Issue #26: Chime's Valuation Hits $14.5b, Kraken Becomes A SPDI And McKinsey Thinks Fintechs Are Facing An "Existential Crisis" 😬

👋 Hi, FR fam. I hope you’re all staying safe and sane out there. Let’s get things started this week with some Open Banking real talk.

It’s easy to riff about how Open Banking (or CDR in Australia) is a big deal - I know I’ve done it in previous issues of FR 😂. However, sometimes it feels like the hype is ahead of actual implementations. This data from Swedish open banking aggregator, Tink, shed’s some light on where FSIs are actually investing their cash when it comes to Open Banking.

According to their survey of 290 financial executives from 12 Europen countries, digital identity services hold the top spot along with KYC process automation. Although unsurprising, it again indicates where the real pain points are for most FSIs - identifying customers and monitoring their activity.

Revision of the Volker Rule might mean we see an influx of new bank VC funds. Google pulls Paytm from the Play Store for violating their gambling policies (but then proceeded to let them back in). The future of fintech in Southeast Asia is looking bright. Banks and fintechs in the UK pledge to play nice with each other. Brex decides to become a remote-first company. The Fintech50 2020 from FintechCity (Europe) dropped this week, and the top three are all financial infrastructure companies. Last week a new European BaaS player launched out of the startup studio, eFounders. How Klarna works, a UX case study. Marcus from GS gets insightful with some new features.

It’s was a massive week for fintech fundraising, with 22 deals sweeping up $2.19b in capital 😯

💸 Chime Becomes The Most Valuable B2C Fintech Startup In The US

Last week Chime announced they’d raised a $485m Series F round of financing, which now values the company at $14.5b. The round had participation from Tiger, ICONIQ and General Atlantic, Dragoneer, and DST Global.

🤓 My Take

This was a sharp up-round for the challenger bank and almost tripled their valuation - taking them from $5.8b to $14.5b val. The uplift in valuation makes them the most highly valued B2C fintech startup in the US - narrowly edging out Robinhood.

However, I think the valuation uplift is not as interesting as the fact that (as TechCrunch pointed out in their coverage) Chime has now become “profitable on an EBITDA basis during the pandemic.” According to TC, who sought clarification if this was on an adjusted basis, this is “true EBITDA,” - which is impressive.

It’s interesting to contrast this with the recent discussion around how UK banks are struggling to navigate their way to profitability and having to raise at deep discounts. Obviously, there are divergent views as to whether this is indeed the case or simply the story some media outlets have choose to run with - and as with most things, it’s likely to fall somewhere in the middle. Regardless, it’s becoming clear that there are structural differences between the UK and US markets, which are supercharging the growth of the neos in the later. It seems that most of this relates to both how the big US neos are monetising (thanks Durbin Amendments) and the target demography they’re going after - which for most has been underserved Americans.

For example, in the case of Chime, their core customers are those Americans who are earning between $30,000 and $75,000 a year. Further, they don’t currently offer lending products, don’t charge account or overdraft fees. As you’d expect, this means that the business is heavily reliant on interchange revenue, which works when you’re adding “hundreds of thousands of accounts a month,” as Chime claims to be doing at the moment. As Chime CEO, Chris Britt notes:

We're more like a consumer software company than a bank… It's more a transaction-based, processing-based business model that is highly predicable, highly recurring and highly profitable.

However, the flip side to this is that an interchange based business model narrows the range of exit opportunities. For example, due to the Durbin Rules, incumbent banks are unlikely to look at an acquisition. Running profitably is great - but as we’ve seen, most of the neo bank players still need capital support (read as: venture dollars) to grow their acquisition channels. This really only leaves the IPO route as a liquidity event.

In the case of Chime, this doesn’t matter as much, as they are signaling they plan to go public and should be “IPO-ready” in 12 months - which I think many in fintech land are eagerly awaiting.

💰Affirm And Klarna Both Get The Bag

Last week both Affirm and Klarna announced big rounds of funding.

Affirm announced a $500m Series G round of funding. GIC and Durable Capital Partners LP led the round. This raise brings the total capital ingested by Affirm to an eye-watering $1.3b.

Klarna also announced a monster round of their own last week. The BNPL player rasied $650m in their latest round, bringing their valuation up to $10.65 billion. As the press release notes, this makes Klarna the highest-valued private fintech in Europe. 

🤓 My Take

As I’ve discussed in previous issues of FR, BNPL is running hot. There are many ways to dissect the rise of the sector - everything from the growing dislike of credit by Millennials, the increasing rate of savings amongst Millenials through to the use of technology over ‘plastic’ to manage finances. Regardless of which angle you come at it from, it’s clear that it’s becoming the preferred method of payment amongst this much sought after segment of the market.

In Australia, we’ve had a front-row seat to the rise of the BNPL sector, with seven companies now listed on the Australian Stock Exchange - including the OG BNPL startup, AfterPay. In this regard, I think the Aussie experience is illustrative of the broader market trend around BNPL and is worth briefly discussing.

