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Goldman's Marcus Losses Could Top $1.2 Billion
Neobanks Volt & Dozens Call It Quits, Meta Kills Novi Wallet, More on BlockFi's Bailout, FTC Sues Walmart
Hey all, Jason here.
After a couple of weeks in my hometown of Chicago, I’m glad to be back home in the Netherlands — though the summer travel chaos at Schipol airport is no joke. I’m looking forward to enjoying the Dutch summer (and catching up on any emails etc. I may have missed while traveling.)
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Walmart Facilitated Money Transfer Fraud, FTC Alleges
Walmart, which is trying to push deeper into financial services with its fintech project’s acquisitions of neobank ONE and earned wage access startup Even, has attracted fresh scrutiny from the FTC.
The agency alleges that Walmart “looked the other way” while scammers used its money transfer services to scam consumers out of hundreds of millions of dollars. The complaint alleges Walmart didn’t properly train its employees, provide warnings to customers, and employed policies and procedures that enabled fraudsters to cash out at its stores.
Walmart acts as an agent for popular money transfer services, including Western Union, MoneyGram, and Ria, as well as offering some services under its own brands “Walmart2Walmart” and “Walmart2World.”
According to the FTC’s announcement (emphasis added):
“The Federal Trade Commission today sued Walmart for allowing its money transfer services to be used by fraudsters, who fleeced consumers out of hundreds of millions of dollars. In its lawsuit, the FTC alleges that for years, the company turned a blind eye while scammers took advantage of its failure to properly secure the money transfer services offered at Walmart stores.
The company did not properly train its employees, failed to warn customers, and used procedures that allowed fraudsters to cash out at its stores, according to the FTC’s complaint. The FTC is asking the court to order Walmart to return money to consumers and to impose civil penalties for Walmart’s violations.”
Walmart released a statement aggressively pushing back on the claims, painting the allegations as ‘misguided and legally flawed,’ and alluding to political motivations. According to its statement (emphasis added):
“Walmart has a robust anti-fraud program to help stop third-party criminals who try to use money transfer services to commit fraud, and only a miniscule [sic] number of transactions are even alleged to be fraudulent. In fact, Walmart has stopped hundreds of thousands of suspicious transactions totaling hundreds of millions of dollars.
Despite Walmart’s anti-fraud programs, the FTC is trying to blame the Company for actions by third parties, including fraud the FTC has already acknowledged was caused by another company—while that company was under federal government oversight through a compliance monitor, and during a period when that company’s own fraud prevention system had failed.
This civil lawsuit is factually misguided and legally flawed. In fact, it was approved by the FTC by the narrowest of margins after Chair Lina Khan refused Walmart the due process of hearing directly from the company, and then the Department of Justice refused to take this case to court.”
Meta Killing Off Last Remnant of Failed Crypto Strategy
Facebook parent company Meta warned users of its Novi wallet that they had until September 1 to withdraw any funds, at which time the app will be shutting down.
As a quick refresher, the original intention was that the Novi wallet would leverage a newly created stablecoin, Diem, which would be backed by a basket of fiat currencies. But faced with intense regulatory scrutiny, the ambitions and scope of the project shrunk repeatedly.
Eventually, a Novi wallet “pilot” focused on remittances between the US and Guatemala did launch, though it utilized Paxos’ USDP stablecoin instead of Meta’s defunct Diem.
Earlier this year, the Diem Association, a third party entity setup by Meta, announced it would shut down and sell its assets to crypto-focused Silvergate Bank.
Finally Novi, the last vestige of Meta’s crypto strategy, is being put out of its misery.
Goldman’s Marcus Losses Could Top $1.2 Billion This Year
Part of the promise of Goldman’s consumer business Marcus was that ‘boring,’ consistent revenue generators like consumer lending would provide stability to serve as a balance to the firm’s traditional business lines, like trading and investment banking, which can be highly profitable but also volatile.
With Marcus on track to record a $1.2 billion loss this year alone, things aren’t turning out that way.
Back at its 2020 Investor Day, the firm expected losses from its consumer and transaction banking businesses to peak at $1 billion (ex-loan loss reserves) in 2020.
Goldman forecast that the initiatives would breakeven in 2022 and generate positive returns in subsequent years.
That, of course, was before COVID disruptions, delays to new product launches, and executive turnover.
While Goldman is nearing the launch of its consumer checking product, convincing customers to switch from their existing bank may be a challenge.
Other initiatives, like its PFM tool Marcus Insights, a point-of-sale loan dubbed Marcus Pay, and its robo-like advisor Marcus Invest, have failed to gain meaningful traction.
Now, with persistent inflation and a recession appearing inevitable, Goldman faces the prospect of increased losses in its consumer installment loan and credit card portfolios.
Marcus has arguably diluted Goldman’s brand, while failing to deliver on its promise of providing stable earnings to complement chunky trading and investment banking revenues — though it has provided a cheap and stable source of funding in the form of consumer deposits.
One has to wonder how patient Goldman shareholders — and senior leadership — will be, in the face of a continued sea of red ink.
FTX Has Right to Buy BlockFi For “Up to” $240 Million
Crypto universe continued to unravel last week, with FTX and its founder Sam Bankman-Fried still playing the role of lender of last resort.
BlockFi increased its credit facility with FTX from $250 million to $400 million. Rumors swirled that BlockFi could sell to FTX for as little as $25 million — an astounding fall for a company once valued at $4.8 billion and that has raised nearly $1 billion in venture funding.
BlockFi CEO Zac Prince was quick to shoot down rumors of the $25 million price tag:
Further details of the deal between BlockFi and FTX emerged on Friday.
