5% Cash Back

VeradiVerdict - Issue #129

Recently A16z led a $26 million round into one of our portfolio companies, Eco, a rewards-focused startup launching out of alpha. Pantera Capital and Expa (Garrett Camp’s, Co-Founder of Uber, studio) led the seed round.

  • Eco is a simple financial balance that enables users to spend, send, save, and make money all through one wallet. Users can earn up to 5% APY for deposits on Eco (compared to 0.01-0.06% APY for a savings account) and up to 5% cash back for purchases via Eco (compared to 1-2% cash back from premium credit cards). Users can also earn Eco points for engaging with the app, which can be used to send money to a friend, pay merchants like Amazon, Uber, etc., and more. Eco also charges no fees to users, unlike most banks. 

  • Behind the scenes, Eco holds user funds in the form of USD and USDC and lends these funds to trading desks and platforms, where the funds are used as liquidity to reap high returns. This liquidity then translates into rewards for users, like up to 5% APY on deposits. Though Eco is not FDIC-insured, the approach seems sustainable as Eco’s rewards are not subsidized by the company or venture funding; they are all funded by the company’s business operations. 

  • Eco also foregoes massive payment networks like Visa and MasterCard to earn users higher cashback. When using these traditional payment networks, fees aggregated from the card issuer, payment acquirer, interchange, etc. often amount to 3% or more per transaction. Eco connects directly with merchants to pay them, effectively allowing them to return that 3% of additional value directly to the user. 

  • Ultimately, Eco offers a promising vision for what a better financial future, independent from the friction and predatory pricing of banking, could look like. Crypto is at an important inflection point where public trust in institutions like banks and the governments is plummeting, and mainstream interest in alternative financial solutions is on the rise. Eco provides an intuitive, simple user experience with nearly 100x the rewards of banking services. As Eco captures more of users’ regular financial activities, users can eventually forego banks entirely and truly maximize what they get out of their money.

The Rabbit Hole of Fees

When people think of how banks make money, the first thought that comes to mind is often interest. Banks pay a small (close to 0.05%) interest rate to customers that deposit funds, and collect interest rates (from 2-20%, depending on the financial product) from customers that loan funds. The revenue collected between the difference of these rates has been the banking world’s defining business metric since its inception. 

However, over the past two decades, the profit that banks earn from user deposits has been steadily declining. And as a result, banks are looking for newer, often-more-roundabout ways to squeeze money out from its customers. One of the most popular approaches so far has been offering a full suite of fees: overdraft fees, ATM fees, credit card annual fees, transfer fees, etc. In fact, between January and September of last year, aggregated bank fees rose on average 41% per person per month. Day by day, it becomes more and more expensive for everyday users to even participate in the financial system. 

What’s the real problem here?

The financial sphere is plagued with tons of problems, but we can focus on two with respect to banking in particular:

  • First, a misalignment in incentives. The business model of banks is defined by earning money when you lose money; for instance, banks made over $30 billion in overdraft fees in 2020 alone. Fees feed right into this business model, as they arm banks with ways to incur arbitrary charges based on your financial habits. 

  • Second, a poorly designed, and never-redesigned, system to track payments and balances. Before the digital era, US banks “settled” transactions by having messengers on horseback travel to banks across the country and send IOUs to other banks. That model has never changed; it has only shifted digitally, to a form called ACH. Payments are still networked through several banks, transactions are not efficiently settled, and different banks maintain inconsistent records of balances and debts. Our banking system today still lacks meaningful guarantees around finality, consistency, availability, and more, meaning that banks mess up a lot and have to pay out the costs when they do. The result? Banks charge more in fees and rates to customers to pay out their losses. 

What does a better financial system look like?

That’s where Eco comes into play. Eco is a simple balance that enables its users to spend, send, save, and make money without the drama and friction of banking services like a credit card or savings account. Eco makes it clear that it is not a bank – rather, it’s one simple balance that puts users’ money to work for them. Eco’s primary goal is to build a financial ecosystem where users can maximize how they use their Eco balance and earn money effortlessly. 

