Could Crypto Take Down America's 10th Oldest Bank?
Could Crypto Take Down America's 10th Oldest Bank?
Metropolitan to Offboard Crypto Clients, Evolve Fallout Continues, Goldman to End Personal Loans, 2022 Predictions Graded
Hey all, Jason here.
Around the time this hits your inbox, I should be on a flight from Mexico City to Oaxaca to spend a couple days at the beach for some much needed rest and relaxation.
Programming note: this will be the last issue of the newsletter for the year. Expect to see Fintech Business Weekly back in your inbox on January 8th, 2023. Here’s wishing everyone a safe and enjoyable holiday season! Do yourself a favor and get off Twitter.
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My Six 2022 Fintech Predictions: Graded
At the beginning of 2022, I made six fintech/bank/crypto-related predictions for the year. Since this is the last issue of the newsletter this year, let’s check in on how I did, shall we?
1. A run on (or complete collapse of) a stablecoin
It may be difficult to remember, given all that has transpired since January, that the crypto bull market was still roaring at the start of the year.
Looking back now, we can see that crypto prices actually peaked in November, 2021. They had already dropped significantly by the time a deluge of Super Bowl commercials aired in February (remember Coinbase’s floating QR code?)
The stablecoin market, a lynchpin of the crypto ecosystem, had exploded in 2021. It expanded from a market cap of about $5 billion USD equivalent to $120 billion in the span of about year.
And let’s just say the level of “transparency” around what assets were backing stablecoins and where they were held was… lacking (still true!)
My specific prediction was that:
a currency-linked stablecoin experiences a “run,” causing it to break its peg (eg, redeem below par) or collapse altogether (most likely Tether)
I’m going to give myself an “A” on this one. While Tether is still chugging along, the TerraLuna ecosystem, including its UST stablecoin, collapsed in specular fashion this year.
The failure of the so-called “algorithmic” stablecoin was the match that lit the fuse of numerous subsequent failures across the crypto ecosystem.
2. A Major Correction in Established Crypto Prices
When I published my predictions on January 2nd, 2022, bitcoin was hovering just below $48,000. I suggested that 2022 would see a material correction in crypto asset prices.
Specifically, I predicted that:
a major established cryptocurrency like Bitcoin or Ethereum experience a significant 50%+ correction in price.
As I write this, bitcoin is hovering around $17,500 — a decline of about 63%. I’m going to give myself an A+ on this one.
3. NFTs Dim but Don’t Disappear
My third prediction was that the NFT craze, which reached fever pitch in 2021, would temper significantly in 2022.
Specifically, I predicted that
the NFT trend has already peaked and interest wanes going in to 2022, though communities like CryptoPunks and Bored Ape Yacht Club and “collectibles” like NBA Top Shot persevere (though values decline); use cases continue to evolve, creating new opportunities for niche adoption.
Based on analysis of 4,590 collections and nearly 39 million individual NFTs, NFTGO data show the market has cooled considerably since the frothy first half of this year — though, according to its data, NFTs in aggregate are still worth some $21 billion.
I’m going to give myself an A+ on this one as well.
4. The Metaverse is a Flop (in 2022, anyway)
Prediction number four was that the metaverse, at least in 2022, would disappoint. Specifically, I predicted that
the metaverse remains more trend story than actual product. Adoption of VR headsets needed for Zuck’s vision are limited to hardcore early adopters and hobbyists.
Facebook’s parent company, Meta, has been the most vocal in advocating for a metaverse future.
But users — and shareholders — haven’t been convinced. The company, which had a fairly modest goal of 500,000 monthly active users for its “Horizon Worlds” metaverse product, had to lower its goal to just 280,000.
Analysis of internal documents revealed that most users who tried out Horizon Worlds didn’t return.
Investors haven’t been impressed either — the company’s share price has dropped 64% year to date, erasing billions in value.
I’m also giving myself an A+ here.
5. Consumer Fintech Consolidation Accelerates
By the beginning of 2022, funding conditions were already beginning to tighten — particularly in consumer fintech.
Even as far back as Money2020 in October, 2021, VCs had cooled on consumer, seeking the perceived safety of “picks and shovels” infrastructure companies.
