Varo and Marqeta Raise Rounds, Should Digital Banks Lend? and Fintech Gets Meta
Today, we’re joined by Lex Sokolin to talk through a few recent events that are indicative of what’s important in fintech right now.
Varo raised $241 million in preparation to start operating under its own banking license later this year. Is a banking license an asset or a liability if you’re a digital bank?
Marqeta is reportedly now valued at $4.3 billion, as banking-as-a-service continues its mature.
And LA-based fintech Stackin’ raised $13 million to scale its messaging-based offering designed to help Gen Z find the right fintech. What should we make of this?
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Thank you very much for joining us today. Please welcome, Lex Sokolin.
Full transcript:
Will Beeson:
The world is changing fast. New technologies are impacting how we think about products, services and the way we live our lives. Nowhere is this trend more present than in financial services, where new business models and customer expectations are changing our conceptions about banking, finance, and the very nature of money. Welcome to Rebank, a visionary podcast about banking, fintech and the future. The future of banking is here.
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
Glad to be back.
Will Beeson:
Glad to have you back. After a few weeks of relatively slow news, a few things have come out over the past few days, including just yesterday at the time of recording Varo announcing a $241 million, I think technically Series D Round. Question in my mind as to how relevant that sort of VC terminology even is to regulated banks who are raising reg cap, which is I think a large part of what this raise by Varo went to cover. I'll let you pick it up to start.
Lex Sokolin:
Sure. So the United States was a laggard in terms of adopting the neobank model, where the primary banking experience live inside a mobile app and most of the service is mobile only. However, there has been almost a Renaissance of the neobank model in the US over the last two and a half years or so. And Varo was only founded five years ago in 2015.
Lex Sokolin:
So it's really quite a spectacular story to see a $240 million check go into a fintech still in this B2C space, which in the COVID environment is really challenged with payments going down, with interest rates going down, potentially with adjacent revenue streams for investing and trading going down, and then all these loan portfolios spoiling because people aren't able to pay things back.
Lex Sokolin:
So it's a really surprising and large check and it reflects the increasing traction of the messaging that these neobanks have about going to the unbanked or underbanked, or just the broad retail marketplace with free offerings and embedded credit offerings and embedded credits support for receiving your paycheck early, for example.
Lex Sokolin:
So when you look at things like a Chime and maybe things like MoneyLion and things like Varo, there is this Renaissance in American neobanking now with pretty large checks coming in. I think the last piece I have on Varo is that it has a license application, I believe, to be able to provide banking services and that would allow it to build economics in a way that the other mobile providers simply don't have because they're integrating into APIs.
Will Beeson:
Yup. Agree on all points. To that last one, I think it's tough to get perfect information here, but I'm pretty sure that they're beyond license application and they are in final stages of implementing the asks that were made of them before launching as a fully chartered FDIC-insured bank, maybe as soon as the summer.
Lex Sokolin:
Do you think that means the banking as a service industry is dead? No more Railsbank, no more Green Dot. Do you think all the fintechs are going to get their own license now?
Will Beeson:
No, not at all. That was a multi-year. So speaking of someone who's done it in the UK and it took us better part of three years. In the US, it's longer and more arduous and more expensive. So Varo started in 2015 as far as I'm aware, with the express intent of getting a banking license. And if all goes well, they're launching 2020. So five years on having raised... Don't know the specific amount, but it's got to be close to 500 million with extremely talented high caliber executives.
Will Beeson:
I have all the respect in the world for Colin Walsh, a fantastic track record in the financial services' industry. So certainly someone who would give any regulator comfort. Nonetheless, it's taken years and years. But to the point around the... I don't want to call it, business model. But balance sheet versus non-balance sheet. We'll see if this ends up being something of a watershed moment for digital banking. The first player who's coming in really leading with balance sheet.
Will Beeson:
So lending in addition to the easier to use, lower cost digital bank account type offering. And I think not only is Varo leading this and will they have great efficiency because they own their own charter and their own capital. But the likes of Galileo, the likes of Marqeta who we'll probably talk about in a little bit, really supporting this transition from the IBM mainframe era of banking as a service to the AWS era of banking as a service, which importantly will include lending products via API.
