FTX Collapse: Full impact has yet to be seen; Are BaaS and Open Banking the same?; State of Fintech Q3, 2022;
In this edition:
1️⃣ CZ SBF’ed SBF
2️⃣ Is the UK on the right path to regulating crypto?
3️⃣ Coinbase CEO on Binance Buying FTX
4️⃣ Evolution of platforms to Platform-based ecosystems (PBEs)
5️⃣ How fintech in Europe compares with the United States
6️⃣ The biggest challenge Musk’s super app may face is Musk
7️⃣ State of Fintech Q3, 2022
8️⃣ FTX Collapse: Full Impact Has Yet to Be Seen
9️⃣ Are BaaS and Open Banking the same?
🔟 Imagine being Elon Musk’s bankers on the Twitter deal
And many more….
CZ SBF’ed SBF
Is FTX worth tens of billions of dollars, if it can get through this week of heavy withdrawals and negative press? Maybe! Will Binance buying it allow it to get through this week of heavy withdrawals and negative press and return to profitability? Probably! Is Binance paying FTX tens of billions of dollars for its equity? I would be very, very, very surprised!
There is precedent. In my world, the most famous precedent is probably JPMorgan Chase & Co. buying Bear Stearns Cos. for $2 per share one Sunday in 2008, “less than one-tenth the firm’s market price on Friday.” (Later the price was revised up.) If you need a bailout from JPMorgan over the weekend, JPMorgan will step in and make sure that your business can keep operating and that your customers will get paid and that the financial system does not collapse, but you won’t get paid much.
But in the crypto world, the famous precedents are pretty much Sam Bankman-Fried bailing out crypto lenders this summer. FTX bailed out BlockFi Inc., getting an option to buy it for as little as $15 million or as much as $240 million; it had been valued at $3 billion in 2021. Alameda helped out Voyager Digital with a $75 million loan, and FTX ultimately agreed to buy its assets out of bankruptcy, cashing out customers but paying something like $51 million for its actual business; its equity market capitalization was more than $1 billion in April. This summer large crypto firms were on sale at pennies on the dollar if you had some ready cash and a tolerance for risk; Bankman-Fried did. (As it happens, he explained his process to me at the Bloomberg Crypto Summit in July. You can watch on YouTube; we get into it at around the 9:30 mark.) Now, it seems, his large crypto firm was on sale at pennies on the dollar, and Zhao has the cash.
Source Bloomberg News
Is the UK on the right path to regulating crypto?
The Financial Conduct Authority, either by sluggish accident or design, may feel somewhat vindicated. It has used its only powers, on anti-money laundering, to roll out a registration regime for crypto companies where only 16 per cent of applications have thus far been approved. Celsius Network, the crypto lender, was struggling to get accredited in the UK before moving to New Jersey in 2021 and then collapsing the following year. The regulator followed its warning on Binance with one about FTX in September, which had also been trying to get a licence here.
Blow-ups that happen elsewhere may be seen as a win but crypto’s disregard for regulatory niceties or borders mean UK consumers can still get hurt. The FCA lobbied for new restrictions on the crypto adverts that have popped up in every Tube carriage. Its main approach has been to warn where unauthorised companies are targeting UK consumers and stress that those dabbling in crypto risk losing everything. If anything, it could have shouted louder.
The sector has complained about painfully slow and finicky licensing while regulatory sources counter that many applications were an unapprovable mess. Similarly, the plan for so-called stablecoins to be brought into the regulatory system has come with regulatory murmurs that no existing coins would meet the likely standards that would be applied.
There are plenty of instances where slow-moving regulation results in failure: the UK is reeling from the revelation of hidden leverage in the pensions system, a form of the shadow banking risk and dangerous allure of supposed safety never fully addressed following the financial crisis.
But in a climate where politicians are still considering a call-in power to override regulators seen to be too cautious or stick-in-the-mud, it is worth noting where the watchdogs appear to have got something right.
It’s a jungle out there.
Source Financial Times
Coinbase CEO on Binance Buying FTX
Coinbase CEO Brian Armstrong joins Emily Chang to discuss the news of Binance buying rival FTX after a bitter feud between the two crypto exchange owners, and whether Coinbase would consider buying FTX US
Evolution of platforms to Platform-based ecosystems (PBEs)
These are groups of organisations “linked through non-generic complementarities”, “or investments in mutual adaptation”.13 Members of a PBE have to coordinate to “create a unique value proposition” for the consumer.
