Revolut's US Plan Runs Through Mexico

Aspiration SPACs, Dems on FDIC May Dash ILC Hopes, Varo Expanding Lending?

Hey all, Jason here.

Assuming my flight is on time, I’ll be taking off around the time this hits your inbox. I’ve spent the last week in Guadalajara, Mexico, sometimes referred to as “the Silicon Valley of Mexico.”

The US economy and that of its southern neighbor are inextricably intertwined: despite the pandemic, cross-border trade is set to eclipse 2019 levels, and nearly $4.5 billion in remittances flow from the US to Mexico each month (more on that below).

I’ll be in the country for the next couple of weeks, so the timing and length of the next couple issues may vary — consider them Fintech Business Weekly “summer vacation editions.”

If you’re an early stage fintech looking to raise equity or investor looking for deal flow, I may be able to help. Get in touch: jason@fintechbusinessweekly.com

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Revolut’s US Plans Run Through Mexico

Revolut’s 2020 launch in the world’s largest market was relatively quiet. It launched its core consumer spending account product in the US in partnership with Metropolitan Commercial Bank, offering a set of features with little differentiation vs. US market leaders Chime and Varo or fellow UK/European imports N26 and Monzo.

In a move consistent with its UK offering but out of step with the US market, Revolut offers paid tiers costing $9.99 or $16.99 per month for additional benefits, like overseas medical insurance, ‘priority’ customer support, a premium card design, and higher monthly ATM withdrawal limits without incurring a fee (US competitors like Chime and Varo don’t impose ATM withdrawal limits).

Revolut’s US offering also has emphasized the ability to spend, send, exchange, and hold multiple currencies — a set of features that helped propel its popularity in its home UK market, but may not resonate as strongly with US consumers, especially with the continuing travel disruptions brought on by a global pandemic.

Revolut is also in the process of applying for a state banking license in California and the FDIC insurance that would enable it to hold consumer deposits, though this is likely to be a lengthy process; it reportedly cost Varo nearly $100 million and took over three years to obtain its OCC charter.

Now, at least part of Revolut’s US strategy seems to be coming into focus. Late last month, it announced what it’s referring to as a US-Mexico remittance corridor, saying in its release:

“Revolut, the financial superapp with 16 million customers worldwide, announced today its [sic] simplifying cross-border payments between the US and Mexico with the launch of its US-Mexico remittance corridor. With this launch, Revolut customers in the US and Mexico can now easily transfer money between one another without any hidden fees, at the real exchange rate.”

The announcement seems to be more PR and marketing positioning than substance, as it doesn’t appear to reflect any new functionality. Revolut users already could send money to one another at the “real” exchange rate and with no fees (up to a set monthly cap, depending on paid subscription tier).

Further, Revolut doesn’t yet offer a product in Mexico, which would seem to limit the usefulness of the feature for remittances to users in the country.

Sending money from a US Revolut account to a typical Mexican bank account instead would be via a standard SWIFT transfer and incur a fee from Revolut on the free tier; or 1 free transfer on the $9.99 tier; 3 free transfers on the $16.99 tier.

Revolut seems to be positioning the “remittance corridor” as a wedge feature to attract users on the hopes of attaining primary account status, capturing direct deposits and corresponding interchange revenue, and cross-selling them into other products.

This is a more clearly defined market segmentation and customer acquisition strategy than other foreign challenger banks entering the US market, but that doesn’t automatically equal success. Lower income consumers who may be attracted to the remittance positioning tend to be price sensitive and savvy shoppers, who may leverage Revolut for free or cheap money transfers, while using other accounts for most of their spending.

Meanwhile, plenty of competition exists in the remittance space. Legacy players like Western Union, Moneygram, and RIA are attempting to digitalize and hold on to their historic market share, while Wise (TransferWise), PayPal, and dozens of startups compete for a piece of the approximately $4.5 billion per month that flows from the US to Mexico.

NY Passes Law to Curb Overdrafts

In the latest sign of increasing regulatory and legislative focus on overdraft practices, outgoing NY Governor Andrew Cuomo signed a bill designed to curb overdraft fees in the state, American Banker reports.

Specifically, the bill requires New York State-chartered banks that offer consumer checking accounts to pay checks in the order in which they’re received, or from smallest to largest dollar amount, for each business day’s transactions.

Banks can still decline to honor checks where the amount exceeds the balance in the account, but they must honor any subsequent smaller checks that can be paid with the funds in the account. Previously, banks could decline the initial checks and any subsequent checks, even when the account’s balance was enough to cover them.

In practice, the reforms, which take effect on January 1, 2022, may be limited. They only apply to New York State-chartered banks (not national banks based in New York), which will cover about 80 such banks. Further, the measure is primarily focused on transaction sequencing for checks — a payment method used with decreasing frequency by consumers in the digital age.

