An alternative to traditional student debt.
Income Share Agreement provider Stride is SotW 🚀 📈
Tweet of the week 🦉🏆
This is the penultimate issue of FATP in what has been a pretty awful year full of unexpected changes and many tragic events. Fintech however has been a notable bright spot with new innovations and companies stepping up to help throughout covid.
If you have enjoyed reading FATP this year, I would love to get some feedback from you 🙏. If you haven’t enjoyed reading FATP, I would still love to hear from you 🙏.
Please take 2 minutes to give the 🎁 of feedback this Christmas🎄 here 🎄.
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Recent News 📰
🇪🇺 UK VC Atomico launched its 2020 State of European Tech report with some fantastic data. Great highlights by Sifted. My fave is James Wise of Balderton’s tweet.
🇬🇧 The UK Government is launching a program to help international financial institutions access British fintech, a sector with £11bn in revenues in 2019 and 8% of total financial services output. Take that Brexit.
🇺🇸 Bill Gates gives praise to India’s digital finance model.
Funding 💸
🇪🇺 Open banking platform Tink raised $103m at a $825m valuation co-led by Eurazeo Growth and Dawn Capital, a large increase from the $105m on $503m it raised in Jan.
🙌🏻 FATP Take - This space is heating up with Unit (below) coming out of stealth also this week. Cue the rush to sign up banks everywhere.
🇪🇺 Upvest, a pan-European plug and play securities API provider, has raised a €12m Series A led by Earlybird Venture Capital, joining existing investors Notion, Partech and Speedinvest.
🇬🇧 Entree Capital raised $125m for an Israeli fintech and digital health fund.
🇬🇧 Outfund, the fintech lender, raised £37m of debt and equity.
🇬🇧 Entrepreneur First had a big week with portfolio companies announcing almost $70m in funding with two fintechs amongst them;
Cleo, the financial assistant, has raised $44m in a Series B led by EQT Ventures with participation from Balderton and LocalGlobe.
Proportunity has raised £7.5m in mostly debt funding and was recently selected to join Tech Nation’s Fintech 3.0 cohort.
🇬🇧 gohenry, a kid’s money management app, raised $40m from Edison Partners and Citi Ventures. The app has a community of 1.2m parents and was profitable this year.
🇺🇸 Affirm is pausing its IPO plans, joining Roblox, according to WSJ. The reason? Rumoured to be the initial trading pop’s of DoorDash and Airbnb so expect pricing to be higher.
🇺🇸 Fintech-as-a-platform Unit came out of stealth, announcing $18.6m in funding from Better Tomorrow Ventures, Aleph, Flourish Ventures, Operator Partners and TLV.
🇺🇸 Synctera, a fintech started by former Uber Money head Peter Hazlehurst, also exited stealth mode and announced its $12.4m seed round led by Lightspeed and included angel investors Max Levchin (Affirm) and Zachary Perret (Plaid).
🇺🇸 Prudential Financial is starting a $300m CVC firm, run by Ramneek Gupta, formerly co-head of Citi Ventures, to invest in insurance, fintech health, real estate and enterprise information technology.
🇺🇸 OpenFin, the new operating system for Wall Street, announced a strategic investment from Standard Chartered.
Embedded Finance
🇺🇸 Over the past week Lendflow, the embedded lending infrastructure, hosted a webinar “Opportunities in Embedded Lending” which was excellent and demonstrated what platforms make for a good foundation for lending with some solid examples.
Challenger Banking 🚀
🇬🇧 Sky News reported that Moneysupermarket, the price comparison website, is rumoured to be interested in acquiring Snoop, a money savings app from former Virgin Money chief Dame Jayne-Anne Gadhia.
🇬🇧 Revolut announced it broke even in November and is doing better than pre-covid.
🇬🇧 TransferWise is adding 750 new hires in the next six months, increasing its workforce by a third, most significantly in its London HQ.
🇬🇧 OneBanks is launching its first fully-staffed banking kiosk in Scotland, aiming to provide bank-agnostic services in places high street banks have left.
🇺🇸 Betterment CEO Jon Stein stepped down and is replaced by Sarah Kirshbaum, an experienced exec at large public companies, in what looks like a pre-IPO transition.
Traditional Banking 🏦
🇪🇺 Deutsche Bank is seeing better engineering applicants after announcing a partnership with Google Cloud, in an unexpected boost.
🇺🇸 Citigroup is eyeing Ant Group’s success with its recent tie up with Google.
🇺🇸 Capital One became the first bank to announced it is restricting customers from using credit cards from settling BNPL debts as they are “risky” transactions.
🙌🏻 FATP Take - The BNPL market is very nascent and outside of regulator’s purview but this will not last. The large players would be best served in pre-empting some of regulator’s concerns ahead of being forced into action (credit reporting, background checks for one). They might see themselves as tech platforms to escape too much regulation but they are financial products and Klarna itself is an actual bank.
SME Banking
🇬🇧 50% of UK SMEs are using open banking services, 90% directly because of covid.
Fintech Infrastructure 🚧
🇬🇧 Dawn Capital takes a look into what software banks are buying with their ~$444bn spend in 2020.
🇺🇸 Stripe is planning to expand in Asia, looking to hire 200 people in the region.
🇺🇸 The current fintech infrastructure companies are a huge goliath still and John Street Capital digs into Fiserv’s investor day.
Payments 💰
🇪🇺 Swedish challenger bank Rocker is piloting the first biometric fingerprint debit card in partnership with Idemia, enabling customers to ditch their pin’s.
🇪🇺 Banco Sabadell is enabling business customers to make payments from its website using accounts held at other banks, in a surprising move.
