Fintech Update, 2/19 - 2/25
The Rundown
Capital One plans to acquire Discover for $35.3 billion in one of the largest deals in American financial services since the 2008 financial crisis. If approved by regulators, the deal would combine two of America’s largest credit card companies, making Capital One the U.S.’s largest credit card company by loans (leapfrogging JPMorgan) and its third-largest by purchasing volume. More importantly, the combined company would also control one of the country’s four major card networks in Discover. Capital One CEO Richard Fairbanks called this the deal’s “Holy Grail”: although Discover is the U.S.’s smallest major card network, it still includes 70 million merchants and 305 million cardholders. The issuer-network combination would allow Capital One to compete with Amex more directly, fend off competition from fintechs like Block and PayPal (which have developed relationships with shoppers and merchants to create end-to-end payment ecosystems), and even take on Visa and Mastercard. Of course, this is all pending regulatory approval, which is no guarantee given the Biden administration’s focus on mergers that could limit consumer choice and pricing. In this case, however, the potential for a true competitor to the Visa-Mastercard duopoly could work in Capital One’s favor.
Another week, another bit of bad news for fintech partner banks… The latest challenge to the partner banking ecosystem comes courtesy of a Federal Deposit Insurance Corporation (FDIC) consent order issued to Tennessee-based Lineage Bank [full PDF]. Lineage had gotten some tough press recently from Jason at Fintech Business Weekly (here and here) and the order basically confirms that where there’s smoke there’s fire. In fact, the order explicitly called out Lineage’s fintech relationships in the order, requiring the bank to take actions that include “implement[ing] . . . a program to assess and manage the risks posed by third-party relationships with FinTech companies,” “complet[ing] an [independent] assessment of existing relationships with FinTech Partners,” and “detailing how the Bank will administer an effective and orderly termination with significant third-party FinTech partners.” Our take: Bad news for Lineage, and bad news for banking-as-a-service generally. The FDIC is clearly anxious about the bank’s third-party risk management policies and processes, skeptical of its fintech partnerships, and (in light of its requirements to maintain strict capital ratios and shore up deposits) concerned about brokered deposits generated by those partnerships. But the FDIC’s concerns aren’t limited to Lineage. This is just the latest in consent orders affecting the space, adding to recent actions against Choice and Cross River (not to mention OCC consent orders issued against Blue Ridge). Regulatory concerns and scrutiny is on the rise, especially related to BSA/AML and third-party risk management, and we expect it to get worse before it gets better. Buckle up.
Acting OCC Comptroller Michael Hsu called for federal money transmitting standards, which would replace the current state-by-state licenses which nonbanks and tech companies attain to hold and move money. Hsu thinks this process “blurs” the lines between payments companies and banks, and the latter should be pulled into federal regulation.
Google is sunsetting the Google Pay app in June, in favor of the Google Wallet, which is much more commonly used and supports non-payment items like IDs. Retiring the standalone Google Pay app means that iOS users will not be able to access Google’s payment capabilities in-app, as Wallet is only available on Android.
UK Economic Secretary to the Treasury Bim Afolami indicated that the UK government was “pushing very hard” to introduce stablecoin and staking services legislation to Parliament in the next six months.
Good news for German fintech firms: Germany’s financial regulator, BaFin, is set to ease restrictions on fintech firms operating the country following heavy scrutiny and control-tightening in the wake of the Wirecard scandal. Per Bloomberg, for the past several years BaFin has led “arguably Europe’s biggest clampdown on mostly digital startup banks as well as on payment firms . . . [that] likely compounded deep valuation declines across the industry.”
Meanwhile, in Japan… The Japanese government got one step closer to permitting “venture capital firms and other investment funds to hold digital assets directly” following the passage of a bill in the country’s legislature to implement the change. Another potential win for crypto in what has been an already-strong start to the year (including the SEC’s approval of spot bitcoin exchange-traded products) that has sent the value of Bitcoin back up over $50,000.
The Reading Nook
Alex Johnson of Fintech Takes dropped an absolute banger on the emergence of fintech franchises.
Selected fundings
Colombia-based financial automation technology startup Simetrik raised $55M in Series B funding from Goldman and others.
Embedded finance workflows startup Monite added $6 million to its seed funding, bringing its total to $16 million.