Lightspeed's Aaron Frank on fintech wave 4: Chime IPO, Circle's stablecoin bet, and why consumer neobanks can't bundle

No, it's not what I call my founders. No, the chicken coop on on the property where I live. So, amazing. Do you have a high-tech chicken coupe or are you keeping it low tech? Just pretty much all chicken coops are falling apart by nature. Uh you just kind of like keep propping them up.

Uh it's like any early stage investing. You just keep keep the companies alive until they they produce eggs. Yeah. Growing up, my my dad was was uh very into building hardware software solutions for our chicken coupe.

So he would rig uh these sprinklers to like fill up a bucket at the right time that would pull up the gate using gravity and then it would dump out. So he should have productized it. There's now a bunch of chick tech companies. I don't know how they're doing. Reaction to foxes and hen houses uh avoid at all costs.

Uh guess scarecrows and fake fake owls there. Oh, fake owls. Really? Decoys. Yeah, I'll send you a picture. This is good. Fox defenses defense tech for for chicken coops. I love it. Yeah, I forgot to ask. Anyway, uh awesome awesome to have you on. Um why don't why don't before we just start uh all ranting together.

Give give us uh give give a quick kind of overview of your background, what you're up to for the audience. Yeah. Uh well, before I sold out, uh I was a founder myself, so I sat on the other side.

Uh I bu built a company called Final about a decade ago that became we sold it to Goldman Sachs and it became what is now the Apple Card. So I've done a lot of kind of deep fintech experience. How I met Jordy was I was angel investing and advising long ago in early stage fintech.

Um and then now I'm an early stage partner on the fintech team at Lightseed. Um and when I say sell, this is kind of what I want to do with my life's work. Uh is help early founders and kind of be in the weeds go zero to one. Break up the chapters of fintech history in your mind.

When you started final, uh I'm sure you just got a lot of Did you get a lot of nos or were you built different? And people were like, "Yeah, I don't know about this fintech thing, but uh yeah, this this makes sense. " I got a lot of I got a hundred nos, I think, when we were raising our series A.

Just it was kind of a slog. Uh we were probably, you know, fintech 2. 0 where 1. 0 was like Bank Simple and like um a few other of those uh people. Wave 2. 0, Chime would be at the beginning of that and then like Robin Hood be in the we were kind of the same core of Robin Hood.

uh my company final ultimately we kind of were going after the wrong target customer segment where you just needed massive distribution which it turns out that you know Apple does have especially for the right customer base. So it made sense to partner with Goldman and kind of sit inside there.

But you know now we're sitting on almost wave four right like we're doing a lot of stable coin stuff at Lightseed and I spent a lot of time kind of we hosted a stablecoin conference back in February.

uh you look at all this stuff and the stuff that you want to do in fintech now are just so much easier than it was back then.

Um we were like a full actual credit card including line of credit and took two and a half years to launch that company just cuz there hadn't been anyone since wave 1 when it was a company called Revolution Money had uh had launched through Steve Case and u which why they call it Revolution Capital.

Um, but that was wave one and we had to go find people from that company to even figure out as a startup how you bring a credit card to market. Now you can do it in nine months if if I have a question about this. I was talking to Christian about this earlier.

Um, this idea of like the compound startup, we've seen it in enterprise software. Why can't someone build all of the consumer fintech products in one kind of neoank one-stop shop?

On day one, I sign up and I get a credit card, a checking account, a savings account, the ability to buy stocks and Bitcoin, a mortgage, and a car loan allin one. Right now, that feels like six different startups, six different YC companies potentially.

But if if each one of those can now be built in nine months, why can't they all be built in parallel in 9 months? We may see with kind of like all the AI stuff, but honestly, it's not a technology problem.

Okay, financial services products, the same building blocks that have existed, I hate to say since the Medici, but for a long time now. So, we have product market fit. Consumers want access to credit. They want savings accounts. They want mortgages. They want car loans. What we don't have is product marketing fit.

