Hey all, Jason here.
Happy holidays! We’ve almost made it - the end of 2020, probably the wildest year ever, is in sight. I’m planning on using the holiday down time to relax, recharge, and refocus for next year.
Quick program note: no Fintech Business Weekly next week. Regular programming will resume on Jan 3, 2021. If you missed the surprise Thursday edition covering final rules on industrial loan companies, brokered deposits, and Robinhood’s regulatory trouble, check it out here.
And if you’re new here, don’t forget to subscribe:
4 Fintech Predictions for 2021
2020 has seen continued growth and innovation both in startups and incumbent banks. “Buy now/pay later,” Banking-as-a-Service, and embedded finance are some of the undeniable trends of the past year. With a number of fintechs IPO’ing (or scheduled to), 2021 will test if lofty private market valuations hold up under public market scrutiny.
What else might be in store in 2021? I peer into my crystal ball to make four predictions for what could unfold next year.
A Major Challenger Bank Exits the US Market
If you’re a regular reader, you know that my overall sentiment on challenger banks is on the bearish side: 95% of American households are already banked, and 97% of those households report high levels of satisfaction with their primary banking relationship.
Customers who are more likely to be ‘winnable’ by challengers are those poorly served by incumbent banks: low/moderate income, volatile income, and/or subprime credit. As a result, the challenger space is awash with products offering features to appeal to this audience (no fees, direct deposit 2 days early, overdraft/small dollar borrowing facility, etc.).
Couple this with some huge VC rounds, and the competition for user acquisition (and becoming a user’s primary account) is huge.
The prediction: Monzo (which announced but has yet not yet launched) or N26 (which claims 250,000 users in the US) exit the American market.
Apple Enters the Buy Now/Pay Later Space
Apple and Goldman’s credit card project launched in August, 2019. According to Cornerstone Advisor’s Ron Shevlin, about 3.1 million Americans held the Apple Card as of March 2020; in its Q3 2020 earnings report, Goldman reflected $3 billion in outstanding credit card balances. Not a bad product launch (especially in the face of a global pandemic).
But with 140 million American credit-card users holding ~$980 billion in revolving debt, it leaves plenty of room for Apple and Goldman to grow.
Goldman already offers POS lending through its Marcus brand (with JetBlue, at least); Apple already offers 0% financing via Apple Card “monthly installments” when used to buy Apple products.
The prediction: Apple and Goldman go head-to-head with Affirm and others by rolling out an Apple Wallet/Apple Pay-integrated buy now/pay later offering, both for existing Apple Card holders and for non-cardholders (via a MarcusPay loan).
Banking M&A Accelerates - Including Fintechs Buying Charters
Despite a drop deal count in 2020, banking M&A picked up steam in Q4 as the outlines of an end of the coronavirus pandemic began to develop.
In the “traditional” banking category, deals of note included PNC-BBVA, TCF-Huntington, South State-CenterState, and First Citizens-CIT.
In the fintech category, Lending Club acquired Radius, and Jiko acquired tiny Mid-Central National Bank.
The predictions:
At least one merger in the regional space, as banks like US Bancorp, M&T, TD, Comerica, and Regions look to compete against the mega banks on one side and fintechs on the other
At least one acquisition of a small bank by a fintech as a route to acquire a charter - possibly Chime
Governments Leverage Fintech to Fix Broken Benefits
As the scope of the economic impact of the pandemic became clear, federal and state governments were left scrambling to figure out how to get desperately needed relief funds into the hands of consumers and businesses.
But the federal nature of relief programs, intermediaries (eg, banks), and ancient, inflexible benefits qualification and disbursement systems made for a halting, confusing, expensive roll out (Alex Rampell at a16z makes a related argument).
The result was a confusing mess of paper checks, scammy-looking prepaid cards that some tossed in the trash, and a small business loan program ripe for fraud (even when administered by fintechs).
The idea of disbursing benefits directly to citizens (rather than via ACH or paper check) isn’t new; many state governments use EBT cards (electronic benefits transfer) to disburse/process SNAP benefits (“food stamps”).
The prediction: with the goals of reducing fraud and increasing speed of disbursement, the federal and some state governments evaluate and implement overhauls in how citizens and businesses apply for and receive benefits, including leveraging common fintech vendors and best practices, such as:
mobile KYC for identity verification (Jumio)
bank account verification/use of data aggregators (Plaid)
API integrations with small business accounting software like Quickbooks and Xero
and heavier and more explicit use of disbursement to “p2p” payment apps like Square’s Cash App or Venmo
Crypto Q&A with Shayne Mullen, VP of Business Development at BlockFi
While I’ve been involved in the fintech space for 10+ years, I’ve only had tangential exposure to the crypto space. With increasing institutional and even governmental interest in the technology surrounding crypto and digital currencies, the space is more relevant than ever.
Here to provide some insight on how one company serves as a bridge between crypto and traditional assets is Shayne Mullen of BlockFi.
Shayne Mullen is VP of Business Development & Partnerships at BlockFi, a cryptoasset service that pairs financial products with institutional-quality benefits. BlockFi also recently announced the world’s first credit card that earns rewards in Bitcoin.
What follows is our written interview.
Jason: “Crypto,” broadly speaking, has moved from the fringes of the internet to institutional acceptance fairly quickly, with once skeptical players like JPMorgan and Goldman now embracing aspects of the ecosystem. To what do you attribute this? Was there a key turning point?
