Brands as Banks, Samsung Money, Kabbage vs. OnDeck and Fintech Geopolitics
Today, we’re joined by Lex Sokolin to talk news and current events.
The fintech world is not taking the summer off. New developments are coming fast and furious, from fundraisings to product launches to government intervention.
Banking for brands startup Bond raised $32 million to capitalize on the exploding trend of B2B2C banking.
Samsung Money launched, leveraging SoFi’s infrastructure. As SoFi again seeks a national banking charter, they could become the de facto leader in this space.
Kabbage and Intuit launched small business bank accounts as extensions of their already deep relationships with SMBs.
And WhatsApp is trialing all sorts of financial services in India just as Chinese fintech super apps are being banned from the country.
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Thank you very much for joining us today. Please welcome, Lex Sokolin.
Full transcript:
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
Wonderful to be back. I've been missing our conversations.
Will Beeson:
Same here. How are you holding up over there?
Lex Sokolin:
How am I holding up? Why would anybody ask that right now? We're doing great. Coffee has caffeine in it. Everything's fantastic.
Will Beeson:
Excellent. Well, I guess there's been a lot of fascinating recent stuff to focus on and to keep us busy. So, let's see diving right in. I think there were some really interesting developments and news items over the past two, three weeks now, since we last connected, around platform banking, banking as a service, infrastructure banking, banking for brands, call it what you want. Actually, going forward I'm sure we'll call it more often, banking for brands. I guess it's a thesis that, I certainly had for some time now, based on a decent amount of direct experience, and I think we've seen it continue to evolve in the market. It's effectively everything that the brand credit card partnerships were decades ago to everything that Bancorp, Green Dot and a whole number of others have been doing for partners over the past number of years, we're just seeing a continued evolution.
Will Beeson:
So it's everything from the Thought Machines of the world extending their, I think it was a series B, which they had initially announced maybe earlier this year, they'd raised like $83 million from Draper Espirit and a number of others. They've I think added $40 plus million onto that. Thought Machine, fantastic company looking at doing core banking infrastructure differently. Paul Taylor, is an extremely talented engineer, a visionary founder. It's everything from that to funding news from a company called Bond, who I guess I kind of know tangentially, they raised $32 million from Goldman Sachs and MasterCard and others, basically to continue to abstract banking functionality into technology that sits above banks that plugs directly into fintechs or consumer brands to help deliver banking experiences to end users, and that importantly is kind of sponsor bank agnostic. If you look at the reality of building in this space. If you want to launch a checking account and a debit card like so many have done, in fact, I'm sure we'll get into some others later on in this conversation. If you want to launch that sort of offering right now, you basically go to, maybe it's a Galileo and a Marqeta as the card processor, maybe it's a Bancorp or a Cross River or a Green Dot or a Radius or a relatively long list of others in terms of sponsor banks. And you spend the better part of, I don't know, six to 12 months, depending on how innovative you want to be pulling all the pieces together, dealing with risk management, regulatory compliance, setting up the right team, the right architecture, the right offering, getting all the approvals you need.
Will Beeson:
It's no easy feat. Everyone's doing it, but it's not as easy as it could be. So Bond and surely others to come and others that are already working on the problem are looking to make this more plug and play. It's kind of a thesis that we've heard about for a number of years now, Railsbank comes to mind, for instance, looking to make it easy to kind of connect with the banking products and issue them if you're a FinTech. I think Bond is definitely onto something, maybe the time is right. Maybe the time is right more than anything. The co-founder and CEO is the former COO of Twilio, who definitely understands the integration and kind of the connectivity and communication via software space. It's interesting. I think it'll be really interesting to see where all this continues to go.
Lex Sokolin:
Yeah. This piece of news sticks out to me for a couple of reasons. I actually did not know that Twilio's executive was in involved that colors it in yet another way. Twilio is massively successful and they had started out as a very precise communications focused API, getting that text on your phone when a website wants to two factor authenticate you, and they grew into just a fantastic company that ended up being a call center platform. So that one line of communication became a modern communication platform as a backend for a lot of large institutions. And so that definitely is a team to bet on. The other thing that stuck out at me was this categorization of brand banking. And it is something you've flagged for me before. And seeing this as a label, brings a bunch of things together.
