look at which provider is going to give me the highest rebate, versus looking at the technology and really evaluating the automation and the savings, and the experience you’re going to get from the technology.   

Talk about putting your money where your mouth is.

Navan is intentionally enabling competitive corporate cards within its expense management solution and trading its ability to generate revenue from interchange (or give that revenue back as rebates) for its ability to support whichever corporate card its clients (especially its larger clients) prefer.

And this is more than a simple business decision. This required some real engineering and business development work with the card networks in order to ensure that the same level of deep integration between the card and the expense management software, which creates the magical experiences that Navan likes to brag about, would be possible when the card isn’t provided by Navan.

2 Fintech Content Recommendations

#1: a16z-, Unit- & Blue Ridge-Linked Startup Targets Undocumented Immigrants With Deceptive Claims (by Jason Mikula, Fintech Business Weekly)

This is great stuff from Jason. Here’s the key section:

Taking Maza and its founders at face value, the intentions here seem to be good.

But ignorance isn’t an excuse for failing to comply with laws and regulations designed to protect consumers — particularly when the intended audience is a vulnerable one that may not speak English or have knowledge of the US immigration or banking systems.

There’s an incredibly strong temptation in fintech, especially B2C fintech, to believe, in big and small ways, that the ends justify the means. We’re helping undocumented immigrants get access to the financial system. It’s OK if we temporarily cut a few corners on compliance.

This mindset is understandable but wrong. You don’t get to make mistakes when it comes to people’s money, and not complying with regulations, even those that seem trivial or unnecessary, is a huge mistake. 

#2: “TAM that is so large, it almost does not merit discussion” (by Jared Franklin, Costanoa Ventures)  

Consider this your primer on the cross-border B2B payments space and the fintech companies that have been doing well in it. 

Jared’s framing is really helpful, and he’s also assembled a tremendous list of additional resources to check out. 

Bookmark this one.

1 Question to Ponder

How will the abundance of fintech infrastructure, which most modern B2C and B2B fintech companies are built on, impact fintech M&A over the next couple of years? Will modern fintech companies be worth less to potential acquirers because they were easier and cheaper to assemble?

If you have thoughts on this question, ping me on Twitter or LinkedIn.