Hey Fintech Fam,
This week I explored how payment companies are approaching opportunities in the metaverse. I also spoke with the co-founder of one of the artificial intelligence start-ups helping to automate loan underwriting.
Plus, keep reading for a recap of the horse race to become the “world’s crypto capital.” Did the new 3,000-pound crypto bull help Miami charge ahead?
Register here to attend the FT’s first Crypto and Digital Assets Summit on April 26-27. Be sure to check out the full line up of events, and don’t miss Sid’s interview with David Mercer, chief executive officer of the LMAX Group.
Traditional financial companies seek a foothold in the metaverse
For those who did not get invited to the exclusive Grammy Awards last weekend, Mastercard held a splashy alternative. The event, held on the gaming platform Roblox in partnership with the Recording Academy, was the US payments giant’s first-ever metaverse event — although it expects to host many more gatherings.
“Metaverse for us is here to stay. It’s going to be an extremely important space that Mastercard will play a key role in, and you’ll see a lot of action coming from us in the space,” said Raja Rajamannar, Mastercard’s chief marketing officer.
With its Grammy’s party, Mastercard joins a host of finance organisations that have embraced the new alternative realities. Earlier this year, JPMorgan opened a lounge in Decentraland — complete with an illuminated portrait of chief executive Jamie Dimon — and last month HSBC bought a virtual plot of land in The Sandbox.
So far, however, most of traditional finance companies’ moves in the metaverse have been dismissed by industry observers as more signalling than substance.
“A lot of this stuff that’s happening right now around the metaverse — that is very much just branding and making a splash,” said Mikkel Krenchel, partner at consultancy Red Associates. “You can have a corporate entity use that for branding, but more importantly, you can then get to tell a story about how [much of a] cool and forward-looking brand you are.”
Though the industry is still in the early stages of figuring out what role it wants to, and can, play in the metaverse, the potential business opportunity is substantial. The metaverse economy could grow to $8tn-$13tn by 2030, according to a recent Citigroup report. In 2021, Second Life, a virtual reality gaming platform, had a GDP of $650mn, making it larger than some small countries.
“The challenge for traditional companies is if we move to a Web3 Metaverse,” said Ronit Ghose, lead author of the Citigroup report.
As more transactions move to digital and virtual environments, traditional payments companies are evaluating how they can avoid losing their share of the market.
“We are obviously the heart of commerce in the real world, so why would we not want to do the same thing in a metaverse? Particularly when [the] metaverse is going to scale and we do believe that it’s going to scale,” Rajamannar said.
Cards giant American Express gave a glimpse into its thinking last month, when it filed a series of patents for ecommerce and electronic business transactions in the metaverse, as well as systems for trading non-fungible tokens. The company did not comment on its intentions beyond the patents.
Traditional payments companies like Mastercard, and American Express will probably play a central role as the gateways to commerce on platforms like Meta and Roblox, according to Ghose.
The risk for card companies is that the tech giants that have so far dominated the decentralised metaverse draw up new rules and structures that either cut into the transaction fees earned by intermediaries like Mastercard or Visa or cut them out entirely, Ghose said.
Still, it is too early to count them out.
“The apex companies in payments today definitely have the potential to still be big in the next generation of 3D Internet,” he said noting their large balance sheets should help them compete either through M&A or organic development. “It’s just the usual innovators’ dilemma.”
Quick Fire Q&A
I recently chatted with Justin Wickett, CEO and co-founder of informed. IQ, an AI company helping lenders like Ally Financial add automation to the loan underwriting process. The former Credit Karma director founded the company alongside his mother, Magdalena Yesil, in 2016. Informed. IQ now automates income verification for over 125,000 applicants a month and Wickett expects business to double over the next year.
How did you get started? I got the opportunity to see financial institutions get leads from Credit Karma and really struggle to originate loans. These lenders had thousands of people whose jobs it was to manually review pay stubs and bank statements and calculate income. In that process, oftentimes applicants would have their incomes miscalculated, there were biases that were introduced, different loan officers had different ways of accounting for someone’s overtime pay or their night shift pay. I knew that there had to be a better way.
How much money have you raised so far? $33mn
Major shareholders? NYCA, a boutique fintech investment firm and US Venture Partners
What’s the revenue model? We are a software as a service business. We charge banks a transactional fee. Every loan that we analyse is a transactional charge. Banks today have to pay for armies of staff and software systems to originate a loan — we’re automating that process.
Why can’t traditional lenders do this in-house? Today, the incumbent process is very manual. It’s very time-intensive. It’s very costly. And there are a lot of mistakes that are made about 15 per cent of the time. Staff at the bank will miss a certain line item on someone’s bank statement or a certain form of income . . . And so what we’re doing is enabling AI to automate those types of calculations and validations, so that in real time, information can be provided back to the consumer and the consumer can have access to more financial options than ever before. Today, that’s just not possible. You’d have to staff tens of thousands of people to be able to review income documents as applicants are applying for credit. It would just be cost-prohibitive to have all of that staff and even if you did, those staff still would be making mistakes, introducing biases, implicit or explicit.
What regional differences do you see in credit reporting? Different regions have different amounts of data that are made accessible to lenders. In the US region, we’re actually seeing lenders moving away from using traditional credit reporting methodologies like FICO. If you talk to Ally financial, one of the things they will say is most important to being able to assess an applicant’s likelihood of repaying a loan, is payment to income ratio — so the income is absolutely critical. And what we’ve seen historically is FICO is not a great predictor of an applicant’s likelihood of being able to repay their loan.
Meta targets finance Facebook parent Meta is preparing to introduce virtual coins, tokens and lending services to its apps after the collapse of Diem, its crypto project. For now, the new virtual currencies are expected to be more like the tokens used in the Web2 form of the metaverse, since a scalable use case for Web3 applications have still yet to emerge.
Vying for crypto hub status Last week hoards of Bitcoin enthusiasts flocked to Miami for the 2022 Bitcoin Conference where organisers unveiled the city’s own Crypto Bull and declared Miami “the world’s capital of crypto.” But competition for that title is shaping up to be fierce. In the same week, across the Atlantic, the UK’s Chancellor of the Exchequer Rishi Sunak used Twitter to announce his intention of making the UK a “global crypto assets hub,” and in San Francisco, new start-up Praxis is promising a new way of life for crypto investors.
The fintech powering BlackRock’s results The world’s largest asset manager has become an under-the-radar fintech, Lex writes, as BlackRock’s portfolio management technology platform Aladdin accounts for a growing share of its topline.
*This article has been amended since initial publication to clarify that Apple is not a client of informed. IQ.