Lex Sokolin:
Maybe this is a vector for FinTech venture investment going forward of, who is the best at enabling completely nonfinancial groups of customers to have financial products offered to them. Right? So this isn't like banking as a service necessarily, which wants to enable fintechs that provide financial services, but don't have the regulated entities to do it. Banking as a service kind of packages up things that financial offerings that those fintechs can then distribute. This is about packaging up financial services to brands, and in my mind, brands are things like, Nike or the Travelocity insurance example and so on. So it's really driving much more closely to the consumer. And then I think one distinction that sometimes gets lost in the word salad of banking, banking as a service, banking platform, banking APIs, banking operating system, all these stuff, open banking, decentralized banking.
Lex Sokolin:
The thing that gets lost here is there's one innovation theme, which is innovating the technology on which the actual bank sits. And this is what I believe Thought Machine, with its closing out their 80 million round is doing, is redoing the core banking platform on which the bank is using to operate. And when you see IBM or Microsoft fighting for the cloud of the financial services industry, it's very much in this vein of let's get things out of the closet, out of the proprietary servers, off the mainframe and have a new technology infrastructure on which our financial institutions run.
Lex Sokolin:
And that's the core banking theme. This is very much on the other side of what the bank does after it has packaged everything into products and applied its licenses and kind of stood up the ability to interact with his accounts and then piping that through, into the consumer footprint. And so I think it's a really interesting twist, and maybe, we notice brands like Intuit and Kabbage, play with these ideas for small businesses. How do you think about those developments?
Will Beeson:
Yeah, definitely. Firstly important distinction, glad you made it between the Thought Machines of the world on the core banking side who no doubt, are building some of this B2B2C functionality into what they're doing and this kind of like pure play B2B2C software, à la Bond, that's providing, I guess you could look at it from either direction, you could look at it from the brand standpoint and say, they're providing a service to brands, i.e linking them in a banking partner agnostic way to the infrastructure, or you could on the flip side suggests that they're allowing banks, create roots into the next big consumer brand banking offering. Maybe one, that's just worth mentioning before we dive into the small business accounts is Samsung Money.
Will Beeson:
So the SoFi plus Samsung offering that had kind of been announced, or at least, first discussed a few months ago coming to fruition now. And I think it's just a good representative example, right? So Samsung in this specific case device manufacturer already has Samsung Pay. So there's a concept of associating your card with the device and then using that device and NFC to pay. Now, you can basically open a Samsung bank account in short, right? So you can extend that payments functionality into a cash management functionality. And if you spend on the Samsung Card that's associated with that account, then you accrue effectively rewards points for Samsung goods that effectively have a very low kind of cost basis for Samsung in terms of their ability to gift them away. But potentially have high value for users.
Will Beeson:
And therefore, it's kind of a margin arbitrage for Samsung around incentivizing customer usage of their account. And for clarity, those, I think who listen regularly are operating in this space. Generally the two main revenue drivers for the checking account plus debit card business model are an interest revenue share on the account balances side and an interchange share on the debit spending side. So you're kind of incentivizes the program to both, build checking and savings balances, but more importantly to get users to spend on your debit card. And so Samsung has done that in conjunction with SoFi and this is where it gets really interesting. So the account that they're doing this through, which is as far as I can tell the equivalent of, SoFi's cash management account that they offer directly to consumers, is not actually a bank account.
Will Beeson:
So they're not operating on this traditional sponsor bank model per se. They have gone the FINRA route, i.e the investment company brokerage account route, where they're not directly covered by the FDIC insurance, I guess they're probably covered by the brokerage equivalent. And yet they're able to offer effectively the same functionality, the ability to hold the cash balance, ability to move payments in and out, all the same functionality as a bank account, except without the deposit sitting on the balance sheet of a sponsor bank. So there're actually some interesting examples of companies that have gone this route Aspiration, is another one based out of L.A, a socially conscious digital bank. And there are number of others. It's a different take on the same model. Why is this interesting-
Lex Sokolin:
Just to... Okay. So in the SoFi case, you're saying they are sitting on a trust company, cash sweep, or a money market fund-
Will Beeson:
They are that.
Lex Sokolin:
They are that.
Will Beeson:
Yes. So SoFi is-
Lex Sokolin:
It's funky because I don't think you can say that you are a bank and offer a cash sweep. And Robinhood did this. Robinhood said, "We're going to have a bank account for you." And they were planning to do a cash sweep. And I think the SEC, or maybe the OCC ended up slapping them on the wrist. They had to backtrack.
Will Beeson:
It's all in the wording, right? It's called Samsung Money. It's similar, it's called SoFi Money. It's a money management account or a money management platform. It's not a checking account or a savings account. They explicitly say that, now there is an FDIC component via a deposit network. And it gets even more abstract for people that aren't deeply interested in this, but basically the idea of generally smaller banks, community and regional banks kind of coming together in effect pool a balance sheet. So, maybe banks were net deposit takers, making balance sheet available via this network. So that the likes of in this case, SoFi can direct access deposits. Potentially in this case, all deposits into this bank deposit network. So their deposits actually would be filtered through to FDIC insured bank. So the FDIC insurance would flow through from the moment that the deposits actually land on these banks balance sheets.