Before COVID19, if you took a walk down any high street in Australia, you’d notice the proliferation of BNPL company stickers on the windows of retails. The increase in the level of competition was noticeable.

Now, as the move online continues to accelerate, the same has started to occur with online retail - the battle to be the BNPL checkout button of choice is also visibly intensifying. Much of this is being driven by all the players clamoring to accumulate sufficient scale - after all, beyond exclusive lockup deals, the only thing approaching what looks like a moat is scale. When you combine this with the entry into the BNPL space of incumbent players like Visa and Paypal, it’s relatively clear the market is becoming increasingly crowded.

Given the winner takes most dynamics of the market, I think we’ll continue to see VC dollars pile in (brrrrrr go the VCs), meaning more mega-rounds, probably some futher consolidation, and the BNPL’ifcation of every product you can imagine. Now, who wants a slice of pizza… over four monthly installments?

Zip Pizza Hut

📈 Kraken Becomes First Crypto Exchange to Charter a US Bank

I have to admit, I went down the rabbit hole on this one.

Let’s start with some background. Late last year, the Wyoming Legislature enacted HB 74, which created a new type of deposit-taking institute called a special purpose depository institution (SPDI). The Wyoming Division of Banking website (which might be the only site left on the web built on GeoCities) explains that:

These institutions are banks that receive deposits and conduct other incidental activities, including fiduciary asset management, custody and related activities. It is likely that many SPDIs will focus heavily on digital assets, such as virtual currencies, digital securities and utility tokens. SPDIs may focus on traditional assets as well.

Sounds cool, right? I think so too.

However, for fintechs, it’s important to note that these entities can’t lend out customer deposits of fiat currency - which means that fractional reserve banking with these entities is a no go. For crypto exchanges this isn’t a big deal as they generally only play a custodial role and don’t rely on lending as a part of their business model. However, for fintechs with aspirations to balance sheet lend, this could prove to be too limiting a vehicle.

So why bother going through this process of becoming a bank if you’re a crypto exchange? One of the big issues for many exchanges is banking relationships. This solves that problem in a meaningful way. Specifically, you don’t have to live in fear of imminent debanking. Having said this, and an important caveat, it seems that for an SPDI to gain access to a master account at the Federal Reserve Bank of Kansas City (meaning it can deposit funds at the Fed and gain access to the global payments rails), it will still need to apply to the Federal Reserve Bank of Kansas City and this is examined on a ‘case-by-case’ basis.

Beyond solving the issue of being debanked, it’s likely to open the aperture on the types of products a crypto exchange can offer. For example, offering IRA accounts could be on the table.

Kraken is the first to take the leap, but I can see others quickly following.

😬 Fintech Sector Faces "Existential Crisis," Says McKinsey

After reading this headline, you know I had to hunt down the actual report and read the thing - you can find the full paper HERE if you’re keen on reading it too.

To be honest, the paper doesn’t really say anything new. As you’d expect, it highlights the challenges of running a neobank without a lending model, the risks in a downturn of being a mono-line fintech, and the impaired funding landscape for some challenger banks. To be fair, the report is worth checking out for some of the data it provides (albeit sometimes it’s slightly hard to decipher).

In classic consultant style, the paper helpfully provides four “emerging imperatives” that challenger banks should look into. These being: (1) targeted retrenchment combined with big bets, (2) leaning into next-normal behaviors, (3) business model course corrections, and (4) fueling growth through M&A and joint ventures. Thanks, McKinsey!

Michael Saylor On Buying Bitcoin With His Balance Sheet → In case you haven’t heard, Michael Saylor’s publicly listed company, MicroStrategy, has decided to drop ~$425m of its $500m cash reserves into bitcoin. As you can imagine, ‘coiners have lost their collective minds and have welcomed him into their cult with open arms.

If you’re keen on hearing the ‘why’ behind the move, have a listen to this pod.

My personal favourite tidbit for the podcast was that MicroStrategy bought the second tranche of bitcoin (~$175m) over 74 hours. As Messari Capital notes in their paper on the strategy, this means they executed 88,617 trades of 0.19 BTC (~$2k) every 3 seconds and all without moving the market. Very impressive.

Understanding Consumer Fintech in China with Linda Jiang and Yi Luo → I love hearing from people who have spent time in the Chinese fintech ecosystem. Specifically, I’m always interested in getting the ‘compare and contrast.’ This pod is a great one for just that.

The Future of Wealth Management and Self-Driving Money with Chris Hutchins → This podcast is from a few months back. Still, it's an excellent conversation about self-driving money from the firm that’s pioneering its mass-market adoption. Well worth a listen👂

📈 You can check out Radar, an open database of Australia's fintech ecosystem. You can find it here  📡 SideFund Radar

📧 Feel free to flick me an email if you have any exciting news you'd like me to share with the FR community. I'm and @alantsen on the Twitters.

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