The non-generic complementarity is related to thematically connected discreet transactions (the “customer journey”) coordinated through the formal participation in a shared infrastructure, the enabling digital platform.
The thematic journey is characterised by a theme. For example, “living a healthy life” includes a set of discrete actions and purchases that are all part of a healthy lifestyle. These otherwise unrelated transactions are facilitated, enabled or complemented by a common “platform” that binds them all, adding value for the customer through convenience and/or rewards.
Vitality is an example of a PBE that consists of a set of applications that attract, motivate and reward consumers for living a healthy life. Customers appreciate the convenience that the proposition offers. All participating organisations benefit from lower customer-acquisition and retention costs, while the insurer, Discovery, pays out less frequently on the policies it underwrites.
An example of this evolutionary dynamic is Square. Having started out as a linear business with a simple plastic dongle that enables small merchants to accept card payments in the US, Square’s payment value proposition evolved into a platform before becoming a PBE in less than nine years. Their value proposition now encompasses the whole range of tasks that are linked to running and growing a (small) business.
Their services quickly went beyond the development of software and hardware to process and accept payments with apps to manage payroll, taxes, work shifts or detailed sales reports.
In addition to these, Square has developed the Square Cash app, which is now evolving into a buyer/consumer focused platform in its own right.
The payer and payee focused solutions are complementary to each other, enabling, amongst other things, Square to be able to benefit from “on-us” transaction economies.
Source Arkwright Consulting
How fintech in Europe compares with the United States
Using three life cycle aspects of founding, funding, and scaling, a comparison between Europe and the United States is instructive. The United States exceeds the European average and is within the top third across all KPIs — with particular strength when it comes to the contribution of US fintechs to the economy and the workforce.
How to explain the strength of the United States compared with the European average? Many factors could be at play here that correspond to similar factors in Europe. For example, the United States has a large home market, but it also has just one primary language and largely harmonized banking regulation — thus benefiting from favorable market structure conditions. Market maturity is also stronger than in various European countries, with the venture capital (VC) community, especially in the tech sector, perfecting funding mechanisms from earliest seed funding through to IPOs. The United States has strong connections with all the other large economies and has long served as a magnet for investors, making access to capital easier: US pension funds and other institutional investors provide venture capital in ways that are restricted in some parts of Europe, where risk concerns tend to be larger.
Nevertheless, analysis shows that some individual countries, including the United Kingdom, outperform the United States in the funding stage. In addition, US companies can easily attract talent from the world’s best universities; regions such as Silicon Valley, south of San Francisco, or New York City, as the US financial center, exert a strong pull on foreign talent, although immigration measures have somewhat limited the flow.
Scaling fintechs. As a proxy to judge the ability of countries in Europe to scale their fintech ecosystems, we looked at the prevalence of fintech unicorns.15 Most countries with more than one unicorn show a timeline between six and eight years from funding to becoming a unicorn. The United Kingdom has the best scaling track record by far with 32 unicorns in total — four times as many as France and the Netherlands, the countries with the next largest numbers of unicorns.
In some countries, the limited scale of fintechs may be related to the relatively low level of internationalization of business models, which can serve as a constraint on growth. Europe’s fintech leaders, including the United Kingdom and Sweden, tend to have a global footprint. For example, the leading neobank in the United Kingdom had a presence in 34 countries including the United States and three Asian markets in 2021. In Sweden, an open-banking platform is present in 18 countries
Source McKinsey & Company
The biggest challenge Musk’s super app may face is Musk
A lesser man would look at the battered fintech landscape and say, “Party over, oops, out of time.” But not Elon Musk! Musk is going to party like it’s 1999, with his new toy called Twitter.
At the start of 1999, Musk was emailing about his plans to remake banking with a startup called X.com — plans that accelerated when he merged it with another startup that eventually became PayPal. On Wednesday, he talked up strikingly similar ploys in a Twitter Spaces chat.
Musk had been saying for a while that he wanted to turn Twitter into a super app, a do-it-all service called X that encompassed communication, news, shopping, and payments. These apps have been successful in China — think WeChat — but not so much elsewhere, though that hasn’t stopped American tech companies from trying.
