a16z: From B2B market to financial operating system

Original author: a16z

Compilation of this article: old yuppie

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The B2B marketplace is the gateway to the financial operating system

B2B markets, especially FMCG, are booming in the global south, which includes Latin America, Africa, Asia and three-quarters of the world's population. Informal commerce is at the heart of these economies, fueled by small shops and kiosks scattered throughout large cities and even rural areas. There are 6 million such retailers in India, 7 million in China, 2 million in Brazil and 2 million in Pakistan, selling everything from cosmetics to pharmaceuticals to electronics.

These retailers are vital to the commercial lifeline of the region, with B2B marketplaces offering credit to expand business, guaranteed payment and delivery, software to order and promote products are increasingly being adopted. The software and financial products built into these marketplaces are extremely sticky and can act as a Trojan horse for the financial operating system of retailers, distributors, wholesalers, and manufacturers. In some cases, these marketplaces can even serve as distribution points for consumer financial services.

• We have seen multiple iterations of this model from Colombia to Indonesia (see non-exhaustive map below), and we believe these markets need to encompass two fundamental elements of the product:"for market participants"Come for the tool, stay for the network

• software for digital transactions and financial management

Embed lending and payments, create liquidity in the market, and monetize generally low-margin industries.

- Sumeet Singh,a16z Financial Technology Transaction Partner, and David Haber, a16z Financial Technology General Partner

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Buy Now Pay Later (BNPL) Credit Report

Shortly after the CFPB launched a market-monitoring investigation of five BNPL lenders, Equifax, Experian and TransUnion announced they would begin including BNPL data in their credit reports. BNPL lenders have historically required minimal consumer data (compared, for example, to the data credit card lenders require when applying) to provide loans to them, making BNPL the preferred choice for credit for the 60 million undocumented consumers in the U.S. A rare and important way.

If credit bureaus start providing BNPL performance data to their loan customers, it could help the credit-invisible crowd improve their credit files for larger purchases. Equifax internal research (done in partnership with FICO) found that BNPL's on-time payments can improve credit scores by 13-21 points. We suspect that more consumers will buy BNPL products in the next few years as it becomes more seamless with checkout - Verifone just announced that BNPL will be the payment option for millions of payment devices and online checkout systems across the country.

While this all sounds promising, how these institutions choose to classify and report BNPL loans is crucial. For example, if they treated it as a new, stand-alone category, it might be completely ignored by downstream lenders whose systems still rely heavily on FICO, which employs a fairly rigid framework for generating scores (and likely won't be incorporated into a whole new category anytime soon). With this in mind, we recommend classifying BNPL as an unsecured personal loan – while it may not bear interest, the lender has no recourse to take back goods sold through BNPL.

- Marc Andrusko,a16z Partner, Fintech Transactions, and Seema Amble, Partner, a16z Fintech

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Regulatory changes (and opportunities) for payment apps

Effective January 1 of this year, the IRS introduced new reporting requirements for payment apps (like Venmo, Cash App, and Zelle) and storefront providers (like eBay, Etsy, Cashdrop). Now, any transaction of goods and services -- not peer-to-peer personal payments -- totaling more than $600 needs to be reported to the IRS. Previously, these platforms were only required to report transactions when users paid more than $20,000 and made 200 transactions. To be clear, this is not a change in the tax code, but a change in the reporting rules. However, this could have some interesting implications for the many small businesses that rely on payment apps and online stores to operate.

Over the past few years, especially during the pandemic, payment apps and storefronts have seen a huge increase in activity from solo entrepreneurs and side hustles. These apps are already familiar to these entrepreneurs, as many of them have used them themselves as consumers and as an easy tool for them to collect payments. In fact, many entrepreneurs may not be paying taxes on the money that goes through these payment apps. This new requirement changes that and may make these apps less attractive to use.

While the new reporting requirements may make payments less attractive to small businesses, it also presents an interesting opportunity for payment apps to create a software connection layer with governments. What’s more, this new reporting requirement could prompt the transformation of these platforms from purely transactional to entrepreneurial control centers or operating systems. We've seen that tax tracking is a huge pain point for small and solo entrepreneurs. Imagine if they could not only see their earnings, but also track tax claims, pay employees, get a better understanding of overall cash flow, and even get working capital loans in their payments app. When a software provider is embedded into the "checkout" experience for small businesses, it makes the software the core source of information for those businesses, which ultimately powers every other financial transaction a business makes.

- Seema Amble,a16z Fintech Partner

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Bancorp of insurtechs

Starting any business can be daunting, and insurance startups are some of the toughest to get off the ground. High capital requirements, state-by-state regulations, and finding capable partners are all factors that force founding teams to work for 12-24 months to bring a product to market. The intense company-building period is made even harder if a startup wants to control more of the consumer journey. To do this, startups often create an MGA, or Managing General Agency.

Briefly, the MGA is a hybrid operating structure where startups have more control over the consumer journey and receive underwriting authorization from the insurers and reinsurers they work with. This model was developed to deal with risks that distributors are more aware of. These MGAs may also share responsibility for claims, policy servicing and payments, effectively controlling the entire consumer journey.

During the insurance industry's recent renaissance, startups took advantage of a variation of the MGA model: Instead of partnering with traditional insurers, they leveraged "front-end operators." These front-end operators typically take little to no risk, instead ceding (or giving up) the risk to the reinsurers. Unlike State Farm, Progressive, and Travelers, front-end operators usually have no brands. Instead of building a huge balance sheet to create value for shareholders, they earn a certain percentage of premium through the services they provide. In a way, a front-end operator is to insurtech startups what Bancorp is to Chime, the chartered entity that enables experiences.

In realizing the experience, businesses can expect a certain rate of return, and in a rapidly growing industry such as emerging banking, the ability to grow with customers can create a very valuable place to operate.

–Joe Schmidt, Partner at a16z Fintech Transactions

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Isn't now a great time to raise money?

Most fintech IPOs in 2021 were significantly below their offering prices. As volatility continues to seep through the market, how do you know if this is the right time to raise capital? Is it best to wait until public equity funds are green? Are we heading into a winter of persistent bear markets, or is the bull market just weeks away? Come after lull? If we get out now, will we get the valuation we want? Or will investors focus on public stocks that are down 70% from their highs?

Several factors determine whether now is the right time to raise money for a company - what motivation do you currently have? What is your public stock trading price? How much room do you have for development? Not all companies can wait out a quarter as their runway shrinks and monthly burn increases as expectations grow. Ideally, you should have a 6-12 month fundraising buffer in case it takes longer than expected.

Another way to raise capital is to manage debt payouts (or start talking to lenders as a lower cost of capital option).

–Melissa Wasser,If you actually talk to investors, sell the bigger vision and focus on the building blocks of the next 10-20 years, rather than short-term market conditions, continue to create a product that customers can't leave, and optimize by creating multiple paths, This gives you the ability to choose whether financing now is the best outcome.