Hi! It's Monday, September 14, 2020.
We hope everyone had a wonderful and relaxing Labor Day Weekend! And, yeah, this is a MEGA Update (don’t say you weren’t warned)!
Leading Off
Jiko, a small fintech startup still in beta mode, became the first fintech to acquire a bank, Minnesota’s Mid Central National. // Tech giants Amazon and Google rolled out embedded payments functionality, pushing themselves further into our wallets. // Robinhood is facing civil fraud charges from the SEC over its ‘payment for order flow’ deals with high-speed traders. // In other news, Visa is facing an inquiry from the European Commission over its treatment of fintechs; PayPal introduced a buy now, pay later product; and Credit Suisse is launching a digital banking service. // This + more below!
Heavy Hitters
Jiko comes out of nowhere to become the first fintech to buy a bank(!) The small startup – still in beta mode and with only 23 employees – founded by former Goldman Sachs trader Stephane Lintner acquired Mid Central National Bank, a 63-year-old Minnesota-based retail bank, making Jiko “the first fintech firm to complete the acquisition of a nationally regulated U.S. bank.” The purchase is another example of the rapidly shifting landscape of fintech firms with licences to operate as banks, joining the likes of Varo (approved for national bank charter), Square (approved for an ILC charter in Utah), and Lending Club (acquiring RadiusBank, pending approval). [Shameless plug: check out the Big Idea piece we wrote about this phenomenon back in February!] Moreover, it represents a growing diversity in fintech banking models: Instead of offering a traditional deposit product, Jiko will sweep its customers’ money into Treasury Bills, providing an opportunity to get a greater yield than at other banks (Jiko accounts generated a 3.3% annualized return last year). OCC Acting Comptroller Brian Brooks remarked that Jiko’s acquisition “represents an important milestone in the maturity and evolution of fintech companies . . . [and] demonstrates the value and attractiveness of banks and in particular the federal banking system.”
Big Tech keeps pushing deeper into your wallet. Last week, Amazon officially launched a new feature, teased back in January, that allows Alexa users to pay for their gas at the pump using voice commands. Three days later, Google announced that Google Maps users will be able to pay for parking directly within the app. Though unrelated to each other, both announcements signal the continued push of the world’s largest tech firms into financial services, particularly by embedding themselves as middlemen in existing payments relationships: Gas paid for using Alexa “will be processed through Amazon Pay, which uses the same payment information stored in the customer’s Amazon account”; while parking paid for in Google Maps will be processed through Google Pay. However, the cash is an ancillary benefit… as we noted back in January, the real prize is “greater insight into consumer financial [and spending] habits.”
Robinhood faces civil fraud charges from the SEC over deals with high-speed traders. The Securities and Exchange Commission (SEC) is investigating the popular trading app for not fully disclosing its sales of customers’ trade orders to high-speed trading firms. While the practice of “payment for order flow” is legal, it is controversial: Critics say such sales allow sophisticated traders with access to high-speed trading systems to exploit the behavior of retail investors. Robinhood earned roughly half of its revenue in 2017 and 2018 from selling order information to high-speed traders, but it did not disclose the practice until October 2018. According to the Wall Street Journal, the SEC’s investigation is in an advanced stage and Robinhood may be required to pay over $10 million if it agrees to a settlement. The investigation is the latest setback in a string of recent legal and PR challenges for the firm, which has nonetheless raised $800 million in 2020, raising its valuation to $11.2 billion in the process.
Quick Takes
Visa faces EC inquiry over fintech treatment. The payments giant is being investigated by the European Commission (EC) concerning the rules it imposes on fintech companies using its network. Regulators are concerned that Visa struggles to identify fraud and money laundering, while Visa’s clients argue that its rules are anti-competitive and restrict data access for small firms.
Visa and PayPal strike new RTP partnership. The two payments giants agreed to a collaboration that will expand the reach of PayPal’s Instant Transfer service – which uses Visa’s own real-time payments (RTP) platform, Visa Direct – to new small- and medium-sized business and consumers. The partnership will allow use through PayPal, Venmo or Xoom . . . Braintree, Hyperwallet and iZettle solutions.”
PayPal introduces buy now, pay later product. PayPal launched a new product called “Pay in 4,” a short-term, interest-free, installment payment offering for U.S. merchants, which puts PayPal into direct competition with firms like Klarna, AfterPay, and Affirm.
Credit Suisse is launching a digital banking service. The global Swiss bank will launch a digital banking app, “CSX,” aimed at existing challenger banks like Revolut and N26. When it goes live next month, CSX reportedly will include free foreign transactions and online banking tools, with a “fully digital wealth management service” coming in November.
Meanwhile, Monzo and Revolut are losing market share. Concerned about the challenger banks’ lack of profitability amid the uncertainty of the pandemic, some of their customers are abandoning the firms in favor of more stable, longer-standing High Street banks.
Colorado authorities reach landmark true lender settlement. Colorado authorities reached a settlement with two marketplace lenders and their bank partners, which provides a much clearer framework for fintech and bank partnership models for digital lending programs.
Current partners with InComm. The U.S. challenger bank announced a partnership with the payments company that will “enable Current members to make cash deposits to their bank accounts at major brick-and-mortar retail chains across the country.”
Amazon adds more financial services options in India. The global e-commerce giant is rolling out new options, including insurance and gold purchasing, on its Indian financial services platform, as it works to expand its customer base in a country where it already has over 100 million registered users.
Square launched the Cryptocurrency Open Patent Alliance, a non-profit aimed at preventing companies from locking up useful, crypto-related technologies through defensive patents.
Pop Flies
Google Finance launched a revamped interface to increase the accessibility of investing information.
Starling Bank launched Starling Kite, a child-friendly banking account that incorporates certain controls for parents and guardians.
Wells Fargo launched a low-cost checking account with no overdraft fees that will cost customers $5/month.
Fundings!
Art crowdfunding firm Patreon raised $90M in Series E funding at a $1.2B valuation.
Dutch payments startup Mollie raised $106 million in Series B funding.
Global cross-border payments network Thunes raised $60 million in a Series B round of funding.
Brazilian digital bank Neon Pagamentos raised $300 million in a Series C round of funding.
German credit marketplace Auxmoney raised €150 million in growth capital.
Klarna reportedly is targeting a new, $500M round that would value the firm over $10B.
And lastly, CB Insights released their annual “Fintech 250” list (see below).
One thing I've wondered about Jiko is why/how did the Fed approve the acquisition when it declined to open a master account for TNB (https://www.reuters.com/article/tnb-fed-lawsuit/new-york-fed-fights-lawsuit-by-deposit-only-connecticut-bank-idUSL2N1WX1YZ). The business models seem basically the same? Perhaps it's due to different politics at the FRBSF vs. FRBNY -- I don't really know how centralized the Fed's decision-making process is -- or evolving views or different management teams at Jiko vs. TNB or maybe there's a subtlety that distinguishes Jiko's model vs. TNB's, but the whole thing is a little weird.