Specifically, I predicted
accelerated M&A activity in US consumer-focused fintech, with a smaller challenger bank like Current, First Boulevard, Daylight, or Novo and a BNPL provider like Sezzle, ChargeAfter, or SplitIt being merging or being acquired.
I think this has been true, though perhaps not quite to the extent that I expected.
We have seen earlier stage and weaker companies exit — bankrupt LendUp’s neobank, Ahead, was acquired by Kinly. Zip was supposed to acquire Sezzle, but the deal fell apart. Stilt was acquired by JG Wentworth. Bolt bought Wyre to expand into crypto.
SoFi picked up Technisys to build out its banking tech stack. Global Payments expanded its scale by acquiring EVO Payments. UBS picked up Wealthfront* (correction: UBS was going to acquire Wealthfront, but ultimately called off the deal.)
I’ll give myself a B+ here — I think as we move in 2023 and more companies burn through their runways and encounter a challenging fundraising environment, this trend will not only continue, but accelerate.
6. A Foreign Challenger Bank in the US Calls it Quits
This was actually the second year in a row of making this prediction — for 2021, I made the same prediction, and that year Berlin-based N26 exited the US market. I renewed the prediction for 2022.
Specifically, I predicted
Monzo announces it is leaving the US market before it even launches a product in the country.
I suppose I have to give myself an F on this one — low and behold, Monzo exited beta and publicly launched in the US in February, 2022.
Its most recent annual report, which only runs through Monzo’s general market launch in the US, shows just £64,000 in revenue in the United States and a £4,292,000 loss — it will be interesting to see how the company’s American ambitions have fared since then.
The 10th Oldest Bank in America Decided to Get Into Crypto. It’s Not Going Well.
While all eyes have been on Silvergate and Moonstone in the aftermath of FTX and BlockFi’s collapse and amid the ongoing crypto rout, there’s another bank that may be regretting its decision to go all-in on crypto.
$1.7 billion asset BankProv, the recently rebranded bank subsidiary of publicly traded Provident Bancorp, has attracted almost no scrutiny — despite its inability to file its third quarter earnings on time, as it needed more time to determine its “actual level of losses due to the recent decline in the cryptocurrency mining industry.”
Now, to be clear, BankProv did not and does not hold crypto on its balance sheet nor custody crypto assets, nor did it have exposure to FTX nor BlockFi (which it felt compelled to announce in a press release) — but that hasn’t immunized the tiny, almost 200-year-old Massachusetts bank from potentially catastrophic risk from the ongoing “crypto winter.”
Beginning around 2019, BankProv embarked on a multiple prong strategy to lower its cost of funds by gathering noninterest-bearing deposits, deploy its growing deposits in novel ways to boost its loan book, and to generate new sources of fee income.
That strategy saw BankProv push into new areas, including serving “digital asset” companies, banking-as-a-service (including to crypto companies), and “enterprise value.”
BankProv identified multiple potential segments in the digital asset space, including bitcoin miners, bitcoin ATMs, exchanges and trading platforms, NFTs, crowdfunding platforms, and digital asset custodians:
When crypto was booming, the strategy looked like a savvy pivot to profit from the rapidly growing industry. From the first quarter of 2018 to the first quarter of 2022, BankProv doubled its assets, from $890 million to $1.79 billion.
It grew deposits from $724 million to $1.32 billion, and improved net interest margins to 4.43% by shifting its deposit mix to nearly half (49%) noninterest-bearing deposits.
But, in getting to this outcome, BankProv also became increasingly exposed to the highly volatile crypto space, with about 8% of loans and 12% of deposits coming from the sector, as of Q1 2022. BankProv lent to “bitcoin mining” companies as well as extending lines of credit secured by bitcoin and ether.
Signs of trouble in the crypto ecosystem began emerging early in 2022. Bitcoin prices had peaked around $67,000 in November, 2021, and were hovering around $40,000 during the first quarter.
By May, TerraLuna had collapsed. In June, Celsius froze withdrawals and ultimately filed for bankruptcy. That same month, crypto hedge fund Three Arrows Capital also collapsed and was ordered to liquidate. In short, by the end of the second quarter, crypto was in the early innings of a meltdown that would continue to metastasize through to the present.
That, however, doesn’t seem to have discouraged BankProv from continuing to grow its exposure to the sector.