Unlike banks, where users can open multiple accounts or lines (checkings, savings, credit card, etc.), Eco offers a single wallet from which users manage all their financial transactions – spending, saving, earning, etc. For savings, Eco users can earn up to 5% APY on deposits; for reference, most savings accounts offer APYs under 0.06%, meaning Eco’s simple balance can offer higher returns by nearly a hundred-fold. For spending, Eco users can earn up to 5% cash back with merchants like Amazon and Uber, still considerably higher than the 2-3% cash back offered by premium credit cards like American Express. Eco also charges no fees, meaning it is completely free to use. 

One of Eco’s biggest draws is its engagement program –– Eco Points. The exact design and specification of Eco Points seems to still be under wraps, but we can reasonably infer from the company’s materials that Eco Points are powered by some kind of cryptographic primitive or token. All actions in Eco (saving, spending, etc.) earn users Eco Points, similar to a credit card rewards system or airplane miles. 

How does it work?

Behind the scenes, Eco holds user funds in the form of USD or USDC and lends them trading desks and lending platforms, as liquidity to earn high yields. These yields are what translate downstream into 2.5-5% APY on deposits for Eco users. It’s worth noting that Eco is not insured by the Federal Deposit Insurance Commission, which insures bank accounts to up to $250,000. However, Eco’s founders have pointed out that in the face of rising inflation, FDIC does little to protect against the collapse of the value of people’s savings, while discouraging users from seeking out more profitable investment vehicles “in exchange for this kind of psychological safety net.” As a further vote of confidence, Eco notes that its rewards are not subsidized by the company or its venture funding, unlike many of its competitors. This suggests that the company’s investing model can sustainably support Eco’s continued rewards for its customers. 

Eco enables higher cash back on purchases as well by foregoing complicated, high-cost payment networks. For most merchants, paying with Visa or MasterCard requires close to 3% fees per transaction, due to aggregating fees from the card issuer, the payment acquirer, the interchange, etc. Eco foregoes these payment networks and instead connects directly with the merchants, effectively eliminating the fees from this friction. These savings can then translate into higher cash back for Eco users, at fundamentally higher rates than credit card services can offer. 

What can I use Eco for?

Today, Eco can be used to deposit, send, and save money, as well as spend at a plethora of merchants like Amazon and Uber. 

Eco’s goal is to encourage its users to question how their money is handled in the traditional financial system and to seek better alternatives. To accomplish that, the team recognizes that they need to eliminate their users’ dependence on traditional financial products, like credit cards and bank accounts. 

In line with that, the company continues to build out the infrastructure to power a more complex, diverse suite of financial actions: paying bills, taking out a mortgage, paying friends, and more. Coupled with the growing usability of Eco Points, Eco’s wallet will capture more and more of users’ regular financial activities, allowing them to eventually forego banks entirely and maximize what they get out of their money. 

Final Thoughts

The past decade has seen thousands of innovations in the crypto-sphere, and the past year in particular has seen a massive uptick in mainstream interest in crypto. We’re at an inflection point where trust in institutions like banks and the government is declining, and users are seeking independent, better ways to take care of their money. People are getting more and more frustrated with the friction and costs of banking services, but still struggle to find effective, sustainable alternatives. 

By building out the financial infrastructure for everything from paying bills and rent to sending money to friends, Eco is capturing more and more of users’ everyday financial activity, reducing their dependence on traditional financial institutions and services. With unbeatable rewards like up to 5% APY on deposits and 5% cash back on purchases, Eco also provides users with a way to make the most of their money, regardless of how they use it. Ultimately, Eco offers a promising vision for what a completely redesigned financial system, truly optimized for its users, could look like. 

- Paul V

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ABOUT ME

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.