Government exhibit in the case against former FTX CEO Sam Bankman-Fried.
Source: SDNY
While prosecutors are requesting that FTX founder Sam Bankman-Fried spend 40 to 50 years in prison for his crimes, the defense team is urging the judge to consider a sentence that’s roughly 90% shorter.
Bankman-Fried’s fate will be announced in Manhattan on Thursday morning by Judge Lewis Kaplan, who presided over the monthlong trial in November. Bankman-Fried was found guilty of seven charges tied to the collapse of crypto exchange FTX and the roughly $10 billion of customer deposits that went missing.
The hope for Bankman-Fried’s team is that Kaplan takes into account the increased likelihood that FTX customers will be able to recoup most, if not all, of the money they lost when the exchange spiraled into bankruptcy in 2022.
Lawyers representing the bankruptcy estate of FTX told a judge in Delaware last month that they expect to fully repay customers and creditors with legitimate claims. Bankruptcy attorney Andrew Dietderich, who works with FTX’s new leadership team, said “there is still a great amount of work and risk” ahead in getting all the money back to clients, but that the team has a “strategy to achieve it.”
It was a potentially dramatic change in the narrative surrounding FTX’s collapse 16 months ago. At the time, it was believed that many thousands of customers — reportedly up to a million — collectively lost billions of dollars that would be unrecoverable due to the lightly regulated and unsecured nature of the crypto industry. Those clients faced the real possibility that the vast majority of their money had evaporated, just like in other cases of hedge funds and lenders that failed during the so-called crypto winter of 2022.
Much of the government’s successful case against Bankman-Fried hinged on convincing the jury that the defendant had stolen billions of dollars worth of FTX customer money to make risky bets at Alameda.
For months, as FTX has wound its way through a Delaware bankruptcy court, new CEO John Ray III and his team of restructuring advisors have been clawing back cash, luxury property, and crypto, as well as tracking down missing assets. They’ve already collected more than $7 billion, and that doesn’t include valuables like $26 million in gifts and property to Bankman-Fried’s parents, or the $700 million handed over to K5 Global and founder Michael Kives, who invested FTX cash in companies like SpaceX that have since increased in value.
Bankman-Fried’s defense team has asked the court for a sentence in the range of 63 to 78 months. Beyond the fact that he’s a “first time, nonviolent offender,” attorneys for the FTX founder largely lean on the argument that Bankman-Fried’s risky bets paid off and the bankruptcy estate expects to fully repay FTX customers.
It’s a story that Bankman-Fried was trying to sell as he awaited trial.
“FTX US remains fully solvent,” Bankman-Fried wrote in a Substack post on Jan. 12, 2023, while he was under house arrest at his parents’ home in Palo Alto, California. He said the exchange “should be able to return all customers’ funds.”
One key asset in FTX’s portfolio is its stake in artificial intelligence startup Anthropic. Late last week, FTX’s bankruptcy estate struck a deal with a consortium of buyers to sell the majority of its Anthropic holdings for $884 million. Under Bankman-Fried’s leadership, FTX invested $500 million in the startup in 2021 before the boom in generative AI. The company’s valuation hit $18 billion in December 2023, which would put FTX’s roughly 8% stake at about $1.4 billion.
During Bankman-Fried’s trial, Kaplan denied the defense’s request that it be permitted to say that FTX’s investment in Anthropic was a smart bet.
Renato Mariotti, a former prosecutor in the U.S. Justice Department’s Securities and Commodities Fraud Section, told CNBC that the more money the estate is able to recover for clients, the better for Bankman-Fried.
“If true, that is relevant and the judge is required to consider victim restitution at sentencing,” Mariotti said. “But even if victims weren’t harmed, he is still guilty of the offense.”
Mariotti said he expects the sentence to fall somewhere in between what the prosecution and defense are asking, predicting it will be “at least 20 to 25 years.”
Joseph Bankman and Barbara Fried arrive for the trial of their son, former FTX Chief Executive Sam Bankman-Fried, who is facing fraud charges over the collapse of the bankrupt cryptocurrency exchange, at Federal Court in New York City, U.S., October 26, 2023.
Brendan Mcdermid | Reuters
In addition to the Anthropic gains, FTX customers can look at the rebound in crypto for signs of optimism. Bitcoin is trading at close to $70,000, up from less than $17,000 at the time of FTX’s collapse.
Solana fits into a category of so-called “Sam coins,” a group that also includes Serum, a token created and promoted by FTX and Alameda. Solana saw a huge run-up of late, climbing more than eightfold since the end of September.
Meanwhile, FTX’s bitcoin stash, which was worth $560 million at the time of the September report, when the coin was trading at around $25,000, has seen a significant uptick as well. Bitcoin’s value has increased by around 180% since then.
For FTX customers, being made whole, according to a judge’s ruling, means getting the cash equivalent of what their crypto was worth in November 2022. In other words, they’re not seeing any of the upside of FTX’s investments or being given virtual coins that would allow them to cash out at higher valuations.
Braden Perry, who was once a senior trial lawyer for the Commodity Futures Trading Commission, told CNBC that Bankman-Fried faces at least 70 months in prison based on his base level offense, number of victims, sophisticated means and leadership role — even if there’s no monetary loss to the victims. The massive losses that were originally expected would suggest 30 years to life, Perry added.
When entrepreneur Stephen Chen’s mom began approaching retirement age, she was forced to borrow money from Chen — and Chen’s brother — to make ends meet. They wanted to help, but the siblings also wanted to figure out a more sustainable, long-term solution that’d help their mom retire without having to worry about finances.
Chen tried to get guidance from a financial adviser, but no one would take his mother as a client because her net worth wasn’t considered high enough. So Chen started building spreadsheets and financial models himself, doing his best to figure out how his mom could live the retirement lifestyle that she wanted.
“People like my mom lack the tools to look at their money holistically and strategically so they can make informed decisions, monitor their financial situation, understand which levers to pull and when and make the connection between the choices they make today and the long-term ramifications to their plan,” Chen told TechCrunch. “There’s a confluence of factors that may alter the future of financial planning and advising.”
It was after Chen helped his mom lower her expenses, figure out when to claim Social Security, decide when to downsize and take other steps to become financially independent that Chen realized lots of other older Americans were facing the same challenges.
So Chen founded NewRetirement, a Mill Valley-based company building software to help people create financial retirement plans. Today, NewRetirement’s direct-to-consumer products power financial planning for 70,000 users managing close to $100 billion in their own financial plans, according to Chen.
“Our models go beyond savings and investments, taking into account all of the other factors in a person’s life, from home equity, healthcare costs and taxes to Medicare and Social Security,” Chen said. “Every time a user makes a change, we run thousands of simulations in order to help them optimize their plan … We account for thousands of different scenarios, enabling users to confidently map out accumulation and decumulation projections with digital guidance.”
NewRetirement is Chen’s second startup after Embark, an online college search and admissions tool he launched in 1995. And, like Embark, Chen sees NewRetirement as a digital solution to a transition faced by millions of Americans.
“120 million Americans over age 50 hold 80% of the wealth in this country,” Chen said, “But running out of money remains a top 10 fear, with nearly half of Americans saying they are worried about it.”
NewRetirement’s platform uses predictive modeling and data analytics to help users suss out the right savings approaches. Image Credits: NewRetirement
NewRetirement, which began as a consumer offering and in 2021 expanded to the enterprise, charges $120 per year for access to a suite of tools, calculators, recommendations and scenario comparisons and ~$1,500 per year for check-ins with a certified financial planner. In addition, NewRetirement sells a subscription-based private label version of its tools aimed at financial advisers.
Now, you might wonder, what makes NewRetirement different from startups like Retirable, which similarly provides an array of retirement planning tools and access to asset managers? Chen asserts that NewRetirement is one of the few — and perhaps only — financial planning platform that serves consumers as well as advisers and workplaces.
“Our core innovation is allowing anyone to create a plan with industrial-strength tools, enabling advisers to collaborate with the end user and making this available at scale through enterprise partners who bring it to their customers,” Chen said. “As more financial services companies see their offerings like investment management become commoditized, there’s huge value in helping clients and prospects think about their money holistically. By offering self-directed digital planning to clients versus starting with a human adviser, they can scale and serve any number of users, learn about them, help them make good decisions and position their products and services more effectively.”