According to its second quarter 10-Q — the last quarterly report available — BankProv had increased its exposure during the quarter to a reported $138.6 million in loans to digital asset companies. BankProv’s total credit exposure to crypto-related entities could be materially higher, if certain deals were categorized into reporting segments other than the banks “digital assets” unit.
By the third quarter, however, the wheels started to come off, as volatility in crypto markets continued and as energy prices spiked, particularly hurting the economics of bitcoin miners.
According to a pair of 8-K filings in mid-November, BankProv disclosed it would report an approximate Q3 loss of $27.5 million vs. net income of $5.1 million in Q3 2021. The swing to a comparatively huge loss was triggered by the need to dramatically increase allowances for loan losses — BankProv increased reserves from $18.9 million in Q2 to over $54 million in Q3, according to its most recent call report.
What necessitated the abrupt increase in loan loss reserves?
One or multiple bitcoin miners appear to have defaulted on $27.4 million in debt and, although the bank was able to repossess the “mining rigs” (specialized computers), the value of those rigs is linked to the profitability of bitcoin mining. As the value of bitcoin has declined and the cost of operating the rigs (electricity) has increased, their value has logically decreased. The value of the specialized computer hardware also depreciates with time, typically around 15% per year.
According to its filing, the default and write down “triggered a detailed review of the portfolio of similarly collateralized loans.”
Excluding the $27.4 million already written off, BankProv is still exposed to at least another $76.5 million in similarly structured loans, as well as $35 million in outstanding debt on $75 million worth of lines of credit secured by bitcoin and ether — together comprising about 7.6% of the bank’s overall loan book.
While the credit exposure is the most worrisome, BankProv also has deposit exposure and is likely to see crypto-related fee income drop significantly.
About $214 million — or 14.5% — of its total deposits are from digital asset customers. BankProv pursued these deposits because they’re “cheap” — it doesn’t pay any interest on them. This lowers the bank’s cost of funds and improves its net interest margin and profitability.
If a material amount of these deposits move from BankProv, which seems distinctly possible, it will need to replace the lost liquidity. There are numerous avenues it could take to do so (brokered deposits, retail, etc.), but replenishing its deposits — particularly in today’s rising rate environment — will increase the bank’s cost of funds and reduce its profitability.
BankProv is also likely to see fee-related income decline due to the broader crypto market decline and particularly if it decides, as some other banks appear to be considering, to cut ties with crypto-related companies.
In its Q2 filings, BankProv showed $1.6 million in noninterest income, noting the most rapidly growing sources of fee revenue were tied to crypto-related customers:
“Customer services fees on deposit accounts increased $186,000, or 43.0%, which is primarily attributable to fees generated from cash vault services for our customers who operate Bitcoin ATMs, as well as growth in our business accounts related to our deposit services for digital asset and BaaS customers.”
In short, the potential loss of crypto-related businesses would mean rising costs and declining revenue — a tough spot for a bank that has averaged around $5 million net income per quarter in recent years.
How Bad Could It Be?
Even after substantially increasing its loan loss reserves, the picture for BankProv is still potentially dire. According to its third quarter call report, the loss it incurred by beefing up its allowance for loan losses reduced its total bank equity capital to about $186 million, or about 10.45% of assets.
In a hypothetical scenario where the value of its crypto-related loans goes to zero, BankProv could see its equity plunge to around $111 million, or about 6.65% of its assets.
For a bank engaging in typical, lower-risk activities, this would likely be an acceptable capital buffer — but, given the lines of business BankProv has pursued, it’s not unlikely regulators would expect it to maintain more appropriate, risk-adjusted capital buffers.
While this wouldn’t necessarily be catastrophic, it could necessitate raising fresh capital — something the company is poorly positioned to do.
With a market cap of just $126.9 million — and potentially considered to be in distress — any capital raise would likely be on quite unfavorable terms.
As a small, state-chartered bank, it likely lacks the expertise to navigate the problematic circumstances it has found itself in — making a sale, voluntary or otherwise, an even more likely outcome.
But who would be willing to buy it?
Two possible options make the most sense: either a fintech/crypto-aligned company or investor, who believes the banking-as-a-service and digital asset strategy is still viable (with a reboot); or another community bank or investor looking for a bargain that could pick up BankProv at a discount and then jettison the problematic business units.
