Fintech Update, 8/28 - 9/10

Sep 11, 2023

Hi! It’s Monday, September 11th, 2023.

Regulatory scrutiny of banking-as-a-service – it’s not just for community banks anymore! Goldman Sachs reportedly received a warning from the Federal Reserve earlier this year concerning compliance gaps in its transaction banking business unit, which provides banking infrastructure to fintech firms like Stripe and Wise. Concerns raised by Fed examiners included “insufficient due diligence and monitoring processes by the Goldman division when accepting high-risk non-bank clients.” Our take: Ratchet up the heat on BaaS one notch higher. In a vacuum, it's not that regulatory attention on Goldman’s fintech team should cast a glare on the activities of other banks – but as the old saying goes, financial regulators abhor a vacuum. Attention on one of the country’s largest and most sophisticated banks immediately raises the specter of doubt in the capabilities of smaller regional and community banks, which typically power fintech partnerships. After all, the thinking will go, if even Goldman can’t get BaaS compliance right, what chance does a community bank a fraction of Goldman’s size have? We’d argue that this line of thinking is overly simplistic and reductive, but we also understand why it’s persuasive on its face – and why it’s driving regulatory scrutiny across the industry.

Block’s major payments companies, Square and CashApp, faced a nearly 24-hour service outage (a “blockout”?) on Thursday and Friday, leaving small businesses unable to process payments and consumers unable to send and receive money. Block’s stock fell as reports proliferated of businesses losing thousands in revenue, and the outage’s impact on the service industry. The cause of the outage is not yet known.

The Consumer Financial Protection Bureau (CFPB) published a new "Issue Spotlight" report on Big Tech's Role in Contactless Payments, taking aim in particular at Apple’s closed ecosystem that prevents use of Apple’s NFC chip and therefore restricts third parties from building payment apps for Apple products that would compete with Apple Pay. As the report notes, use of “tap-to-pay options in the US is predicted to hit $179 billion this year . . . [and] nearly half of iOS users - 55.8 million - made an in-store payment using Apple Pay in April 2023.” Thought bubble: This usage rate drives tremendous value to Apple, both in terms of direct revenue (Apple takes a small cut of all purchases made using Apple Pay) and the additional consumer spending data it gathers, and restricting competitors from building on Apple prevents innovation in the platform and “ultimately eliminates the possibility of consumer choice in tap-to-pay on Apple devices.”

Coinbase is launching an institutional crypto lending service. It’s an interesting move given the current industry landscape, marked by regulatory ambiguity and institutional reluctance following the implosion of crypto lenders BlockFi and Genesis late last year. It’s an even more interesting move when you consider that (1) Coinbase is in the middle of a very vocal spat with the SEC and (2) its last attempt at a lending service (“Lend”) was dismissed by the SEC under threat of legal action in 2021. Our take? The new service represents an opportunity to capture unmet demand in the wake of the BlockFi and Genesis bankruptcies. The new offering is also different from Lend in that it targets institutional rather than retail investors. Taking an institutional angle could enable Coinbase to avoid the added regulatory scrutiny that can come with launching a consumer-facing product.

The Wall Street Journal reported that Visa and Mastercard are planning to raise credit card fees paid by merchants, interchange rates and network fees. The fee increases are supposedly planned for October and April, and focus on online transactions. Both networks denied the report, with Mastercard more explicitly ruling out rate increases this fall. Visa noted that its interchange rates have been flat for the past decade. 🤔 Interchange rates are the subject of Block’s antitrust lawsuit filed against the networks in July, which claims that Visa and Mastercard are in effect conspiring to inflate fees paid by the payments giant, and increase retail prices paid by consumers.

Social media platform X – a.k.a. Zombie Twitter – is pushing forward with its financial services ambitions, adding money transmitter licenses from Maryland and Georgia to a roster that also includes New Hampshire, Missouri, Michigan, Arizona, and Rhode Island. Seven states down, 42 to go! (Fun fact, one state doesn’t have a money transmitter license – do you know which one? Answer at the bottom.)

Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham – speaking on her own behalf – called for a new regulatory sandbox for digital asset regulation in the US, stating that “a ‘wait and see’ approach in the U.S. towards the potential opportunities of blockchain technology and digital assets falls short of the proactive measures needed.” Pham’s statements speak to the sentiments of digital asset entrepreneurs and commentators who have cited a lack of consistency in the US regulatory framework as a cause of crypto and blockchain businesses leaving the US for other jurisdictions.

The US Department of the Treasury and IRS proposed a new tax reporting requirement [full text] for cryptocurrencies, NFTs, and other digital assets. The regulation would require brokers to report the prior year’s crypto activity to the IRS and investors each January, beginning in 2026.

Simon Taylor explores whether payments is a race to the bottom, on the back of Adyen’s ~40% share price decline last month.

Israeli startup ThetaRay, which helps banks to monitor payment traffic to flag potential money laundering risks, brought in $57 million in new funding, bringing its total funding to $160 million.
UK-based neobank Zopa secured $93M in debt financing.

* The state of Montana has not enacted a money transmitter licensing regime. The more you know!