Chen says that about 70% of NewRetirement’s revenue is enterprise presently, with the remaining 30% coming from consumer customers. The platform has 20,000 individual subscribers and “several” wealth management clients as well as “multiple” enterprise customers including Nationwide, which recently expanded an existing partnership with NewRetirement.
That momentum no doubt helped NewRetirement to cinch its Series A funding round this month.
The company raised $20 million in a tranche that brings its total raised to $20.8 million, led by Allegis Capital with participation from Nationwide Ventures, Northwestern Mutual Future Ventures, Plug and Play Ventures, Motley Fool Ventures and others. Chen says that the cash infusion will be used to expand 50-employee NewRetirement’s enterprise products, scale up onboarding, accelerate R&D efforts and build capacity to meet future demand.
“With this new capital, we will have three to four years of runway,” Chen said. “That gives us time to continue to scale our enterprise partnerships and enhance our product. What’s more, the current downturn is enabling us to bring in incredible talent. We have a strong team in place and will expand headcount further this year.”
AUSTIN — There is a sort of clubhouse for Austin’s bitcoin believers on the second floor of the Littlefield Building at the corner of Congress Avenue and Sixth Street. The hideaway is at the crossroads of two worlds — the majestic thoroughfare that leads to the Texas State Capitol and the iconic, albeit notorious, stretch of bars, restaurants, and live music that define the capital’s party vibes. It’s an apt metaphor for the space itself.
The Bitcoin Commons is, at once, many things.
By day, it functions as an open plan, fluorescent-lit co-working space for the more corporate-minded bitcoin operators, but at night, it moonlights as a safe space for underground meet-ups of the industry’s rogue actors. Periodically, it plays host to conferences that draw in a mix of attendees ranging from venture capitalists to armed preppers living entirely off the grid. And on some afternoons, once happy hour hits, the kitchen at the back is retrofit with a stowaway bar.
“We also fund developers, and we help them advance their projects,” said Parker Lewis, one of the stewards of the Commons, as well as the author of a new book on bitcoin called “Gradually, Then Suddenly.”
“We help advance bitcoin through education and actually developing the monetary network, the code base, and the applications,” said Lewis, who is widely considered to be one of Texas’ de facto bitcoin ambassadors.
Francisco Chavarria was born in Mexico City and spent time in Salt Lake City, but three years ago, he made the move to Austin to be a part of a community of like-minded thinkers. His company, Yopaki, which is a neobank for bitcoin focused on the Latin American market, just won first place in a hackathon put on at the Commons.
“If you talk to other builders in the competition, a lot happens here,” said Chavarria. “There definitely is a sense of, ‘I don’t need for others to lose for me to win.’ There really is a relationship and a collaboration for bitcoin to succeed.”
“Right now it feels like we’re all winning because of the price, but those of us who have been building in the bear market, we know,” Chavarria added.
Austin’s “Bitcoin Commons” hosts regular meetups and conferences for the city’s bitcoiners.
CNBC
Bear or bull market, bitcoiners have flocked to Austin because of a combination of pro-crypto policies, abundant, renewable energy, and an ever-growing network of some of the brightest developers and miners on the planet. And even in the price doldrums, they typically bring the same level of enthusiasm to the conversation — though bitcoin’s recent stretch of record-breaking price moves has gone a long way toward boosting morale.
In March, bitcoin hit multiple, fresh all-time highs, as trader enthusiasm for the digital asset sector soared. A lot of that price run-up has to do with the record flows into the newly-launched spot bitcoin exchange-traded funds in the U.S., led by the world’s largest asset manager Blackrock and its $15.5 billion iShares Bitcoin Trust, which have helped to solidify bitcoin’s place as an asset class that’s here to stay.
Collectively, these spot ETFs have brought in around $60 billion, and in some cases, they have been breaking records for ETF flows altogether.
“The biggest driver is certainly the ETF flows, which have surpassed the expectations of all but the most bullish pundits,” said Castle Island Venture’s Nic Carter of bitcoin’s record price moves this month. “And these blockbuster flows have materialized before the major wirehouses, asset managers, and RIAs have actually approved the ETF for their clients.”
Carter added that there is also new liquidity coming into bitcoin from Asian markets via two main pathways: bitcoin’s version of non-fungible tokens known as ordinals, as well as bitcoin-issued coins called BRC20 tokens.
In the last 20 years, Austin has matured into one of the country’s leading tech centers, a trend accelerated by the Covid pandemic, which saw industry leaders migrate en masse from California.
“Bitcoin was founded in 2009. A lot has happened post-financial crisis. Austin was already emerging as a tech center, and you know, enter bitcoin, and it just became the logical home,” said Lewis, who runs business development at Zaprite, a bitcoin-native financial services firm.
It helps that Texas is a libertarian-friendly state that actively supports free market policies. It has proven to be a big draw for a group of people who think of bitcoin as a way of life — that is, a monetary network that is decentralized, borderless, and doesn’t answer to central banks or governments.
Austin’s “Bitcoin Commons” draws in an eclectic mix of people, including venture capitalists, bitcoin miners, and coders.
CNBC
Many hardcore bitcoiners ironically embrace the term maximalist or maxi as a way to self describe. In Texas, though maxis exist along a professional spectrum from venture capitalists, to miners, coders, company executives, and generalist techies, the eclectic tribe have a few things in common. Many are family-oriented, patriotic carnivores with an aversion to the overreach of government and a strong belief in the right to bear arms, among multiple other personal, individual liberties.
Bitcoin’s eponymous Austin lair, which is adorned with the Texas state flag and bitcoin memorabilia, has adopted Chatham House rules for many of its events to protect the identities of those conversing within its walls. One such meetup is the monthly BitDevs (short for bitcoin developers) gathering, where bitcoin builders, investors, and the bitcoin curious are all welcomed, so long as no pictures or videos are taken.
At these meetings, topics run the gamut, from detailed discussions about code to concerns that the Microsoft-maintained GitHub may pose a greater existential threat to the bitcoin network since much of the development work and conversations among coders happen on that platform. At one such gathering, the moderator of the two-hour session asked the room who ran a bitcoin node. More than half of the people in attendance raised their hands.
After attending multiple Austin BitDev meetups over the last three years, a few common conversation themes have emerged, including the focus on identifying threat vectors to the network and brainstorming workarounds. Beyond software, there are also concerns over hardware vulnerabilities, given that the ASIC chip used in bitcoin mining rigs are manufactured out of China, a country which has proven hostile to the crypto sector in recent years.
The “Bitcoin Commons” functions as a sort of clubhouse for the city’s bitcoin believers. It puts on a mix of programming, including conferences and hackathons, as well as hosts a co-working space by day.
The Commons hosted a hackathon, BitDevs, and a one-day conference dubbed the Bitcoin Takeover on the sidelines of the annual South by Southwest tech festival, which put on virtually no crypto programming this year.
Across those multiple gatherings, there was a newfound interest in talking about the burgeoning ecosystem of projects building on top of bitcoin’s blockchain, which began to heat up with the introduction of ordinals in Jan. 2023 — bitcoin’s version of non-fungible tokens.
One underrated driver of bitcoin’s recent rally is new programming innovations that may allow it to reach technological parity with ethereum. These advancements involve beefing up the bitcoin ecosystem with tools like smart contracts, which are programmable pieces of code that help to eliminate middlemen like banks and lawyers from transactions. That makes it easier for developers to create products and applications for consumers.
BitVM, for example, has a promising plan to do just that. It is ultimately trying to bring smart contracts to the bitcoin network, which has helped spur this renaissance of interest in layer two technology — that is, the startups being built on top of bitcoin’s base chain.
“I’ve never seen deal pacing move this aggressively in the bitcoin space in my entire career,” Carter tells CNBC.
Indeed, the VC appetite for these layer two bitcoin projects has been picking up in the last few months.
PitchBook says that the fourth quarter of 2023 was the first time in almost two years that deal value in the crypto sector had increased, reaching $1.9 billion — up 2.5% from the previous quarter. While still well off the 2021 high of $31 billion, funds are building back interest, and trust, in the space.
Grant Gilliam spent 15 years working in private equity in New York before pivoting to run a bitcoin VC fund called Ten31. This investment platform, which is focused exclusively on bitcoin, has invested $125 million of equity in aggregate since launching five years ago. More than $100 million was deployed in the last two years during the bear market.
