Issue #6: Bye Bó, Tencent Takes A Stake In Afterpay And Stash Gets The Bag.
👋Hi, FR fam. I hope everyone is keeping safe and sane.
I assume, like me, you all tuned into the 2020 Berkshire Hathaway Annual Meeting to hear from the Oracle of Omaha himself. I trust you didn’t miss this slide 😂
🥊 Round 2. Fight!
This week round 2 of the Paycheck Protection Program (PPP) loan scheme went live in the US. By way of background, the second round of the scheme was a $US310 billion top-up on the $US350 billion that was loaned out in the first round of the program - just two weeks ago.
As you’d expect, this surge in loan volumes has put enormous pressure on the SBA’s systems. For example, E-Trans, the infrastructure which all banks need to submit their loans through, has experienced 100,000 times its regular volume.
To get a sense of the size of the task, this joint quote from Small Business Administration (SBA) Administrator Jovita Carranza and U.S. Treasury Secretary Steven Mnuchin puts the PPP scheme’s scale into perspective:
“Following its launch, the SBA processed more than 14 years’ worth of loans in less than 14 days…”
For the second round, fintech startups were able to process loans from the moment it opened up. However, there were only ten fintechs directly authorised to participate. These were:
PayPal
Quickbooks
Square
OnDeck
Funding Circle
Kabbage
Bluevine
Credibly
Fundbox
In addition to the above, some startups partnered with banks to provide loans. You can find a full list of startups and BaaS providers I compiled in the following Airtable.
One critique that many have leveled at the program is that it has not been able to reach those who truly need it the most. Specifically, the sole traders and the micro-SMEs who don’t, for example, have established relationships with banks. Jackie Reses, Square Capital lead, articulated this perspective in the tweet below (I’d also recommend reading the full thread).
Over the last few years, the SME lending space has been evolving rapidly, with many of the OG fintech lending startups opening the market up for a plethora of new providers of liquidity to SMEs. More recently, we’ve started to see startups who initially used business management software (think, Square, Paypal, and Shopify) as their wedge starting to offer loan products. These players have been using their embedded relationships (and thus distribution channels) to deliver data-driven loan decisions that can be made almost instantly. Further, the ability to collect their repayments directly also help to drive down impairments.
I predict there’ll be an acceleration in the trend of business owners unbundling their daily banking and moving the liquidity management function (i.e., lines of credit) from incumbent banks to their business management software providers (e.g., Square and Shopify Capital). Post COVID-19, not only will many SME owners remember the digital-first experience (see, for example, the Square Capital user journey below), many will also remember that these companies were there for them when they needed it the most.
💰 Notable Funding Announcements
This week Stash, the US-based challenger bank, closed an impressive round of financing. The $112m Series-F was led by the publicly listed online lender, LendingTree, and had participation from some notable late-stage funders, including T. Rowe Price and Breyer Capital.
Stash has been quietly growing it’s user base and announced they hit 1m customers earlier this month. The article notes that their average customer is 29, and their average income is less than $50,000 per year - which probably raises some questions about the current unit economics. Given the heat currently in the US challenger banking market, it’ll be interesting to see if this helps them accelerate against the likes of Chime (which has 5 million customers) and the British inbounders.
Oriente this week announced a $50m round that had participation from the notable corporate venture investor, Wix.com (??!?).
For those who haven’t heard of Oriente, they provide ‘credit as a service’ and currently operate across the Philipines and Indonesia. Providing credit across emergent markets in Asia, especially at the point of sale, is becoming an increasingly popular vertical in the region with several other startups attacking the BNPL market (see, for example, Kredivo in Indonesia). With a growing middle class and high levels of mobile penetration, this is going to continue to be vertical to watch in Asia.
This funding announcement is slightly different from the ones I usually discuss - it’s crypto related. Andersson Horowitz this week announced a re-up of their crypto fund. This time they’ll be taking a $515m bag to invest in blockchain companies. Fund 1 was a $300m vehicle that has yet to generate any significant winners - but for the company that has been the only (paper) returner for VCs, Coinbase (For those interested, here is an Airtable of all their bets from fund 1).
