Fintech Update, 1/9 - 1/16

Jan 17, 2023

Hi! It’s Tuesday, January 17, 2023.

We hope you enjoyed the long weekend and had a chance to meaningfully celebrate the life and mission of Dr. Martin Luther King.

The Rundown

Goldman’s big bet on consumer banking isn’t paying off. The investment banking giant reported a $1.2B loss in just nine months in its Platform Solutions division, a carve out housing what’s left of GS’s bid to dominate consumer banking. The division, which includes Apple Card and installment-lending platform Greensky, will see a loss of $2B for the full year, and $4B over a three year span. Losses are driven by usually high charge-off rates for consumer lending compared to peers (2.9%), in a period of historically low rates across the industry. The whittled-down division’s $1B loss in 2021 was primarily tied to the Apple Card, and the $2B loss in 2022 was driven by Greensky and continued Apple Card losses. For the first time, we’re seeing exactly how much Goldman is spending to support its high-profile partnership with Apple. Now that Goldman is publicly reporting performance in its consumer banking division rather than viewing it as an investment, and announcing large-scale layoffs to cut costs, this bet will be under ever more scrutiny.

What’s more embarrassing, buying a fake company or publicly admitting it? If we’re in JP Morgan Chase’s shoes, we’re going with the latter. Last week, the global bank sued Frank, the student aid-focused fintech startup that it acquired for $175 million in September 2021, for allegedly inflating the size of its customer base by fabricating a “list of names, addresses, dates of birth, and other personal information for 4.265 million ‘students’ who did not actually exist.” Frank’s fraudulent claims about its client roster seem likely: The JP Morgan complaint [full text] includes screenshots of presentations Javice gave to the bank claiming Frank had over 4 million customers, and screenshots of invoices that Frank paid to “ data science professor” to allegedly invent the personal data for the 4+ million fake accounts. There’s also the fact that, “when JP Morgan sent test marketing emails to . . . 400,000 Frank customers . . . only about a quarter of the emails were delivered, and of those, just 1 percent were opened.” So, not great, ~~Bob~~ Frank. JP Morgan deserves its day in court and to get to the bottom of the case. On the other hand, we don’t think that’s what this story is really about. Rather, we think it’s a surprising indictment of JPMorgan Chase itself, and specifically the due diligence it did (or didn’t do) on Frank. Not only should one of the world’s largest, most sophisticated financial institutions have had the tools and processes in place to diligence Frank itself, we also know that they had plenty of warning from Congress and regulators as early as 2020 that things could be amiss at the startup. JP Morgan had years to consider the deal and look under the hood at Frank, and they made the acquisition anyway. Javice almost certainly lied to the bank; but didn’t anyone at the bank independently test the accuracy of her statements? We’re not condoning any fraudulent statements she made, but doesn’t the acquisition demonstrate that one of the most sophisticated banks in the world has a flawed risk and due diligence process? If we’re JP, we’re taking the L on this one and moving on. Things are likely to get only more embarrassing from here.

Vista Equity Partners announced that it will acquire insurtech Duck Creek Technologies for $2.6 billion. While this by itself may be written off as a single acquisition in a frothy space, we see it as a data point in a larger story about private equity heating up in fintech over the past six months. What else has been going on? First, Vista acquired automated tax compliance software provider Avalara for $8.4B in August 2022, along with Centerbridge and Bridgeport’s purchase of CSI (payments processing and regulatory compliance services) for $1.6B. Then, Cinven acquired reparation software provider TaxAct for $720M in November 2022. Finally, Thomas Bravo took Coupa private in a deal that valued the firm at $8B in December 2022. So what does it all mean? As a starting point, PE firms usually invest in underperforming businesses that nonetheless have upside if the firm can cut costs. In addition, PE firms typically also target fragmented industries with plenty of room for consolidation. With valuations of public fintech companies falling dramatically over the last 12 months and the sudden scarcity of VC money driving many to look elsewhere for cash, PE firms may see fintech checking both boxes. Our guess: more PE firms buying out fintech firms (and ensuing roll-ups), more M&A (see below), and continued shake ups in a space that has seen many of them recently. Hold on tight.