“We invest across the bitcoin ecosystem across every major theme,” Gilliam told CNBC. “Anything that is relevant to bitcoin infrastructure, we like to say the picks and shovels of companies building products and services for holders of bitcoin.”
Gilliam, who spent a few years commuting from New York to Austin every month for the BitDevs meetup, said that some of the layer two bitcoin investments are more hype than substance, but he’s still bullish overall on the deal space.
“There’s been a lot of L2 hype lately, mainly driven by the ordinals, and inscriptions, developments or innovations, if you want to call it that,” Gilliam said. “There’s a lot of activity in that right now, but we haven’t been as focused on that. It’s our firm view that the ordinals will prove to be a passing fad.”
Gilliam says that Ten31 is focused on basic building blocks of the ecosystem, such as companies that are providing financial services, which could be custody trading and lending, or projects that are working to scale the lightning network.
Lightning, with is the layer two payment technology meant to realize bitcoin’s original vision of being peer-to-peer cash continues to struggle with the issue of reaching scale. Developers tell CNBC that a lot of engineering work remains to close that gap.
The Boys Club put on its own Austin summit on the sidelines of SXSW with programming on the new internet, crypto, and digital culture.
“Number go up” is a big mantra among bitcoiners, but as the community evolves, so too does the thinking about the price of the coin.
“Price is really an output of many inputs of human beings, building tools to make bitcoin both more secure and a greater utility,” Lewis said. “Price is the best indicator of more people coming to the conclusion that bitcoin is money, and it’s a better store of value, so it is very relevant.”
Every four years, bitcoin undergoes a market making event known as the halving. It cuts the production of new bitcoin in half, and it has typically come before a major run-up in the price of bitcoin.
Miners from around the world flocked to Texas when China banned the practice in 2021, attracted by the abundant renewable energy and a grid that’s friendly to flexible buyers of power — both ideal conditions for miners.
In April, however, the profits for these bitcoin miners will be cut in half.
For some, it may prove an Armageddon-level event. Others have braced for impact by swapping out their fleet of machines for more efficient rigs. The price run-up in bitcoin has also helped to give some of these companies a buffer in their profit margins.
West Texas miner Jamie McAvity has 60 megawatts at his mining site. It runs on a part of the grid that is 90% powered by a mix of solar and wind power.
“If you’ve been in for more than one cycle, you have situated yourself in a place where you can resist the halving to the best of your ability,” McAvity told CNBC at Austin’s Bitcoin Commons.
McAvity, who previously worked for ten years as a trader on the floor of the New York Mercantile Exchange, added that ETF flows have helped to change the pricing dynamics for the world’s largest coin.
“The spot ETF inflows are so massive that reducing the available supply of newly mined bitcoins from 900 to 450, is probably going to be immaterial relative to that,” he said.
“But who knows, the ETFs could cool off for a while, and it’s hard for someone to credibly say that a reduction in supply is not going to change the market price equilibrium, because that’s a fundamental principle of market economics,” he added.
A ten minute walk west from the Bitcoin Commons is the Austin Proper Hotel, a five-star establishment where the lighting is intentionally dim to strike a certain mood. Here, the Boys Club, a popular and buzzy, female-led organization which self-describes as a “social collective bringing new voices to the new internet” put on its own crypto conference on the sidelines of South by Southwest.
The Boys Club caters to a more blockchain agnostic crowd, where the focus is less on exclusivity to one coin or chain — and more about borrowing the best features from across the ecosystem to solve problems in the real world.
CNBC caught up with Micha Benoliel at the one-day summit. Benoliel built Nodle, a decentralized wireless network that’s now getting into the business of using the blockchain to battle AI-powered deepfakes.
“Blockchain is the only way to make a record that is immutable, and is going to prove the time at which this photo has been taken, or video, and also to help you prove the location and other elements that are going to reinforce that proof, so it creates a real immutable proof of authenticity,” he said.
The Boys Club put on its own Austin summit on the sidelines of SXSW with programming on the new internet, crypto, and digital culture.
CNBC
The one-day popup event gathered together more of a web3 crowd to talk about everything from the latest trends in tokenization to the resurgence of on-chain meme culture.
Similar to other bull runs in the price of bitcoin, some altcoins have seen a meteoric rise alongside blue chip names in crypto, because they’re seen as a comparatively cheaper buy.
Dogecoin, a meme-coin that was started as a joke, now has a market cap of nearly $25 billion, placing it in the top ten most valuable cryptocurrencies on the planet. Boden, a coin named after President Joe Biden, saw a run-up of more than 800% in a six-hour window after Super Tuesday, and the newly popular DogWifHat is collectively worth more than $2 billion.
Typically, this is the bellwether of a peak bubble moment, but analysts say that despite frothy conditions, this bull run is different to past cycles.
The price of bitcoin is cyclical, and it sees price run-ups roughly every four years. Each time, the price floor is higher. What’s also a departure this time around is the fact that institutional money is here in a way that it hasn’t been during past bull runs.
Fundamentals in the crypto market are playing a big role, as well.
In a note from JPMorgan on Mar. 15, analysts credit ether, the world’s second-biggest crypto token by market cap, for being a significant driver of crypto’s recent gains, including Coinbase‘s stock price rise. Ether has rallied nearly 50% so far this year, recently breaching the $4,000 price level and outpacing bitcoin’s returns, before paring back some gains.
“While the focus of the cryptocurrency marketplace has been the net new money going into U.S. spot Bitcoin ETFs and the positive impact on Bitcoin token prices (here, the spot Bitcoin ETF and its ultimate launch in January has driven the cryptoecosystem over the past several months), we see impact of ETH appreciation also as particularly meaningful,” JPMorgan wrote.
Regulators in the U.S. remain a universal concern for the crypto sector, especially amid reports of the Securities and Exchange Commission probing crypto companies building on the ethereum network.
Still, many in the space, including coders and investors remain optimistic.
Ethereum, the blockchain that underpins ether, underwent a major upgrade on Mar. 13 dubbed Dencun. Developers told CNBC it was expected to slash transaction fees by up to 90%. That is game-changing not just for the end-users, but also for the coders building apps on top of ethereum.
Base, crypto exchange Coinbase’s self-built layer two network, is ethereum-based and allows developers to more easily build decentralized apps. Coinbase’s Base lead, Jesse Pollak, anticipates this will open the door to applications in both the gaming and decentralized social media arena now that it is no longer nearly as cost prohibitive to build these types of programs.
“The thing that is happening with Dencun is we’re going to create a whole new kind of storage on ethereum that’s purpose built for Layer 2s like Base,” Pollak told CNBC.
“That means that right now we pay a ton to ethereum, and we’re going to pay a lot less, which is going to lower the fees for everyone. Because ethereum is basically going to build a product purpose built for us,” continued Pollak.
Chris Dixon, crypto chief at venture firm a16z, echoed that sentiment, noting that part of their portfolio is focused on these startups.
“The core idea is that if you build a social network, or a game or a financial service, on top of the blockchain, it has all sorts of benefits where the money and control flow out to the users and the creators that access the network, as opposed to the companies that control it,” said Dixon. “In the same way that steel was a better way to build bridges and buildings than wood was in the Industrial Revolution, blockchains are a building material.”
NASHVILLE, Tenn. — Digital banking service provider LemonadeLXP won the inaugural Demo Challenge at Bank Automation Summit U.S. 2024. Nine financial services technology startups showcased their latest innovations with technology leaders and executives at the March 19 event. The Ottawa, Canada-based company provides custom technology learning modules for internal and external-facing capabilities, John Findlay, chief […]
Sixth Street, KKR and Bayview Asset Management were part of the consortium of investors that bought Atlanta-based GreenSky for an undisclosed price, completing a deal that was initially announced last fall. The niche home remodeling space remains hot for financial services, as total dollars going into home improvement projects remains elevated from pre-pandemic levels, according to a report from the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.
GreenSky CEO Tim Kaliban said in a news release Friday that the institutional investors will bring “funding, scale and continuity” to the tech company, which also plans to deepen its long-term partnership with Synovus Financial. Sixth Street, which has more than $75 billion of assets under management, led the investor consortium and plans to help GreenSky “deepen its focus on helping grow the businesses it serves,” Michael Muscolino, co-founder and partner at Sixth Street, said in the release.