Will Beeson:
You can check out the recent Rebank conversation with Galileo's CEO, Clay Wilkes for more on that and what their recent acquisition by SoFi is going to allow them to do going forward. But fundamentally, and it's not just US digital banks either. I think it will be increasingly European digital banks potentially led by Monzo. And we can talk about that a little bit later, but lending is going to gain more prominence going forward.
Lex Sokolin:
So I'm always stuck on this license thing. Is having a license a positive asset or just a negative asset with an obligation? Like if I were to just give you a license, are you richer or poorer? And I don't know the answer to that. I mean, I think a lot of people will say, "Yeah, of course it's license worth 10 million or 50 million," or whatever. But in the US alone, there are something like 8,000 community banks and then another 5,000 credit unions that are all serving their local community just fine.
Lex Sokolin:
They've got a branch, you can get in there and use an ATM and get a card and they sit on Fiserv or they sit on Jack Henry and they're happy to have 500 million in deposits or 2 billion in deposits. And nobody's thinking about these 2 billion depository institutions, as some unicorn fintech. Whereas you give Sterling two and a half billion of small business deposits and people think it's worth 500 million Sterling or something like that.
Lex Sokolin:
Why not instead of this five-year arduous process, just go and buy the Mom and Pop Bank across the street for like 3 million bucks. Why torture yourself?
Will Beeson:
I think it's a valid question and one perhaps for a regulatory specialist, perhaps we can get someone on at some point, maybe call them to talk about that. I'm very familiar with people who have considered doing it. There are a few nuances which perhaps make it more complex than that description. One is the multiple regulators in the US, the difference between a state-chartered bank, a federally chartered bank, approvals that you have in terms of offering services across state lines.
Will Beeson:
Virtually all charters I think were premised on some sort of physical branch presence. And I think what makes the Varo charter unique is that they don't. In terms of buying a bank perhaps it's quicker, but I don't believe that's guaranteed. I think you're fully expected to effectively build out all of the controls' governance capital that you would if you were applying for your own charter, from scratch, you also then inherit, I guess, any of the legacy of that underlying bank.
Will Beeson:
And I'm not talking about technical legacy, because I'm sure you could replace that if you wanted to, but whatever governance related legacy that underlying institution already had. So I'm sure there are lots of considerations which make it more complex than a pure like for like comparison.
Lex Sokolin:
Yeah, absolutely. So a little bit of a rhetorical question to play with. I've definitely heard the point being made before that when you're buying a bank, it's authorized to do activity that was already part of its business plan. And so you're getting the asset as is, and if you want to change anything or you want to swap out the core banking system, or you're changing your business plan from serving the community to serving the entire nation, you're essentially going to resubmit for approval the entire business plan, which you might as well do it from scratch, it carries the same risk. So that's certainly an argument I've heard about it.
Will Beeson:
So there are few potentially related pieces that we may be touched on in there. Marqeta raised $150 million, reported they have $4.3 billion valuation. Marqeta being a payments platform, kind of put most simplistically, but again, with reference to the Galileo conversation we had recently, they largely play in the same space. And it's just a fascinating area to watch at the moment, the technology, the platforms that are supporting all of these models.
Will Beeson:
And sure, even in the Varo case, you say, "Hey, they've got their own license now, they're independent." Sure. But every single bank works with technology vendors for critical infrastructure. Varo will be no different and any challenger bank, digital bank that follows in Varos' footsteps will be no different. And the likes of Marqeta, Galileo and a number of others are in many ways like the new iteration of more traditional core banking and payments processing type infrastructure.
Will Beeson:
I think this Marqeta fundraising is very interesting. I think we're going to see it as an accelerator of this AWS era banking as a service trend. And I think really like in my mind, we're looking at an exponential ramp in the activity in digital banking that we're seeing right now. I think it would be difficult to argue with someone who suggested that "Okay, sure. Apart from having a more modern looking brand and perhaps a slightly faster app, what's the difference between a digital bank and an incumbent bank, other than that they offer a lot less products and charge a lot less fees?"
Will Beeson:
I think we're going to see an acceleration of that gap start to develop. And I think it's going to be driven as much by the actual consumer facing businesses as it is by these infrastructure providers. And I think this is very exciting.