Evolve Fallout Continues: Solid Shuts Down Crypto Clients; Metropolitan Commercial to Offboard Crypto Startups.
The fallout from Evolve Bank & Trust’s problematic partnerships continued last week.
Despite Solid CEO Arjun Thyagarajan’s recent claim that “things are going really well” with Evolve and it’s “business as usual,” one Solid client told its customers last week that the company and Evolve abruptly halted all crypto-related programs.
In an email to its customers last Tuesday, Nucleus, which issues cards “backed by crypto,” informed users card services were “paused due to crypto programs decision made by [its] card enablement partner.”
The email went on to claim that Solid and Evolve had halted all crypto-related programs, speculating that recent controversy around ZELF may have been the reason (emphasis added):
“We wish we had better news. Unfortunately, our banking provider (Solid + Evolve) has unexpectedly halted all crypto programs, including ours. This means we cannot currently power any card transactions or issue new cards for you…
Why did this happen?
This was completely out of Nucleus' control. We were not given any details at all by our Banking provider, Solid. But according to us, recent negative crypto perception around crypto/FTX along with an incident, wherein a company named Zelf issued cards without conducting KYC/identity verification procedures, may have been the triggering factor for the underlying Bank sponsor, Evolve, to halt all crypto programs with Solid.”
Nucleus’ email continued that it would look for a new BaaS/partner bank, and that the abrupt termination of its relationship demonstrates the precise reason why users need to be able to go “bankless” —
“According to us, this proves exactly why the world needs to go bankless. We currently operate in a world where a bank or custodian can at their whim, decide to do this, affecting how we bank or pay for things.”
Nucleus did not respond to a request for comment.
Solid did not respond to a request for comment.
Metropolitan Commercial Bank to Offboard Clients With Crypto Links — Including Crypto.com
In the latest sign that banks are seeking to put distance between themselves and anything that smells like crypto, Metropolitan Commercial Bank is seeking to cut ties with any crypto-linked clients, numerous sources confirmed Friday. It’s unclear if the decision had anything to do with last week’s uproar over ZELF, or if the timing is coincidental.
Metropolitan provides banking services to several crypto-related companies, including Unbanked, BitPay, Uphold, and, most notably, Crypto.com.
While Metropolitan seems to have made the decision, the actual timing of offboarding customers could take 90 days or longer, depending on the specific terms of their contracts.
A representative for Metropolitan Commercial Bank didn’t immediately respond to a request for comment.
Goldman’s Marcus To Stop Offering Personal Loans, Layoff Up to 400
Goldman’s consumer bank Marcus, once a success story fintech evangelists could point to, seems to be dying a slow death.
A recent reorganization saw the consumer unit that housed Marcus split, with Marcus itself, which consisted of personal loans, savings/CDs, a roboadvisor, and PFM going into the newly combined wealth and asset management division.
Meanwhile, the newly formed Platform Solutions business unit inherited the consumer partnerships (Apple, GM), home improvement lender GreenSky, and the recently built transaction banking business (TxB), which boasts partnerships with Stripe and Modern Treasury.
Now, both Bloomberg and Reuters are reporting the firm will cease originating unsecured consumer loans altogether. Bloomberg reported Goldman may eliminate as many as 400 roles across its retail banking operations — and as many as 4,000 across the firm.
Without personal loans as an anchor — it was the first retail product Goldman built itself and launched the “Marcus” brand — the future of the firm’s retail ambitions are more uncertain than ever.
The developments suggest a likely wind down of GreenSky — why jettison one personal lending channel but keep another? — and, perhaps, of the Marcus brand itself.
Other Good Reads
Customer Segmentation: An Algorithmic Approach (Chaos Engineering)
The Pressure Increased on Sam Bankman-Fried (The New Yorker)
The Full Testimony Bankman-Fried Planned to Give to Congress (Forbes)
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Excellent newsletter as always. I can't wait for your 2023 predictions, your 2022 were outstanding! Enjoy your time off.
Best regards,
Greg Quarles - CEO Green Dot Bank
"Goldman’s consumer bank Marcus, once a success story fintech evangelists could point to," i mean... was it ever really successful? Like most fintechs that get this designation, they do a great job at PR but struggle to build a scalable, resilient and profitable business.