What’s most remarkable about Musk’s plans for Twitter is that they sound an awful lot like his X.com playbook from the turn of the millennium: $10 bonuses for new accounts, high-yield savings accounts, sending money to other accounts, and eventually checking accounts and debit cards. (For kicks, I dug up a filing for what was briefly called the “X.com U.S.A. Money Market Fund.” Retro!)
- Musk argues that people who are paying Twitter $8 a month for Twitter Blue or earning money from new creator features will decide to just stash their cash with Twitter.
-Twitter seems serious: It’s registered with FinCEN, which helps oversee money transmitters. (There are a lot of licenses required to be in the money business, as Musk and his compatriots learned the hard way at PayPal .)
-Oh, and the X.com domain? Musk bought it back from PayPal in 2017.
- One problem with his scheme: Those $10 bonuses for new accounts? Even the modern PayPal, which tried using them again last year to boost its user numbers, found that they attracted fraudsters. Can you imagine what the spambots will do if Musk waves cash money in their silicon faces?
There’s a bigger problem, though: Musk’s wannabe super app faces a ton of competitors that didn’t exist two decades ago. One of the chief ones is run by someone close to him.
- Under Jack Dorsey, Cash App has become a major growth engine for Block . It already has those banklike features Musk is talking about. A lot of rappers, celebrities, and porn stars like to tweet their Cash App handles, or “cashtags,” which start with a dollar sign instead of a hashtag.
- Dorsey supported Musk’s bid for Twitter and rolled his stake into Musk’s new company, so Musk’s competitive push seems like a particularly unkind form of payback. But hey, it’s SIlicon Valley and if you can’t shiv your friends, who can you shiv, really?
- Anyway, rising rates have surprisingly boosted the fortunes of some neobanks, since consumers now have more of a reason to hunt for yield and consider dumping their paleobanks. If there’s a time to try an X.com revival, it’s now.
State of Fintech Q3, 2022
TLDR: Your rundown on fintech in Q3'22
$12.9B fintech funding in Q3’22.
Lowest level since Q4’20. Fintech funding dropped 64% year-over-year (YoY), with $12.9 B raised across 1,160 deals in Q3’22. This was the sector’s weakest quarter since Q4’20. The funding level represented a 38% drop quarter-over quarter (QoQ) as the economy moved toward a recession and investors deployed less capital.
19 $100M+ megaround deals.
Fewest since Q2’18. Mega-rounds continued to decline in Q3’22, dropping to only 19 deals totaling $4.4B. Average deal size was down 38% from full year (FY) 2021. Fintech mega-rounds only accounted for 34% of total funding, compared with an average of 66% in 2021. The top funding rounds in Q3’22 went to Klarna, DANA, and wefox.
32% Europe surpasses the US in late-stage deal share.
First time since Q4’18. In Q3’22, Europe drew 32% of late-stage deals, while the US brought in 24%. This is the first time Europe has overtaken the US since Q4’18. Among regions, the US’ share of late-stage deals has declined steadily over the past decade. The top equity deal in Q3’22 went to Sweden-based Klarna.
6 new unicorns in Q3’22.
A new low since Q2’20. Unicorn births fell below double digits for the first time since 2020. All regions saw a decline in quarterly unicorn births. The US led with 3 new unicorns, followed by Asia (2) and LatAm (1). Switzerland based crypto firm 21.co had the highest valuation ($2B) among the quarter’s new unicorns
-14% drop in M&A exits QoQ to an 8-quarter low.
Fintech M&A exits declined 14% QoQ to 155 deals, an 8- quarter low. M&A activity still led among exit types, but the number of SPACs (4) surpassed IPOs (2) for the first time ever. The largest SPAC deal was DPCM’s acquisition of Canada’s DWave Systems at a $1.6B valuation. The top IPO went to Italy-based insurtech Yolo — On Demand Insurance at a $33M valuation.
16 companies backed by Coinbase Ventures.
More than any VC. Coinbase Ventures was the most active fintech investor and 1 of only 2 CVCs to make the top investors list (alongside Kraken Ventures). Both are affiliated with cryptocurrency exchanges, and their investments came amid a 2022 decline in crypto valuations
$1.2B banking funding in Q3’22.