Lex Sokolin:
For sure. It's another fat check. And for the astute observer, you'll see that the fat checks are going to companies that sit on top of the payments flow, companies that are involved in credit and in applying balance sheet to lend. I'm still very confused about how the economic cycle is affecting the underwriters because for some it's absolutely decimating them into nothing. So something like OnDeck with a small business loan balance sheet is completely decimated.
Lex Sokolin:
Something like Sterling, which is a depository institution in the UK for a small business accounts that also lends to small business is doing just great from a private fundraising perspective. But that's the place where a lot of the checks are going. I think if you look at the other sectors, whether it's insurtech or digital wealth and investing, that's a place where I see a lot more consolidation.
Lex Sokolin:
It's later in the cycle things are getting bought out or cleaned out or combined, whereas sort of the payments flow, banking is a service and lending has a lot of legs even in this environment.
Will Beeson:
So the last related piece there is reports around continued challenges for Monzo. And frankly don't like this sort of media piling on taking advantage of what could very likely be good housekeeping to build a fantastic business going forward, to slam what has been the poster child of digital banking. Monzo is a phenomenal company. Tom is one of the most capable and inspirational founders I know. They recently hired a more of a... I don't want to say banker type CEO, but an individual with significant experience at, I believe maybe card companies, maybe Amex, and I think standard chartered, but just a tremendous pedigree in banking.
Will Beeson:
And as part of that, I imagine one of his early moves was some headcount reduction. So reports of Monzo laying off 120 people, which again, I think any responsible management actions in this environment are very much warranted and will set the business up for success going forward. More interesting than that, I think in my mind is implications that this potentially has on... This experience, this situation potentially has on Monzo's roadmap and focus areas.
Will Beeson:
You talked before about the lack of clarity in your own mind as to kind of whether lending is good right now or bad right now. So if you're OnDeck, it's been massive exposure, which has wiped out an order of magnitude of market cap. And if you're some other businesses, it seems to be a good thing. Stepping back a little bit, Monzo, I think set out with an interesting vision of offering consumer banking and then pulling in connectivity with experiences that are broadly speaking, finance related in some cases or at least lifestyle related with kind of a leg into finance, but that weren't within the realm of traditional banking.
Will Beeson:
So how you interact with your insurance companies, how you interact with utilities providers, how you interact with your travel providers in the event that you've purchased travel. And kind of providing a lot of that in a single touch point in a single interface, so to speak.
Will Beeson:
And it was broadly termed kind of a marketplace model and Sterling was pursuing a marketplace model approach. And the question at least a few years ago was basically, can you get scale at building this connectivity, this fee revenue generating marketplace before the music stops and the venture community stops funding you at increasing valuations? And unfortunately the COVID pandemic has ended up being a crunch point for a few of these businesses and Monzo, which hadn't early on intended to go heavy into the lending space, I think has had to accelerate its push into lending and we'll see going forward over the next few months and years, to what extent that becomes an increasingly important part of its focus.
Will Beeson:
Monzo has a full banking license. So it's a deposit taking institution, has the balance sheet, so lending would be from a traditional sense, at least a natural extension of the business that it's doing.
Lex Sokolin:
First, hats off to the traction that they've created and the psychic space and the brand that they've built. And I think being one of the first players in a market is really hard and you get copied by everybody and then people iterate on your strategy and that can be frustrating. The second point is all across the board venture funded companies, small businesses, large organizations, there have been layoffs and furloughs and other versions of headcount reductions.
Lex Sokolin:
So I don't know if we can read deeply into this tactical change of the headcount reductions, because again, I think that's the current normal, rather than something exceptional. But if you do look at the Monzo model, there are two conversations that we've had recently. One was with the CEO of Tinkoff Bank, Russia's largest internet bank. And then separately, I recently connected with the founder of Curve, which is an aggregator of credit cards.
Lex Sokolin:
And those two conversations really clarify for me why the Monzo approach maybe is less focused or is a little more fuzzy than what others are doing and where they could be losing ground. So if you take somebody like Curve, which has no interest in actually being a... Like the value props, not being a bank and put your money here and direct deposit into some Curve, third-party bank as a service account or whatever.