And so, it's the same reason we've seen even Robin Hood with essentially infinite capital to go and acquire. It's taking them a long time to get the right product construct and aggregate all of those different products together.

and them them this is sort of the wealth the wealthfront MMO when they tried to play this game but it's just really hard to get that second third fourth fifth attach rate to be high enough to make it work that you can ever make the economics work um unless you're playing the bundling game right if you're build which is what Robin Hood gold is if you're playing Amazon Prime which is my best customers I want to just own their entire financial life that's a path you can you can take but that the answer is just product marketing fit it's not product market fit financial services fundamentally have it we need access to it, but you just, you know, getting the product right.

Why would I, if I have trading at Robin Hood, go get a a shittier checking account from them? Not that they have that, just from across the board. You just need to get the product construct right. And then you're also not going to go out and spend on CAC again. You're going to try to cross-ell.

So, I I'm just wondering about like the product marketing fit.

this idea that like if you went to customers with this idea of like this is the drop-in replacement for your Chase account which you have your mortgage with and your car loan and your credit card with and Chase owns a bunch of different stuff but it's all one solution one app for everything.

Uh maybe they're all kind of mediocre to start with but then they all get better. It just it's interesting that no one's been able to break through with that.

But I mean I think I think the challenge is you acquire a customer in their 20s and they just need a basic checking account, credit card and maybe best class and everything, right? Because you're like, "Oh, I I want the best possible price for my mortgage.

" And so unless you can win consistently in every single thing, you're going to get fragmentation. So I think it'd be helpful to talk through a couple recent IPOs, Chime as well as Circle. They they Chime, you know, obviously represents what you called, you know, fintech uh 2.

0 0 started around the time that you guys started final. Finally got out, you know, well below uh their their 2021 marks, but at least they're out. And we now have proof points to that that some of these businesses can do well in the public markets.

At least Dave uh I think if you bought Dave at the bottom like a year and a half ago or something, you'd be up like uh you know crazy multiples. So, it's good to see that, you know, uh, these sort of neo banks can exist in the public markets. But why don't we start with Chime? Uh, what was your reaction?

Uh, it seems like a pretty solid outcome for from my point of view. It's great for everyone, but I think Sequoia or DST did the last round. Um, and even then, I think they're back pretty close to in the money. Uh, ultimately, like liquidity is the future. The Chime IPO is fantastic for the rest of Fintech.

um we will see compounding amounts of capital flow down one to the early stage funds but even every single one of their employees over the last I think it was a 2012 company 2011 over the last like 13 years become angels in a meaningful way and just see that there's room for product innovation um they also are a potential one of these aggregators right Chime now has a even bigger balance sheet and they can go in after and and aggregate people and maybe it's not the same customer for the multiple products but they can get deeper into credit, they in theory could buy they could have bought a Dave or a money line and kind of get that sort of product under the hood.

Um, you know, when you look at like a Chase, a $750 billion company or banking, um, they have to do a lot of things to get to that market cap. So, you have to do all of these disperate services that don't always necessarily have the same fundamental core systems underneath.

So, Chime now as an IPO shows one that fintech actually can have a decacorn um as a public company um and in neo banking.

So, we'll see a few others go and we can also see that we can actually and I trust Chris and Ryan to go out and do this because they know what they're doing, but they can go and become an aggregator and kind of do more.

I think it'll also just drive a few more fintexs to go public because it's just it forces you to be a mature business, get your economies to scale, right, and in some sense the Chime IPO that it's below the the the top tick mark is probably just more a side effect of interest rates being higher and capital finding other sources as opposed to like this thing being worth whatever it's worth today, right?

It's still up like 40% from the IPO, which seems pretty successful and you know, uh it's a pretty good win for the industry. Yeah. Yeah. Circle. Um before we dive into Circle, is there um how how are companies like Chime messaging around AI?

