Plaid Co-Founder Buys a Bank; Goldman Readies Checking
N26 Closes Accounts Without Warning or Refund, Crypto Bank Enters Consent Order for BSA/AML Failures, FT Partners Q1 Insights
Hey all, Jason here.
I’m wrapping up my week in New York and headed back to the Netherlands this evening. Really enjoyed Fintech Week here and the chance to meet with folks face to face. Special thanks to Empire Startups, Rise, and everyone else who worked to put together all the great events this past week!
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NYC Fintech Week: 5 Takeaways
I had the privilege of attending New York City Fintech Week last week, and it was great to be back in NYC (and back in person!)
It gave me a chance to catch up with old friends and colleagues, meet some folks face-to-face that I’ve only known via Zoom/Twitter/LinkedIn, and make some new connections.
Here are five quick takeaways from the week:
A cooling investment climate for fintech? After two years of frothy fundraises and rapidly rising valuations — and, perhaps, a FOMO-driven reduction in diligence — a constant background conversation for the week was if it’s time for a reckoning. We’ve seen public market fintechs take a beating, canceled SPACs and IPOs, and some high-profile blowups. But, maybe this is a good thing? A reversion toward a more rational investing climate will push companies to focus on fundamentals that piles of VC cash let them ignore for too long, like functional business models and unit economics.
Infrastructure and partnerships. Despite Apple’s reported intentions to move in the opposite direction, partnerships — not building everything yourself — has become the standard playbook in fintech and banking. In areas where you’re not seeking to differentiate, it makes more sense to partner with a best-in-class vendor that specializes in a given function, like KYC or issuing-processing, for instance.
“Financial health” is still a hot topic — but with the occasional critical voice asking if consumer fintech is really advancing this objective. I’ve been a frequent critic of the narrative and talking points deployed by many consumer fintech and crypto companies, which often describe themselves as “democratizing” something or “expanding access and inclusion,” while leveraging business models where companies win when their users lose (cough, Robinhood.)
Crypto’s future is working within the regulated banking system, not outside of it. There was admittedly an availability and selection bias on this one — I was at NYC Fintech Week, not a Bitcoin conference in Miami. Still, elements of the banking and fintech establishment understand the potential for crypto, but, for it achieve widespread adoption, realize it must achieve the legitimacy, safety, and stability that comes from working with regulators, rather than putting them on blast.
Lastly, live events are back (hopefully for good this time)! The last large live event I was at was Money2020, last October, which still definitely felt like it had the cloud of COVID hanging over it. While vaccine card checks and masks were still the norm this week, there was definitely a much-overdue vibe shift of sorts, with people generally seeming to be much more comfortable and coming out of their shells.
Plaid Co-Founder Buys Himself a Bank to Launch Native Banking-as-a-Service Platform
In a world where non-banks often must work with banks to offer regulated products, like deposit accounts or credit, US fintechs found a solution in partnering with banks.
The first version of this was direct fintech-bank relationships, like you see with neobank Chime, which works with The Bancorp Bank and Stride behind the scenes, and Affirm, which works with Cross River Bank and Celtic.
But many of the banks offering services to fintechs were smaller, older, and less technically sophisticated. This was particularly true for banks partnering to offer checking accounts, as the business model relies on the higher interchange available to banks with less than $10 billion in assets, which are exempt from the Durbin amendment’s caps.
This gave rise to what popularly became known as bank-as-a-service. A more recent crop of middleware players popped up, to simplify the process of launching products with regulated bank partners. Companies like Unit, Treasury Prime, and Bond would sit between a fintech and the underlying bank partner, serving to abstract away both technical and legal, regulatory, and compliance complexity.
And while these banking-as-a-service providers quickly won business due to the cost- and speed-to-market advantages they offered vs. working directly with underlying partner banks, they are, in a sense, a band-aid.
This, it would seem, is the opportunity Plaid co-founder William Hockey and his wife Annie Hockey are attempting to exploit in their purchase of a small California bank.
The two spent $50 million to acquire Northern California National Bank, a one-branch bank in Chico, California.
The bank’s bricks and mortar branch will continue operating, serving local customers, while the Hockeys have leveraged its license to build a new offering aimed at fintechs, which they’ve dubbed Column.
According to the Wall Street Journal:
“The Column team developed its own banking platform from scratch, complete with a customized direct connection to the Federal Reserve’s payments network. It signed up clients, including the fintech companies Brex Inc. and Point Up Inc., letting them use Column’s software to automate the mechanics of activities such as opening bank accounts, moving money and extending loans.”