Will Beeson:
It's quite complicated. And I guess you can see now why there's a benefit to a brand in having a dedicated software or platform partner like Bond who's taking care of this for you. There's one last little twist that I think is hugely relevant here, which is so far having applied again for a national banking charter, or at least said, they're going to. So, SoFi, few years ago, I think had gone the banking charter route, they'd ended up pulling their application Varo in the meantime, applied and has effectively been approved from what I can tell. And I think we're in the process of-
Lex Sokolin:
Is it a bank charter or an ILC?
Will Beeson:
Bank charter.
Lex Sokolin:
I remember Square, was looking at doing an industrial loan company based in Utah, which is this fun loophole in the American regulatory regime and didn't end up getting it. But Varo, is just a good old OCC charter.
Will Beeson:
Yes. Now, I don't want to misspeak because there are a number of regulators involved, but it's a genuine national bank charter.
Lex Sokolin:
Gotcha. So fun fact about nationally chartered banks as of last week, the OCC has clarified that they can custody cryptocurrencies. So just want to throw that in there. I think that's always an overlay. I got-
Will Beeson:
I will be shocked if SoFi obtains a national charter, if they didn't then take advantage of that opportunity, I think they're already probably active in crypto. So anyway, just closing the loop here. SoFi applying for national charter. They acquired Galileo recently, which we talked about. We connected with Clay Wilkes, founder and CEO of Galileo, after that who knows maybe we'll have SoFi on the podcast at some point, but basically in SoFi you increasingly have full stack, right? The technology part that's supporting Samsung as the banking for brands, they do now via Galileo, the card processing and kind of the ledgering, which is a crucial part of the technology function of supporting these brand bank partnerships and potentially in the not too distant future in banking terms, a few years may have a national charter. So they can actually offer bonafide checking and savings accounts, FDIC coverage, all in one place. So really interesting core piece of this trend here, watch this space.
Lex Sokolin:
Yeah. This is why people listen to the podcast, Will. This is the meat. I find it fascinating. For somebody to build this out is to put together all of these gears. And I guess there's an embedded question of how many layers of bundling the different gears? How much economics is there, industry-wide for bundling these different gears into seamless consumer experiences? But what you're doing is, first you're aggregating the banks into APIs, and then you're aggregating the aggregators into a platform. So somebody can plug in a module Stripe style without really ever invoking any of the underlying. Stripe is obviously a fantastically valuable company, $40, $50 billion, whatever it is on the private markets. Is there the same enterprise value for a banking enabler? And I think we'll find out, but that takes us back to Intuit and Kabbage. And their move into providing small business bank accounts. What happened there?
Will Beeson:
So I think it's a pretty direct extension of the PPP experience, i.e facilitating a government lending to small businesses, Kabbage was already big in the small business lending space. They started distributing these government loans as did some others Square and PayPal, I think. This is something we were talking about a few months ago, the direct channel between the government, lender and small business didn't really exist before. Kabbage was delivering these loans. Well, Hey, there's actually a great opportunity using one of these platform partners, in the Kabbage case Green Dot, to just launch a checking and debit type functionality for small businesses, they're already in the ecosystem. They're already managing their loan through Kabbage. So great. Great upsell here. Makes a lot of sense, core to this whole conversation around platform banking. And Intuit and QuickBooks. One of the biggest small business accounting platforms has effectively launched the same thing, checking plus, plus debit. Everyone's doing it.
Lex Sokolin:
Yeah. So I think it's a couple of things to say on that. The first is, and you mentioned this to me prior to our conversation, is that the Kabbage account looks really good. This is a vendor that cares about small business in a way that is, I think, different from how a global universal bank would look at their small business channel. These customers are more important to Kabbage, which is more focused on them and which crafts experiences that are far more customer centric than maybe what you would get at a national size brand name. And so it's really great that these small businesses are getting good product. I think that's really nice. We're going from the sort of B2C retail revolution now to more and more small business focus in very large part because of the money that's flowing from the government as a result of COVID.