It feels like the obvious application is just better customer service and maybe you can use agents to serve more customers and and increase margins.

is that uh and I'm sure they're applying it around, you know, fraud and and and other use cases, but in your mind, what are what are the exciting ways that that a that a scaled uh fintech like Chime can actually apply this stuff? Yeah.

I mean, it's where there's ever in in industry speak and coming from credit cards, there's a lot of industry speak. Um it's where we can apply AI to arms and legs, right? Like people are this massive cost. So customer service is one thing, but really it's actually the back offices of a lot of these businesses.

um we've invested in a company that does dispute management and then like as a professional service plus AI and so you are able to give what is effectively an AI powered BO and do this for other companies but for someone like Chime you know pre IPO they announced that they I think they call it Chimeore like they built their own processing stack and they they kind of are getting off of Galileo which is owned by SoFi slowly it AI enables kind of all these macro tailwinds that just really give them better economies of scale as a bank um to operate Tier one is customer service.

Tier two is then really like, you know, a bank is kind of like um an iceberg. As a consumer, you only see above the water, but there's so much below the water to make these things really work.

And that's where Chime is like able to actually and all of these kind of scaled neo and fintech companies are able to use AI to provide better services for their customers. You can almost think of it as like applied AI, right?

They're not research companies, but they really can find places just to replace where they've thrown bodies at problems in the past. That makes sense. How are latestage private market investors as well as public market investors looking at fintech businesses that get a large amount of their revenue from interest yield?

It felt like when interest rates popped in late 2022 and and you know have have sort of uh stabilized it felt like people were kind of looking around being like okay a bunch of these businesses are generating a lot of revenue now but everyone was discounting it so massively.

Now if you look at the macro it seems like we we potentially have entered into a new normal with just like sort of moderate rates. Is that is that the way people are looking at it or or is it still like a massive discount being applied uh in the private markets? There's still a pretty big discount.

Some people will give you credit and it the reason you give someone credit is just cuz it lets you compound the business, right? Like you're essentially immediately profitable post zer ending because you just had all these deposits.

it's going to flow to you and you're going to be able to make all of this interest revenue and the best founders are now just compounding that into other business lines. Um, and using that to just bring kind of more of what you're talking about of all of these different services.

We see it a little bit more in small business than we see it in consumer just because if you're pitching a consumer on a high interest rate, they're typically a pretty like hot deposit. They're going to move around and it's just not the best person to build against.

where as a business you're actually giving services and so you're able to charge them across the board. Um, but yeah, so there's a pretty big discount on it, but you know, it's not it's not back to Zerp discount, which is I think what everyone was expecting initially.

It's more akin to two to three point rate, wherever the two-year T is. You know, it feels about right just from where we're expecting the market to come back to. That makes sense. Uh, what was your reaction to Circle's IPO? We had Jeremy, the CEO, on the show, which was great. They have a big, you know, bold vision.

I think they've executed very, very well.

Um, and at the same time it was interesting to see the market reaction to stables versus how people initially reacted to the S1 which many people looked at it and said this company isn't even actually shouldn't actually go out like they should just get acquired by by Coinbase and clearly there was an exceptional amount of demand.

But I'm curious how you how you saw you kind of looked at the the business pre and then post IPO. Yeah, I mean preipo is the same kind of look like all the revenue goes to Coinbase and I know a bunch of circle people. I know Jeremy uh he actually spoke at our conference um and and have been able to get closer to them.

But it it it's one of those that you know if you think about the macro trend of stable coins and this isn't circle specific but you know the biggest export in the US economy is the US dollar. Um post Brenton wood let's give it up for the dollar.

Uh yeah, post Brenton Woods essentially like we've tried to dollarize the world and make everything trade in it. Um circle IPO is just showing that there's more demand for that, right?

There's one retail demand for kind of like a normal crypto company in the public markets, but two is if you think about where the world might go, where the dollar might just be it's already hegemonic, but it becomes the only meaningful currency.

Um Circle or Tether is going to be one of those two people who plays that role. Um, it's possible we see a new upstart. There's, you know, we're playing around with a bunch of ideas around stable coins and how uh they may exist.

