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FIS Is Buying BaaS Platform Bond, As Fintech Consolidation Accelerates
Apple Users Have Issues Moving Savings, CFPB Warns on P2P Deposit Insurance Coverage, 5 Takeaways from Monzo's Annual Report
Hey all, Jason here.
Happy Pride month! I had the chance to attend the boat parade here in Utrecht yesterday, and you really could not have asked for more perfect weather.
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FIS Is Buying BaaS Platform Bond, As Fintech Consolidation Accelerates
FIS, best known as a payment processor and core banking provider, is acquiring banking-as-a-service platform Bond, multiple sources tell Fintech Business Weekly. The deal could be announced as soon as this week.
Bond’s partner banks include Evolve Bank & Trust, CBW Bank, and UMB. Capabilities Bond provides include facilitating DDAs, debit/credit/charge card issuing, revolving credit, and payments. Clients include Atomic, Cledara, College Ave, FloatMe, Flutterwave, Squire, and others.
News of the deal comes on the heels of regional bank Fifth Third’s acquisition of BaaS platform Rize and Qenta’s quiet acquisition of card issuing/BaaS platform Apto Payments.
In short: fintech “infrastructure” consolidation is upon us.
The underlying forces leading to the M&A wave are no great secret. BaaS platforms like Bond catered to fintech startups — promising faster speed to market and lower cost to market.
As VC funding plummeted in 2022, new startup formation slowed, meaning fewer new customers for BaaS platforms, and existing startups scaled back market spend dramatically, meaning slower revenue growth for existing BaaS clients. And, with failures and consolidation in consumer fintech accelerating, likelihood of BaaS clients churning is increasing.
Now, the questions is, how do these BaaS platforms integrate with their acquirers’ existing businesses? Fifth Third has quietly built an embedded payments business that’s growing “double digits” with revenue on track to exceed $130 million this year.
One can imagine the synergies between Bond and FIS — but FIS doesn’t exactly have the best track record digesting acquisitions (though, to be fair, Bond is orders of magnitude smaller than an acquisition like WorldPay).
Something else to keep in mind: all three of these deals are in basically the same sector. A similar story is likely to play out across other fintech vendors, like ID verification, fraud screening, issuer-processors, payroll APIs, and so on…
Apple Savings Users Complain About Difficulty Withdrawing Funds
Apple’s recently launched savings feature, powered by bank parter Goldman Sachs, has hit a speed bump. But is the press making a mountain out of a molehill?
The Wall Street Journal broke the story, providing a handful of anecdotes about customers who had difficulty withdrawing funds from their Apple savings accounts.
Several of the customer stories WSJ cited involved large sums — $100,000 or more — or customers trying to move money from their Apple account to an external account other than the one from which it had originated.
While such delays are, understandably, frustrating to end users, such “security reviews” aren’t unique to Goldman.
The actions profiled likely triggered fraud and/or anti-money laundering reviews.
Goldman made the following statement in response to reports of customer issues withdrawing their funds:
“The customer response to the new Savings account for Apple Card users has been excellent and beyond our expectations. While the vast majority of customers see no delays in transferring their funds, in a limited number of cases, a user may experience a delayed transfer due to processes in place designed to help protect their accounts. While we would not comment on specific customer interactions, we take our obligation to protect our customers deposits very seriously and work to create a balance between a seamless customer experience and that protection.”
Understandably, the issues attracted heightened attention given the companies involved — Apple and Goldman Sachs. That said, these kinds of delayed transfers, especially on newly opened accounts, aren’t unusual.
For its part, Apple is continuing to learn the downsides of being in financial services: people tend to get pretty upset when their money is involved.
It will be interesting to see how Apple manages user expectations and complaints as it rolls out its BNPL feature, Apple Pay Later, for which Apple is handling significantly more of the infrastructure and servicing vs. the Apple Card and savings products that it partners with Goldman Sachs to operate.
Is Apple ready for irate customers whose checking account was overdrawn by a debit, errors on credit reports (actual or perceived), fraud disputes, CFPB complaints, and so on?