Lex Sokolin:
The value prop is, you use HSBC, fantastic. You use Barclays, fine. You use Monzo, great, put your money there. And then we as Curve will give you the neobank experience across all your stuff. So it's not a data aggregator, it's a neobank experience, but it's across all the places where your money sits already, so you don't have to have behavior switch in order to grow the quote unquote, deposit base.
Lex Sokolin:
And I think a play like that has a better shot at doing a marketplace model because they access a larger set of deposits. And then what they can do is intermediate, for example, loyalty across multiple bank accounts, right? They can start adding on travel and they can start adding on adjacent things and really create an ecosystem because they're not as tied to also growing their particular depository base.
Lex Sokolin:
And so to me, that model kind of makes a lot more sense for the Amazon comparison rather than the one saying, "I'm going to have my product plus a marketplace." And then number two is to preview the conversation we've had with the Tinkoff team, they said very loudly that to be a bank that doesn't lend is dumb. I mean, I'm putting words in that didn't come out, but at least that was my read, so maybe that's how I think, right?
Lex Sokolin:
So if you're going to have deposits and you choose not to monetize those deposits in the way that the banking model works, you're putting yourself into a massive disadvantage that you just continuously have to swim upstream against. And so I think there's a moment of question where you need clarity on, do you want to do the aggregation in the marketplace and the scale of users and sort of like the broader non-bank stuff in order to be the financial home? Or do you get the best balance sheet and the best deposit and go from there to underwrite?
Will Beeson:
There's clearly some arbitrage in the market right now between tech valuations and bank valuations. And in the private markets, you're much better off trying to position yourself as a tech company than a bank, because then you get whatever it ends up being, I would say 20 times earnings, but earnings are negative. So it's a multiple of revenues versus being valued on a price to book, which as a bank with a balance sheet is traditionally the way that that valuation is done, or at least the main metric that people are looking at in comparing relative value across banks.
Will Beeson:
And price to book values you lower than tech multiples. So from a pure, how do we maximize the value of what we're building and importantly, how do we raise the most money possible and give away relatively less of the company? Well, it's by telling the tech company story and in a sense it's by avoiding the balance sheet. Now the balance sheet is a fantastic source of cashflow. It's pretty easy to look around the banking industry, even now let alone over the past number of decades and see that the tremendous amount of cashflow that has been generated by those institutions, tremendous and in many cases objectionable.
Will Beeson:
There was a report that came out, I think just yesterday, US banks generated $11 billion in overdraft fees last year. We could have a whole separate conversation talking about the ethical implications of that. And hopefully what that says about the prospects for new paradigm banks like Monzo and Varo, and so many more that we talk about and engage with regularly on the podcast. But from a cashflow perspective, balance sheet is fantastic. Arbitrages go away at least in theory.
Lex Sokolin:
That's like the nicest way to say that you're doing a bad trade, arbitrages go away.
Will Beeson:
And again, it works in the private markets because the private markets are private. And I think we've yet to see a digital bank with a multi-billion-dollar valuation and virtually no balance sheet attempt to go public at a tech multiple. I think there's probably a reason we haven't seen that. I think we probably all have a hunch as to what would happen, but sure. So you definitely don't want to take fundraising capacity off the table by almost marking yourself down to a multiple of your book value.
Will Beeson:
At the same time, all of these entrepreneurs on some level, most of these entrepreneurs on a very primary level are trying to build long-term sustainable businesses. And I think at a certain point, you have to just ignore whatever momentary arbitrage opportunity exists and think about what's best for the business and what's best for the impact that you're trying to have on the world. And in many cases, being a full-service financial institution, who's offering credit in a responsible way, is a way to deliver a much more positive social impact than raising at a higher valuation.
Lex Sokolin:
So let me drive us to what may be a natural landing place or a natural conclusion, which is, I think there continues to be in the market confusion about where you are in the channel or the customer funnel or the customer development process. What is your purpose? Do you own your whole funnel? Do you just build the product of the banking deposit account that you rent to others? Do you do sort of the middle and you go horizontal and there's lots and lots of different models and we're starting to see some die out and then some are getting sort of like the double-down venture check?
Lex Sokolin:
The piece of news that I loved this week, which I think is super fun, is from a company called Stackin'. You know it's cool because it's got an apostrophe at the end.
