A weekly five-point roundup of critical events in fintech, the future of finance and the next wave of banking industry transformation.
a16z Goes to London, Leaves Questions In Its Wake
What happened: Andreesen Horowitz has never opened an office outside of the U.S. When the world’s most famous venture capital firm decides to go to London, people pay attention.
Why it matters: The early backers of Facebook, Twitter, Coinbase, and Stripe, among many others, haven’t explicitly said they’re going to London because of the SEC’s recent crackdown on crypto. But the VC firm closed its largest fund ever last year, nearly $5 billion just to invest in blockchain and crypto, and it has recently praised what it calls the U.K.’s “thoughtful approach” to crypto regulation.
What’s next: London is reeling as its own version of regulatory uncertainty has caused the flight of fintech start-ups to other European capitals. Given A16Z’s stated reasons for opening the office, expect the country to all but roll out the red carpet in the form of speedy, clear guidelines around crypto. (By Tim Bradshaw, The Financial Times)
Venture Drought Hitting FinTechs as Hard as Any Industry
What happened: Venture capital deal activity is at roughly one-third what it was at its peak only two years ago. Every industry that relies on a steady stream of disruptive start-ups is affected, but maybe none more so than fintech.
Why it matters: The recent banking crisis that brought down Silicon Valley Bank and First Republic was correctly seen as a boon for some recently built, consumer-friendly start-ups. But that combination of spoils going to winners whose seed stage is far in the rearview mirror and the drying up of VC money could create a generational gap.
What’s next: Expect more creative acquisitions like one described in the piece. When seed stage start-ups have trouble raising new rounds, those more established fintechs can come in and buy them out, providing funding and an incubator at the same time. (By Yuliya Chernova, The Wall Street Journal)
Where Banks Close, PayPal Fills a Void
What happened: More than half of PayPal’s small business loan origination occurred in zip codes where 10 or more bank branches closed within the past five years. The company actual uses data like this now to direct targeted advertising and encourage more small businesses that use the payment processing technology to layer on loans as well.
Why it matters: “PayPal is part of a market of payment-oriented fintechs that offer loans on top of payment processing to small businesses. These fintechs have long attempted to outflank community and regional banks by offering faster digital approvals brd on the merchants’ existing payment track record. The overall weakness in the banking sector that followed the collapse of Silicon Valley Bank earlier this year has drawn fresh attention to this model, given the potential for community and regional banks to reduce small-business lending.”
What’s next: Copycats. American Express mentioned doing something similar in its latest earnings report, and while Block and Stripe haven’t explicitly said the same they’re also seeking out the same customer base. (By John Adams, American Banker)
The Biggest Challenge for FinTech Partnerships: Bad Tech Support
What happened: Apple made a splash with high interest savings accounts in partnership with Goldman Sachs. Now reality is setting in, and Apple, a company famous for bending over backwards for customers, is facing an unusual number of customer service complaints.
Why it matters: A lot of financial startups see a path in Embedded Finance: partnering with larger, more established companies as a means towards instant exposure to a much larger base of customers. But that model only works if the bigger, more established companies are OK with handing off tech support to startups that may lack the resources. Because if Goldman Sachs is having trouble, anyone can.
What’s next: Expect more companies that aren’t banks but might want to be to have second thoughts. If even Apple is being thwarted by regulatory delays and the lack of customer support from an equally giant partner not used to dealing with retail customer concerns, then no one is safe. (By Meaghan Johnson, Forbes)
The Long Road Ahead for Regional Banks
What happened: The downfall of some regional banks is now well understood. What’s less well known is how those that remain fight their way through the minefield to come.
Why it matters: “If you’re wondering why you’re only earning 0.4% on your savings—the average in May—it is because you’re one of those the banks are relying on for profit and survival. You could get 5% or more from an online-only account, T-bills or a money-market fund, but the bank is exploiting your loyalty or laziness. Investors are focused on understanding how long banks can continue this trick to figure out how fast deposit rates will rise, compressing margins.”
What’s next: Dividend cuts, higher capital holds and some changes in FDIC insurance. But mostly, a lot of pain. (By James Mackintosh, The Wall Street Journal)