As some of you may know, I’m an undercover blockchain bull, but I don’t envy the task of meeting enough blockchain companies to invest that amount of money. Godspeed to Chris Dixon and co - there’s going to be plenty of crazy to get through to find some gems.
📧 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 me@alantsen.com and @alantsen on the Twitters.
Ps. If you like what I’m doing with FR please feel free to share it on your social disinformation network of choice. Also, I’d appreciate it if you forwarded this newsletter to a friend you think might enjoy it.
📰 News
⚰️The short story of RBS’ failed digital bank Bó
In June last year, JPMorgan Chase shutdown its millennial-focused challenger bank after just a year. In what almost seems like an effort to beat that, RBS this week announced the closure of Bó - their attempt at a consumer-facing challenger bank that lasted only six months.
According to the article, RBS sunk $100m into Bó 😲 For this eye-watering amount they were able to net, wait for it, 11,000 customers. To be fair, it has been a hard time for many challenger banks, with lower levels of engagement from customers. However, this shows the level of commitment most banks have to innovation - basically none.
💀RIP Bó, the worst named challenger bank ever.
💰FIS Accelerates Innovation with $150 Million of New Capital for Venture Investments
FIS announced this week it had launched a $150m venture fund that will be investing globally in fintech startups. The first announced deal was an investment into Nigeria-based fintech startup Flutterwave.
By way of background, FIS is one of the world’s largest core banking and payment processing vendors with a market cap of $79bn. You may also remember the monster acquisition they made last year of Worldpay for $12bn in the largest fintech acquisition of 2019.
Although CVCs can be very ‘high variance’ in their effectiveness, I like the approach FIS is taking in pushing this through in the middle of COVID-19. I’ll be adding them to the bench of my fantasy VC line up as a ‘watch and see.’
🛍️ Chinese giant Tencent takes $300m stake in Afterpay
Chinese tech giant Tencent has taken a 5% ownership stake in Aussie BNPL player Afterpay. According to the article, they acquired the shares for between $17.11 and $31.30 over a few days in late April.
To be honest, it feels like a strange play by Tencent. The move to hold 5% doesn’t buy them anything from a strategic position. The article correctly points out that Ant Financial made a strategic investment in Klarna earlier this month. The article seemed to intimate that this might be Tencent’s response. However, the Klarna investment was part of strategic investment in the private market (i.e., Klarna agreed to take the money), which to me makes it a vastly different type of play.
Beyond what might turn out to be a clever financial decision, this buy-up of $300m in Afterpay shares by Tencent feels like someone in the Tencent head office accidentally hit the ‘buy’ button (numerous times over a few days).
📹 Creating an Unprecedented Digital Financial Services Giant: Before, During and After COVID‑19
This webinar with two of the biggest neo banks from either side of the pond was fascinating. It’s well worth a watch for several insights from some first-rate operators. It’s also interesting to watch for the contrast between Chris and Nik 😂 Once you watch it you’ll know what I mean.
I’d also highly recommend subscribing to the FT Partners newsletter - they write some thoughtful research on what’s happening in the fintech financing space. Also, they’ve been hosting some 🔥🔥 webinars recently. Here is one on VC investing in fintech during COVID-19.
Bonus: If you don’t know the story behind FT Partners, it’s well worth a read.
🥶 From Cold Storage
This week I’m sharing a resource I haven’t seen discussed anywhere else. It’s a database by the team over at Banq that covers over 200 banks from around the world and where they’re at with their open banking programs.
It’s a great resource if you’re a startup looking to work with a bank. It’ll quickly give you a sense of where they are with their open banking program. It can be useful in helping to identify incumbents worth reaching out to 😉It’s one that I’ve flicked to founders many times to get them ready before a conversation with a potential FSI customer.
You can find the database HERE.
📱What’s It Cost?
The app stores are the battleground for customer acquisition in B2C fintech. However, it’s one area most fintechs struggle to understand from a user acquisition perspective. This is an excellent report from AppAnnie on global UA trends and benchmarks for finance apps. Download it here and get schooled on the data and better understand the cost of activating a user.