Maybe we'll get a stable coin per country, not necessarily CBDC, but maybe we also dollarize every country. We're seeing a lot of ideas come through right now from the circle IPO just showed there's just a ton of demand. Um, I know Jeremy and team are incredible.

What are what are um every single person that is at a legacy financial institution or a big bank is looking at the circle IPO and you know probably excited and a little bit like we should do this ourselves starting to think about you know should we have our own stable coin etc.

I can think of some reasons why they have more of a moat than the average person just kind of analyzing the business for the first time might think, right? They have liquidity, deep partnerships, they have a regulatory, you know, um, you know, uh, sort of arm that's now getting involved in countries all over the world.

They have developer tooling that's really powerful.

So, they've they've they've done quite a lot to build out their sort of um long-term edge, but I'm curious why you think Circle could could potentially continue to to sort of durably acrue value even though other people will will naturally um start to compete with them. Yeah.

I mean, look, there was a story about Walmart and Amazon trying to launch a stable coin. Um you know, the joke I've made to friends is that essentially just rhymes with Kohl's cash. like nobody wants a a a merchant-based stable coin.

Maybe from the banks they'll build a consortium, but we've seen historically those kind of fail.

The reason Circle But did Zel did Zel fail or Well, Zel is EWS which sells a bunch of services, but ultimately like consumer NPS on Zel cannot be high because it's so fraud and so just painful to use as a kind of integration point. Um, no.

I'm talking um, man, it used to be called Soft Pay at one point was called ISIS was this bank consortium of pay by like pay by bank. I kid you not. Crazy crazy name for a bank consortium. They had they had to rebrand when ISIS chose the same name as them.

Brutal pay and then JPM bought them to take them out of the market so that nobody could really see how bad it was. Um, so like a bank consortium with stablecoin makes sense. There's a bunch of people. Greg Kidd, who is one of the early angels into Twitter, Square, Ripple, Coinbase, is working on something called USDB.

Um, we're going to see a lot of these things play out. Circle just has this like in financial services, scale is what makes you win a lot of the times, right? Or it gives you a real network effect.

Circle is going to spend a lot of this money trying to build sort of a a network like Visa, Mastercard is kind of the underlying bet where they can get merchants on one side and and get consumers on the other.

Um whether or not it's for supplier payments and B2B stuff or B TOC payments is a little unclear and I'm sure you know if I were them I'd be throwing everything against the wall to make it stick. Um they had a lot of announcements pre IPO in the pretty much all of April and early May.

Um which seemed like stuff that they really been working on for a while and just weren't sure kind of due to the Trump tariffs if they'd be able to go out if the market would reopen. They got that stuff out there. It's a very strong narrative of what they can do into the future.

um it just now they have to go and execute on it and that's one of the things you know they're fighting an uphill battle of network effect in traditional financial services. How are you thinking about stable coins as a c as an investment category? I'm sure this is how you're spending probably 50% of your time.

Is now the time to get in? It seems like this is a public company. Oh, I think in many ways the IPO No, I'm not saying investing in the next stable coin issuer. I'm talking about the actual consumer applications, B2B applications.

The infrastructure here, you know, to me, it's it's it's I can imagine a massive wave of companies being funded that try to ride the stable coin wave, but then ultimately end up getting just, you know, um, Sherlocked by by circles and stripes and and things like that. But but how do you think about it?

Yeah, I mean, so I'm an early stage investor for the most part. like I bet on people and then I like I'm looking for companies and founders I fall in love with and then want to figure out how to deploy capital into them. Um, stable coins is this current trend.

Every company's now in some sense a stablecoin company um if it makes sense for their business just like every company is an AI company. Um we we figure out a few archetypes of founders uh and I was joking with one of my founder friends of like we'll probably coin it as money 3.

0 know founders where they they're very serious about how you handle a business that actually touches money but on the other side of it they're taking all the efficiencies that come with crypto and when you combine the two you end up in a in a world which is stable coins.