Lex Sokolin:
The interesting thing about Intuit is, there is two things. One is of course, the fact that they bought Mint in 2007, which for me kick started all of FinTech in its current iteration, so data aggregation, Plaid, you could tie all of that story to personal finance management and Intuit and Mint. And so there is this DNA of being on the leading edge of FinTech themes. And then second is, I think a lot of investors, when they think about the lending category, they think upstream, like where does the marketing funnel bring in customers? And there is no better flow. Maybe Amazon's a better flow, but there are a few places you would get better data about a small business than their accounting software, because you know their entire economics and therefore you have the perfect information in order to do underwriting.
Lex Sokolin:
Now, Amazon has slightly better information because they also know the traffic to that small businesses product pages. So they know the revenue before the revenue hits. Square, might know the information even better as well, because they're at the point of sale device and therefore they know how the money hits the bank accounts. They see all the economic flows and they can model out the small business as well. And so you start seeing in these funnels, embedded lending, small business lending, arms like Square Capital, for example, that are there to help these customers grow. And the software becomes a lead gen for the underlying financial product. And so it's really curious to see this happen with Intuit because it's like, they've been on this journey for 20 years to end up offering bank accounts. And finally all the tech is there to make it super easy.
Lex Sokolin:
So I think that's really interesting. I think this is a sad corollary is a company called OnDeck. Kabbage and OnDeck in my mind are essentially the same company. They underwrite the same types of small businesses. They write very similar sized checks. There were founded around the same time and they saw similar levels of mind share and brand success, kind of around the same time. And I think, in aggregate there's been billions that have flowed through OnDeck, $13 billion in originations to date to support small businesses over the last 14 years. The main difference between the two is that Kabbage stayed private and continues to be worth several billion dollars on the private market, continues to raise money in order to launch new features like these bank accounts and to arbitrage the government funding and so on.
Lex Sokolin:
Whereas, OnDeck went public. And they went public a few years ago at $1.4 billion valuation, and they raised $200 million and it sucks being public. Their valuation collapsed by 80% over time just from being treated as a banking company, rather than a tech company. And then through the COVID crisis because of the small business exposure, their portfolio soured lots and lots of their underlying borrowers can't pay back what it is that they owe. And this is all done in a public company. So all the information is transparent and mark-to-market immediately. And so OnDeck's value fell to something like $50 million, with each share being worth less than a dollar, a penny stock. And I think, this is just a really sad outcome.
Lex Sokolin:
The news recently is that OnDeck is being acquired by Enova, which is another public company focused on lending, $500 million market cap, not a gigantic player. And one that's primarily focused on consumer and payday, and they're buying OnDeck for $90 million, 90% of which is just going to be in Enova stock. And so it just boggles my mind how different these outcomes were for OnDeck and for Kabbage having followed a very similar journey. Where the main distinction is being public and just how destructive it has been for OnDeck to run a public company rather than having stayed private much longer.
Will Beeson:
Yeah. Well, I think the big takeaway here for me is that in some people's minds, it's cool to be a lender until it's not, you get a lot of money upfront in terms of origination fees, it's easy to give money away. And then something like COVID happens and it always does. And apparently OnDeck, by the end of June, had basically 40% of its book at least 15 days past due. So it's easy, it turns out, just giving money away. It's also about doing it in the right ways to the right companies and managing your credit portfolio over time. This is hopefully a cautionary tale to the clear coming wave in consumer FinTech toward lending, especially to subprime, underbanked, and until-recently-unbanked consumers. I'm personally a bit concerned about where all this is going to go.
Will Beeson:
This combination of digital banks under pressure to be profitable, to solve unit economics and increasing number of checking account plus, plus debit card offerings. People looking for the hook or a leg up on competition, it was get paid two days early for a while. There are a number of those offerings in the market now, does it increasingly become credit? Is it responsible both from the lender's perspective and the borrower's perspective and importantly for the industry more broadly, the economy more broadly, are we going about this in ways that are actually constructive? As opposed to short term and value destroying.
Lex Sokolin:
Free money to everybody.
Will Beeson:
CARES Act.
Lex Sokolin:
Yeah, exactly. Okay.
Will Beeson:
It works when they don't have to pay it back.
Lex Sokolin:
Well, you're going to get me into the Federal Reserve and not having to pay back what we print, but that's a whole other conversation. So we know that right now the tech companies are testifying in Congress about, what it is that they're going to do to improve the way that they deal with customer data and the role that they play in society. And while that's happening, I think a really interesting counter example or a really interesting corollary is, what is happening in India. And remember the broader context of these geopolitical moves is that unfortunately there is a technology Cold War as people describe it between the U.S and China. And that's been playing out in, Huawei and the 5G battle that's been playing out and how people talk about TikTok and the apps there.