Will Beeson:
And it's based in LA.
Lex Sokolin:
And it's based in LA. So Stackin' raised 13 million bucks. And I think the headline and the spin is kind of silly, but I want to open up what it means. So their model and the spin is that they are connecting to the TikTok generation, to young millennials and to Gen Z, so younger than us by about 10 years. And they are helping that generation pick fintech solutions. So it's not like even what bank should a 16-year-old have, it is which fintech app should the 16-year-old download.
Lex Sokolin:
And they're doing this through chat, through embedded chat whether it's like WhatsApp or they're doing it through video social media and so it's very much not about the web. It's not about download an app for some sort of aggregation of stuff. It's about, let's go to the social media where people hang out and put contextual messages like prompts and memes and things that are in the language of this generation into those social channels.
Lex Sokolin:
And so there's like the chat bot stuff a couple of years back, and there was a whole lot of compliance chat bots. And none of that really worked at scale. What I really like about Stackin' is that if you look at it closely, it's a lead gen company. So what does a lead gen company do? The lead gen company goes after the biggest audience possible and converts them down to a point where they can pass them off to somebody to actually convert them into a bank account.
Lex Sokolin:
So if you go to Betterment, there's like three questions you answer and it's the investment account. The neobanks win on account opening because they got to convert people into an account super-fast. The lead gen company is not trying to do that, is trying to qualify people, is trying to engage them, is trying to prime them, ask them questions. So the lead gen company is actually going to be much better at solving financial planning, financial literacy, budgeting questions, by an order of magnitude, than a provider of a financial product. There is a super clear demarcation of conflict there.
Lex Sokolin:
So like Mint was a lead gen company for credit cards and it was focused around budgeting on your credit and your spending and that that worked. So Stackin' is a very young lead gen company and lead gen companies actually are super valuable and they work. So if you look at something like Credit Karma, which has... I'm going to make this number up, I don't remember it, but it's something like 50 million or a 100 million users who track their credit score and various budgeting and things like that.
Lex Sokolin:
Or if you look at LendingTree. So LendingTree is a very early 2000s, late '90s financial services lead gen company for lending products on the web and they're public and they've had a fantastic journey. People didn't understand them for a long time and now they're a powerhouse of a business because they know how to get the audience. They know how to speak in the language. They know how to convert them into the product and they know how to send at 50 bucks a pop the leads to the financial provider.
Lex Sokolin:
And so I'm excited to see this iteration happening for these much more alien territories for me, which are the TikToks and the chat streams. And I just think it's a cool bet. I like it.
Will Beeson:
Yeah, well, you're much more visionary than I am as it relates to things like, I guess, lead gen business models. Big question mark in my mind as to whether the world needs like a Meta fintech service that helps route you to the best fintech. But I think you're pointing to some very tangible examples that have worked at scale in the past.
Will Beeson:
For me, the part that's most interesting is... And perhaps is most eye opening because I'm not 19 anymore, is this return to almost like unformatted just SMS type messaging. Every once in a while, you get a text that says... Like with a little piece of financial advice, "Hey, you should think about this," or "Hey, here's a product that you could like." That something with that sort of experience is getting the traction that it is, is to me interesting and I don't think that Stackin' is the only one.
Will Beeson:
I've seen some very niche I think for now, but Gen Z focused digital banks even that it's just a WhatsApp conversation. You send money to people the same way that you would send WhatsApp messages and you check your balance the same way you'd send WhatsApp messages. And the whole experience is distilled into something super, super, super light and super-efficient, and then delivered through literally just text messaging.
Will Beeson:
Which is pretty fascinating in a world in which on the one hand, you have everything racing toward the richest possible content, whether it's games or entertainment or even the way that websites and apps have developed over recent years to have these offerings for a younger generation focused on such an aesthetic type of experience. It's interesting. And it's a space I'll certainly be watching more closely.
Lex Sokolin:
Indeed, said perfectly.
Will Beeson:
All right. Well, I think it's a good point to wrap it up for today. Lex, wonderful to connect with you today.
Lex Sokolin:
My pleasure at any time.
Will Beeson:
Lex Sokolin, thank you very much for joining us.
Lex Sokolin:
See you next time.
