OBSERVATIONS FROM THE FINTECH SNARK TANK
It seems unfair to name winners and losers in fintech for
2020. We should give the losers a pass because of the year we just had, right?
This is the Fintech Snark Tank, folks—pity is for pansies. Let’s get to the
lists.
The Winners
1) Stripe
With plans to raise another round of funding that could
value the company at nearly $100 billion, no fintech company is as hot as
Stripe. And the ratio between the firm’s valuation and the number of people who
know what Stripe does is astronomical. The payment acceptance company
benefitted greatly as the global pandemic forced people to buy online instead
of in-person.
But that’s not the only reason Stripe is a fintech winner
for 2020. It continues to innovate and recently announced the launch of Stripe
Treasury which will:
“Enable platforms like Shopify to offer merchants access to
financial products. Platforms can offer users interest-earning accounts
eligible for FDIC insurance and enable customers to have near-instant access to
revenue earned through Stripe, and then: 1) spend it directly from their
balance with a dedicated card, 2) transfer it via ACH or wire transfer, or 3)
pay bills.”
2) Chime
Another fintech whose recent funding yielded a huge valuation,
Chime makes the list not because of its valuation (which can’t possibly hold up
to the scrutiny of reality), but because of how it’s winning customers. While
many challenger banks (and now legacy banks) prattle on about their “customer
experience,” Chime gains customers through product “featurization:”
- Early access to their money. Nearly a quarter of
Chime customers said they chose the fintech as their primary bank because it
offering 2-day early access to their direct-deposited paychecks, as well as
because Chime offered early access to government stimulus and tax refund
checks.
- Spot Me. This product feature lets Chime
customers make debit card purchases that overdraw on their accounts with no
overdraft fees. Chime customers with monthly direct deposits of $500 or more
are eligible to enroll.
- Credit-builder credit card. Chime’s
predominantly low- to middle-income consumers aren’t in the crosshairs of the
big credit card issuers’ marketing efforts. According to Cornerstone’s
research, 15% of Chime’s primary banking customer base either has the card or
is on the wait list for the card—all within six months of launching the card.
3) Cross River Bank
A leader in the bank-as-a-service space, Cross River earned
its spot on the Winners list thanks to the Paycheck Protection Program (PPP).
Through August, Cross River was the 12th leading PPP lender from a dollar
volume perspective.
Cross River started the year with roughly $2.5 billion in
assets. The smallest bank among the 11 banks who issued more in PPP loans was
Zions Bank, about 30 times larger than Cross River, with more than $71 billion
in assets.
In terms of number of loans, Cross River was the
third-largest lender behind Chase and Bank of America. Both of the megabanks
had average loan sizes dwarfing that of Cross River’s, an indication that Cross
River was serving the truly small small businesses in need of help during the
pandemic.
Cross River accomplished all of this, of course, through a
network of fintech partnerships that included firms like Kabbage, BlueVine, and
Gusto.
So what happens after the PPP ends? Cross River’s SVP of
Public Affairs Phil Goldfeder says:
“We're probably going to invest a significant amount of
money in developing a small-business lending program to capitalize on those
relationships and offer the small businesses the services that they need.“
And they have a good chance of doing so—roughly half of
small businesses with $100,000 to $5 million in revenue are likely to look for
a new banking relationship in the next year according to research from
Cornerstone Advisors.
4) Shopify
The global eCommerce platform processed more than $5 billion
in sales over Black Friday/Cyber Monday (BFCM) this year—a 76% increase over
its 2019 volume. According to eSellerCafe:
“Over the past few years, the Shopify platform grew to power
over a million online stores, including launching a fulfillment service similar
to Amazon FBA. Recently, the company also partnered with Walmart to enable
Shopify store owners to tie into Walmart.com’s marketplace platform, a tie-up
that was promoted by Walmart and Shopify and clearly aimed at Amazon.”
It’s not just the BFCM volume that earns Shopify it’s place
on the podium—it’s how it is advancing embedded finance (more specifically,
embedded payments). The company’s Shop Pay offering: 1) enables customers to
get one-tap checkout and 0% installment payments (i.e., BNPL), and 2) promises
merchants faster checkout speeds and reductions in cart abandonment.