Dems on FDIC Board May Dash ILC Hopes

With the Biden administration still working through financial regulator appointments, the fate of industrial loan company (ILC) charters may hang in the balance.

The somewhat obscure charter type allows commercial companies to hold a bank charter and insured deposits without the requirement to become a bank holding company and submit to regulation by the Federal Reserve Board. (I’ve written about ILCs previously here and here.)

After a lengthy pause in the granting of new ILC charters following the 2008 financial crisis, payments firm Square and student loan servicer Nelnet were able to win approval for their applications during the Trump administration.

The change in administration has resulted in the balance of power on the FDIC board shifting, with Democratic appointees holding 3 of 4 positions. The shift isn’t an automatic denial for currently pending or future ILC applications, but the lens through which the FDIC evaluates them may change.

While Biden appointees have demonstrated greater caution about granting charters to fintech firms, they’ve also acknowledged the opportunity of these companies to responsibly serve populations historically not well served by mainstream financial institutions. Testifying in front of the Senate Banking Committee recently, acting Comptroller Hsu said:

“We must find a way to consider how fintechs and payments platforms fit into the banking system, explore the appropriate use of sandboxes to encourage responsible innovation, and coordinate with the FDIC, Federal Reserve, and the states to limit regulatory arbitrage and races to the bottom.”

Still, the uncertainty illustrates the complexity of choosing a path toward a banking charter — a process that is lengthy, expensive, and subject to changing regulatory priorities and preferences.

According to Todd H. Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, via American Banker:

“Everyone's in this deeply unfair situation where they're spending millions of dollars based on legal advice that says they should be able to get some charter, and yet administratively, because of the Michael Hsu situation and a lack of guidance from Congress, there’s no assurance that they will be able to get one.”

Varo Preparing Expanded Lending Products?

Last week, Varo customers received an email alerting them to upcoming changes to Varo’s Advance product. While a follow-up email sent the next day indicated Varo “didn’t mean to send that,” the updated terms and conditions, which take effect on October 1, appear to pave the way for the bank to offer larger loans:

Presently, Varo Bank offers a small-dollar line of credit. Users can borrow up to $100, based on account history and qualifying direct deposits. The cost of the advance is a fixed fee from $0 to $5 based on the size of the advance.

Under the new terms and conditions, users will pay $0.50 plus 4.7% of the advanced amount on advances larger than $20; advances of $20 have no fee.

The move appears to be designed to allow for larger advance amounts.

With the new fee structure, a 14-day, $200 advance would cost a user $10, or 130% if calculated on an APR basis. While still an expensive form of credit, the cost is substantially lower than traditional forms of small-dollar credit, like overdrafts or payday loans.

Aspiration Aspires to SPAC

Environmentally-focused challenger banking product Aspiration announced its intention to go public via a SPAC merger last week. The deal would value the company at approximately $2.3 billion and leave it with over $400 million in cash to power its growth and product expansion plans.

Aspiration’s core feature set should be familiar to those who follow the challenger banking space: a spending account with debit card issued via partner bank Coastal Community; a savings account that can earn up to 1.0% APY (on up to $10,000, if user is enrolled in the $5.99/month Aspiration Plus plan); ability to get paid up to 2 days early; no-fee ATM access via the AllPoint ATM network. Aspiration also plans to launch a credit card product.

The key differentiator for Aspiration is its ESG-focus, which promises deposits won’t be used to fund fossil fuel exploration or production, a ‘personal impact score,’ and the option to ‘round up’ each transaction to pay to plant a tree.

While these features don’t represent a significant competitive moat (eg, they are copyable), Aspiration does enjoy a first-mover advantage in offering them, and they arguably appeal to higher income/credit score segments than larger rivals like Chime.

Perhaps what is most interesting about Aspiration’s SPAC presentation is the detail on how it generates revenue. The majority (56%) of its revenue comes from what it dubs “Corporate ESG Impact Services” — products and services to help companies assess and reduce their carbon footprints.

Only 11% of Aspiration’s revenue comes from interchange income and an additional 11% from consumer subscription revenue. A combined total of just 31% of Aspiration’s revenue comes from categories it defines as “Consumer Financial Services.”

To the extent that Aspiration is able to execute on this part of its business model, it has a unique revenue source vs. other challenger banks:

What will be interesting to see is what the public market makes of this combination of revenue sources from a valuation perspective. The corporate ESG-sourced revenue doesn’t fit neatly into the “tech” bucket nor the “banking” bucket, which may pose a challenge for public market investors valuing the business:

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Other Good Reads

Will Varo Bank Be the Pin that Pops the Fintech Valuation Bubble? (BankersDigest)

Venture capitalists move away from payday lending (Axios)

Facebook says ready to launch digital wallet (FT)

The World’s Biggest Crypto Exchange Still Lacks U.S. Footing (NYTimes)

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