“Our investor consortium looks forward to providing the GreenSky team with the resources it needs to continue innovating and delivering industry-leading and easy-to-use solutions for its merchant network and their customers,” Muscolino said.
GreenSky offers point-of-sale technology to connect home improvement contractors with consumers to make loans. The loans are housed through bank partners, like Synovus, which is building on its existing relationship with GreenSky.
Synovus CEO Kevin Blair said on the company’s earnings call in January that he expected a “sizable increase in income” from the GreenSky relationship, projecting between $20 million and $30 million in revenue per quarter through fee income. The bank reeled in $51 million in total noninterest revenue in the fourth quarter.
Last month, Synovus also created a chief third-party payments officer to oversee merchant services and sponsorships, tapping Jonathan O’Connor for the role.
Since its founding in 2006, GreenSky has grown its network to more than 10,000 merchants, and has facilitated more than $50 billion of commerce through nearly 6 million consumers, the company said.
Homeowner renovation and maintenance spending peaked last year, hitting $481 billion, after growing at a rapid clip since 2020, according to Harvard’s housing studies center. At the start of the home improvement heyday, banks began making moves to buy into the space. Truist Financial acquired and expanded its own point-of-sale home improvement platform in 2021. Regions Financial made a similar purchase around the same time.
Even last month, Synchrony Financial announced that it had agreed to buy Ally Financial’s point-of-sale financing business and $2.2 billion of loans, focused on home improvement and health care.
While total home improvement spend has started marginally decreasing, the Harvard group still expects folks to put around $450 billion into home projects this year. Prior to 2021, that number had been hovering around $300 billion.
“Home remodeling will continue to suffer this year from a perfect storm of high prices, elevated interest rates, and weak home sales,” said Carlos Martín, project director of the Remodeling Futures Program at the Joint Center for Housing Studies, in a prepared statement.
Still, Abbe Will, associate project director of the group, said in the report that recent improvements in homebuilding and mortgage rates signal that the rate of spending will pick back up by the end of 2024.
Fintechs are looking to legacy banks with strong portfolios to provide seamless onboarding and digital capabilities following the regional banking crisis last year. One year after the collapse of Silicon Valley, Signature and First Republic banks, clients are still clinging to “too big to fail” institutions, Ashish Garg, co-founder and chief executive of digital communications […]
Welcome to TechCrunch Fintech (formerly The Interchange)! This week, we’re looking at the piping hot global payroll space, neobank Dave’s financial results and related stock boost, and more!
To get a roundup of TechCrunch’s biggest and most important fintech stories delivered to your inbox every Sunday at 7:30 a.m. PT, subscribe here.
The big story
This week alone, we covered three interesting deals in the global payroll space. For starters, Deel announced it is acquiring African-based payroll and HR software and services company PaySpace in its largest acquisition to date. It also said it’s crossed $500 million in annual recurring revenue (ARR). Then I wrote about Remofirst, a startup out to take on the likes of Deel and Rippling, too, securing $25 million in Series A funding. Also, Tage wrote about how UAE-based RemotePass announced it had raised $5.5 million in Series A funding led by Istanbul-based 212 VC. There’s no question that this space is hot, hot, hot.
Listen to Alex Wilhelm and I talk more about it on Equity:
Analysis of the week
We’re looking at another fintech recording positive financial results. Neobank Dave told us via email that it had achieved profitability for the first time as a public company, notching adjusted EBITDA of $10 million in the fourth quarter and GAAP net income of $200,000. The company also beat guidance for the 2023 fiscal year and reported a 26% increase in non-GAAP operating revenue with a big boost from its ExtraCash offering. Its stock skyrocketed on the news — starting the week opening on March 4 at $22.46, reaching a new 52-week-high of $43.99 on March 7, before closing at $36 on March 8.
Dollars and cents
Two-year-old Colombian payments startup Yuno has reached a $150 million valuation with $25 million in Series A funding from investors such as DST Global Partners, Tiger and a16z.
Paris-based business banking startup Qonto is using an undisclosed portion of its cash reserve to acquire Regate, an accounting and financial automation platform.
The Artemis Fund, which invests in underrepresented founders in fintech, commerce and care, closed on its second fund with $36 million in capital commitments.
What else we’re writing
Apple’s iOS 17.4 update is primarily about adapting iOS to the EU’s Digital Markets Act regulation. But the company has also released a new API called FinanceKit that lets developers fetch transactions and balance information from Apple Card, Apple Cash and Savings with Apple.
Georgina Merhom wants to squash the status quo with SOLO, a first-party data collection and reporting engine that integrates user-permissioned data sources, including financial transactions, online records and digital footprints to tell a more complete story about someone’s financial behavior.
PayPal announced that it’s launching “Tap to Pay” for merchants with an iPhone through the Venmo and Zettle apps in the U.S.
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MEMPHIS, Tenn., March 5, 2024 (Newswire.com)
– Evolve Bank & Trust (“Evolve”), a global leader in the payments and Banking-as-a-Service (“BaaS”) industry, recently partnered with Neon Money Club, a digital financial wellness and investment platform, to issue the Neon Money Club Cream American Express® Card, which became available for pre-order on November 1, 2023.
The Cream Card lets Card Members invest by converting their Neon Money Club points to invest in stocks. Neon Money Cub will match the value of Card Members’ points when they convert those points to invest in stocks in the NMC app. For example, if a Card Member converts 1000 Neon Money Club points to invest in stocks in the app, Neon Money Club will match it with an additional 1000 Neon Money Club points for stocks. The Card also includes benefits from the American Express Network, including Amex Offers (for shopping, travel, dining, services, entertainment, etc.), presale ticket access, dining benefits, and purchase protections.
“Neon Money Club is what the next generation of financial brands will look like,” said Luke Bailey, CEO and co-founder of Neon Money Club. “We’re working to bring the important topic of financial wellness to the forefront of discussion. In order to do this, we need to work with institutions that value and understand our mission. This is why we chose American Express and Evolve Bank & Trust. We look forward to partnering with them on this journey.”
“Evolve is proud to begin our relationship with Neon Money Club and launch a product on the American Express network. The financial services and digital payment industry is continuously expanding, and we are thrilled to work with innovative leaders bringing unique and multi-faceted product offerings to market,” said Scot Lenoir, Chairman of Evolve.
Evolve’s card issuing solution offers an array of white-label options including virtual, prepaid, debit, and credit cards. This allows for freedom and flexibility when building out a customized card program to serve consumer demands.
“By working with tech-focused banks like Evolve, American Express makes it more seamless for fintechs like Neon Money Club to bring their payments innovations to life on our global payments network,” said William Stredwick, Senior Vice President and General Manager of Global Network Services North America at American Express.
The Cream Card is available for pre-order exclusively at neonmoneyclub.com.
Opinions expressed by Entrepreneur contributors are their own.
We’ve been visiting the headquarters of some of the most innovative and imaginative leaders in business for The CEO Series, learning what it takes to launch and grow a thriving brand. For this episode, our crew went to the office of M1, a fintech platform that bills itself as “the finance super app.” The powerful online investing and banking platform has raised $315 million at a valuation of about $1.5 billion and manages about $8 billion for half a million customers. I sat down with founder and CEO Brian Barnes to learn all about the platform, how it was created, and his advice to founders on running a company built to last.
Below are some highlights of our conversation, which have been edited for length and clarity. You can watch the full video above.
The thrill of investing
“M1 is a personal finance platform. We started the company about eight and a half years ago. We now manage about $8 billion on the platform for half a million customers. And we are really just trying to create the best possible way for someone to manage their finances. And we do that with a lot of personalization, customization, and automation. I was fortunate to be introduced to finance at a pretty young age and I was immediately hooked. I love the idea of investing, of trying to find out what a company’s worth and how it’s operating in a complex world. As an investor, you’re making a high-conviction bet. If you’re right, you make money. If you’re wrong, you lose money. And so, you know, some people like sports gambling. For me, it is what is a company going to be worth in the next five or ten years.”
“We want to create a financial institution that lasts for decades. There are companies out there that have lasted for centuries. If you are around for that period of time, it’s unquestionable that you’re going to have these massive disruptions in the overall market. And so we have been trying to build the organization so that we can survive in any macro environment and not just be tailor-made for one.”