In addition, the company announced that it will use Stripe
Treasury (see Winner #1) for Shopify Balance. According to TechCrunch, “if a
Shopify merchant wants to hold money, pay bills and spend money from their
Shopify account, they can open a bank account in Shopify Balance directly.”
Honorable Mention #1: Drive-Through Banking
If you would’ve told me in January that drive-through
banking would be big in 2020, I would’ve had a good laugh. With the mass bank
branch closings, however, branches with drive-through windows were saviors for
many bank customers this year. Don’t expect to see drive-through banking on the
winners list in the future, however.
Honorable Mention #2: Embedded Finance
The fintech buzzword of the year award definitely goes to
“embedded finance.” Every VC firm in the industry jumped on this bandwagon as
fast as they could. And for good reason, as it certainly is a growing trend.
But the term itself will—as so many buzzwords do—come to lose meaning over the
next few years. Why? Because embedded payments is very different from embedded
lending which is very different from embedded banking.
The Losers
1) Credit unions
It hurts to name credit unions as one of the losers in
fintech and banking for 2020, but the numbers don’t lie.
According to a consumer study conducted in January 2020 by
Cornerstone Advisors, 14% of US consumers started the year calling a credit
union their primary provider.
A mid-December study from Cornerstone found that percentage
had shrunk to 10%.
In July, CUNA Mutual projected that credit union membership
growth would fall to 1.5% in 2020 and climb back up to just 2% in 2021 and
2022—half the growth rate credit unions achieved from 2016 through 2018.
Sure, many credit unions’ growth plans were stifled by the
pandemic in 2020 as many consumers turned to the megabanks and digital banks to
open new accounts.
But it wasn’t just this year’s pandemic that puts credit
unions in the loser column. Since Q3 2017, the percentage of new checking
accounts being opened at credit unions has dropped from 18% in Q3 2017 to 8% in
Q2 2020.
Not all credit unions were “losers” in 2020, of course—there
are many who did very well this year. It’s the credit union industry that’s
making this list. So don’t @ me to give me grief about how great your credit
union performed this year.
2) Robinhood
Speaking of grief, I got a lot of it for putting Robinhood
on last year’s loser list, and I’m gonna get more for putting the company on
this year’s list. But it seems like every week that the company is in the news
being accused of something by somebody.
The most recent somethings/somebodies were: 1) a $65 million
settlement with the SEC over charges that Robinhood failed to disclose its
relationships with firms it uses to process trades, and 2) charges by
Massachusetts regulators that the company exposed investors to unnecessary
trading risks.
Earlier in the year, the trading platform got unwanted
attention when a 20 year-old customer committed suicide after seeing a $730,000
negative balance.
I’m having trouble reconciling Millennials’ claim that they
want to do business with companies whose values align with theirs and the
number of them doing business with Robinhood.
3) OnDeck Capital
In July 2020, OnDeck was acquired by Enova for less than 10%
of what the small business lender’s market value was in 2015. According to
American Banker:
“At the end of June, 39.5% of OnDeck’s loans were at least
15 days past due, up from just 10.3% three months earlier. In May, the company
temporarily stopped originating new loans.”
Ouch.
After suffering nearly $95 million in losses its first two
years as a public company, OnDeck launched a subsidiary to provide digital
lending technology to banks, but it was too little too late for the company.
The bank market is still in need for better digital lending
tools, however, so Enova may emerge one year on the Winners here for having
acquired OnDeck for a steal and growing it into a sustainable tech vendor.
Dishonorable Mention: Megabanks
The megabanks did their reputations no favors this year when
they prioritized their existing lending customers over their deposit customers
when the Paycheck Protection Program launched, and even worse, prioritized
their larger business customers over the smaller ones.
Last Words
There are common themes running through these lists:
1) The shift to digital created winners like Stripe, Chime,
and Shopify—but losers like credit unions.
2) The growing importance of small business in the banking
world helped put Cross River on the winning side, but the difficulty in
profitably lending to small businesses forced OnDeck onto the losers list.
3) Embedded finance offerings from Stripe and Shopify helped
to solidify their dominance in the fintech world.
The thing to remember, though, is that this year’s winners
could easily be next year’s losers—and vice versa. Let’s see how 2021 plays
out.
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