This Week in Fintech (2/21)

Hello Fintech Friends,

What a week!

Top stories: Lending Club buys a bank, HSBC slashes 35,000 jobs, Ally Financial acquires Cardworks for $2.65 billion, Coinbase can issue credit cards, and Morgan Stanley goes shopping for retail customers with eTrade.

Grab a coffee and enjoy another exciting week of banking and fintech news.

Quote of the week

“The financial sector and fintechs have historically been thought of as a vertical industry serving specific use-cases (banking, lending, trading, etc.). However we are now seeing the rise of “embedded fintech.”
Rather than standalone applications, financial features are being embedded into all of the consumer and business applications that people are using already”

Chris McCann, Proof of Capital Managing Partner (source)

Open role spotlight

Nothing new this week.

Read of the week

In World’s Happiest People Seek Road to Financial Literacy, Bloomberg profiles an interesting initiative by Finland’s central bank, which wants to help its citizens improve their personal financial management in order to keep the country’s spending and savings in-check.

As Quartz points out, household debt has grown in the country and new research shows that mobile payment users tend to have worse outcomes in their personal finances than non-digital users. This is something important to consider for fintechs in consumer finance: if removing the physical connection to payments makes it easier to mismanage money, how can you offset that effect?

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In banking and credit card news, Morgan Stanley announced a blockbuster deal this week by snapping up E*Trade in an acquisition valued at $13 billion. This is the bank’s biggest acquisition since the financial crisis, in a heady time for financial services M&A. The move will allow Morgan Stanley to more effectively target retail customers, yet E*Trade’s 5 million customers and $360 billion in assets are still just a drop in the bucket for the bank whose wealth management division manages $3.1 trillion. For Morgan Stanley, this is a defensive move to offset innovators’ dilemma as it watches nimble retail brokerages like Robinhood eat away at its future customers. The question is whether retail trade execution becomes material enough to the banks’ business to encourage it to continue to invest in a best-in-class digital experience, or whether the site languishes and E*Trade users (including some future private wealth management clients) move to other products.

Ally Bank, in the week’s other blockbuster M&A deal, will move into non-prime card lending through its acquisition of CardWorks for $2.65 billion. The move comes as issuers compete fiercely for margin, late into a credit cycle where customer acquisition costs for premium cardholders significantly elongate payback periods.

Meanwhile, multinational bank HSBC announced this week that it will be cutting a record 35,000 jobs over the next three years as it attempts to cut costs by £3.5 billion, after profits fell by a third in the past quarter. Lloyd’s banking profits similarly fell by a quarter in their latest earnings, prompting their CEO to take a 28% pay cut. Conventional banking models continue to get squeezed on operating costs, forcing many banks into branch closures and layoffs.

JP Morgan Chase has delivered an ultimatum to fintechs that leverage account information to provide their services to customers: transition to our APIs, or risk being cut off from data access entirely after July. This would likely force fintechs to leverage aggregators such as Plaid to access Chase banking data. At the same time, J.P. Morgan and UK Aid have invested in Catalyst Fund, which supports fintechs working on financial inclusion across Kenya, Nigeria, South Africa, India and Mexico.

The Members Exchange, aka MEMX, is a new stock exchange that expects to file an application with the SEC to register as a competitor to Nasdaq and the NYSE. The exchange is backed by Citadel Securities and Virtu Financial, which trade 20% of US equity volume, and is a bid to lower exchange pricing for traders.

Visa has granted Coinbase entry into its Principal Member program, which could let the company develop a credit or debit card that allows users to spend XRP, BTC, or ETH as cash anywhere Visa is accepted.

As aggregate credit card debt in the US continues to rise - at $930 billion with serious delinquencies jumping up among young cardholders, new research by Housing and Urban Development shows that incorporating rent payment history into credit scoring could unlock credit for underbanked consumers.

The Royal Bank of Scotland, which was bailed out during the financial crisis, nearly doubled its profits over the last year to £3.1 in 2019, and will rebrand as its consumer banking DBA, NatWest.

Banco Santander has hired a former Apple executive to head up a new division of the bank meant to spur growth in peer-to-peer payments via One Pay FX, its real-time money transfer product that uses Ripple.