🇬🇧 Furthering its rollout of QR codes, PayPal is introducing them to iZettle’s POS in the UK. PayPal acquired the Swedish startup in 2018. iZettle was also added to Starling Bank’s business Toolkit this week to help SMEs manage payments.
🇬🇧 Glint, the gold trading and investment platform, became a “Principal Member” with Mastercard, meaning it can issue cards directly and on behalf of others.
🇬🇧 Zilch, former SoTW from October 9th issue, is the first BNPL to become FCA licensed for its over the top BNPL product, available wherever Mastercard is accepted.
🇬🇧 UK’s Supreme Court has given the greenlight for a £14bn class action lawsuit against Mastercard over interchange fee charges between 1992 and 2008.
🇺🇸 A survey from Marqeta of 200 European bank exec’s found 84% are struggling to take advantage of covid due to legacy infrastructure and 85% believe overhauling their existing payments infrastructure necessary.
🇺🇸 Square added DoorDash to its delivery platform, enabling Square sellers to own their fulfilment flow and embed it in their own sites, utilising DoorDash Drive.
🇺🇸 With the credit card and BNPL space on 🔥 recently, everyone has an opinion. Alex’s distinction I think is spot on in terms of who BNPL is suited to.
Longer reads 📜
Banking providers still aren’t ready for big data - Jim Marous
Financial reconciliation when you’re managing a ledger - Ayo Omojola
Top 5 banking and fintech trends for 2021 - Ron Shevlin
The problem with banking - Richard Yu
Banks and fintechs talk partnerships - Rebecca Ayers, Finledger
Two breakdowns of Affirm’s S1 from Rohit Mittal and S1 Club
The travel unicorn doubling in size in 2020 - Mauricio Prieto
Startup of the Week ⭐🇺🇸🏆
You can check out last month’s featured startups here.
🙋If you are working on any exciting fintech startups, I would love to connect with you so drop me a message.
Stride Funding is a student financing company that offers a more flexible, affordable alternative to traditional student loans via Income Share Agreements (ISAs). An Income Share Agreement better aligns the cost and value of education and ensures students only pay a fixed percentage of income over a set number of years.
Team
Stride founder Tess Michaels, a Harvard MBA graduate, experienced first-hand the cost of student debt and conceived the idea while talking to her peers. Tess has a background in financial services having worked at Goldman Sachs after attending Wharton and then in private equity before founding Stride in 2018.
Chief Revenue Officer Patrick Conner brings over 25 year’s experience in lending from his time at Wells Fargo, Santander, and SoFi. David Kafafian, who runs business development and operations, is a Harvard Law School graduate who worked at JPMorgan before joining Stride.
Stride has raised $3.8m to date and has scaled to 10 full-time employees. Investors include GSV Ventures, Slow Ventures, and Western Governors University's venture arm.
Market
Whilst relatively common in the UK and Europe the first mainstream ISA was available in 2016 and has scaled from one participating institution to over 80 today. The total ISAs originated have scaled from $0 in 2015 to nearly $300m in 2020 in the US.
In 2019 the average debt of students who took out loans was just over $30,000, an increase of 27% in ten years, reflecting the sharp increase in the cost of college education. 44 million Americans hold over $1.6trn in student debt and ~30% of borrowers are in default, late or have stopped making payments six years after graduating.
25% who default but restore their loans to good standing, default again within five years. Unlike most loans, federal student loans cannot be written off in bankruptcy. At risk borrowers get stuck in a death spiral where unforeseen circumstances impact their income and ability to repay. Defaulted borrowers continue to accrue interest, become ineligible for federal student aid, get charged as much as 25% by collection agencies and take hits to their credit score for seven years, according to Pew.
The education lending space is highly regulated by the DoE and currently ISAs are unregulated which makes some investors cautious. Purdue, one of the highest ranked schools to offer ISAs, has their endowment invested in their ISA program, serving the dual purpose of an investment and recruiting tool.
Product
At its core, an ISA is a financial product with specific terms, set by the ISA provider, based on factors such as college major and expected salary at graduation. Key ISA terms are detailed below;
Income share percentage - how much of your income you will repay each month, typical range is 2%-10%.
Salary floor - The minimum salary a borrower must earn before repayments are made and should reflect expected income after graduation.
Payment cap - the maximum you will repay as a function of how much you borrowed i.e. 2x what you borrowed.
Repayment term - length of ISA, typically ~5 years.
The terms are directly linked to what you should expect to earn after graduation meaning it better aligns the interests of the student and the college. Stride primarily funds STEM programs and healthcare students whose post-graduation earnings are more predictable.
Business Model
Stride is pursuing both a B2C and a B2B approach, focusing on ensuring students can borrow regardless of what school they want to attend. Colleges see ISAs as a way to retain and recruit students, especially given the financial challenging times education institutions face currently.
Stride also had a campus ambassador program across 60 campuses pre-Covid to raise awareness of ISAs and to educate financial aid offices on the benefits for students. During covid Stride has seen a 4x MoM growth in students looking into ISAs as a funding mechanism and the increasing popularity of online degree programs will provide a big tailwind. Stride is partnering with educational technology platforms which enable these online specific programs that institutions are starting to offer to provide another distribution channel.
An often-cited issue with ISAs is the adverse selection problem. Stride minimizes this risk by their focus on STEM programs and healthcare students. Additionally, there is a need to provide career support to borrowers which is both a cost and an opportunity for Stride to stand out and help increase the earnings potential of its borrowers.
For an additional perspective on the broader student lending space, check out Jason Mikula’s post here.
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Michael