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Is Affirm's Amazon Deal Better Than Walmart?
Regulators' Guide On Fintech Partnerships, Chime Acquires Charlie, Robinhood Stock Promo Scrutiny
Hey all, Jason here.
I’m wrapping up my second week in México, in the southern state of Oaxaca. And, despite some beach closures and implementation of “Ley Seca” as pandemic control measures, it has been a fantastic week with lots of predictably amazing food. A few days left here before I continue on to Mexico City on Tuesday. Onward!
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Amazon Latest to Strike Major BNPL Partnership
Amazon is the latest company to strike a partnership in the still-red hot buy now, pay later space. Recent developments in the industry include PayPal’s launch of a “split pay” product in 2020, Apple’s announcement it is developing a split pay and longer term loan offering with partner Goldman Sachs, and Square announcing its acquisition of Afterpay.
Amazon is testing offering Affirm as a financing option in the US for orders over $50; according to the release:
“As a result of Amazon and Affirm's partnership, select Amazon customers now have the option to split the total cost of purchases of $50 or more into simple monthly payments by using Affirm. Approved customers are shown the total cost of their purchase upfront and will never pay more than what they agree to at checkout. As always, when choosing Affirm, consumers will not be charged any late or hidden fees.”
The release did not specify the terms of the financing (split pay, longer term installment loans, or both), nor did it suggest that the arrangement is exclusive.
The partnership comes at an opportune time for Affirm. Peloton, which accounted for about a third of Affirm’s revenue at IPO, is cutting prices for its entry-level bike for the second time in a year amid slowing demand and increased competition.
Affirm also partners with Amazon rival Walmart, though the partnership appears to have had negligible impact on Affirm’s business; across Q3 2021 earnings materials, “Walmart” is mentioned 3 times on Affirm’s earnings call vs. 28 mentions of “Peloton” across the earnings release, supplemental materials, and call.
The slow traction with Walmart may be driven by its share of sales coming from bricks and mortar vs. ecommerce.
In Q2 2021, just 11.41% of Walmart's US net sales came from ecommerce. Using Affirm for an in-store purchase at Walmart requires a cumbersome process of pre-qualifying for a specific amount on Affirm’s site and bringing a one-time use barcode to be scanned at the register at Walmart — the opposite of the typical low-friction experience of using BNPL online.
Further, as I’ve written about before, Walmart has other horses in the financial services race; Walmart’s site makes heavy promotion of the Capital One Walmart credit card, which offers 5% cash back on Walmart purchases. It also promotes its Green Dot-powered Walmart Moneycard, Bluebird prepaid debit, and its Walmart Pay digital wallet, not to mention the yet-to-be defined “fintech startup” with Ribbit Capital.
The most important difference between the Walmart and Amazon partnerships for Affirm? The sheer scale of Amazon’s ecommerce activity: it’s expected to do about $367 billion in ecommerce sales in 2021, accounting for 40.4% of ALL ecommerce activity in the United States, vs. Walmart’s $65 billion.
However, some of the headwinds that exist for Affirm in the Walmart partnership are present in the Amazon deal as well: Amazon offers multiple financial products and financing options, including: an Amazon credit card with Chase that offers 3% cash back at Amazon and Whole Foods; an Amazon Store Card with Synchrony that offers 0% buy now pay later financing; Amazon Secured Card, also with Synchrony; and Amazon Pay, a checkout and payments platform used by tens of thousands of merchants.
Further, the partnership announcement didn’t specify the deal is exclusive. Amazon is well-known for its relentless testing and optimization, both to hold down costs and boost conversion rates.
I would be surprised if Amazon didn’t test additional BNPL options in the future.
Why Partner Instead of Building Its Own — Or Acquiring?
Amazon has a track record of building seemingly unrelated businesses that support its core retailing functions; most notably, Amazon Web Services and Amazon Logistics.
Amazon certainly has the technical capability to build its own buy now, pay later offering; or, with about $89 billion in cash and a per share price of $3,349, more than enough financial fire power to acquire Affirm, which is worth about $18 billion as of Friday’s close. So why partner?
Skepticism of the valuation of BNPL companies. Unlike Square, Amazon’s core business isn’t financial services. Offering BNPL makes sense to support its retailing function, and it could “platform-ize” a BNPL capability via its Amazon Pay function. But the decision to partner (for now), suggests skepticism of the sustainability of BNPL valuations.
Antitrust. The tide has markedly turned against Big Tech in recent years when it comes to antitrust, and even more so with Lina Khan, notable critic of Amazon, taking the helm as FTC Chair. Amazon may be seeking to avoid additional regulatory scrutiny and potential negative PR associated with it.
Federal Regulators Issue Guide for Community Banks Partnering with Fintechs
Last week, the FDIC, OCC, and Federal Reserve released a due diligence guide for community banks considering partnering with fintechs.
When chartered banks partner with non-bank fintechs to provide services, like debit cards, savings accounts, and loans, the fintech is considered a vendor or service provider of the bank — and the ultimate responsibility for ensuring regulatory compliance lies with the bank. These relationships have received increased attention recently, with proposed interagency guidance on risk management of third-party relationships published last month.
The interagency guide is part of federal regulators’ “efforts to promote and support the adoption of new technologies by financial institutions, particularly community banks,” according to the release.