Shayne: I think it’s been a gradual realization that they are missing out on a revolutionary new financial product. Crypto isn’t very correlated to the public bonds and equities market, so when that market faces issues, like inflation due to a global pandemic, I think it can be a great inflation hedge for both institutional and retail investors in addition to a store of value.
In terms of being a deflationary asset, you might think of Bitcoin and other crypto currencies as the modern version of gold. So even though these older financial institutions were quick to dismiss crypto as a fad, I think they’ve been forced to reconsider it as a viable and reliable asset.
In fact, some of the most impressive investors of our generation have a position in Bitcoin; Paul Tudor Jones, Stanley Drunkemiller, Mike Novogratz, the list goes on...
Jason: There is still, however, a less savory side to the crypto space: criminal elements, money laundering, questionable ethics (as demonstrated by things like Cred's recent bankruptcy).
How would you respond to critics of the sector?
Shayne: That mindset isn’t in line with where the crypto sector is at now. Though there are some bad actors in the space, most crypto companies should be licensed in all states they operate in.
In addition, many, like BlockFi, are backed and invested in by major financial institutions, and utilize airtight hardware security modules that protect from external threats and insider access. Running at high standards is the basis for trust and security.
Jason: For those unfamiliar with BlockFi, what does the company do? How is it unique in the crypto space?
Shayne: We bridge traditional finance and cryptocurrency by providing high-yield crypto interest accounts, a crypto trading platform, and crypto-backed loans to our retail and institutional customers.
Our goal is to provide yield to our clients at an unparalleled level in the crypto space. We’re 100% backed by institutional investors, never raised a utility token, tightly focused on risk-management & security, and have a talent pool unparalleled to any other player in the space.
Jason: Most of my readers come from more ‘traditional’ banking and finance - when they see ‘earn up to 8.6% APY,’ often the first reaction is “that must be a scam” -- can you explain the mechanics of how this is possible?
Shayne: When clients send crypto to their BlockFi account or purchase additional crypto within the BlockFi Interest Account, that digital asset is replaced with an obligation to return the same amount of that crypto plus any interest earned.
In order to pay our clients crypto interest on a monthly basis and to meet withdrawal requests on a timely basis, we engage in a number of activities, including
(1) keeping a material amount of digital assets available for withdrawal with third parties such as Gemini, BitGo, and Coinbase;
(2) purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures; and
(3) applying risk management to the lending activities in the institutional market. The credit risks to these institutions are mitigated by credit due diligence and/or collateral (such as cash, crypto, or other assets).
Jason: The crypto assets users transfer to a BlockFi interest account -- who are you turning around and lending those out to? Why do they need to borrow them?
Shayne: We lend to trusted institutions and corporate borrowers, mostly crypto native funds and traditional financial institutions. They use the borrowed funds to hedge, implement trading strategies, and generate working capital.
Jason: How does BlockFi approach licensing and regulation requirements for the products it offers?
Shayne: Blockfi is committed to being a crypto services provider that financially empowers clients on a global scale. It’s not an easy process, since every state and country has a different regulatory approach to crypto, but we have adopted an aggressive approach to gaining licenses, especially in the few remaining US states we aren’t licensed in yet.
We are registered with FinCEN as a Money Services Business, and we have money transmitter and lending licenses at the state level.
Jason: What was the most difficult aspect of building the Bitcoin rewards credit card product, and what can we expect from it at its launch?
Shayne: Digital assets are still very nascent, and this card is the first of its kind, but in the end Visa, Evolve Bank, and Deserve all are in major support of the crypto rewards.
It’s the world’s first credit card that earns you bitcoin on every purchase. We’re super proud of this card and really excited to get it out to our clients next year.
Cardholders will earn 1.5% back in bitcoin rewards on every purchase. Those rewards are then credited to a BlockFi Interest Account and start accruing interest in crypto.
It’s a pretty amazing and easy way to start passively building your bitcoin wealth.
Jason: How do you see global adoption of crypto evolving in 2021?
Shayne: The biggest thing that drives crypto adoption is simplicity. That’s been a big pain point for this industry.
Everyone knows how a dollar can get you a soda, but it’s harder to know how bitcoin can transfer to real-life value. Now we have major players, like PayPal, Square, JPMorgan, and a whole bunch of others creating easily accessible solutions for managing crypto assets that are going to drive the proliferation of crypto acceptance and familiarity.
Jason: A number of ‘challenger’ financial products, including Robinhood, Revolut, and Square/Cash App, are adding crypto offerings.
Why do you think they’re entering the space? Do you think it’s appropriate to embed these offerings in apps catering to small investors (Robinhood average account size is ~$5,000) or lower income users?
Shayne: Challenger financial institutions want to be able to cater to a variety of different user types. Offering crypto exposure (you do not physically own the asset, ie. you can’t move the crypto you have bought off Robinhood) is a way to help that diversification narrative (and earn revenue).
I think crypto can be an asset that is adopted by all types of investors, it shouldn’t have a boundary.
BlockFi Legal Disclosures
Joining the waitlist to apply for the BlockFi Bitcoin Rewards Credit Card (“Card”) does not guarantee that you will be eligible to receive the card. Geographic, regulatory, and underwriting restrictions will apply. Fees and terms are subject to change, and additional terms of service will apply to the Card.
Rates for BlockFi products are subject to change. Digital currency is not legal tender, is not backed by the government, and crypto interest accounts are not subject to FDIC or SIPC protections.
For more information, please see BlockFi's Terms of Service.
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