The UK launched its Community Access to Cash pilot program, which looks to help cash-reliant communities migrate to digital payments. And the country’s Financial Conduct Authority cited regulatory gaps and IT outages as its biggest current financial system risk factors.

84 newly uncovered patents show that the Chinese government is quickly moving ahead with plans to digitize its currency, the renminbi (yuan). And the country has begun to leverage blockchain technology to provide financing to businesses affected by coronavirus.

Source: Chris McCann.

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In fintech news this week, for all the talk of banks buying fintechs, a fintech finally bought a bank.

Lending Club ended its fourth quarter earnings announcement with the announcement that it will acquire Radius Bank for $185 million, which will allow it to shift from a lending marketplace to a marketplace-bank. This move could help the fintech to recapture some of the economics it sends to partners, lower its cost of funding, and add new revenue streams. But much remains to be seen. Will regulators approve the merger? Will Lending Club be valued as a bank (balance sheet lender) or a fintech marketplace? How will Lending Club sell investors on adverse selection, and how will they offset balance sheet risk heading late into the credit cycle?

The credit card fintech formerly known as Zero Card (now Zero) this week launched a new digital banking app called Level that offers a 2.1% APY on deposits and unlimited 1.0% cashback, putting it in the highest-tier of savings accounts yields. Chime meanwhile now claims it has 8 million accounts and plans to launch a new 1.6% APY savings account.

Neobank Monzo announced that it will once again roll out its freemium model, with paid accounts for users in the first quarter of this years that offer airport access, better ATM allowances, and other perks. This follows an aborted 2019 attempt and will be accompanied by hiring 500 more employees.

In Australia, meanwhile, neobank Hay launched with a digital bank account and credit card.

Payments company Dwolla’s CEO and co-founder Ben Milne will step down from the company as the company pivots in its market strategy.

i2c and SmartHealth partnered to launch the SmartHealth PayCard, which provides consumers an easier card solution for managing their healthcare and medical payments.

In Saudi Arabia, state-owned Saudi Payments is partnering with a Saudi Telecom Company subsidiary, stc Pay, to lessen the country’s reliance on cash and expand the ubiquity of mobile wallets in the kingdom.

And Patreon is the latest of many non-native tech companies now adding fintech as a stack in their service offering, by providing micro-loan cash advances to content creators on the platform.

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Financings

Toast, which makes restaurant point-of-sale payments technology, raised $400 million at a post-money $4.9 billion valuation.
Flywire, which builds technology for healthcare, education, and travel companies to manage payments, raised $120 million from Goldman Sachs, putting its valuation over $1 billion.
Enterprise data security and homomorphic encryption startup Enveil raised $10 million from backers including Mastercard and Capital One.
Fintech Ordwayraised a $10 million Series A to build a payments and revenue management platform.
Negotiatus, a fintech startup focused on helping small businesses with purchasing, raised a $10 million Series A.
Motorefi raised $8.6 million for its auto loan refinancing platform.
Amman-based small business peer to peer lender Liwwa raised $6 million in equity and $15 million in debt to expand its program in Jordan and Egypt.
Austrian small business point of sale software-maker ready2order raised €5 million.
US bank Wells Fargo invested $5 million in the Series B of British cryptocurrency surveillance startup Elliptic.
French bank Societe Generale invested €1.1 million in Czech insurance startup Mutumutu.
Canoe Intelligence, a fintech focused on alternative asset investments, raised a Series A from backers including Nasdaq Ventures.
Citi Ventures invested in blockchain trade finance platform Contour.

Exits and M&A

Financial services behemoth Ally Financial will acquire sub-prime credit provider and consumer lending company CardWorks in a deal valued at $2.65 billion.
Italian payments company SIA will list on the Milan bourse in an IPO that could value the firm at over €4 billion.
Duo Bank of Canada is acquiring near-prime credit provider Fairstone Financial.
Swedish point of sale financer Klarna acquired Italian buy-now-pay-later startup Moneymour. Terms were not disclosed.
In-tandem with its fundraise, payments fintech Flywire acquired healthcare technology startup Simplee.
insightsoftware, an ERP technology company, acquiredLongview Solutions, a financial planning and tax software provider. Terms were not disclosed.