Um so we've been able to back about two companies right now in the last few months doing that.

We've seen a lot of the companies kind of in the middle of the of the sandwich which is like you have issuance, you have consumer distribution, in the middle you have a lot of orchestration, you have a lot of like actual bill pay and stuff like that. Um we've sat more on the issuance side and core infrastructure side.

We've looked a lot at the kind of like later stage distribution side and just have realized that in the middle they're going to get squeezed.

the the the issuers like Circle are going to have to move up market and verticalize or the distribution plays where they control all the value from the consumer and can build a better product.

Um they're going to have to move down market and kind of eat down the stack or or dual source or triple source their vendors so that they can at the end of the day squeeze them on margin which is honestly from a distribution perspective the traditional fintech play. It's what Cash App it's what Chime has done.

you put as many vendors behind you as possible that do the same thing and then when you go to rebid the contract, you just squeeze them. So, we've made a few bets in the space. Um, and really when we're seeing demand on the distribution side, we're seeing it honestly outside the US.

I I personally haven't figured out a use case where stable coins reduce the friction of that you see in the US banking system, but if I'm not in America and I want access to the US dollar, it's the fastest way for me to get access to the US dollar in something that looks like a US bank account.

Um, it also helps for people who are, you know, um, operation. What about buying a car on the weekend? Uh, you can still do that. There are services that do that. Fed wire is actually, I believe, 7-day settlement now. So with the right bank you can even do that.

But also like what fed wire for coins like yeah I mean no I mean there's a bunch of other there's so many other use cases. I mean streaming you know I mean there there's it's the thing is like if you think how Visa and Mastercard work they're the biggest factoring networks in the world. They're they're taking risk.

They're adjudicating risk for a bank when a consumer swipes. And so what is the risk that Visa, Mastercard, and MX Discover take? It's single digit maybe dozen like 12 basis points. The rest of that interchange flows to the bank. It flows to the issuer who's actually taking the real risk.

And so if stable coins and Visa and Mastercard are both taking this very seriously. If stable coins start kind of eating their lunch, we're going to enter a world where they're just going to cut rates and we're going to get a much more I hate to say efficient.

we're going to get a less lucrative um card issuing and kind of network-based world there for the big banks where Chase can no longer offer you Capital One can't offer you high high rewards because there's no margin in it for them. Interesting.

So, will we see protests in the streets from point points maxers, you know, just taking saying like we don't want efficiency, we do not want efficiency in the financial system. We want to keep rewards high. Really upset. Well, they'll just hire the lobbyists finally, right? like crypto got around to hiring lobbyists.

The points points guys will uh points guys will uh what about unexpected beneficiary? Oh, sorry. I'll No, no, I was going to say the banks also want higher interchange. So, they're actually fighting as well. It's why they're trying to put out stable coins. It's going to get messy.

Like we're going to overinvest in the space like we do in everything in venture and then at the end of the day a few winners will emerge. Circle's been around for so long that like it clearly makes sense.

They got big, they aggregated a lot of value and now we're going to see a lot of people come for their for that opportunity as well. Uh what about unexpected beneficiaries of stable coins?

I've heard that potentially some payroll companies that maybe hold on to uh tax withholding, they might be able to earn higher yield because they're able to actually uh hold the treasuries themselves.

Do like does do stable coins unlock any sort of float dynamics and shift it from a bank making uh making an interest rate return on float that they're holding versus the company can now do it because of stable coins. Are there any kind of unlocks like that that are might be happening?

uh let if I live in I hate to say Venezuela, Columbia, but if I live like so so for what your use case, not for a sophisticated business, you should be having a serious conversation with your bank to figure out how you earn that float.