CFPB Warns Consumers On P2P Deposit Insurance Coverage
Last week, the CFPB released an “issue spotlight” and consumer advisory regarding deposit insurance coverage of funds held in peer-to-peer payment apps like Cash App, PayPal, and Venmo. The relatively brief report had four key findings:
More than 75% of Americans use such apps, with the proportion rising to 85% for those aged 18-29
Nonbanks may be able to deploy idle funds held in such accounts to earn a return for themselves
Funds sitting in such payment apps may lack deposit insurance
User agreements often lack key information
According to the issue spotlight:
While consumers may perceive a stored value account as functioning like a traditional deposit account, there are significant distinctions. Deposit insurance coverage would only apply to funds which are held on deposit at an FDIC-insured bank or NCUA insured credit union in the unlikely event of a failure. If the consumers’ funds have not been deposited into an account at the bank or credit union, then those funds would not be eligible for deposit insurance coverage.
Users may not realize or understand when their funds are held as deposits at insured partner banks vs. when payment apps may deploy those funds as investments.
CFPB analysis found representations about deposit insurance and where funds are held varied by app and product; whether funds are held in insured accounts, or the actions necessary to ensure that they are, is not always clearly presented to users.
Five Key Takeaways From Monzo’s FY2023 Annual Report
Alongside releasing its FY2023 annual report, UK neobank Monzo also announced it had reached “monthly profitability” for the first time.
While an accomplishment and surely an indication the bank is heading in the right direction, it’s hard to evaluate how meaningful “monthly profitability” is, without knowing any seasonal trends in revenue and expenses.
Monzo isn’t the only UK/EU neobank moving towards or achieving profitability.
Tandem, a “greener” digital bank in the UK, reported its first full year of operating profit in 2022, driven by rising deposits and lending.
Starling, also based in the UK and focused primarily on business banking, recently reported a six-fold increase in profits, notching £195 million in pre-tax profits for the fiscal year through the end of March. Rising revenue was driven by an increase in lending to just shy of £5 billion.
And bunq, the Dutch neobank that operates across much of the EEA, ended 2022 posting its first quarterly profit and said it expected to remain profitable in 2023. Bunq has gradually increased its lending and has benefited from rising interest rates on customer deposits it parks at the ECB.
Something notable about all four of these companies: they’re fully licensed banks, meaning they can hold their customers’ deposits and deploy them as income-producing assets.
This compares to most all US neobanks, which often position themselves as “tech companies,” and partner with banks to hold customer deposits and operate their products.
1. Improving User Metrics
Monzo grew its overall customer base by 28% to 7.4 million users. It did so while spending £21.7 million on marketing, making its CAC a relatively low £14, though this is up substantially from the £4 CAC Monzo posted in FY’22 (CAC based only on reported marketing spend.)
That compares favorably to its average revenue per user (ARPU) of £48 — a metric that has improved substantially from FY’22, when ARPU was £27.
Average deposits per user also edged up, from £759 in FY’22 to £811 in FY’23 — improvement that may be driven in part by the more than 200,000 business customers Monzo now boasts.
2. More Lending
Monzo is doing substantially more lending than it has in the past across overdrafts, term loans, and “flex” loans (BNPL). It grew is lending by nearly 200%, from £258.8 million in FY’22 to £759.7 million in FY’23.
While Monzo’s credit losses grew substantially as well — from about £14 million to just over £100 million — its lending, net of interest expense and loan losses, yielded £63 million in income.
3. Diversified Revenue Mix
Unlike American neobanks, which are highly dependent on interchange income, Monzo has a diversified revenue base.
In addition to transaction income (interchange), Monzo also generates interest income from its lending activities covered above and parking balances at the central bank, subscription income, and partnership income.
4. Growing Customer Deposits
Monzo’s interest income would not be possible without the customer deposits it is able to hold as a fully licensed bank. The bank’s deposits grew by about 36% year over year to £6 billion — a notable achievement in an increasingly competitive deposit gathering environment.
As mentioned above, the average deposit per customer also improved — noteworthy, given the ongoing “cost of living crisis” in the UK.
5. But, Monzo Still Lost £116 Million in FY’23
Despite the meaningful improvement in deposits, lending, and revenue, Monzo’s overall loss for the fiscal year was approximately flat vs. the year prior: the company posted a overall loss of £116 million for FY’23, which ended this February, vs. £119 million the fiscal year prior.
Given Monzo is now touting it has reached monthly profitability, it will be interesting to see what has changed since the period covered by its FY’23 annual report.
Other Good Reads
A Decade of Risk Machine Learning (Chaos Engineering)
Creating A Monster (Net Interest)
The Future of Embedded Finance (Fintech Brainfood)
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