Calm in the storm
“I try to stay calm — on the outside. [Laughs] The entrepreneurship quote I love is that the highs are high, the lows are low and they’re ten minutes apart. There are times when you think you’re taking over the world. And then there are times where you’re like, What the hell am I doing? I took all this money, I convinced people to quit their jobs and join me, I’m competing against the Schwabs of the world. But stewing in all of that stress accomplishes nothing. I think maintaining my emotions and figuring out how I can allocate my time productively has been a good attribute that I’ve had as I’ve built the organization.”
“Being a founder of a tech company is more than just being a CEO. You’re both the most senior and most junior person at the company. You get to set direction and strategy and things like that, but in any area where there is not someone dedicated to that role? It’s on you to fill the gap. I would say I played CEO from 8 a.m. to 11 a.m. And then I played junior analyst from 11 a.m. to midnight every night. You’re just running around and trying to add value where you can. As you grow, you’d love to put things on pause while you figure out how to scale your team. But that’s not how it works — you’ve got to scale your team and build a product and acquire customers at the same time. There’s a little bit of chaos, but you have to sort of thrive in the chaos.”
“My mom Brenda Barnes was CEO of PepsiCo and Sarah Lee. I mean, that’s a great person to learn from. She was one of seven sisters. They all shared a bedroom. They were a Polish immigrant family in Chicago. Her father was a factory worker. And so, I think she always had an insanely healthy respect for people who did the actual work at her companies. The people who bottled the cola, who loaded the delivery trucks. As a CEO, you need to respect that they know their job better than you. And the leader’s job is to set an example for what you want the values across the company to be. If you could write down all the positive attributes and values that you would want instilled throughout the company, then you better exhibit those things.”
Check out more profiles of innovative and impactful leaders by visiting The CEO Series archives.
Welcome to TechCrunch Fintech (formerly The Interchange)! Apologies for being out last week — a cold got the best of me, but I’m back and here to talk about the fact that shutting down startups is big business, Stripe’s new valuation, Klarna’s latest AI update and more.
To get a roundup of TechCrunch’s biggest and most important fintech stories delivered to your inbox every Sunday at 7:30 a.m. PT, subscribe here.
The big story
Last week, I wrote about two startups — Sunset and SimpleClosure — that help other startups shut down raising capital. It was a deep dive into how and why this business has become one that is so sought after by investors. I also covered Stripe’s tender offer that resulted in a 30% higher bump in valuation — to $65 billion — for the payments giant. This means that the company likely won’t go public this year after all. You can hear Alex Wilhelm and I discuss both topics on Friday’s Equity Podcast episode. You can also hear me talk to Nubank CEO David Vélez about a variety of interesting topics.
Analysis of the week
Klarna has been in the news a lot lately. Last week, a failed coup on the part of one investor, Sequoia Capital’s Matthew Miller, made headlines and resulted in his ousting. This week, the Swedish BNPL giant posted a narrower year loss ahead of its potential IPO. Then the company stirred up a bit of controversy when it said its new AI assistant is doing “the equivalent work of 700 full-time agents.” A spokesperson for the company told me via email that since launching globally just a month ago, the AI assistant had 2.3 million conversations, managing two-thirds of Klarna’s customer service chats. She emphasized, though, that the company had not made any cuts as a consequence of launching this AI assistant. She added: “Klarna’s customer service is supported by 4-5 large global partners who collectively have over 650,000 employees and work with thousands of different companies around the world. When one of the companies, like Klarna, requires less support, these agents are assigned to new tasks at another company … With the AI assistant, our customer service can operate with fewer people and require significantly less resources. However, there still is a need for more experienced and senior staff, for example, with specialized training in complex or sensitive cases.”
Dollars and cents
Nearly two years after securing $20 million in Series A capital, Colombian B2B financial solutions startup Simetrik is back with additional investment to the tune of $55 million in a Goldman Sachs-led Series B funding.
Embat, a Spanish fintech which does what they call “real-time treasury management,” closed a financing round of $16 million Series A led by Creandum.
Deel — the $12 billion HR business — said it is scooping up Zavvy, a Munich-based AI-based “people development” startup building tools for personalized career progression, training, and performance management.
FairMoney, a digital bank based in Lagos and headquartered in Paris, is in discussions to acquire Umba, a credit-led digital bank providing payroll and financial services to customers in Nigeria and Kenya, in a $20 million all-stock deal, sources tell TechCrunch.
“Creating an acquiring footprint, creating value-added services over that, I think it is very logical for fintechs in India. I would be really surprised if we lose that game. With the clear thinking of the government and RBI, Indian fintechs will go global, as simple as that,” he said at Razorpay’s annual event in Bengaluru.
He noted that Indian fintech companies must spearhead the task of elucidating the country’s payment standards to the global market before exporting them.
He also noted the need for investment, saying that payment startups are well-funded. He acknowledged the dilemma faced by fintechs regarding balancing focus between domestic and global markets, given India’s substantial market size.
Asbe issued a caution to fintech founders regarding regulatory compliance, advising them to refrain from developing products that regulators have not explicitly authorised.
He emphasised that if a particular activity or product has not been explicitly approved, the default stance should be to abstain from pursuing it.
“Whatever is not written in regulation means a no…When we are part of managing other people’s money, we should be responsible. Compliance is good and risks become higher with size, if fintech founders are here to build long-term, I don’t see it without compliance,” said Asbe.
NPCI has also been pushing the lever on international expansion of UPI payments. The domestic service is currently live in countries including the United Arab Emirates (UAE) and Mauritius.
Under a consent order with the Federal Deposit Insurance Corp., the $290 million-asset bank must implement a board-supervised strategic overhaul that boosts its risk controls, increases its capital and results in the offboarding of some of its fintech partners.
The order took effect on Jan. 29. It was first reported on Friday by Fintech Business Weekly and made public later in the day.
Jonah Crane, a partner at the advisory and investment firm Klaros Group, said in an interview last month that he expects every bank with a banking-as-a-service line of business to see some level of regulatory action over the next year.
Many banks dove into the sector to add deposits and fee revenue but didn’t appropriately allot resources for staff and technology, Crane said. Cross River Bank and First Fed Bank are among the financial institutions that have had to rein in their banking-as-a-service businesses due to compliance failures.
Lineage was founded when father-and-son duo Richard and Kevin Herrington acquired a small, local bank and began ramping up its banking-as-a-service business in 2021.
Since then, the bank has partnered with Synctera and Synapse, two intermediary companies that provide banking-as-a-service technology to connect banks with fintechs. It has grown its assets and deposits by more than 900%, according to FDIC call reports. Lineage’s assets grew from $27 million at the end of 2020 to nearly $300 million at the end of 2023.
In a January 2023 blog post, the bank said that “due to our partnerships with organizations like Synctera and Synapse, we’ve been able to tap into the market with great success. We look forward to expanding upon this BaaS growth here in 2023.”
The FDIC is now requiring Lineage to limit annual growth of assets and liabilities to under 10%, terminate “significant” fintech partnerships and increase its Tier 1 capital.
Lineage did not respond to requests for comment. The FDIC declined to comment.
A Synctera representative said in an email that it’s “unfortunate to see [Lineage] leaving the fintech space,” and that the bank is helping transition fintech partners to new banks. Synapse declined to comment.
In the wake of the FDIC’s action, Lineage has shaken up its leadership team, tapping Jeffrey Hausman as its chairman, and naming Carl Haynes, who was previously chief banking officer, as CEO, the Nashville Business Journal reported on Thursday. Hausman and Haynes replaced Richard and Kevin Herrington, who founded Lineage in 2020 through the acquisition of Citizens Bank and Trust Company.
Konrad Alt, a partner at Klaros Group, told American Banker in November that banks should look at recent regulatory actions as providing a blueprint for their own banking-as-a-service risk strategies.
“The message to banks that are in this space is that if you want to be providing banking as a service, you need to have first-class compliance and risk management,” Alt said. “That’s a message the regulators have been communicating pretty consistently.”
Stark Bank, one of the few Latin America startups to receive funding from Jeff Bezos’ family office, is generating profits from its business of helping companies handle payments, while leaving cash raised from its funding rounds nearly untouched.
The Sao Paulo-based company handled 155 billion reais ($31 billion) of payments in 2023, a three-fold jump from a year earlier, while more than doubling net income to 71.5 million reais, founder Rafael Stark said in an interview, disclosing the closely held firm’s 2023 financial results for the first time.
