Fintech Fire Alarms: June, 2021

A fintech shopping spree, yield as the new product wedge, and more.

Fintech moves fast and there's plenty of hype.

What's real? What should you pay attention to? What should you be worried about? What should be on your roadmap?

What's just smoke and what's fire?

Here are the five fintech trends, from June 2021, that should be setting off alarms in your organization.

1. Imitation is the most reluctant form of flattery.

What happened?

  • Capital One, OneUnited bank, LendingClub Bank, Randolph-Brooks Federal Credit Union, and Andrews Federal Credit Union have all begun offering their customers early access to their direct deposits, following in the footsteps of neobanks like Chime and Varo.

  • Ally Financial has eliminated its $25 overdraft fees and a number of other banks - PNC, Fifth Third, Bank of America, and Huntington Bank - have taken steps to limit the impact that overdraft has on their customers.

So what?

The easy narrative here is that traditional banks and credit unions are, finally, following in the footsteps of the big neobanks (Chime, Varo, Current, etc.) in delivering product features like early access to direct deposits and overdraft fee-free accounts.

Complicating this narrative is the fact that some of these product features will be easier for a majority of banks and credit unions to adopt than others. Early access to direct deposits should become table stakes within the next two years. Eliminating overdraft fees entirely will be, for many FIs, a more difficult decision. With no branch costs and limited overdraft revenue to begin with, Ally Financial was well positioned to go first. It remains to be seen how many others are willing to follow.

It'll also be interesting to see how far down the neobank roadmap most banks and credit unions go. The next big product category under consideration is credit building, which is an area that traditional FIs have traditionally avoided.

2. A fintech shopping spree.

What happened?

  • JP Morgan Chase’s UK arm will acquire personal financial management startup Nutmeg to expand its consumer wealth management offering in the UK. The bank will also acquire OpenInvest, a personalized consumer ESG investing platform and 55ip, a provider of automated tax-smart investment strategies.

  • Following its failed acquisition of Plaid, Visa will acquire European open banking provider Tink for €1.8 billion.

  • Fintech investing platform Stash acquired financial literacy app PayGrade, following the former’s growth to 6 million users.

  • Fintech partner bank Cross River Bank acquired lending risk management tool PeerIQ.

  • Fifth Third Bank announced that it will acquire Provide, a platform for healthcare practices.

So what?

With so much money floating around the financial services industry right now, it was inevitable that we'd see an uptick in strategic acquisitions.

From a bank perspective, the playbook appears to be to fill in gaps in product (JPMC — 55ip), industry (Fifth Third — Provide), or geography (JPMC — Nutmeg). This makes sense given the cultural and political challenges that banks tend to struggle with when partnering or acquiring to get capabilities that could be perceived as cannibalizing existing revenue streams.

From a fintech perspective, the acquisitions we are seeing so far seem to be more focused on product synergies (Visa — Tink, Stash — PayGrade).

In both cases, the increase in acquisitions is an acknowledgment that building everything internally isn't a feasible option in today's fast-moving environment.

3. Investigations and lawsuits and fines, oh my!

What happened?

  • Afterpay got hit with a class-action lawsuit for allegedly misleading customers in regards to the costs of its service.

  • MoneyLion disclosed that the CFPB, SEC, and multiple state regulators are looking into the company's lending and membership practices ahead of its SPAC merger.

  • Robinhood was ordered by FINRA to pay a $70 Million fine for systemic supervisory failures and significant harm suffered by millions of customers.

So what?

Here's Matt Levine (writing about one of the other times Robinhood screwed up):

In many areas of “tech,” companies are racing to do things—in virtual reality, in artificial intelligence, in surveillance and data collection—that have genuinely never been done before and that pose novel social and regulatory challenges. In many areas of fintech, though, companies are racing to do things that were done in the 1920s, before modern financial regulation came into effect, only this time with an app. The regulators know how to handle that.

Well, they're handling it.

4. Yield is the new wedge.

What happened?

  • Startups are trying to lure customers in search of yield with novel deposit solutions, like lotteries:

    • PrizePool, a lottery-based savings app, raised a $10 million Series A.

  • Yield farming:

    • Linus, a high-yield cash account & crypto provider, raised a $1 million seed.

    • UK banking app Ziglu opened new investment accounts with 5% APY up to £10,000 balances.

    • Yield, a provider of fixed-rate DeFi lending, raised $10 million.

    • Compound Labs launched Compound Treasury, which will enable fintech partners like Current to convert US dollars into USDC and deploy them for a guaranteed 4% interest rate.

  • And sometimes both:

So what?

The calculus in deposits, traditionally, was about figuring out exactly how much of a pricing increase you should offer in order to attract the 'hot money' that tends to chase the best yield.

The lower the federal funds rate is, the less ability banks have to grow through these targeted pricing changes.

With the fed rate continuing to hover just above 0% and with bank customers holding excessive liquidity thanks to stimulus checks and strong savings behavior over the last year, there's an unusually big opportunity to acquire new deposit customers if you can offer a superior yield.

This opportunity isn't going to last forever. TradFi interest rates will, eventually, go back up and DeFi interest rates from yield farming will go down as investment in various tokens continues to grow.

5. The data ownership debate is just getting started.

What happened?

  • California’s Office of Financial Empowerment released a scathing report on banks’ use of ChexSystems to deny bank accounts to low-income consumers. 

  • The House Financial Services Committee held hearings on the proposal to create a public credit reporting agency.

So what?

An under-appreciated side effect of fintech is the increased public awareness of previously-obscure companies in the financial services ecosystem; companies like ChexSystems (FIS) and TALX (Equifax).

Even well-known companies, like the credit bureaus, end up getting a lot more public attention than they are, historically, accustomed to receiving.

These companies provide critical yet deeply controversial services to banks; services that depend on the collection and aggregation of consumers' personal data without consumers' permission.

Where there is increased public awareness, regulatory scrutiny always follows. This scrutiny revolves around a single question — who owns the customers' data?

Fintech infrastructure companies are betting (wisely, in my opinion) that the answer to this question won't be in favor of the status quo.

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.

Twitter: @AlexH_Johnson