Another week, more fintech layoffs 😔– Coinbase announced that it is laying off 950 employees, roughly 20% of its workforce, only six months after laying off 1,100 employees; Crypto.com also let go 20% of its workforce, roughly 700-900 employees total; online lender LendingClub laid off 225 employees (14% of its workforce); digital mortgage lending platform Blend laid off 340 employees (28% of its workforce) in its fourth round of layoffs since last April; and kid-friendly banking services provider Greenlight laid off 104 employees, (21% of its total headcount). What’s tying all these layoffs together? The same macroeconomic factors that have caused other turbulence throughout fintech, such as the drying up of VC funding, concerns about a recession, and crypto winter. Many fintech CEOs have commented that their companies hired aggressively to meet heightened demand during COVID, and now need to reduce headcount to reduce burn. Our take? We’ve been saying for months that these headlines are only going to get worse, and unfortunately it continues to be our prediction until we have a clearer economic outlook and the market calms down again. We continue to be bullish on the future of fintech, but 2023 will be a tough one for many. If you’ve been impacted by the layoffs, please reach out–we’re happy to help however we can.

The Securities and Exchange Commission (SEC) charged crypto firms Genesis and Gemini with the sale of unregistered securities related to their Earn product, which offered customers “yields of up to 8%” on deposits. According to the SEC’s complaint [full text], Genesis was loaning out Gemini customers’ crypto assets, dividing the profits between itself, Gemini, and Earn customers – a structure that should have been registered as a securities offering.

Stripe cut its internal valuation by about ~11% in a new 409A price change, implying a valuation of $63 billion, down from its peak of $95 billion. This is Stripe’s third internal valuation cut since June – the payments giant has reduced its own valuation about 40% in the past six months.

It was a verrrrry busy week for fintech M&A - Fidelity acquired Shoobx, a Boston-based equity management ops & financing software provider, for an undisclosed price. In its first acquisition since 2015, "Fidelity said its purchase of Shoobx is a sign of its commitment to the private market."Remote payroll startup Deel acquired equity management software provider Capbase for an undisclosed amount in a cash and stock deal. Business insurance provider Vouch acquired lending startup Level for an undisclosed price. Sam Hodges, Vouch’s CEO and Co-Founder, said that the acquisition will bring additional expertise to the Vouch team as they “continue to effectively underwrite and support complex insurance policies.”American Express announced that it is acquiring Nipendo, a fintech that automates and streamlines B2B payments processes. BlackRock invested an undisclosed amount and took a minority stake in SMB 401k provider Human Interest.
Given the fact that an IPO doesn’t appear to be a great option for fintech companies at the moment, paired with the challenges in raising venture funding in this macro environment, we expect to see a lot more M&A activity throughout the course of the year. It may take a little more time for the market to really heat up, given the fact that public stock isn’t an attractive transactional currency at the moment and most companies want to conserve cash, but we think it is a great market for larger, acquisitive companies to pick up great tech and talent.
But Wyre you still here? Last week, we covered a story reporting that crypto firm Wyre was shutting down, buuuut turns out that may not be true. Last week the firm announced on Twitter that it “received financing from a strategic partner . . . to continue our . . . operations.”

According to reports, Twitter is developing a feature that will allow users to reward individual tweets with “Awards” using “Coins” that can be purchased with fiat money.

SBF is getting into FTX fan-fic. Taking an indefinite hiatus from his company (“company”), SBF has moved back in with his parents (with a fancy new ankle bracelet to boot!) while he evaluates his future (“is orange really the new black?”). With his newfound downtime, the FTX founder is focused on his writing, blogging in a new post on Substack (does he have more subscribers than us??) that he did not misappropriate consumer funds, FTX US remains solvent, and Alameda Research failed due to market turbulence (all claims that the DOJ and regulators contradict).

The Reading Nook

Alex Johnson wrote a great essay on P2P payments, unpacking “some of the visions that different financial services (and financial services-adjacent) companies have of P2P payments and what those visions tell us about the future of money movement.”

Selected fundings

Paytient raised $40.5 million in Series B funding, which included $33 million in equity and $7.5 million in debt.
Kwara, the Kenyan fintech that works to upgrade credit unions’ back office operations, raised $3 million in seed extension funding.