The guide calls out six key areas requiring due diligence by community banks evaluating potential fintech partners:
Business Experience and Qualifications
Legal and Regulatory Compliance
Risk Management and Controls
While there hasn’t been a major failure of a US challenger bank, recent history has numerous examples of business or technology failures that caused significant disruption and hardship to end consumers:
Account lockouts and disruption to consumers’ online banking access during Simple’s account migration to BBVA
Beam Financial, a purported high-yield savings app, which had serious difficulties meeting customer withdrawal requests and faces an FTC inquiry
Prepaid card provider RushCard, where, in 2015, users were locked out of accounts for days during a botched payment processor transition; the company was ordered to pay $20.5 million to resolve customer claims and was ultimately sold to Green Dot
Numerous UK payment and banking apps faced disruption amid the collapse of German payment processor Wirecard
Australian neobank Xinja, a fully licensed bank in the country, handed back its banking license and returned customer funds when facing potential insolvency
The US interagency guidance is a good first step in offering community banks a template to follow when evaluating fintechs — partners, distribution and deposit gathering channels, and sources of revenue that are likely to become more crucial to small community banks that have historically relied on a geographic branch footprint.
Chime Acquires, Shuts Down Debt Management Startup Charlie
Neobank Chime announced it has acquired debt management service Charlie and plans to shut down the app. Charlie offered personal financial management tools designed to automate and help users pay down debt more quickly.
It’s unclear what features of the Charlie app, if any, will be incorporated into Chime. According to the announcement:
“We’re excited to announce that the Charlie Finance team is joining Chime! This talented group, whose mission is aligned with Chime’s, will continue working on new and better ways to provide people more control over their financial lives.
Charlie was founded in 2016 by Ivo Parashkevov, Ilian Georgiev and Robert Ludeman to support Americans who feel anxiety when it comes to managing their personal finances. While the Charlie app is going away, at Chime the team will be able to have even greater reach and impact.”
Charlie joins a long list of PFM tools that were acquired and subsequently shut down, with features absorbed into the acquiring company to varying degrees:
Capital One’s 2015 acquisition of budgeting app Level Money
CreditKarma’s 2018 acquisition of PFM chatbot Penny
Goldman Sachs’ 2018 acquisition of Clarity Money
The oft-learned lesson here isn’t that there’s no value in budgeting and personal financial management tools, but rather that these tools are features and not businesses.
They make the most sense offered in conjunction with other products, like spending, credit, and investing accounts. Indeed, there are multiple startups that offer embeddable PFM functionality via API: just call it PFM-as-a-Service.
Robinhood Stock Promo Causes Companies’ Proxy Costs to Soar — and They’re Not Happy About It
For all its faults, Robinhood is exemplary at the sometimes dark art of “growth hacking” (or, more charitably, product-led growth). Its gamified pre-launch waitlist garnered an astounding 1 million signups.
But now its free share marketing promotions are getting attention from regulators — and from the companies whose shares Robinhood is giving away.
Robinhood rewards new customers or those referring friends with a free share, typically one valued less than $10. Such signup bonuses or “refer a friend” programs are common in consumer fintech; challenger banks like Chime and payment apps like Cash App offer cash incentives for signups and referrals.
But Robinhood’s promotion comes with a hidden cost: delivering proxy materials. According to the WSJ:
“Brokerages like Robinhood are required to deliver proxy materials to a public company’s shareholders ahead of annual meetings. They are then reimbursed by the public company for the cost of distribution.
This means that Robinhood’s stock giveaways have saddled some companies with larger bills for delivering proxy statements. Now, the practice is sparking a backlash from companies and scrutiny from market regulators.”
One small company whose shares Robinhood gave away in its promotions, Catalyst, saw its bill for delivering proxy materials balloon 1,872%, from $12,500 in 2019 to $234,000 in 2020.
The problem isn’t just a small company one: Marathon Oil saw its proxy delivery costs jump 25x from 2019 to 2020 after Robinhood included its shares in the promotion as they dipped as low as $3.12 during the early days of the pandemic.
The New York Stock Exchange has already passed a new rule banning brokers for seeking reimbursement for shares they give away for free. The rule doesn’t impact Robinhood, as it’s not a member of the NYSE, but companies are urging Finra, which oversees brokers including Robinhood, to pass a similar rule.
Corp Card Startup Ramp Raises $300m, Valued at $3.9 billion
Corporate card and spend management startup Ramp has raised a $300m Series C, valuing the 2-year old startup at just shy of $4 billion. The startup raised a $115m round less than five months ago. The company also secured a $150m debt facility from Goldman Sachs this February.
Ramp’s card, expense management, bill pay, and accounting tools are focused on helping companies better manage costs and spend less than they would managing finances across multiple, disconnected platforms.
Ramp has seen rapid growth during the pandemic, with its number of cardholders increasing by 5x since the beginning of 2021, for a total of more than 2,000 businesses using the company as their “primary spend management solution.” Transaction volume has increased year-over-year by 1,000%, according to the company.
The company derives revenue primarily from interchange income — not unlike consumer fintechs like Chime and Varo. Ramp’s 2,000 customers implies a valuation of $1,950,000 per customer.
Presumably investors have a bullish view of Ramp’s ability to increase spend from their current customer base, to attract newly formed companies, to displace incumbents like American Express, and to develop and cross-sell additional products, including lending.
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Other Good Reads This Week
Buying a bank turned LendingClub around. Now the fintech industry is watching. (Protocol)
God, Money, YOLO: How Cathie Wood Found her Flock (NYTimes)
The secret bias hidden in mortgage-approval algorithms (The Markup / AP)
Does decentralized finance really help the underbanked? (American Banker)
Crypto Firms Want Fed Payment Systems Access — and Banks Are Resisting (WSJ)
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