Lex Sokolin:
That's playing out in the Blockchain Services Network that China is launching throughout Asia and Africa and the Middle East, and what Americans are doing about that. And obviously that's playing out at the level of the communist party and Trump, and sort of like the toxic narrative there. And so in this context in India, there are two pieces of news. People didn't write about them together, but I saw it and it's just like, it just clicks as a really interesting and weird development. And so the first headline is that WhatsApp, of course, we know that WhatsApp is owned by Facebook and it's just Facebook by another name. WhatsApp, is piloting a project in India to deliver credit, insurance, pensions, all the sort of FinTech stuff that it can for users in India. And you can think of Facebook, trying to catch up to Ant Financial or Alibaba or WeChat, which are the Chinese technology financial services companies. Ant Financial's rumored to be having an IPO at a $200 billion valuation. Right. So this is Facebook trying to catch up to the super apps and to do in the regulatory environments where it can do that. We talked previously about it getting unceremoniously booted from trying to do this in Brazil. It's trying to do this in India, because it can't do this in the U.S there's like all of the Libra project as well. So WhatsApp, is making progress in India to be the finance super app. At the same time, India has just banned something like 59 Chinese apps for the stated reason, very similar to what the American pushback is, which is they are essentially surveillance apps and their data pipes back to the Chinese government about the activity in those apps.
Lex Sokolin:
And so things like TikTok, which has a Snapchat sized footprint and is massively popular all over the world, as well as things like WeChat, which is not Ant Financial and AliPay. It's the number two Chinese FinTech payments app also starts with the usability of chat, right. So WeChat is like WhatsApp in its chat functionality. And WeChat already has the credit and the insurance and the pension services. And it's just been banned in India with WhatsApp coming in. So I think that's a really interesting, and kind of... It reflects a dynamic that's not driven by capitalism or the success of an app of how well it's built that reflects the dynamic of geopolitics. And so I wonder what you think about the prospect of these global apps and how politics impacts, whether these things can be successful. They are now so big that the determinant is not like which app is better and which has a better bank account, but which country does India want to side with in these tectonic movements?
Will Beeson:
Yeah. Well, look, there's so much here to unpack. I am surely unqualified to do it. Companies that are bigger and bigger with serious global footprints. Whether it's Alibaba, Ant Financial, WeChat, Facebook, Google, potentially, the likes of, I don't know, SpaceX or Tesla, or kind of, I don't want to say infrastructure, but strategic technology companies. And that can either mean, like the engineering work that they do or the data that they have access to. Once you hit a certain scale, then it's political by nature, India and China traditionally have a very antagonistic relationship, the U.S and Russia, the U.S and China have antagonistic relationships traditionally. It's not surprising.
Will Beeson:
Yeah. It feels in many cases, I don't know, like a bit of a return to the past in a world that many of us feel like had been moving toward a place of connectivity and globalization and openness, but I think it's a reflection of one that reality of the power of these companies and the data that they have access to, and a reflection of the broader international political environment, which is one of nationalism and isolationism as much as anything else. We'll see to what extent crises, like COVID, any potential large scale economic repercussions of COVID accelerate that isolationist approach, or potentially given the resources and collective creativity that we have at our disposal, help move us in a more open direction. But it's a massive topic. And one that I'm sure we could link, not only to all different areas of FinTech and tech and crypto and DeFi but other industries as well.
Lex Sokolin:
Absolutely. I think that's a great existential final point for our conversation. It's almost uncanny to see the FinTech industry grow up from a lot of young teams and projects, trying to figure out a better way to do banking to now being a part of this... Really, of this global movement. So it's moving faster than ever, and hopefully we'll get to a place that is productive and not a toxic one.
Will Beeson:
A hundred percent. And I don't think by any stretch that, that's a given getting to a productive place rather than toxic one. There just a lot of both geopolitical, but let's leave that aside. Even just incentives and alignment considerations around profitability, solving genuine problems for users, what makes sense for businesses? What makes sense for customers? Banks are one of the most hated industries because of this general misalignment of interests with their own customers, in the lender borrower relationship is one of mistrust and kind of zero value taken from one is, is value generated by another. Can we through FinTech get beyond that? Or are we just going to get back to that same place in a way which is kind of hyper scaled and hyper pervasive and potentially not having delivered the positive outcomes that we would have expected to at the beginning.
Lex Sokolin:
Yep, absolutely.
Will Beeson:
All right, Lex, great to talk to you as always, we will pick this up in the near future, again.
Lex Sokolin:
Sounds good. Take care of yourself.
Will Beeson:
Lex Sokolin, thank you very much for joining us today.
Lex Sokolin:
My pleasure.
