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Fintech funding slowdown
“Once a job is done, it takes a 10x improvement to get users to switch, and, in a three-sided network, that 10x is 10^3.” - Ben Thompson, Stratechery
This week has seen lots of news in the payments space with some exciting news from Apple, monster earnings from PayPal and a new bank charter! Also some data on fintech financing from H1 2020 shine a light on the impact from Covid.
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Crunchbase put out its Q2 European Venture report with some unsurprising numbers; H1 funding -20% yoy, 904 startups raised >$2m which is down 9% and an increased focus on biotech, e-commerce and healthcare and funding rounds >$100m were down 52% yoy.
The contrast between Europe and US occurs mainly in the top end of the market where larger rounds are more common in the US and points to the lack of maturity of European VC at the later stages generally.
CFPB complains since March are up 50% yoy, with most complains around mortgages, student loans and vehicle financing. The CFPB was established to protect consumers and it seems it has done a lousy job, espeically given its recent decision to remove plans to limit payday lenders.
In more regulatory failings, BaFin, the financial regulator in Germany, has unveiled plans to shake up financial regulation after the Wirecard scandal which also included beefing up powers of the body that oversees auditing firms, something I think is needed almost everywhere!
Innovate Finance reported that UK Fintech funding in H1 2020 was -39% from the same period last year, bringing in $1.84bn only.
FT Partners Q2 Quarterly Fintech Insights shows dramatically reduced financing volume of $9.3bn but the second highest number of deals at 479. Could this be a sign of a slow down in mega rounds? M&A volume was the lowest since 2013 at $8.1bn from 162 transactions. The slide below shows the uptick in inside rounds due to Covid although when looking more broadly at all rounds, doesn’t seem that pronounced.
Being a challenger bank isn’t easy and Monzo’s annual report just confirmed this with £114m in losses for the year. TS Anil, who took over after founder Tom Blomfield exited the business, reported spending has “decreased significantly” due to Covid, causing fee income to shrink compounded by the BoE lowering the interest rate from 0.75% to 0.1% which reduced interest earned on deposits. Even their 40% discounted £60m funding round last month might look expensive at this rate. Challenger banks have struggled to monetise consumers as they often start with a basic bank account which is free and havent expanded to revenue generating products quick enough. Relying on VC funding to fuel losses and fuel CAC no longer seems like an option. I think time for consolidation and M&A in the industry.
Interesting data from research firm Alphacution on Robinhood’s revenues. Robinhood charges no fees for trading but generates large revenues from “payments for order flow”, where it sells its orders to specific parties for execution. In 2017 this was $21.1m and jumped +227% to $69m in 2018. Reports that the company made $60m in March 2020 alone mean this figure is going to jump as trading volumes and number of customers increased alongside market volatility due to Covid. As Robinhood has no fees, it must geneate revenue from somewhere and the stop loss orders its customers make use of are very valuable. Some may argue Robinhood is designed this way to encourage the use of financial instruments that are valuable for it to generate revenue from.
Varo Money is the first US fintech to be granted a national bank charter after 3+ years of working with regulators. The charter allows them to transition away from its partnership with The Bancorp Bank and offer its own suite of FDIC-insured services. Possibly it could become a BaaS service and white-label its products for other fintechs as well. It costs most neobanks $100 to serve a customer and $400 for incumbents and Varo will look to lower thost costs to $50, according to Fintech Today.
eToro, the online investment platform has acquired e-money company Marq Millions as it looks set to launch a debit card.
Revolut, which recently saw its CEO leave after one year, is launching a price comparison service using Moneysupermarkes white-label tech. The site will allow UK customers to switch and save on utilities, internet, mobile and TV. Whilst sites like these are very popular in UK, I can’t think of any in US.
Banking app Dave has informed customers that its third party provider Waydev has had a data breach in which the personal details of its customers, 7.5m of them, has been exposed.
ING has launched a partnership with genesis, a low code application platform to launch its new Credit Insurance Application, a deal-flow and portfolio application that will transform credit and political risk insurnce. Genesis will allow “faster deployment, increased functionality and control” for ING and the low code will mean the business can solve its own problems without having to rely on IT departments and consultants.
With most banks shrinking their branch network in order to lower costs and switch customers to digital services, OneBanks, a Glaswegian startup, is stepping up to serve the 9m-12m people who still need a branch. OneBank will set up bank-agnostic kiosks in convenient locations e.g. supermarkets. The company will only charge banks although it remains to be seen how, but with each bank branch costing £700k per year, it will save them a lot of money. It would be great to see the banks investing in OneBanks and gaining efficiencies while still serving customers.
Wells Fargo shooting itself in the foot again as reports have surfaced that the company has placed a number of customers into forbearance programs without customer approval which has severe implications for their credit reports.