The startup, which assists companies in processing payments, invoices and receivables, is focused on gaining domestic market share from large corporate banks, said Stark, who owns 38% of the firm. Its list of 600 or so clients includes Gol Linhas Aereas Inteligentes SA, Localiza Rent a Car SA, Cia Ultragaz SA and fellow startups Loft and QuintoAndar.
“While a lot of tech companies are trying to stop losing money we’re posting high levels of profitability,” Stark, 35, said. “There’s no need to keep raising money and diluting my stake. It’s better to grow and create much more value further down the road.”
Series B
In its Series B round in 2022, Stark raised $45 million from investors including Bezos Expeditions, the Amazon.com Inc. founder’s family office, and Ribbit Capital at a valuation of $250 million. Earlier investors included Fabio Igel of Monashees Capital, Stewart Butterfield of Slack Technologies Inc., Brian Armstrong of Coinbase Global Inc. and Arash Ferdowsi of Dropbox Inc.
Stark said the firm’s market share in various metrics remains small among corporate banks in Brazil, showing potential for growth. While Stark doesn’t have a formal banking license, it’s able to lend from its own cash on hand, and is planning to spend more on marketing in 2024 after years of keeping a low profile to build the product.
Stark said the company allows its clients to automate time-consuming tasks like billing and payroll.
“When a company manages a lot of transactions they can misplace information, and if they’re not organized they can lose a lot of money,” he said. “We allow the company to be more efficient. That means sometimes a team of 30 people that do manual tasks and commit human errors can be reduced to about five people to do the same work.”
About 30% of its nearly 90 employees are engineers.
Stark’s focus on helping fellow tech companies and the ability to customize solutions for clients is an advantage compared with large Brazilian banks, said Bruno Diniz, a managing partner at consulting firm Spiralem, which works with fintechs.
‘Interesting Niche’
“They found a very interesting niche,” Diniz said. “They’re very lean in their tech stack, which allows them to provide this custom type of service for the big players. And once they create a customer solution for one player, they replicate that and start offering to all the other clients.”
Born Rafael Castro de Matos in the central state of Goias, Stark studied engineering in Brazil and later received a scholarship in the US, where he attended California Polytechnic University and Stanford University. He founded his firm in 2018 and legally changed his surname to Stark on all official documents.
In drawing parallels to digital bank Nu Holdings Ltd.’s growth path, he anticipates a potential initial public offering about a decade after founding — or close to 2029 — and is focused for now on Brazil and Sao Paulo, where the bulk of the country’s biggest firms are based.
One glaring difference at Stark from other tech startups is that employees are expected to be in the office five days a week. To sweeten the deal, he’s built out the top floor of the building to soon house a bar, restaurant and meeting areas for employees. Stark also says he pays above market wages while offering a stipend for those living close to the office.
“I don’t believe in remote work,” he said. “We need people who are aligned with what we’re building. So someone who is aligned with their own comfort zone and remote work isn’t aligned with the values of Stark. To do big things, you need to leave your comfort zone.”
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A young man holds a credit card and uses a laptop for online shopping.
Diy13 | Istock | Getty Images
Americans shopping online after midnight often make riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
The fintech firm uses the hour a consumer attempts a transaction as a key data point to help determine whether to approve loans, Linford told CNBC in a recent interview. Other factors include a user’s repayment history with Affirm and transaction data from credit bureau Experian.
“Local time of day is a signal that we use in underwriting, and most times of day have the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day â credit delinquencies spike right around 2 a.m.”
While the data is clear that late-night financial decisions are riskier, the reasons for it are less so. Shoppers could be inebriated or under financial or emotional duress and desperately seeking credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for longer-term credit.
Firms including Affirm, Klarna and Sezzle have embedded their services in the online checkout pages of retailers.
A key to their business model is the ability to approve or reject customers in real time and at the transaction level, using data to help judge the odds of being repaid.
“We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay back the $700 purchase you’re making right now. That is very different from credit cards, where they give you a line and say, ‘Godspeed.’”
The use of buy now, pay later loans has grown along with the overall rise in consumer debt. While the industry touts up-front rates and fewer fees compared to credit cards, critics have said they enable users to overspend.
But Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023from a year earlier, even as total purchase volumes surged 32% during that time.
Affirm has little incentive to allow users to pile up debts, according to the CFO.
“If you can’t pay us back, we’ve lost, unlike with credit cards,” Linford said. “We don’t charge late fees. We don’t revolve, we don’t compound.”
The rates at Affirm are in contrast to credit card delinquencies at the four biggest U.S. banks, which have been climbing since 2021 as loan balances have grown. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, a $50 billion increase from the previous quarter amid higher interest rates and persistent inflation, according to a Federal Reserve Bank of New York report.
“The job environment is good, so it begs the question, why are credit card delinquencies creeping up?” Linford said. “The answer is, they took their eye off of underwriting and from my perspective, they got aggressive in a time when consumers were beginning to show stress.”
Stuart Sopp, Current CEO & Co-Founder, joins ‘Fast Money’ to talk the latest CPI report, the impact of inflation on consumers, teh FinTech space and more.
Michael Berman (left), founder and chief executive of Ncontracts, and Ginger Devine (right), senior vice president and senior risk officer at Citizens First Bank, a client of Ncontracts. “This is going to really put financial institutions in the driver’s seat for understanding those control factors earlier in the process,” Berman says of his company’s artificial intelligence assistant for reviewing legal agreements.
For banking executives negotiating contracts with new and existing fintech vendors, careful review of the terms is essential. But as their list of partners grows, the task of analyzing every contract for compliance with current guidelines and continuously monitoring them can become unwieldy.
Meeting the ever-changing standards of regulators is a necessary cost of doing business for both fintechs and financial institutions. Banks and credit unions accordingly scrutinize every third party with which they work to avoid any possibility of missteps in risk management.
Ncontracts, a risk management software firm located in Brentwood, Tennessee, has spent the past year training its new Ntelligent Contracts Assistant to help automate the review process by feeding it vendor contracts with financial institutions and having it learn key terms such as “notice permissions” and “business continuity.” The product made its debut last month.
The assistant scans files one word at a time using optical character recognition and isolates clauses such as price changes and renewal dates using entity extraction. Then it uses a proprietary model powered by generative artificial intelligence to create a comprehensive score and summary that shows how well — or how poorly — the agreement complies with regulatory requirements.
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Screengrab of Ncontracts’ Nvendor platform. Showcased are different modules that track which vendors have different alerts associated with them, as well as the level of risk they pose to the client. (Paul Viancourt)
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A closer look at a summary of an individual contract generated by the Ntelligenct Contract Assistant. (Paul Viancourt)
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Within the Ntelligent Contract Assistant widget, summaries of analyzed documents are broken down by sub categories such as “performance measures or benchmarks” and “costs and compensation.” (Paul Viancourt)
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In contract scorecards generated by the assistant, problematic clauses and sections are isolated and addressed with an explanation for why it was rated inadequate. (Paul Viancourt)
Organizations large and small can “have hundreds of vendors, so being able to automatically process this information as well as identify any exceptions, is a far more efficient use of time than having” a human read each and every agreement, said Michael Berman, founder and chief executive of Ncontracts.
Berman emphasized that the tool, which is offered as part of the firm’s third-party Nvendor platform hosted on Microsoft Azure, is not designed to be a substitute for a lawyer but rather an additive product for running initial checks on contracts and identifying problem areas early on in discussions.
“Having a way to preliminarily run an agreement through a tool [like the Ntelligent Contracts Assistant] and make sure it checks the boxes for all the regulatory issues before you spend thousands and thousands of dollars with a law firm is extremely useful, because nobody wants to spend all that time and money with outside counsel to learn that a vendor doesn’t have everything in place,” Berman said. “This is going to really put financial institutions in the driver’s seat for understanding those control factors earlier in the process.”
With the proliferation of cybersecurity breaches and other third-party issues across the banking industry last year, officials with the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency finalized guidance in June detailing proper steps for overseeing relationships with external vendors.
“As part of sound risk management, it is the responsibility of each banking organization to analyze the risks associated with each third-party relationship and to calibrate its risk management processes, commensurate with the banking organization’s size, complexity, and risk profile and with the nature of its third-party relationships,” the guidance said.
Organizations that have been hit with consent orders over their fintech relationships include the $3.2 billion-asset Blue Ridge Bank in Martinsville, Virginia, which has been offloading fintech partners to address compliance shortcomings in its banking-as-a-service relationships.