In addition to the expansion of the credit facility, the agreement gives FTX the right to purchase BlockFi at a maximum price of $240 million, based on achieving unspecified “performance targets.” Even if it achieves that maximum price, it would still represent a ~95% markdown from BlockFi’s previous valuation.
A tweet from BlockFi CEO Prince characterized the $400 million credit facility, theoretical maximum $240 million purchase price, and unspecified “other potential consideration” as a “total value of up to $680M.”
That description seems misleading at best, given that the value of the credit facility doesn’t accrue to the company or its shareholders.
Credit to BlockFi for prioritizing the safety of clients’ funds. Other crypto shadow banks, like Celsius Networks and Babel, froze customer withdrawals amid exposure to defaulting counterparties, like now-bankrupt Three Arrows Capital, and cratering crypto prices.
According to Prince’s tweets, some deals BlockFi was considering would have seen depositors take a haircut or have their claims made junior to new creditors providing bailout financing.
Still, protecting customers’ deposits is literally the bare minimum.
BlockFi has frequently touted its ‘transparency’ and risk management practices (emphasis added)…
“BlockFi’s core value is Transparency Builds Trust — maintaining and expanding our clients’ trust is paramount to that. As such, we view risk management as key to our success. We seek to monitor and control our risk exposure through an enterprise risk management framework, including by managing liquidity and credit risks that could potentially impact our obligations to clients”
…including its lending and collateral policies (emphasis added):
“We require many, but not all, institutional borrowers to post collateral in the form of digital assets, cash or other assets.
Whether we require institutional borrowers to post collateral and, if so, the type and level of collateral we require, depends on the borrower’s credit profile and the size and composition of the loan portfolio.
The collateral provided by our institutional borrower clients may also be subject to margin calls if the loan to collateral value ratio breaches certain thresholds set forth in their loan agreements.”
Given the position BlockFi now finds itself in, it would seem its risk management framework was wholly inadequate.
Neobanks Volt, Dozens Call it Quits — Is It a Warning Sign for US Challengers?
Australian neobank Volt, the first in the country to obtain a full banking license, is calling it quits.
Volt was one of four online-only banks to be granted a full license in the wake of a 2018 inquiry detailing misconduct in the highly concentrated Australian banking sector. The four largest banks — the Commonwealth Bank of Australia, Westpac, National Australia Bank, and ANZ — control three quarters of the consumer market.
Neobanks seeking licenses, like Volt, were subject to less stringent standards, with the hope that they would spur competition in the sector.
Now, only four years later, three of the four in that first wave of Australian neobanks have been sold or quit operating altogether.
Volt is packing it in after failing to raise fresh capital. The company was seeking to raise about USD $138 million but was unable to do so. Volt will return customers’ deposits, which total just USD $68 million, without drawing on the government’s deposit guarantee scheme.
Meanwhile, Dozens, a UK neobank operating under an e-money license, is also shutting down. In a lengthy blog post, the company blamed everything from COVID lockdowns and supply chain disruptions to the war in Ukraine for, what sounds like, an inability to raise additional capital:
“The domino effect of Covid means there is less money in the system. Covid has led to supply chain disruption across the world and in the UK this has been compounded further by Brexit. The war in Ukraine has reduced supply further in an already constricted system. This lack of movement and supply of goods has caused prices to rise. As people and businesses across all sectors of society are adjusting how they use their money and where it sits, less and less money is being placed in illiquid investments like VC funds.”
The more likely reality is that, with offerings limited to a no-fee current (checking) account, budgeting tools, and robo-style investments and just 60,000 accounts, Dozens lacked a sustainable business model.
Dozens’ blog post says the company will pivot to focus on “B2B,” though it isn’t entirely clear what that means (emphasis added):
“Our current shareholders continue to support the business today, throughout this transition time and the plans for the future. Project Imagine is continuing, but simply changing track to B2B for the time being, to give the long term mission the best chance of success.”
Revolut Expands to Five Additional Countries, Claims to Have Two-Year Runway
The rapidly changing funding environment doesn’t seem to be changing Revolut’s strategy, for now, at least.
Earlier this month, the company announced it is launching a “streamlined” version of its app in five additional countries: Sri Lanka, Chile, Ecuador, Azerbaijan, and Oman.
The move appears to be part of Revolut’s strategy focused on favorable foreign exchange rates and remittances — areas that have been a cornerstone of the company’s customer acquisition strategy since its 2015 launch in the UK.
Revolut now supports transfers to over 50 countries in more than 30 currencies. Transfers to fellow Revolut users are no cost, while transfers to non-Revolut accounts in the five new countries will incur a 1% fee, with a $1 minimum.
Still, while favorable forex rates proved to be an attractive wedge feature in Revolut’s home UK market, it’s less clear how that strategy will translate in foreign markets. For instance, Revolut is making a play for a share of the US-Mexico remittance corridor, in what is becoming an increasingly crowded market.
Further, attracting a user with good forex and remittance rates and converting that user into a primary account holder are two entirely different things.
Despite the aggressive growth, Revolut co-founder Nik Storonsky claims the company is ‘profitable’ and has at least two years of runway, according to a recent interview with Bloomberg (emphasis added):
“The boss of Revolut Ltd. said his fintech startup has enough funding for at least two more years and would not be looking to raise money, as venture capital dries up across the technology industry.
Nikolay Storonsky, the 37-year-old chief executive officer, said the London-based company is now profitable and “aggressively expanding” in Latin America, India and the Philippines while looking to the Middle East.”
The company’s most recently published financial accounts, for 2020, reflected a total comprehensive loss of £168 million.
Other Good Reads
How Apple Will Boost the Apple Card with Buy Now Pay Later (Ron Shevlin/Forbes)
The Next Table Stakes Feature in Digital Banking (Fintech Takes)
Creating a Culture: the Case of Credit Suisse (Net Interest)
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