Issue #104: Visa and Mastercard Come To A $30b Settlement With Merchants, Robinhood Drops A New Product, And The DOJ Launches A Lawsuit Against Apple
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A curated round-up of the most interesting and relevant news from the world of fintech. In each issue, I focus on what caught my eye from the previous week — so don’t expect a weekly smorgasbord of press releases and partnership announcements. The aim is to serve the meaty bits in a neat, nibble-worthy package. It's all about spotlighting the head-turners and giving you the nitty-gritty without the fluff.
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As always, it’s been a busy week for fintech, so without further ado, let's delve into the major happenings from last week.
📣 The News Grab Bag
⤷ Visa, Mastercard reach $30 billion settlement over credit card fees
Visa and Mastercard last week reached an estimated $30b settlement with merchants in the United States to limit credit and debit card fees. Under the settlement, the card networks agreed to reduce interchange rates (also known as "swipe fees") by at least four basis points (0.04 percentage points) for three years and cap these interchange rates for five years.
The settlement also removes the "anti-steering" rules that previously prohibited merchants from directing customers to use cheaper payment methods. The value of the fee reductions and caps is estimated at $29.79b, with small businesses comprising over 90% of the settling merchants. The settlement is still subject to judicial approval, and its potential impact is not expected until late 2024.
🥡 Takeaway: This was THE story in fintech last week, and it had many talking about the 20-year saga that is this piece of litigation.
Some might recall when the litigation started in 2005 (before the card schemes listed on NYSE). It cast a shadow over the two prospective listings and impacted how Visa eventually listed. Specifically, they had to push the latent liability associated with the protracted litigation into a separate class of shares (Class B) at the time of listing back in 2008, and the litigation dragged on for so long that they looked to “unlock” those shares last year for member holders. What a wild piece of FS litigation.
As expected, this cost the card schemes a lot of (future) money. Undoubtedly, it will impact them in the short run with a dip in swipe fees and then into the five-year cap period. Having said this, the stock prices rallied after the news, ending the day up. I assume the market was happy to have the liability finally quantified, and along with this, I assume most see this as a short-term blip in the earnings runs of the card schemes.
What’ll be more interesting to observe is the second-order impact it could have on the card market. As the following infographic from Flagship Advisory shows, the effect will likely be mixed — depending on where you sit in the transaction flow and your bargaining power with the card schemes.
⤷ Robinhood Gold Card announced — Earn 3% cash back everywhere
Last week, trading platform Robinhood announced the launch of its new Robinhood Gold Card. This premium credit card offers users a 3% cash back on all purchases, with no limit on the amount that can be earned. To be eligible for the Robinhood Gold Card, consumers must first sign up for a Robinhood Gold membership, which costs $5 per month or $50 annually.
In addition to the 3% unlimited cash back on general purchases, the Robinhood Gold Card also features 5% cash back on travel-related expenses. Furthermore, cardholders will not incur foreign transaction fees when purchasing abroad. The physical card is a real statement piece designed with a thick, gold-plated material.
🥡 Takeaway: Robinhood has been busy recently, with a slew of new products hitting the market. You might recall that two weeks ago, Robinhood announced it was opening its doors to customers in the UK. Along with these new offerings, they’ve been getting aggressive with customer acquisition, offering unlimited 3% match on IRA transfers and 401(k) rollovers for gold members and 1% for everyone else earlier this year.
This new card clearly fits in the “expanded” quadrant of Robinhood's strategy. The company is seemingly seeking new ways to reach its existing customer base while potentially luring prime customers from other credit card offerings.
Shortly after the card's announcement, Fintech Twitter pounced and pointed to the delicate financial balance they’ll need to strike to make this card work.
Part of the magic in making the economics work will come from cross-selling customers into trading more. As banks have known for a while now, a credit offering needs to sit in an ecosystem of higher-margin offerings to make the economics work—the classic being home loans in the case of a bank. Having worked on the revenue modelling of card programs, I can tell you the economics are challenging, and most underestimate the overall costs of running these programs — especially if it’s a net new offering.