What advantages might Column have vs. the BaaS model of Unit/Treasury Prime/Bond or the direct bank partnership model?
It is, presumably, purpose-built as a banking technology platform, with capabilities designed to be made available to third parties from day one. Let’s call it third-gen BaaS or native BaaS, perhaps.
The approach promises to solve the time and expense of integrating directly with old-school partner banks without the additional layer (and expense) of adding a separate banking-as-a-service layer like Unit to the mix.
Goldman Sachs Readies Consumer Checking — But Will Anyone Use It?
Marcus’s checking account, originally announced in January 2021, is entering an internal beta, where any of the bank’s 20,000 US employees will be able to sign up and test it, CNBC is reporting. Like its lending and savings products, the checking account will be no-fee — but, unlike other major banks, the accounts will be interest bearing.
Still, who will use a Marcus checking account?
At this point, it’s unclear what kinds of customer segments the bank may target for the account.
Marcus’s lending product (disclosure: I was an early Marcus employee who worked on launching this) had a relatively well-defined market: consumers who were carrying higher interest rate credit card debt and could benefit by consolidating it into a lower cost installment loan.
Marcus’s savings product sought to attract sticky deposits by offering savers good — but not top of market — interest rates on online savings accounts (OSAs) and CDs.
Other, less well targeted consumer initiatives have seen less success. Marcus Insights, a PFM tool borne of the firm’s acquisition of Clarity Money, is a lackluster and rudderless also-ran in a crowded category.
Its mass-market investing product, Marcus Invest, has a $1,000 minimum and charges a 0.35% management fee, more than many competitors, for an uninspiring basket of ETFs a user has access to on most any other online brokerage.
The Apple Card is widely viewed as a success, but its launch benefited from built-in distribution in Apple’s Wallet app and a legion of excited Apple fans.
With Marcus Checking, it’s as of yet unclear what feature — if any — might convince users to switch their primary account.
Goldman is, presumably, not going after the type of disaffected big bank customer who benefited from switching to a no-fee neobank like Chime, Varo, or Current.
Beyond offering interest on checking balances — presumably equal to or lower than its OSAs, what could Goldman offer mass-affluent customers to switch?
N26 Closes Accounts Without Warning or Refund in AML Cleanup
N26’s challenges with AML compliance seem to be continuing.
In 2021, the Germany-based neobank paid a ~$5 million fine and agreed to an order limiting it to opening 50,000 new accounts per month. Last year’s order from BaFin stated:
“Specifically, BaFin has ordered measures to remedy shortcomings in risk management with regard to IT and outsourcing management. The institution must implement these measures within a set time limit.
The shortcomings in risk management are due to the bank’s substantial growth. In accordance with section 45b (1) sentence 1 of the German Banking Act (Kreditwesengesetz – KWG), BaFin has ordered risk mitigation measures that place limits on customer growth and on certain risk exposures. Customer acquisition is to be substantially reduced with N26 Bank GmbH only permitted to acquire a maximum of 50,000 new customers per month.”
Now, social media has been flooded with complaints from N26 users who’ve had their accounts frozen with no warning — and, in some cases, no refund.
According to German publication Handelsblatt (translated from German):
“The most valuable German fintech is threatened with new trouble: customers are outraged because their N26 account was terminated abruptly. No transfers, no cash withdrawals: The Handelsblatt is aware of 40 cases of users based in Germany who have not had access to their accounts since last Thursday. There are also numerous complaints from customers in France and Italy on Twitter.
Customers have received the same letter from the online bank, stating that N26 has detected a breach of terms and conditions on the account in question. ‘We therefore declare the extraordinary termination of your N26 account.’”
N26 seems to be cleaning house by aggressively closing customer accounts, citing “irregularities” or suspicious transactions. While some users have been able to recover the funds in their closed accounts, many received emails with a request to “send proof of the origin of funds through appropriate receipts.”
The measures by N26 are reminiscent of stories that circulated about Chime last year. The US neobank reportedly closed users’ accounts, often not returning funds or doing so slowly, causing stress and hardship for its mostly low-income user base. Chime’s move coincided with an uptick in anecdotes of fraud — and of some car rental and hotel merchants refusing to accept the card.
Chime, of course, isn’t the only US fintech to struggle with fraud. PayPal saw its stock dive after recently admitting that 4.5 million user accounts were “illegitimate.”
UK neobanks have struggled with fraud and AML controls as well. According to Bloomberg:
“The Financial Conduct Authority said Friday that a review conducted last year had showed suspicious activity reports filed by the banks had risen, raising concern about the adequacy of checks that they carry out when taking on new customers. It said some failed to adequately check even basic details such as the occupations and income of customers.
