Banking
N26 Exits UK Market Citing Brexit as Reason
February 13, 2020
The challenger bank N26 pulled out of the UK market this week, citing Brexit as the reason for its departure. Saying that it will no longer be able to service Britain now that it has left the European Union, N26 has stopped onboarding new customers and will be closing all British accounts on April 15th.
The news came as a shock to many N26 users as the company has, as recently as October 2019, published multiple blog posts assuring customers that Brexit will not disrupt their service. These posts have since been deleted.
In a statement, the neobank advised its UK customers to empty their N26 accounts before April 15 and apologized for the inconvenience. “With the UK having left the European Union, N26 has today announced that it will be leaving the UK market. The timings and framework outlined in the Withdrawal Agreement mean that the company will in due course be unable to operate in the UK with its European banking license.”
Having its headquarters in Berlin, the neobank holds a German banking license. Under EU law, passporting rights enable any banks that hold a charter granted by an EU member state to operate in any other EU country. And while this of course means that N26’s license will no longer be enough for the UK market, temporary permissions exist that allow EU fintechs and financial services companies to continue operating under the same rules until December 31st, 2020, allotting time to draw up new deals and ink new charters.
This detail, as well as the fact that none of N26’s competitors, Revolut, Starling Bank, and Monzo, have announced their exit, has led commentators to reason that the high investment cost associated with applying for a UK banking charter is influencing the decision to pull out, rather than the feasibility and process required.
Speaking to deBanked, a spokesperson for Starling said that “We’re not affected by N26’s decision. Some digital banks appear to have been focusing on growth at all costs. At Starling, we’ve always gone for sustainable growth and have long mapped out our path to profitability. We expect to hit breakeven by the end of 2020 and to turn a profit by the end of 2021.”
Having entered the UK market in October 2018, more than two years after the leave vote, N26 will be cutting service to its +200,000 UK customers. Most of the dozen or so staff members the neobank had in Britain will be repositioned elsewhere in the company, which has offices in Berlin, Barcelona, São Paolo, Vienna, and New York.
The challenger bank has been available in the States since August 2019, garnering over 250,000 customers in the market since then. Valued at $3.5 billion in its July funding round, N26 has received investments from Peter Thiel’s Valar Ventures, Li Ka-shing’s Horizon Ventures, and China’s Tencent Holdings Ltd.
Varo Receives FDIC Approval for Bank Charter
February 12, 2020V
aro Money, the company that has been providing customers with app-based banking since 2017, has just received approval from the FDIC to take deposits. Having been working towards this for the previous three years through various rounds of applications to the FDIC, Varo CEO Colin Walsh told CNBC that “it was a long process – for this to finally see daylight is a big deal for the industry.”
Fintechs such as Varo, like Revolut, N26, and Chime, rely on partnerships with banks to provide financial infrastructure in the absence of such FDIC approval. This decision is a first for the fintech space and it means that all accounts with Varo’s partner, Bancorp, will transfer to Varo in Q2 of 2020, so long as the company passes final regulatory tests.
Robinhood, a startup that offers options to invest in stock through its app, previously applied for the same charter but pulled out in November, while the payments titan Square has applied for a different charter for a specialized industrial loan company license.
“Receiving an official bank charter has been part of Varo’s vision from the very beginning, and we are excited to progress through the necessary steps to accomplishing that goal,” Walsh, who is a former American Express executive, said in a statement. “Despite historic economic growth, only 29% of Americans are considered financially healthy. Varo is committed to creating inclusive financial opportunities that deliver measurable benefits to all consumers. Becoming a fully chartered bank will give us greater opportunity to deliver products and services that impact the lives of everyday people around the country.”
Varo has stated that it has ambitions to provide additional services that are typical of banks, eg. credit cards, loans, saving products, but these are of course pending charter approval.
Goldman Sachs-Amazon Deal to Offer Small Business Loans in the Works
February 3, 2020
Tech giant Amazon is reportedly in talks with Goldman Sachs to offer business loans to those small and medium sized merchants operating on its marketplace, according to sources that the FT describes as “two people briefed on the discussions with the online retailer.” One of these sources said that it could launch as soon as March.
The news comes after CEO David Soloman spoke at the bank’s Investor Day recently, explaining that Goldman would be pursuing a “banking-as-a-service” model this year that would see the bank white labeling their products for third parties to use. As well as this, Solomon commented on a shareholders call last week that the bank is seeking to increase revenues from new channels such as consumer banking and wealth management.
One such channel is Goldman’s partnership with Apple last summer that saw the launch of Apple Card, a credit card solely available to Apple’s +100 million users in the US. The card’s launch was lauded by Solomon; and according to Business Insider, cardholders had $736 million in loan balances by the end of September, one month after the card was released to the public.
The Apple and Amazon deals highlight how Wall Street banks are employing and partnering with Big Tech to leverage advantage over fintechs, and ultimately gain access into markets that are historically not domains of the uber rich. Traditionally a bank that catered to elites, Goldman Sachs has been edging its way into consumer and small business banking ever since the launch of Marcus, its personal banking platform.
Amazon has been offering loans to merchants on its platform since 2011, using algorithms to determine which sellers would be best positioned to receive and repay a loan. Having previously partnered with Bank of America to finance such loans, the terms of these were for 12 months or less, with amounts funded ranging from $1,000 to $750,000. According to the FT, Amazon had $863 million in outstanding SMB loans on its balance sheet as of the end of 2019.
