Fintech Update, 4/29 - 5/5

Hi! It’s Monday, May 6, 2024

The Rundown

• In remarks to the Alliance for Innovative Regulation (AIR), Acting Comptroller of the Currency Michael Hsu commented on the challenges community banks face when dealing with their core technology: “In every single discussion I've had about banks, digital, and modernization . . . I've heard a lot of frustration from community banks because they feel like hostages in these [core] relationships and have no negotiating leverage.” Our thoughts? Community bank core systems, which typically come from one of three primary companies in the space (FIS, Fiserv, and Jack Henry), regularly are among the most expensive and lamented single costs of running a community bank today (reasons include poor user experience, feature limitations, and long development timelines). Core system providers regularly demand long-term contracts that lock banks into exclusivity and bundled deals, hampering their ability to invest in more modern technology stacks. Such dependence on a limited set of frustrating options is one of the factors that has given rise to a new generation of digital-first services over the past several years, including both BaaS/embedded finance players like Treasury Prime and Unit as well as digital front ends that bolt onto legacy cores to make them more user-friendly, such as Narmi or MANTL. As we’ve covered extensively recently, digital enablement for community banks is a noisy space to play in at the moment, with no clear consensus yet on what is the best strategy. What is clear is that the status quo is not working for many community banks. And, as AIR CEO Jo Ann Barefoot noted, regulators play a significant role in how new technologies are perceived and adopted: “I'm dreaming of the day when a field examiner will come into a financial institution, see an antiquated piece of technology, raise their eyebrows and say 'I can't believe you're still on that.’” Count us in for that dream!

• The Federal Reserve, FDIC, and OCC issued new joint third-party guidance for community banks. The guidance is supplemental to last June’s guidance, which Fed Governor Bowman criticized as lacking clarity for community banks, and does not replace it. The new guidance illustrates principles in the June guidance, and walks through each stage of a third party relationship. 

• Chime gave us all a look under the hood! In an interview for Forbes, CEO Chris Britt shared the up and down story of the business, along with some headline statistics about the business and some of their plans for the future. Some key highlights: $1.5 billion in annualized revenue; $8 billion a month in transactions on its cards; seven million active users (“most” of whom have set up direct deposit); ⅓ the cost to serve a checking account compared to a typical bank; and profitability in Q1 2024. So what’s next for Chime? Over the next month or two, it plans to launch an unsecured lending product. Britt also alluded to offering retirement accounts and ETFs in the longer term.

• Federal prosecutors are looking into compliance lapses at Block’s two main units, Square and Cash App. The Southern District of New York is investigating transactions that Square processed involving sanctioned countries, and cryptocurrency transactions with terrorist groups on Block.

• Changpeng Zhao (aka “CZ”), founder and former CEO of crypto exchange Binance, was sentenced to four months in prison following the company’s admission that it “engaged in anti-money laundering, unlicensed money transmitting and sanctions violations.” The DOJ had recommended a 36-month sentence.

• Silicon Valley Bank’s venture capital business, SVB Capital, will be sold to a new entity backed by Brookfield and Sequoia Heritage, as the assets of the former bank continue to be wound down or sold.

The Reading Nook

• Ron Shevlin considered whether community banks are “getting squeezed out of existence,” looking at increased competition in the retail banking space, generation changes, and regulatory policy. Small business banking and lending, he concludes, will save community banking.

• The Economist looked at the proliferation of national payments systems like India’s UPI and China’s UnionPay in its special report on the fragmentation of the global financial system.

Selected Fundings 

• Digital investment platform Altruist raised $169 million in Series E funding. 

• Backflip, the company that helps real estate investors flip houses, raised $15 million in a Series A funding round led by FirstMark.  

• Ansa, which offers infrastructure that enables merchants to launch branded customer wallets, raised $14 million in Series A funding.

• Business banking fraud prevention startup Baselayer raised $6.5 million in seed funding.