A new low since Q4'18. Banking funding dropped 37% QoQ to $1.2B. That level represents a whopping 86% decline from a record-high $8.3B in Q2’21. However, deal count saw a slight increase QoQ, growing to 76.
$2.3B insurtech funding in Q3’22.
Insurtech funding saw the smallest QoQ decline of any fintech sector, ticking down 4% from $2.4B to $2.3B. Deal count fell slightly to 140. While down significantly from 2021’s highs, unlike other sectors, insurtech has remained relatively flat throughout 2022. The top deal went to Germany-based wefox, which raised a $400M Series D.
and many more…
FTX Collapse: Full Impact Has Yet to Be Seen
“Bloomberg Crypto” covers the people, transactions, and technology shaping the world of decentralized finance.
Antoni Trenchev, Co-Founder of crypto lender Nexo, says we have not yet seen the full effects of FTX’s meltdown. Hester Peirce, Republican SEC Commissioner, says the lack of US regulatory clarity for the crypto industry is problematic. Perianne Boring, CEO of trade group Chamber of Digital Commerce, says she’s concerned about policymakers overreacting to the FTX crisis.
Are BaaS and Open Banking the same?
A neat definition of open banking is the permissioned opening up of access to account data and services via APIs. That compares with BaaS as the opening up of banking capabilities via APIs. But the reality is not that simple, and a deeper understanding is critical to the creation of a competitive BaaS offering.
In many regions, including the EU where open banking first attained some regulatory clout through the revised payment services directive (PSD2), open banking includes payments. The inclusion makes sense: three times as many consumers worldwide picked making a payment over receiving personalized financial insights as a beneficial use case of open banking, according to a recent Mastercard survey. Yet, alongside open banking, payments are also one component of the BaaS stack.
In markets where open banking is regulated, the term premium API refers to the opening up of APIs beyond mandated minimums. The focus tends to be on the data side of things, but that largely just reflects how markets move faster than regulations. Outside of certain discrete uses, even pure data sharing is usually tied to other banking capabilities to create an effective value proposition.
So while some distinction between BaaS and open banking can be made in theory, it can often be rendered somewhat meaningless in practice. The relationship between the two technically keeps BaaS as a subset of open banking, but it effectively accords almost all activity to BaaS.
For most BaaS recipients, whether businesses or their customers, the distinction between BaaS and open banking is largely academic. Globally, 55% of consumers claim to know at least a little about open banking, yet it is no wonder that more of them actually use it than they think. For them, BaaS and open banking are two peas in a banking pod, and understanding the difference is like knowing that a pea pod is a fruit with peas as its seeds. Useful knowledge for a botanist; largely immaterial for everyone else.
Yet for the banks and fintech companies operating as botanists for a banking pod, that lack of consumer awareness represents an important nuance associated with two key opportunities. Most obvious is the ability to differentiate when appealing to consumers. More broadly, it helps banks and fintech companies flex with regulations as they evolve with the market and address consumer sentiment by enabling capabilities beyond just data sharing.
UK high street lenders are tightening their stance on cryptocurrencies
UK high street lenders are tightening their stance on cryptocurrencies, citing a rising tide of scams involving the highly volatile and speculative assets.
Their position contrasts with some fintechs who are pushing deeper into the sector, despite prices crashing and major players collapsing. FTX, one of the world’s biggest crypto trading venues, unravelled in spectacular fashion last week with rival Binance ditching an eleventh-hour rescue and leading to fears of contagion.
Santander said earlier this month it would restrict the amount that customers could spend on cryptocurrency exchanges using online and mobile banking payments from November 15. It said the move was driven by “a large increase in UK customers becoming victims of cryptocurrency fraud”, with plans to block all faster payments to cryptocurrency exchanges next year.
Virgin will prevent existing as well as new customers from purchasing cryptocurrencies by the end of this month.
While TSB Bank became the first bank to ban its customers from all cryptocurrency payments last year, lenders including Lloyds Banking Group, NatWest and Virgin banned cryptocurrency purchases using credit cards in 2018.
A number of lenders also began blocking payments to Binance in 2021, after the Financial Conduct Authority said it was not authorised to undertake crypto business within the UK.