Um small scale, it may get you better economics, but it's not going to move the needle economics, right? There's only so much juice to squeeze from that um orange. Uh really, yeah, the side effect is like I no longer have to trust my my government as a as an international human, right?

like I don't like I can move my savings into the US dollar which right now is in theory the least volatile currency but from like US companies yeah there's a little bit of friction reduction it lubricates the system a little um but at any meaningful scale you're going to take most of that yield anyway because you're going to go back to your your bank partner where you for if I'm a payroll company I have a direct relationship with some bank somewhere and I'm going to take some of that yield um the other thing I should say is stable coins are in theory two things one is that's the actually underlying treasury which actually holds a risk asset.

It's a US usually it's a T bill of some sort, but the other side of it, it's a payment vehicle and payment vehicles traditionally are not risk assets. You send them and the money is good, right? Like and and so it's one of those like the benefit that we see is really on the payment side.

On the yielding side, maybe we'll get securitized CD bill like T bills and T- bonds and like we'll get securized CDs and like somebody will actually have direct access to Treasury to to get these things at Hawk. But it's a it's a bit out because there's just so much demand on the payment side of this industry.

And I it's really hard for all of us to grasp truly how big payments are. Like it that's why stable coins are taking off. It's giving people access to the US banking system in such large volumes that they otherwise wouldn't have been able to. What about geopolitical risk?

I imagine that if I'm a dictator in another country and I'm watching all my citizens like go off of my currency that I control, I would want to ban that. Is that a major risk? Are we beyond those discussions at this point? Um, you can ban the on-ramps, off-ramps.

You can ban your ability for your citizens to get into a stable coin directly, but not indirectly through crypto, right? Like I can go buy Bitcoin and then swap that into USDC.

Um, yeah, that's kind of the running joke between a few of my friends on the back channel of like who's going to who's going to be the first startup to just aggressively essentially become an arm of the CIA and new USA ID in dollarized countries um to promote US edge. It's like half a joke.

It also is just going to naturally happen if I don't have to worry about the volatility of my currency and I'm a and I'm a human who's not living paycheck to paycheck. So, I actually have savings.

Why would I want my local currency if I'm not going to actually spend that money and I actually want to be able to save for the long term? And there is no ability for you to capture that money because it's my private keys. It's so so there there's a ton of value there.

There is some geopolitical risk, but at the end of the day, it's one of those that I think um the world's going to have to move through it, not past it. Yeah.

you so you're not worried about like a great firewall for all the on-ramps and off-ramps and then I mean if you make it illegal that someone's discovered with stable coins you're holding USDC and now you go to jail like that is a serious serious uh headwind towards stablecoin adoption in a you know in a dictatorship I imagine yeah it's a question yeah for maybe unfriendly countries to the US but like if you're a semi-friendly do you want to actually do that right especially when the Trump family is so heavily involved with dig digital assets.

Yeah. And such big believers. Believers. The joke I made last week was like, uh, why why even issue stable coins against Treasury bills? We might as well issue it against the US military. So, like, if you're a friend of the US, you're not going to really cut us off. Yeah.

Issued against Well, that that may be why is Coinbase, you know, sponsored the the Army parade. Maybe. Yeah. Maybe they're maybe maybe they're cooking. Maybe they're cooking. Milcoin, it's coming soon. Milcoin. Uh, any any other any any kind of events?

uh with in the in sort of broader fintech stable coin world that that are coming down the pipeline potential IPOs catalyst that you're kind of looking out for or is it summer break and we can just all check back in the fall. Isn't their stable coin bill going through right now?

Yeah, the Genius Act they're going to negotiate it. You know it I I try not to play politics at all. It's just not where I have the expertise. Um I think I think they'll actually I don't think we'll have a summer break. I think the IPO windows open. uh and not knowing anything like that's great to hear.

Everyone thought they could get public in April and then that blew up and then May kind of like we reopened the window. Um if I was trying to go public, I'm going to try to sneak it through until something geopolitical closes the window again, which is like kind of the mantra right now.

Uh so I think the the bankers on Wall Street are not going to get the summer off. Uh the Hamptons will be empty. Time to grind. That's why the Hamptons are empty. It's so funny. You