Long Take: Is the CFO automation suite (Brex, Ramp, Jeeves, Digits) an SMB underwriting Trojan Horse?
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: We think deeply about financial products embedded in other experiences, and the difference between a feature, a company, and a platform. We visit GroupMe, Slack, and Microsoft Teams for the analogy. Thereafter, we try to discern how the recently valuable CFO-automation startups Brex, Ramp, Jeeves, and Digits position their product, and what asset class they are actually monetizing. The note finishes with a nod to credit cycles and underwriting exposure.
Topics: digital lending, payments, embedded finance, eCommerce, strategy, marketing
Tags: Brex, Ramp, Jeeves, Digits, GroupMe, Slack, Microsoft, Amazon, Better.com
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Brex was founded in 2017. Ramp in 2019. At the time, we thought of it as embodying the “finance-as-a-feature” theme. Let’s parse that assumption, and build towards a model of what’s actually being sold.
The common wisdom about start-ups is to ask — Is what you are building a company, or a product feature? For example, group messaging is a great feature within a messaging app, within a mobile operating system, within a piece of computational hardware. It’s a great idea to start something like GroupMe in 2010 and sell it for $80MM a year later to Skype.
You’ve built something that a larger platform should have, but that doesn’t have a life of its own, unless you build a larger platform around it and compete upstream.
That strategy is also available, you just have to be more bold. As an example, Slack is GroupMe done “right”, or rather, done at a scale of a company providing an industry-scale platform, rather than a chat feature within a messaging app. And yet, an even larger platform than Slack, like the “productivity” suite of Microsoft in the shape of Office, Cloud and various enterprise relationships, is going to make Slack look like a weak point solution.
So we trolled in translating this idea to finance. What if the entire financial industry is actually just a feature, a mere component or derivative, of *actual* economic activity. What if the thing finance produces is just a utility transformation function hidden in between what people actually want to do — i.e., live their lives, make beautiful things, have productive relationships.
Today, maybe that’s not so subversive. But if, let’s say, the only way that financial product is sold is through a top-down, push marketing model — such as bank branches and financial advisors — then one may mistakenly think that the financial industry manufactures stand-alone product that is bought and sold at the financial supermarket. A sneaker is made in the factory and put into the shoe store. A fund is made in the asset management factory and put into the brokerage store.
But what if the fund or the loan isn’t sold in the store, but rather within the regular, economic journey of a person or company in the real world. This is the premise of embedded finance (see our coverage here, and here). Most of the embedding takes place as financial APIs. But one can also frame it as a de-branding of financial products into “generics” and a loss of the customer relationship. In 2019, we talked to the American Banker about this concept:
The trick is to try and understand causality and limits. In the case of traditional finance, it is both an outgrowth and catalyst of the overall GDP pie, somewhere between 15-25% of an established economy. First commerce, then need for money, then need for banks, then investments, loans, and so on. In Web3, we have an interesting flip. There, trading and finance came first in the form of DeFi — the way GroupMe built a group messaging feature. But, the Web3 financial industry expanded outward to generate an economy in the shape of NFTs and DAOs. That’s akin to Slack building out from chat into productive software to rival Microsoft.
So back to Brex, Ramp, Jeeves, Digits, and the other fintechs targeting the Office of the CFO. In our short takes, we said “Putting credit on top of commerce is a good way to juice revenues in the short term”. We want to open up this concept to better understand exactly what is being sold — the operating activity — and then look at monetization.
The Trojan Horse
One of the most powerful innovations coming out of Silicon Valley in the last two decades is the separation between what a company says it does, and what the company really is. Let’s take Google.
Google says that its mission is to organize the world information. Does it charge you, dear reader, for the organization of that information? Does it add value to your life by giving you the best results, and then you pay Google some part of your consumer surplus. Of course not! Don’t be absurd.
Google is a manufacturer of well-targeted attention. Here’s is its actual product — people and their time.