Fintech Fire Alarms: November, 2021
A first-party fraud fiasco, alternative investment assets, and more.
As an early present (because I know you’ve all been on your best behavior this year), I have a double helping of fintech content for you this week.
First, my monthly recap of the five most interesting fintech trends from November, 2021 (found below). And later this week, a Fintech Recap podcast with Jason Mikula (and a special guest) breaking down some of the more interesting fintech news headlines from the past month.
Subscribe to Fintech Takes here, if you haven’t already, to ensure you receive the podcast as soon as it drops. You can also subscribe on Apple Podcasts or Spotify.
And without further ado, the five fintech trends from November, 2021 that caught my eye:
Fintech Acquisitions: Eat or be Eaten
The Platonic Ideal of a Distribution Model
Fintech’s First-party Fraud Fiasco
Crypto Solves Payroll?
The Long-term Sustainability of Alternative Investment Assets
1. Fintech Acquisitions: Eat or be Eaten
Personal investing platform Vestwell acquired Sumday, a college savings platform, from bank BNY Mellon.
BM Technologies, a neobank, will merge with Seattle-based First Sound Bank.
Oportun, a consumer lending platform, will acquire neobank Digit for $212.9 million.
Financial services marketplace MoneyLion acquired content creation platform Malka.
Klarna continued its acquisition spree by buying out PriceRunner, a Nordic shopping comparison site with 3.4 million products from 22,500 retailers in 25 countries, and browser extension Piggy.
I wrote recently about the trend of banks acquiring fintech companies, which I expect we’ll continue to see in increasing quantities.
That said, we are also seeing an uptick in the number of acquisitions being made by fintech companies. Even if you discount Klarna’s crazy shopping spree — like cutting out Olympic scores from the East German judge — you are still left with a myriad of interesting examples. You have fintech companies acquiring non-financial products (MoneyLion). You have fintech companies acquiring other fintech companies in adjacent verticals (Oportun). You even have fintech companies acquiring fintech companies from banks! (Vestwell)
Fintech companies are now getting a taste of what community banks in the U.S. have experienced for decades — an environment in which you are always either eating or being eaten.
2. The Platonic Ideal of a Distribution Model
Klarna is moving from shopping facilitator to e-commerce destination with the launch of its global one-stop shopping app.
Afterpay launched buy-now-pay-later for subscriptions in the US.
CommBank's venture arm launched a machine learning shopping app for Gen Z.
If you provide a payment or lending product, the Platonic Ideal for distribution is for that product to be the last step — the obvious and unscrutinized conclusion — in a much longer journey that you control and orchestrate.
The initial form of BNPL was a distribution model based on merchant partnerships. The ideal form of BNPL is a distribution model based on a highly engaging, always-on digital shopping assistant.
That’s basically what Klarna and Afterpayare building. And it’s what CommBank in Australia is, in a somewhat clumsier way, trying to build with its Cheddar shopping app.
3. Fintech’s First-Party Fraud Fiasco
First-party fraud is reportedly becoming a big problem at big neobanks like Chime and Cash app.
Neuro-ID, an anti transaction fraud platform, raised a $35 million Series B.
Everyone should really read this Forbes article on fraud in neobanks. Parts of it were legitimately shocking to me:
HMBradley, a three-year-old, Santa Monica-based online bank with $375 million in assets, saw a startling rise in fraud coming from the transfers it gets from Chime and Cash App accounts. The schemers would typically open an HMBradley account, then connect it to an existing Chime account. They’d request to transfer funds from Chime, and when the money reached HMBradley, they’d quickly ferry it into a third bank account. Often, the funds HMBradley was pulling in from Chime didn’t exist—and that’s possible because of the way the U.S. bank-to-bank transfer network, or the Automated Clearing House (ACH) system, works.
While HMBradley typically only sees about $500 worth of fraud per month, in May it lost tens of thousands of dollars, split between Cash App and Chime users, according to CEO Zach Bruhnke. To stop the bleeding, Bruhnke put longer holds on transfers so that a customer trying to pull in funds from a Chime or Cash App account would have to wait a few more days to see the funds arrive in HMBradley.
