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An alternative to traditional student debt.

Income Share Agreement provider Stride is SotW ๐Ÿš€ ๐Ÿ“ˆ

Dec 14, 2020
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An alternative to traditional student debt.

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Tweet of the week ๐Ÿฆ‰๐Ÿ†

Twitter avatar for @MAustin4249
Matt Austin @MAustin4249
1/ Another day...another big IPO! I'd argue two common themes are playing out (note: I'm making a huge generalization): a) Companies are leaving money on the table b) The markets are frothy I'll add another narrative, which I'll refer to as "the gravitational pull of capital"
1:17 AM โˆ™ Dec 11, 2020

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 ๐Ÿ™. If you havenโ€™t enjoyed reading FATP, I would still love to hear from you ๐Ÿ™.

Please take 2 minutes to give the ๐ŸŽ of feedback this Christmas๐ŸŽ„ here ๐ŸŽ„.


If you enjoy reading this, please subscribe and share!


Recent News ๐Ÿ“ฐ

๐Ÿ‡ช๐Ÿ‡บ 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 Baldertonโ€™s tweet.

Twitter avatar for @jpwiseuk
James Wise @jpwiseuk
To the many Silicon Valley investors and entrepreneurs wondering if itโ€™s possible to build tech businesses outside of one city..... Let us know if you want some tips:
Image
2:01 PM โˆ™ Dec 9, 2020

๐Ÿ‡ฌ๐Ÿ‡ง The UK Government is launching a program to help international financial institutions access British fintech, a sector with ยฃ11bn in revenues in 2019 and 8% of total financial services output. Take that Brexit.

๐Ÿ‡บ๐Ÿ‡ธ Bill Gates gives praise to Indiaโ€™s digital finance model.

Funding ๐Ÿ’ธ

๐Ÿ‡ช๐Ÿ‡บ 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.

  • ๐Ÿ™Œ๐Ÿป 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.

๐Ÿ‡ช๐Ÿ‡บ Upvest, a pan-European plug and play securities API provider, has raised a โ‚ฌ12m Series A led by Earlybird Venture Capital, joining existing investors Notion, Partech and Speedinvest.

๐Ÿ‡ฌ๐Ÿ‡ง Entree Capital raised $125m for an Israeli fintech and digital health fund.

๐Ÿ‡ฌ๐Ÿ‡ง Outfund, the fintech lender, raised ยฃ37m of debt and equity.

๐Ÿ‡ฌ๐Ÿ‡ง 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 ยฃ7.5m in mostly debt funding and was recently selected to join Tech Nationโ€™s Fintech 3.0 cohort.

๐Ÿ‡ฌ๐Ÿ‡ง gohenry, a kidโ€™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.

๐Ÿ‡บ๐Ÿ‡ธ Affirm is pausing its IPO plans, joining Roblox, according to WSJ. The reason? Rumoured to be the initial trading popโ€™s of DoorDash and Airbnb so expect pricing to be higher.

๐Ÿ‡บ๐Ÿ‡ธ 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.

๐Ÿ‡บ๐Ÿ‡ธ 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).

๐Ÿ‡บ๐Ÿ‡ธ 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.

๐Ÿ‡บ๐Ÿ‡ธ OpenFin, the new operating system for Wall Street, announced a strategic investment from Standard Chartered.

Embedded Finance

๐Ÿ‡บ๐Ÿ‡ธ Over the past week Lendflow, the embedded lending infrastructure, hosted a webinar โ€œOpportunities in Embedded Lendingโ€ which was excellent and demonstrated what platforms make for a good foundation for lending with some solid examples.

Challenger Banking ๐Ÿš€

๐Ÿ‡ฌ๐Ÿ‡ง 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.

๐Ÿ‡ฌ๐Ÿ‡ง Revolut announced it broke even in November and is doing better than pre-covid.

๐Ÿ‡ฌ๐Ÿ‡ง TransferWise is adding 750 new hires in the next six months, increasing its workforce by a third, most significantly in its London HQ.

๐Ÿ‡ฌ๐Ÿ‡ง OneBanks is launching its first fully-staffed banking kiosk in Scotland, aiming to provide bank-agnostic services in places high street banks have left.

๐Ÿ‡บ๐Ÿ‡ธ 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 ๐Ÿฆ

๐Ÿ‡ช๐Ÿ‡บ Deutsche Bank is seeing better engineering applicants after announcing a partnership with Google Cloud, in an unexpected boost.