Ginger Devine, senior vice president and senior risk officer at Citizens First Bank in The Villages, Florida, was looking for help managing vendor relationships when she began partnering with Ncontracts more than five years ago.
“We were challenged in our ability to be able to process all the information related to our vendors, effectively obtain due diligence documentation, conduct risk assessments that were appropriate for the level of risk that the vendor [posed to] us and then do ongoing coordination with the vendor as everything was changing,” Devine said.
The $3.7 billion-asset bank uses several of the products offered as part of the Nvendor platform to manage internal and external audits, conduct custom risk assessments, stay up to date on relevant regulatory changes and more. As the bank continues its expansion, contracts are becoming more complex, leading executives to explore the potential benefits of Ncontract’s assistant.
Tools such as these are valuable “for all of us that are in [risk-oriented] roles where we’re expected to have a good understanding of what’s happening across the board, because we can’t be experts in everything,” Devine said.
Ncontracts is among a number of vendors that have recently begun offering AI-powered contract assistants such as the New York-based SpotDraft’s VerifAI and the Bellevue, Washington-based Icertis’ Contract Intelligence Copilots that entered the market in the middle of last year.
On an institutional basis, that means instituting a “robust governance framework” before using any AI-powered tools and “ensuring proper due diligence is done to better understand their scope,” said James McPhillips, a partner at the New York-based law firm Clifford Chance.
“Like any financial institution that has to analyze its third-party relationships, especially those that are critical, undertaking a due diligence process and performing a robust governance process on the use of [those tools] is really what all the banks are setting up and doing right now,” McPhillips said.
Executives seeking to address these gaps with outside help must remain dedicated to solving issues at their root cause, rather than adopting products as a temporary solution.
“Perhaps most crucially, banks and all industries should not rely on hopes that technology will eventually come out tomorrow to face the challenges the technology brings today,” said Gilles Ubaghs, strategic advisor on commercial banking and payments for Datos Insights.
Scott Sanborn, LendingClub’s CEO, said the company has more flexibility with its capital position after exiting an operating agreement with the Office of the Comptroller of the Currency.
Christopher Goodney/Bloomberg
An operating agreement between LendingClub and its regulator expired Friday, which provides the company an expanded runway for growth as it hits the three-year anniversary of its acquisition of a bank.
The San Francisco-based fintech entered into an agreement with the Office of the Comptroller of the Currency back in 2021, when it bought Radius Bancorp. The pact imposed capital constraints on LendingClub in an effort to temper fast growth.
In an interview, LendingClub CEO Scott Sanborn said that fintechs get huge benefits from obtaining bank charters, but those changes also bring more responsibility and regulatory oversight.
“The operating agreement, by design, in some ways slows you down,” Sanborn said. “It does that for very good reasons: to make sure you understand the obligations that you now have to manage your risk, and to create a thought process and a culture to do that independently.”
Now LendingClub can pursue options to take advantage of its capital position, which should spur a higher return on equity, Sanborn said. Still, he added that growth will be gradual as the company evaluates appropriate capital ratios.
Back in 2018, LendingClub drafted a detailed operating plan for regulators, which didn’t account for the pandemic, rapidly rising inflation or more recent interest rate hikes. The company later had to stay in close dialogue with the OCC to make changes or additions to its plan, seeking permission for major strategic shifts like the launch of new products and the hiring of new executives.
Notably, LendingClub was bound to a tight Tier 1 leverage ratio, which it reported at 12.9% in the fourth quarter of 2023, as well as a constrained common equity Tier 1 ratio. That figure was 17.9% at the end of the fourth quarter.
Now that the agreement has expired, Stephens analyst Vincent Caintic expects LendingClub to have about $400 million in excess capital, which represents more than 40% of its $990 million market capitalization. He said the company should have enough capital to buy back nearly half of its stock, though that’s not a probable outcome.
In the second half of last year, LendingClub introduced a new product called a structured certificate, which has been “a success,” Jefferies analysts wrote in a recent research note. The company can pool loans into a two-tiered private securitization and retain the senior note on its balance sheet, while an institutional investor buys the residual certificate, which can act like financing.
Because the OCC agreement is no longer in effect, LendingClub can ramp up its structured certificate program, which has a 20% to 25% return on equity, according to Caintic.
“[The end of the operating agreement] gives Lending Club more options in how to expand the return on its business,” Caintic said. “I think they’re still going to ease into it, not be too aggressive. They still have regulators, of course, but they can seize more of that growth opportunity and expand both their assets as well as the return on equity of those assets in a faster period of time.”
LendingClub is one of a few fintechs — others are SoFi Technologies and Varo Money — that have a bank charter. The benefits of a charter include a lower cost of funding through deposits.
When LendingClub entered into the OCC agreement in 2021, its bread-and-butter business was selling loans to institutional investors in what it called its lending marketplace.
Sanborn said this week that the company’s objective in buying a bank was to get to a place where it was delivering a strong return from its own balance sheet, and selling loans in the marketplace was “icing on the cake.”
Three years later, LendingClub is starting the “journey” of expanding without the agreement’s constraints, though Sanborn noted that the bank will still operate under its regulator’s purview.
Analysts are optimistic that the operating agreement exit will be a catalyst for growth, and Sanborn said he’s confident LendingClub can manage credit and originations in a way that improves the company’s value.
When one child misbehaves, even innocent siblings can expect extra scrutiny when their parents come home.
“It doesn’t matter if you’re the problem child,” said Jason Henrichs, founder and CEO of community bank consortium Alloy Labs Alliance. “You’re all in trouble.”
The same could be said of players in the banking-as-a-service space. Financial institutions including Blue Ridge Bankshares, Cross River Bank and First Northwest Bancorp have been forced by regulators including the Office of the Comptroller of Currency and the Federal Deposit Insurance Corp. to heighten oversight of their fintech partners, strengthen compliance and more in recent years; in fact, on January 26, the OCC hit Blue Ridge with a second consent order, while the FDIC published consent orders related to fintech partnerships formed by First & Peoples Bank and Trust Company and Choice Financial Group. A recent analysis by S&P Global Market Intelligence found that banks that provide BaaS to fintech partners accounted for 13.5% of severe enforcement actions issued by federal bank regulators in 2023, a disproportionately large number considering how few banks in the U.S. engage in BaaS, the analysis said.
A fintech or other company tied to a bank experiencing regulatory crackdown may be limited in the products it can launch or modify, or face increased scrutiny from new banking partners if they wish to jump ship.
Even entities that have not run into trouble — whether they are brands seeking chartered banks to support their programs, the sponsor banks amassing these companies as clients or the middleware providers that connect the two — may experience ripple effects in the banking-as-a-service space.
The explosion of banking-as-service programs happened at a time “when the CFPB was relatively silent and there was a period of regulatory uncertainty and a relatively hands-off approach,” said Henrichs. “A number of things were done that today would have been cut off quickly,” including claims regarding FDIC insurance and latitude for programs to conduct their own oversight.
This is causing a shift in how fintechs view their banking-as-a-service relationships and how they should position themselves moving forward.
“As recently as two years ago, it was common practice to figure out the path of least resistance for a fintech-bank sponsor relationship,” said Clayton Mitchell, principal at consulting firm Crowe. “That mindset has changed over the last 18 to 24 months. Fintechs are looking for business partners who are in banking-as-a-service genuinely and strategically. That means the due diligence is likely harder.”
One option that may be more appealing to fintechs is redundancy, or taking on more than one sponsor bank.
“We’re working with a couple of very large fintechs that are explicit in thinking about whether they have the right relationships or need to diversify more,” said Adam Shapiro, a partner at Klaros Group.
He said this urge is driven less by fear that the main partner bank will shut down and more by the desire to preserve flexibility in case new initiatives come under review. He has also observed a growing recognition that different partner banks may specialize in different areas, such as deposits, credit, lending or international payments.
“It’s common for enforcement actions to have either prohibitions on new activity for a period or a requirement for regulatory permission to be granted,” said Shapiro. “If you’re a fintech you want a backup plan.”
Stash, a banking and investing app, relies on Stride Bank in Enid, Oklahoma, as its single BaaS partner.