DBS bank, an incumbent bank setting a digital example, is working with the Singapore government to pilot SingPass, face verification software to sign up customers to its digital banking services. SingPass is a national identity system allowing citizens to interact with govenrment agencies and private firms online. There are a number of older DBS customers who are not signed up to digital banking but have SingPass which could further drive users to digital services and lower the banks costs. Just think how far away Western banks are from this type of innovation!
Back in May a class suit was filed in federal court against Plaid, which is accused of accessing user bank accounts and collecting financial information without consent. This could throw a real spanner in the works of its acquisition by Visa.
JPMorgan Chase has announced a partnership with Marqeta to launch virtual corproate cards that are immediately available in mobile wallets instead of waiting for physical plastic cards in the mail. With many people working from home, access to offices where cards are delivered is restricted when workers need to buy things to support their new work set ups.
Apply is buying Mobeewave for $100m, a company that could turn any phone into a POS. This would put Square and PayPal right in Apple’s crosshairs as it looks to expand revenue from services as hardware revenues stagnate. With Apple’s reputation for user experience and privacy credentials, this could be the beginning of Apple moving further into payments, loyalty and rewards. Notably, Apple declined to make the Apple Card contactless, forcing users to use Apple Pay on their device which could be another piece of the puzzle.
Very exciting news from PayPal which is partnering with CVS to offer PayPal services, including Venmo, at the register with QR codes. This marks the first time QR codes are being rolled out in large numbers, with CVS deploying the tech at 8,200 stores and will hopefully start a trend of a wider roll out. It also shows signs of the batter for commerce heating up between PayPal and Square.
On the back of the above exciting news, PayPal reported its strongest quarter ever with quarterly revenues to June, so encompassing the Covid period, +25% yoy with FCF of $2.2bn and total payments volume of $222bn which itself was +29% yoy. As PayPal’s Venmo rolls out direct deposits, this will have a positive impact on metrics increasing average balances. Venmo is already showing some penetration with merchants and more services are coming as the battle with Square hots up. PayPal buying a Shopify competitor would be huge for the company.
WSJ reports that Affirm is reading for an IPO that will value the firm at $10bn, with Goldman Sachs. Affirm raised $300m in April 2019 on a $2.9bn post, so a $10bn would represent a huge increase in valuation and close the the $13.5bn valuation of competitor Synchrony. Techcrunch digs into the comparison.
Remitly announced an $85m round valuing the company at $1.5bn led by PayU to accelerate growth in spite of expected lower remittance volumes. Remitly has seen customer growth +200% in the past year with 300m customers served.
Transferwise completed a secondary sale which valued the company at $5bn.
Mastercard is joining the Pay.UK Framework for its Request to Pay offering, which allows billers to request funds rather than sending traditional invoices, like Venmo does in US.
Fintech Partnerships from Finnovating
This weeks longer reads
Yusuf Ozdalga’s post about “The rise of the workplace bank” was very interesting and I would definitely like to see employers taking a more active approach to their workers financial welfare, especially in USA. In the UK under the Pensions Act 2008, every employer must place certain staff into a workplace pension scheme and contribute at least 3% of salary to it. This “auto-enrolment” guarantees most workers will have an pension upon retirement and as Richard Thaler made clear in his book Nudge, things like auto-enrolment really help engage people with saving for their future. Employers should take a more active role and see this as a valuable point of differentiation when recruiting top talent.
Ben Thompson’s post about Shopify and the power of platforms shows why Shopify, which he describes as a platform, is a competitor to Amazon, an aggregator. Fantastic analysis and points to an increasing battle for online commerce especially given the reluctance to which some sellers sign up for Amazon. Shopify’s Unite is a further push to compete with Amazon fulfillment.
The Rise of Solo Capitalists by Nikhil Trivedi highlights the increasing presence of angel investors in Series A and later rounds, often leading the round. With the increasing importance of indvidual brands of VCs and the reliance of relationships, this development seems likely to stick around.
NuBank, the worlds most successful neobank with 25m users, detailed the process behind developing its new NuConta bank account in Brazil which featured some lean startup practices such as getting out of the building and asking users about their financial lives. Radical approach.
Startup of the Week
US student loan debt, at $1.56trn, is the second largest consumer debt category, behind mortgages. The average loan debt for the 45m borrowers is ~ $30,000. Student debt became popular in the recent political cycle with Presidential candidates such as Elizabeth Warren adovating for the cancellation of these debts due to the burden they place not only on borrowers, but also the economy.
Pillar is a fintech startup that helps users manage their debts by providing advice on the most cost efficient ways to pay back debts. It connects to your student loan servicer and bank and monitors your income and spending to make personalised suggestions.
The company has raised $6.5m to date from Kleiner Perkins, Kairos HQ, Financial Venture Studios and angel investors. CEO and co-founder Michael Bloch, formerly an early employee at DoorDash, saw how much debt his wife had coming out of law school and cobbled together advice from numerous resources but saw the potential for an easier solution. Michael decided to dropout of GSB to focus on the idea.
With the economic impacts of covid still high, solutions like this could really make a difference, not just to students, but to all borrowers.
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