Fintech Update, 5/22 - 6/4

Hi! It’s Monday, June 5th, 2023. 

Before we dive into a two week mega-Update , we are thrilled to announce the addition of Abby Hogan to our team as a contributing writer! Abby is a senior attorney at Discover and previously held roles as in-house regulatory counsel at a mortgage fintech lender and nine years working at the primary federal financial regulator for most fintechs, the CFPB. She brings a wealth of legal and regulatory expertise to the Update team and we’re so excited to have her with us. Welcome, Abby!

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The Rundown

• The Consumer Financial Protection Bureau (CFPB) issued a notice warning consumers about the risks of using popular payment apps like PayPal, Venmo, and Cash App, which do not consistently offer FDIC insurance on funds held with them. The Bureau’s notice highlights that many digital, non-bank payment apps do not automatically push received funds into the customer’s associated bank account. Instead, the funds are held in the company’s name on the customer’s behalf, and the customer holds a claim against the firm rather than insured deposits in an account in his or her name. This has been standard practice among such companies for years; but, as the CFPB points out in its notice, the risks of such behavior are more apparent in the wake of recent bank collapses and broader concerns about the safety of customer deposits. Our take? This announcement is important both from a consumer education standpoint (people should know that their cash in the Venmo app is not in an FDIC insured account in their name!) but also because it signals an increasing effort by the Bureau to steer consumers toward traditional financial services and away from fintech. In the notice, CFPB Director Rohit Chopra commented that, as "tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to." Alongside the CFPB’s promise to “continue coordinating with other state and federal regulators to monitor the evolution of this segment of the payments ecosystem and take appropriate steps,” we think it’s highly likely that the Bureau intends to ratchet up its scrutiny on non-bank financial services firms and take further action to encourage consumers to stick with the relative safety of traditional banks.

• Fifth Third Bank acquired banking-as-a-service platform Rize, combining Rize’s infrastructure tools into a bank that already touts itself as “perhaps the largest embedded finance practice in the industry.” The addition of Rize’s tech stack should help the bank further those ambitions by giving it an “API-driven, fully compliant technology platform . . . to help non-banks seamlessly integrate financial capabilities into their product offerings.” Our take? The first domino has fallen! With many competitors (Bond, Synctera, Treasury Prime, and Unit among them) emerging over the past few years to challenge the original BaaS platform Synapse, the space has become saturated. And, with VC funding drying up, companies in the space are faced with the difficult task of taking more cash at lower valuations, finding an acquisition partner, or folding. BaaS may be entering its consolidation era – we predicted it back in 2020! –  and we expect to cover more stories like this in the coming months (maybe as soon as next week, if rumors about FIS acquiring Bond are true!). Stay tuned.

• Stripe is expanding its credit offering. Stripe Issuing currently offers charge cards in beta in the U.S., with companies like Ramp and Emburse among the early adopters, but will be expanding into the EU and UK. The fintech infrastructure giant also acquired Okay, a startup that focuses on developer analytics, to improve internal tooling for its engineers. 

• Daylight, the neobank aimed at LGBTQ+ consumers, is shutting down months after NY Magazine published a feature that described Daylight’s troubling HR practices, poor financial management and misrepresentations, and uncomfortable company culture. While the company was certainly not helped by a difficult macroeconomic environment, its pivot to fertility planning for LGBTQ+ individuals also proved difficult to scale and further weighed down a company already struggling with mismanagement. Our take: While the salacious details from the NYMag piece and stories shared by former employees are hard to look away from, the real story may simply be that Daylight didn’t find product-market fit. Other companies offer cash back, financial planning tools, loans for fertility treatment, or the option to use your chosen name on your credit card. While companies operated by and for other diverse communities are often filling an underserved niche in the market, i.e., Minority-owned Depository Institutions (MDIs), Daylight's failure could indicate that the LGBTQ+ community is already being more or less served by the existing marketplace. From employment equity metrics, to offering preferred names on bank cards, to advertising through participation in pride parades, the banking sector has created a relatively high bar to entry for products and services tailored to LGBTQ+ people. Fintechs hoping to innovate in this space will need to be strategic in differentiating their offerings from those already offered by traditional banks. 

• UK neobank Monzo reported 2.3x revenue growth for the year and showed profitability for the first time. The company’s reports show that it now has 7.4 million customers and grew deposits by 34% from 2022 to £6.06 billion.

• Meanwhile, Anne Boden, CEO of fellow successful British neobank Starling, announced she’s stepping down from her role after leading the company for almost 10 years. 

• Lending and payments startup Plastiq filed for bankruptcy. The company reached a valuation of $950M in January of 2022, and acquired small business banking startup Nearside for an announced price of $130M in September of last year. Since then, it has seen multiple rounds of layoffs and had to pause its payments service amid the collapse of SVB, whose money transmitter license it was using. 

• NCR is considering selling its digital banking operation, with a rumored valuation of $2B, ahead of a planned split of its ATM and online commerce operations into separate publicly-traded companies. 

• Wise announced that its CFO will be leaving next year, resulting in its shares falling on Monday. The news follows an announcement that co-founder and CEO Kristo Kaarman will be taking an “extended Wise sabbatical” at the end of the year. 

• JPMorgan debuted its payments partner marketplace.

• The highs and lows of fintech investing:

  • QED Investors closed two new fintech-focused funds totaling $925M. The first is an “oversubscribed” $650M early-stage fund, while the second $275M fund focuses on growth-stage fintechs. 

  • London-based Anthemis is looking to raise $200M for its third fintech-focused fund, but has only secured commitments  of ~$36M despite being open since last year. The fundraising comes after the firm laid off 16 people (or 28% of staff) in April, and abandoned plans to raise a SPAC late last month. 

Selected fundings

• Worldcoin, a cryptocurrency and identity project founded by Sam Altman, raised $115M in Series C funding led by Blockchain Capital.

• South African neobank Tymebank raised $77.8M in pre-Series C funding led by Norrsken22 and Blue Earth Capital.

• Digital banking startup Nymbus raised $70M in Series D funding led by Insight Partners.

• Mexican SMB financial management startup Kapital secured $20M in Series A funding and a $45M debt facility.

• Consumer savings startup Checkmate secured $15M in Series A funding led by Google Ventures.