The review focused on relatively new challenger banks with quick and easy application processes. This included six challenger retail banks, which primarily consist of digital banks and covering over 8 million customers.
‘The control weaknesses found by the FCA in its review of challenger banks increase the risk that these banks will be targeted by professional money launderers,’ said Howard Cooper, managing director in Kroll’s Forensic Investigations and Intelligence practice. ‘These weaknesses must be overcome.’”
OCC Issues Consent Order Against Anchorage, the First “Crypto Bank”
Last week, the OCC entered into a consent order with Anchorage Digital, popularly known as the first “crypto bank,” for significant failures in its compliance programs adherence to the Bank Secrecy Act and anti-money laundering requirements.
Anchorage is a national trust bank chartered and overseen by the OCC. It provides crypto asset custody, trading, staking, governance, and financing services.
Specifically, the consent order found:
“(1) As of 2021, the Bank failed to adopt and implement a compliance program that adequately covers the required BSA/AML program elements, including, in particular, internal controls for customer due diligence and procedures for monitoring suspicious activity, BSA officer and staff, and training.
(2) As a result of these deficiencies, the Bank engaged in violations of law and regulation, including: 12 C.F.R. § 21.21 - BSA/AML program violation; 31 C.F.R. § 1020.210(a)(2)(v) - Anti-Money Laundering Program (Customer Due Diligence); and 31 U.S.C. § 5318(i) and 31 C.F.R. § 1010.610 - Due Diligence Programs for Correspondent Accounts for Foreign Financial Institutions.”
The consent order requires Anchorage to:
appoint a compliance committee of at least three members
create and submit a written action plan detailing how it will remediate and sustain compliance with the BSA
ensure the bank has a qualified BSA officer “vested with sufficient independence, authority, and resources to fulfill the duties and responsibilities of the position and ensure compliance with the requirements of the Bank Secrecy Act”
develop a staffing assessment “that ensures that the Bank has sufficient staff with appropriate skills and expertise needed to support the BSA Officer and the Bank’s BSA/AML program”
not outsource BSA/AML functions to third-party vendors “unless the Bank has conducted and documented an assessment of the adequacy of the skills and training of the third party for the proposed services”
implement risk-appropriate customer due diligence (CDD) procedures, including beneficial ownership
implement a methodology for appropriately risk-rating accounts at opening and on an ongoing basis
devise and implement an appropriate suspicious monitoring and reporting program (SARs)
implement a system for validating the bank’s BSA/AML monitoring systems
conduct a “SAR look back” to detect prior unreported suspicious activity
develop an independent BSA/AML testing / audit program
develop and implement a written training program for bank employees
develop and implement appropriate record keeping and data governance policies and programs
among other things
While BSA/AML is not my core area, this consent decree would seem to be a boon to other crypto companies. Anchorage’s consent decree provides a highly specific playbook of what regulators are looking at and may deem to be sufficient in evaluating BSA/AML compliance programs.
FT Partners: Q1 Insights Report
Fintech-focused investment bank FT Partner’s Q1 insights report is out, building on its month-to-month analysis. Definitely worth a skim for those looking to understand broader trends in fundraising, liquidity events, and M&A activity in fintech.
Despite poor performance of public market fintechs, fundraising activity remained elevated in Q1 compared to historical norms — though, it’s worth noting that some of those deals were likely negotiated in Q4 2021, before the market swoon.
Merger and acquisition activity in the fintech sector is also off to a robust start, though note this includes SPAC combinations.
With signs of stress in the public markets and talk of a flight to quality, raising funds in private markets is likely to become somewhat more difficult — which could lead to an acceleration of dealmaking this year.
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Extra Credit: Overhyped Fintech Trends and Navigating a Saturated Card Market
I had the chance to join TransUnion’s podcast, Extra Credit, where I discussed fintech trends that may be overhyped and how creditors and lenders aren’t paying enough attention to the rapidly changing payments universe.
I also offered my perspective on cryptocurrency and the US regulatory environment, and hosts Craig, Josh, and I discussed measures lenders can take as the credit card market becomes increasingly saturated.
I also thoroughly embarrassed myself when faced with a trivia pop quiz on my adopted home country.
You can listen here on Apple podcasts or find it in your preferred podcast app.
Other Good Reads
The Implications of Ownership (Fintech Takes)
Twitter, Elon, Jack, and the promise of decentralized social media (Fintech Blueprint)
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