Having said this, in June of last year, Robinhood announced it was acquiring the credit card startup X1, which is likely providing much of the know-how and backend piping to make this offering work.
My guess is it’ll take some time for Robinhood to “tune” the economics of this product — and it’ll likely come with the ratcheting down of the cash back. What I’ll be fascinated to see is whether it actually works to uplift trading as a cross-sell.
⤷ Digital wallets play key role in US lawsuit against Apple
The Department of Justice (DOJ) has launched a lawsuit against Apple, alleging that the company has engaged in anticompetitive practices to maintain its monopoly in the smartphone market. The lawsuit specifically focuses on Apple's control over third-party wallets and apps.
According to the DOJ's complaint, Apple has "inhibited the creation" of cross-platform, third-party digital wallets by preventing third-party apps from offering tap-to-pay functionality. This has allegedly stifled the development of apps, which would make it easier for consumers to switch between smartphone brands without losing access to their digital wallets and other services.
Apple has denied the allegations and is expected to file a motion to dismiss the case soon. The legal battle is expected to be lengthy, with a trial potentially taking place in a couple of years or more and potential appeals following.
🥡 Takeaway: The DOJ is back at it with Apple (once again) in its crosshairs. What’s interesting about this action is that they’re coming after Apple Wallet, among other products, with a claim raised by banks in different markets for a while.
Specifically, they allege that the company's policies regarding digital wallet apps and payments create an unfair monopoly. The DOJ wants to allow more third-party wallet apps to compete with Apple Wallet and force Apple to give developers access to the iPhone's NFC technology and contactless payments—similar to what it has been forced to do in the EU.
As you might expect, Apple has defended its practices, saying the lawsuit “threatens who we are and the principles that set Apple products apart” and would “hinder our ability to create the kind of technology people expect from Apple.” The safety and consumer protection angle Apple is now using fairly consistently as their defence.
As much as Apple seems to make headway in branching out and cleverly building a wide-reaching financial services ecosystem through partnerships (and all without having to be a bank), it always seems that they hit roadblocks—namely regulators. I’m interested to see if this dampens their seemingly growing appetite to venture deeper into the world of FS.
⤷ EU banks worried about 'unrealistic' instant payment deadlines
According to a recent survey, many EU banks are worried about meeting instant payment deadlines by January 2025. The article notes that banks benefit from instant payments but are concerned about the deadlines and processing scale. To meet new SEPA rules, banks may need to increase IT budgets and explore alternative approaches.
🥡 Takeaway: Surprise, surprise, banks need more time to implement a change to their systems. As noted in previous issues of FR, this might seem like a small change, but it brings the EU one step closer to offering a unified instant payment network. For fintech startups operating as EMIs, this could also be incredibly valuable as they could now access this network under proposed amendments to the settlement finality directive (SFD).
I hope we see the EU stand firm on this, as banks look to once again complain about the nuisance it is actually to modernise their systems for the benefit of customers. Cry me a river.
💸 Notable Funding Announcements
Last week was more upbeat for fintech financing announcements, with 67 funding rounds completed and companies collectively securing $836m in investment.
⤷ ZayZoon Raises $15M in Series B Extension from Viola Fintech and Intuit Ventures
ZayZoon, an Earned Wage Access (EWA) provider for small and mid-sized businesses, has raised $15m in a Series B extension round, bringing the total Series B funding to $49.5m. The round was led by Viola Fintech, with participation from Intuit Ventures and existing investors Framework Venture Partners and Export Development Canada (EDC).
According to the press release, the financing will support ZayZoon's continued growth, innovation, and expansion. The company notes it has experienced significant growth in the past two years and aims to empower individuals to have better control and flexibility over their finances.
🥡 Takeaway: During the ZIRP era, the EWA segment ripped, with several startups formed to take advantage of the funding environment. As employee benefits became increasingly crucial for employee retention, EWA was marketed as an additional tool in the battle to keep high performers, particularly to companies in high-turnover industries such as hospitality.