“Stash Core was built to support multiple banking partners,” said Liza Landsman, CEO of Stash, via email. “Right now, we are only utilizing one partner, but the capability exists for the future as we continue to grow and serve our customers in new ways.”
Moving to another bank is not easy.
“Diversification in terms of sponsors is a logical pathway that a lot [of fintechs] will go to,” said Curt Queyrouze, president of Coastal Community Bank in Everett, Washington. Yet fintechs typically sign three- to five-year contracts with their sponsor banks and it takes time to launch or wind down a relationship. Issuing new routing and account numbers and new cards also causes friction for customers.
“With all the pressures, it’s hard to move,” said Queyrouze.
Coastal Community, which has $3.7 billion of assets, saw a spike in inbound requests in the middle of 2023, as some banks pulled back from this business model.
However, “we’ve slowed the new partners both purposefully and also in response to environmental factors,” including because of regulatory scrutiny, said Queyrouze.
If a company with an existing bank relationship approaches the Warsaw, New York-based Five Star Bank, “we need a pretty convincing story on why they want to leave that bank,” said Abraham Rojo, its head of digital banking and BaaS.
Companies seeking new sponsor banks can take other actions to put themselves in a better position.
“You’re seeing a race to prove out your unit economics in that this is a good and fundable business,” with less emphasis on the number of customers and more on the number of customers that make money for the company, said Henrichs.
Moreover, “There is a shift in the boardroom,” he said. “Previously investors who were [seeking] growth at all costs are now realizing that risk and compliance is not an expense center, but the lifeblood of a company to have freedom to operate.”
Queyrouze echoes these sentiments.
“Be serious about approaches to compliance, particularly about transparency and promises made and promises kept,” he said. “Think about that as a priority. Let us know things about your financial standing, run rates, objectives. The days of having a fintech with a capital focus toward customer acquisition have passed for the time being, and it’s more about unit costing and operating controls and cash flow.”
Rojo, of the $6 billion-asset Five Star, also analyzes leadership.
“We look for their ability to sustain the business,” said Rojo. “I look at their leadership and what they are trying to do, especially how they are differentiating themselves in the market. Who are their backers? Are they well funded? Do they have the background to execute something like this?”
Shapiro advises fintechs and other brands using sponsor banks to watch the regulatory environment carefully and read enforcement actions to see where their bank’s vulnerabilities lie.
“If there is something you see that your bank is not asking you for that regulators are concerned about, do it yourself,” he said, such as providing fair lending data. “Put a report on your file about what they should be asking for.”
Fintechs may also want to revisit their relationships with middleware providers. Synapse, for instance, laid off nearly half its staff in October after one of its partner banks, Evolve Bank & Trust, and a large fintech client both broke ties with Synapse and decided to work together directly.
“The value is as enablers. When they start acting as gatekeepers, that provides negative value,” said Shapiro.
He suggests that fintechs evaluate the benefits of these providers’ technology and operational support but pursue a direct contract with a bank around its banking services.
Fintechs or other companies that embed financial services can view a sponsor bank’s troubles in two lights.
“Either the fintech company should be considering another bank, who may face similar challenges, or more likely, [recognize] that any enforcement action will provide the needed guidance and strengthen the bank’s compliance system and programs overall,” said Phil Goldfeder, CEO of the American Fintech Council, which counts BaaS-oriented banks among its members.
Even one that came under scrutiny itself can spin the experience into something positive.
“If a fintech was examined by regulators and successfully responded to that, we consider that a good thing because they did the homework, showed their commitment and invested in that business rather than winding down,” said Rojo.
“I haven’t seen fintechs that have their act together on risk and compliance, and have business that appears desirable, have difficulty getting new relationships,” said Shapiro.
He even sees new banks quietly enter the market in search of fintech relationships.
“They’re not out at conferences directly marketing [their services] but they’re lurking in the background and looking for people that meet a risk-reward profile,” said Shapiro.
Welcome to TechCrunch Fintech (formerly The Interchange)! In this edition, I’m going to look at Brex’s latest round of layoffs, the state of fintech investing in 2023 and more! I may be taking some time off in coming weeks but never fear, TechCrunch Fintech isn’t going away. We’ll be back soon!
To get a roundup of TechCrunch’s biggest and most important fintech stories delivered to your inbox every Sunday at 7:30 a.m. PT, subscribe here.
The big story
What goes up must come down. For spend management startup Brex, this was the case for its employee headcount. While interest rates were low, the company saw a bump in business and VC money was easier to come by. Its headcount had swelled to about 1,300 before it laid off staff in October of 2022. As things have come down to earth, Brex is attempting a reset, announcing this week it cut 282 employees, or nearly 20% of its staff, in a restructuring. The move came after reports the company burned $17 million in cash each month during the fourth quarter and that it is trying to preserve runway.
Analysis of the week
Fintech, oh, fintech. Last year wasn’t easy on you. Fintech investors injected $34.6 billion in startups across 2,055 deals in 2023, a –43.8% and –32.4% YoY drop, respectively, according to PitchBook data. Valuations also mostly dropped, with the median of $19.4 million, down –13% from 2022’s median. Exits also took a dive, with just $5.9 billion in exit value generated across 185 deals in 2023, a decrease of –76.1% and –22.3% YoY, respectively. But Q4 was a good one. According to CB Insights, fintech saw eight new unicorns during the period and equity funding increase by double-digit percentages.
Dollars and cents
Bilt Rewards, whose platform aims to allow consumers to earn rewards on rent and daily neighborhood spend, announced last week that it raised $200 million at a $3.1 billion valuation. General Catalyst led the financing, which more than doubled the New York–based company’s valuation compared to its $150 million October 2022 raise. The raise and valuation jump are impressive in an environment were mega-rounds (deals worth over $100 million) are few and far between. CB Insights’ State of Venture Report 2023 found that while mega-rounds “were a hallmark of 2021, with 350+ occurring each quarter . . . in Q4’23, that figure fell to just 78 — the lowest level since 2017.”
What else we’re writing
Swedish fintech company Klarna announced its first subscription plan, “Klarna Plus,” for $7.99 per month, featuring benefits like no added service fees when using Klarna’s One Time Card, double rewards points and access to exclusive discounts with popular brands.
PayPal will begin piloting a few new upcoming updates to its service, some of which will leverage AI-driven personalization. The company is introducing a new “CashPass” cash-back offering called “Smart Receipts,” with personalized recommendations, among other things.
Bilt Rewards, whose platform aims to allow consumers to earn rewards on rent and daily neighborhood spend, has raised $200 million at a $3.1 valuation, the company announced today.
General Catalyst led the financing, which more than doubles the New York-based company’s valuation compared to its $150 million October 2022 raise. Eldridge and existing backers Left Lane Capital, Camber Creek and Prosus Ventures.
Ken Chenault, chairman and managing director of General Catalyst, is joining Bilt’s board of directors as part of the new funding. Chenault is also former chairman and CEO of American Express. NFL Commissioner Roger Goodell is also joining the board as an independent director.
The raise and valuation jump are impressive in an environment were mega-rounds (deals worth over $100 million) are few and far between. CB Insights’ State of Venture Report 2023 found that while mega-rounds “were a hallmark of 2021, with 350+ occurring each quarter…in Q4’23, that figure fell to just 78 — the lowest level since 2017.”
With the new capital, Bilt has raised $413 million in total funding since the company launched in June 2021 out of Kairos, the startup studio led by Bilt founder and CEO Ankur Jain. It launched its rewards program in April of 2022.
In a written statement, Bilt said its annualized member spend is “nearing $20 billion” and the company achieved EBITDA profitability in 2023.
At the time of its last raise, the company’s loyalty program and payment platform had been rolled out to more than 2.5 million apartment units. Today that number is up to nearly 4 million units.
Users can earn points and improve their credit by simply paying rent each month. Bilt’s points can be used in a variety of loyalty programs, including major airlines, hotels, travel, fitness classes, Amazon.com purchases, credit toward rent or a future down payment.
Bilt said it plans to use the new capital toward expanding its Rewards Alliance, which partners with multifamily, single-family, and student housing operators nationwide. It will also go towards bolstering its Neighborhood Rewards program, which aims to help local merchants “connect and build loyalty” with new and existing residents in their community. The company also plans to expand into mortgage payment rewards.
Bilt also offers a co-branded Mastercard, issued by Wells Fargo, that can be used to pay rent and earn Bilt Points with no transaction fees.
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