๐Ÿ‡บ๐Ÿ‡ธ Citigroup is eyeing Ant Groupโ€™s success with its recent tie up with Google.

๐Ÿ‡บ๐Ÿ‡ธ Capital One became the first bank to announced it is restricting customers from using credit cards from settling BNPL debts as they are โ€œriskyโ€ transactions.

  • ๐Ÿ™Œ๐Ÿป FATP Take - The BNPL market is very nascent and outside of regulatorโ€™s purview but this will not last. The large players would be best served in pre-empting some of regulatorโ€™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

๐Ÿ‡ฌ๐Ÿ‡ง 50% of UK SMEs are using open banking services, 90% directly because of covid.

Fintech Infrastructure ๐Ÿšง

๐Ÿ‡ฌ๐Ÿ‡ง Dawn Capital takes a look into what software banks are buying with their ~$444bn spend in 2020.

๐Ÿ‡บ๐Ÿ‡ธ Stripe is planning to expand in Asia, looking to hire 200 people in the region.

๐Ÿ‡บ๐Ÿ‡ธ The current fintech infrastructure companies are a huge goliath still and John Street Capital digs into Fiservโ€™s investor day.

Twitter avatar for @JohnStCapital
John Street Capital @JohnStCapital
0/ We've highlighted FinTech infrastructure co's like BR, FIS, JKHY, MA, V, ICE, NDAQ, etc. as companies w/ a variety of moats that have led to dominant mkt share & outperformance despite being 50+ years old on avg. $FISV had their investor day yesterday and laid out the why.
Image
2:24 PM โˆ™ Dec 9, 2020
87Likes7Retweets

Payments ๐Ÿ’ฐ

๐Ÿ‡ช๐Ÿ‡บ Swedish challenger bank Rocker is piloting the first biometric fingerprint debit card in partnership with Idemia, enabling customers to ditch their pinโ€™s.

๐Ÿ‡ช๐Ÿ‡บ Banco Sabadell is enabling business customers to make payments from its website using accounts held at other banks, in a surprising move.

๐Ÿ‡ฌ๐Ÿ‡ง Furthering its rollout of QR codes, PayPal is introducing them to iZettleโ€™s POS in the UK. PayPal acquired the Swedish startup in 2018. iZettle was also added to Starling Bankโ€™s business Toolkit this week to help SMEs manage payments.

๐Ÿ‡ฌ๐Ÿ‡ง Glint, the gold trading and investment platform, became a โ€œPrincipal Memberโ€ with Mastercard, meaning it can issue cards directly and on behalf of others.

๐Ÿ‡ฌ๐Ÿ‡ง 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.

๐Ÿ‡ฌ๐Ÿ‡ง UKโ€™s Supreme Court has given the greenlight for a ยฃ14bn class action lawsuit against Mastercard over interchange fee charges between 1992 and 2008.

๐Ÿ‡บ๐Ÿ‡ธ A survey from Marqeta of 200 European bank execโ€™s found 84% are struggling to take advantage of covid due to legacy infrastructure and 85% believe overhauling their existing payments infrastructure necessary.

๐Ÿ‡บ๐Ÿ‡ธ 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.

๐Ÿ‡บ๐Ÿ‡ธ With the credit card and BNPL space on ๐Ÿ”ฅ recently, everyone has an opinion. Alexโ€™s distinction I think is spot on in terms of who BNPL is suited to.

Twitter avatar for @AlexH_Johnson
Alex Johnson @AlexH_Johnson
Credit card: one product for two very different customer segments. Transactor- uses CC as a safer & more rewarding payment tool. Doesnโ€™t pay interest or most fees. Revolver- uses CC as a flexible and convenient credit tool. Pays interest and some fees.
5:47 AM โˆ™ Dec 9, 2020
36Likes3Retweets

Longer reads ๐Ÿ“œ

  • Banking providers still arenโ€™t ready for big data - Jim Marous

  • Financial reconciliation when youโ€™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 Affirmโ€™s S1 from Rohit Mittal and S1 Club

  • The travel unicorn doubling in size in 2020 - Mauricio Prieto


Startup of the Week โญ๐Ÿ‡บ๐Ÿ‡ธ๐Ÿ†

You can check out last monthโ€™s featured startups here.

๐Ÿ™‹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.ย 

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 yearโ€™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.ย 

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 Mikulaโ€™s post here.


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Michael

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