Despite some obvious economic challenges EWA startups currently face, the industry has continued to grow steadily. There are a few ways to interpret growth in the segment. Depending on your vantage point, it could range from a more modern way for employees to access their hard-earned income to alternative payday lending.
Not unlike BNPL in several markets, EWA falls into a regulatory grey zone. This ambiguity has led to a patchwork of regulatory approaches across the United States — which, to be fair, is par for the course when it comes to fintech in the US. For instance, in Connecticut, EWA services are currently banned unless they comply with specific provisions of the state's small loan laws. From a federal perspective, guidance from the CFPB is still pending.
I might be in the minority on this one, but EWA (in its less usury forms) feels like it has its place in the modern workplace. What is less clear is the model that will win in the segment. Will it be the B2B approach or the D2C one that wins? My guess is that given the regulatory headwinds when it comes to dubious consumer lending products in most markets, the B2B EWA startups are the likely winners.
⤷ Goalsetter raises $9.6m to help families build wealth
Goalsetter, a US financial education platform, has raised $9.6m in a Series A extension round led by an affiliate of Edward Jones and MassMutual.
Goalsetter works with banks and credit unions to provide families with an app and debit card combination for children, educational tools, and parental controls.
The funding will be used to target more partnerships with financial institutions and launch live bank and credit union product implementations to expand their reach.
🥡 Takeaway: Unlike EWA, this segment is one that people will universally agree is a net good for consumers. Providing kids with education on managing their finances and financial products that actually put these learnings into practice feels like a no-brainer.
Beyond this, the segment is valuable—seriously valuable. This article broke down what the CBA’s Dollarmite account could be worth to the bank and pegged it at $10bn, which feels in the ballpark of its value to a large consumer-focused bank.
What’s interesting is that despite this prodcut having a clear market, valuable consumers, and providing a clear benefit to them, we’re yet to see a massive business being built in the segment.
Part of the reason is that this is a looooong play before a startup can even begin to unlock a consumer's value. The other reason is that the willingness to pay for education in a segment where value isn’t fully realised until a person is much older is inherently low.
This is likely why startups like Goalsetter are moving from a D2C model to one more focused on packaging their offering as a white-label product for large FS players.
The other place I think we might see more of this approach start to play out is the more established neo-banks starting to think a little more long-term and building their pipeline of consumers from a much earlier age. For example, Revolut offers a teen-focused product called Revolut <18. I’m sure it won’t be long before we see this become a more standard offering from the rest of the pack.
If you’re interested in reading more about the segment, check out this previous issue of FR.
🎧 Resources & Recommendations
⤷ A Crash-course in Global Payments with Brex COO Camilla Matias Morais
In this episode of the "Run the Numbers" podcast, host CJ engages in a wide-ranging and insightful conversation with Camilla Matias Morais, Brex's Chief Operating Officer. The discussion covers various topics, from the monetisation strategies employed by fintech startups to the nuances of revenue generation and the differences between B2C and B2B fintech business models. It’s a fascinating conversation and well worth a listen.
⤷ Why Software Is Eating The Banks — Mercury CEO Immad Akhund, Then Lead Bank CEO Jackie Reses
In this double header of an podcast, Eric Newcomer chats with Mercury’s CEO, Immad Akhund and Lead Bank CEO Jackie Reses at the Newcomer Banking Summit.
I’ve shared a fair few podcasts with Mercury’s CEO, Immad Akhund, but their always worth a listen. In this podcast, Newcomer asks him some great questions about how Mercury dealt with SVB’s meltdown and he also delves into Mercury’s future plans.
In his conversation with Reses, Newcomer delves into the weeds on Lead Bank. He probes into the specifics of why Reses chose Lead Bank as the platform to execute her vision for a modern infrastructure focused bank, and also explores a range of questions about how the community bank operates - servicing both local businesses and high-growth startups. It’s a great conversation and well worth a listen.
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