Chime CEO Chris Britt again prefers to shift the blame. He says that small companies like HMBradley and One “probably don't have the same level of sophistication in terms of how to process things like ACH transactions and transfers from online accounts.”
It’s not often you see fintech companies go on the record talking about the fraud problems caused by other fintech companies. Nor do you typically see the CEO of one of those companies blaming the fraud on the other companies’ lack of sophistication.
What many of these reported problems come back to is first-party fraud — the use of fraudulent tactics by customers under their real identities and accounts, much of it involving the U.S.’s antiquated ACH payments system.
First-party fraud is a notoriously difficult problem to solve (or even identify), which is why I am playing close attention to the field of behavioral biometrics (and companies like Neuro-ID) which has the theoretical capability to divine a new user’s intent, which could be extremely useful in detecting users planning to commit first-party fraud.
4. Crypto Solves Payroll?
UK fintechs Mode and PayEscape are partnering to let people accept their payroll in bitcoin.
Zebec Payroll, a Solana-based payroll provider, raised $6 million.
There’s a lot of talk in crypto and DeFi circles about the need for better on-ramps. And rightly so! Most corners of crypto are still legitimately terrible to use for neophytes.
One approach to solving the onboarding problem would be to build the on-ramps at the very beginning of the process — enable consumers to get their paychecks (or a portion of their paychecks) directly in crypto.
I can see the appeal of this idea to crypto builders and investors that want to convert more mainstream consumers into crypto users. I’m just not sure I see the appeal for the consumers themselves.
Zebec Payroll makes the case that this capability can unlock the ability for real-time, streaming wages:
“What we are basically enabling is making money continuous,” Zebec CEO Sam Thapaliya told CoinDesk in an interview. “Imagine I send you $100 over 10 days, and you’re receiving money every single second. It makes money programmable. It makes money a continuous flow and enables completely new possibilities for how money can function in the world.”
But … like … we could do this with non-crypto technology as well, right?
5. The Long-term Sustainability of Alternative Investment Assets
Yieldstreet launched a fund for small investors to bet on art.
This is part of a much larger trend — the democratization of the ability to invest in fractions of basically anything. Classic cars. Fine wines. And, of course, art.
What’s interesting about these investment offerings is the way they try to blend the financial (consistently strong, stable returns) with the aesthetic (invest in things that are beautiful and/or interesting). Here’s Yieldstreet’s Managing Director and Head of Art Finance, Rebecca Fine:
Most collectors also prefer to buy art to put it on their walls rather than simply buying for profits. Fine said that while the details are still in development, the company is planning events where investors can view the artworks and learn more about collecting from art experts and artists.
“The experiential aspect will be a big part of the platform,” Fine said. “Ideally we’re hoping to inspire them to not just invest, but buy physical art and build more of their own collection.”
My question is how well will these fractional alternative investments hold up, as an asset class, when interest rates go up and retail investors are left with a comparatively less attractive investment that they can’t actually show off in their homes?
Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.
Afterpay’s dive into the subscription economy fascinates me. It seems like they are going to build basically the opposite of TrueBill. Instead of helping customers keep track of subscriptions and easily cancel unwanted ones, Afterpay could make it easier to sign up for more subscriptions and smooth out the payments so you don’t even notice them anymore.
I have heard first-party fraud compared to a black hole, which is an apt analogy. Check out this blog post for a more detailed deep dive on this point.
If you’re not already, you should follow Frank Rotman’s trip down the crypto/DeFi/web3 rabbit hole. His observations on what’s working and not working are incredibly insightful.
Happy to have the debate about the relative costs of crypto vs. ACH. We should also factor in the value of paychecks being deposited in FDIC-insured bank accounts rather than uninsured crypto wallets.
Worth noting — Yieldstreet’s new art equity funds have a minimum investment requirement of $10,000 (with a 5-year holding period), which seems like a big ask for most retail investors.