Barclays does not currently restrict payments to exchanges with the exception of Binance while other lenders, such as NatWest, restrict payments to specific exchanges which they say present “the highest risk of financial harm”.
Annual losses as a result of crypto fraud reported to Action Fraud, the UK’s national reporting centre, had surpassed £160mn by the end of August, already more than the amount for all of 2021.
The FCA said last month that the number of potential crypto scams reported by consumers jumped 55 per cent in the year to the end of March, from the year before.
The regulator said that it had not instructed banks to stop allowing transfers to cryptocurrency exchanges, but emphasised that digital assets are “high-risk investments and largely unregulated”.
The forthcoming Financial Services and Markets bill will permit greater regulatory oversight of the crypto sector. Currently the FCA only supervises companies’ approach to anti-money laundering.
CryptoUK, a trade body for the digital assets industry, said that fraud is increasing across the board, not just related to cryptocurrencies.
Source Financial Times
Imagine being Elon Musk’s bankers on the Twitter deal
Interesting opinion article by Matt Levine.
They have loaned him about $13 billion, which they planned to syndicate to investors, but which they are currently stuck holding. To syndicate that debt, they will need to prepare disclosure materials describing Twitter’s business plans and financial position. How will they do that? Twitter has completely upended its business every few hours over the last two weeks. Musk fired its chief accounting officer. He will, with absolutely no prompting, tell anyone who listens that Twitter is at risk of imminent bankruptcy.
What do you say, in the debt offering documents? “Please lend money to this company, which is a fraud and probably bankrupt, but we can’t tell you much about its business plan or financials”? Who would buy that? I mean, probably someone, is the answer; there is some price at which some high-yield investor would be willing to underwrite this mess. That price seems to be roughly 60:
Wall Street banks that lent $13 billion to help fund Elon Musk’s buyout of Twitter Inc. have been quietly sounding out hedge funds and other asset managers for their interest in a chunk of the buyout debt at deeply discounted prices.
Some funds have offered to take a piece of the loan package at a discount as low as 60 cents on the dollar, which would be among the steepest markdowns in a decade. The banks have so far deemed those bids unattractive, according to people with knowledge of the discussions who asked not to be identified because the talks were private. …
Discussions so far have centered around the $6.5 billion leveraged loan portion of the financing, the people said. Banks had seemed unwilling to sell for any price below 70 cents on the dollar, one of the people said.
Even at 70 we are talking about billions of dollars of losses for the banks. But even at 60, like, how do you document that trade? Do you put together offering materials, and run the risk of investors suing you if Musk files for bankruptcy the day after you place the debt? Or do you sell the debt on an as-is basis and make everyone sign a waiver saying, like, “nobody knows what is going on here, we make no promises, and you are buying this stuff at your own risk”? Can you even do that?
Incidentally one natural, extremely funny buyer for this debt would be Musk himself, and I (and others) have half-joked on Twitter that he should just bid the banks 50 cents on the dollar to buy up all the debt. Sure that is throwing good money after bad, but (1) it would save Twitter a lot of interest expense, (2) it would ensure that Musk can own Twitter forever if for some reason he wants that, (3) it’s not throwing away that much more money, compared to what he has already spent and (4) it would be a good troll, which seems to be the main business purpose of this deal. Also the more he talks about bankruptcy the lower the price presumably gets.
Source Bloomberg News
5 kinds of business lending + financing and when to make them available to your customers
There are many kinds of business lending and financing; which you choose will depend on your goals, your customers, and their needs.
Say you’re the CEO of Invoicify, a company that helps 100,000 small businesses manage their finances (invoices, payroll, taxes, etc.). Your typical customer has annual revenues of $150K–$1.5M.
You’re excited about lending and financing because of how well you know your customers. You can see with clarity their unmet needs, the peaks and valleys of their seasonal cash flow, and their ability to repay. Not to mention, you can offer financing in your customers’ exact moments of need — i.e., on your platform.
Let’s say that one of your customers is a general contractor. In the following section, we’ll discuss the circumstances in which it might make sense to offer them each of the following five types of lending and/or financing: cash advance, invoice factoring, credit + charge cards, term loans, and revolving lines of credit. In practice, you might choose to offer your customers just one, all five, or any number in between.