The digital nature of Amazon’s marketplace would accommodate Goldman Sachs’ neglect of brick-and-mortars stores, which have historically been a waypoint for small- and medium-sized businesses seeking finance.
LendIt Chairman and Co-founder Peter Renton described Goldman’s progression in the fintech space as “impressive,” noting that the speed at which it has been operating isn’t to be overlooked: “I thought something like this would happen but not in such a short space of time. Apple Card was only six months ago.”
As well as this, Renton was wary of how expansive the deal would be, admitting skepticism of it being a large project for either company. Given how both Amazon and Goldman have shown themselves to be selective in who they provide financing for, this assessment may prove correct.
Former Wells Fargo CEO Fined $17.5 Million
January 27, 2020
Last week the Office of the Comptroller of the Currency released a 100-page report on the Wells Fargo fake accounts scandal that came to light three years ago. Accompanying the document with a fine against the CEO who oversaw the controversy, John Stumpf, for $17.5 million.
Stumpf, whose personal wealth was estimated to be roughly $200 million prior to the scandal, also had all of his stock options rescinded by Wells Fargo, totaling $69 million that was returned to the bank.
Being the largest ever fine to be levied against an individual by the OCC, the news contrasts regulators’ reactions to previous outrages, such as JPMorgan Chase’s London Whale fiasco as well as the ’08 financial crisis, both of which saw executives escape personal scrutiny in lieu of the institutions themselves being subject to penalties. And while Stumpf’s fine breaks records, it may not hold the top spot for long, with the OCC eyeing a follow-up charge against Carrie Tolstedt, who ran the division of Wells Fargo most involved in the scandal, for $25 million.
Stumpf was charged alongside seven others who were implicated in 2016 for opening millions of allegedly fake accounts to meet sales targets. Such goals being set by higher-ups in the 168-years-old bank were passed down to mid- and low-level employees, fostering a culture that promoted the idea of cheating or being fired, according to the OCC’s report.
Employee testimonies allege that one branch manager threatened to transfer those workers who did not meet targets to “a store where someone had been shot and killed,” whereas another employee and Gulf War veteran wrote to Stumpf noting that working for Wells Fargo proved to be more stressful than a war zone.
The filings also described an atmosphere of surveillance, mentioning that “The bank had better tools and systems to detect employees who did not meet unreasonable sales goals than it did to catch employees who engaged in sales practices misconduct.”
Reactions to the scandal have been scathing, with Congress having drilled Stumpf’s replacement, Tim Sloan, during hearings last year. Democratic presidential nominee candidate Elizabeth Warren came out during the week with guns blazing for the bank. “Giant banks like Wells Fargo only clean up their act when their executives know they’ll face handcuffs when they preside over massive fraud,” the Massachusetts Senator said in a statement on Thursday. “Tomorrow morning, former Wells Fargo CEO John Stumpf will wake up to his cushy retirement while the thousands of low-level branch employees who took the fall for him – and the hundreds of thousands of consumers who were cheated on his watch – continue to deal with the repercussions of his scams.”
Sloan ended up taking a forced retirement in March 2019, with Charles Scharf stepping in as CEO. Speaking on his first earnings call since assuming leadership of the bank, Scharf addressed the scandal, keeping the book open on investigations into wrongdoing. “I just want to be clear, I’m not suggesting here that any of these public issues will be closed this year.”
Open Banking: Canada Might Not Be Able to Make Up for Lost Time
January 22, 2020
Over the last two years, open banking has become a matter of public conversation in Canada. Most would agree there is overwhelming support for the implementation of an open banking regime. So why has nothing concrete happened yet?
2019 turned out to be an exciting, yet painfully underwhelming year for open banking in Canada. The news media finally caught on to the movement and started publishing stories on the rise of robo-advisor apps, or how small and medium-sized businesses would be impacted, and so forth. Experts and industry leaders pitched in with a massive volume of op-eds, most of which were in support of open banking, and with many deploring Canada’s slowness. Some came to our podcast to discuss their perspective (spoiler: customer-centricity is a very big theme.)
Another telling sign of the importance of open banking is the fact that at the federal level, both the legislative and executive arms of the government have become actively engaged in the public conversation. The Senate of Canada’s committee on Banking, Trade and Commerce produced a well-researched report — perhaps the most valuable contribution to the conversation. This report calls for swift action on the part of the federal government to advance a regulatory framework for open banking. In parallel, the Department of Finance’s appointed advisory committee on open banking held a consultation with key stakeholders and should publish its own report in the near future.
Even to a casual observer, there was an obvious sense that Canada is ready to embrace open banking.
But here’s the thing: despite all this work and evidence of widespread support, Canada didn’t move the needle on open banking in any concrete way.
Who’s leading?
The UK has already implemented a comprehensive open banking regime, and continental Europe is close behind. Dozens more countries are working toward their own versions. Among the various geographies moving in this direction, some are opting for a government-led approach, the UK probably being the best example. Others, like the US, tend to be more market-driven. In Canada, the main stakeholders are still largely hesitant about where to strike the balance between the two approaches — and the result is that so far, both have failed to provide the leadership that would allow open banking to move forward.
The Department of Finance’s advisory committee was tasked to study the “merits of open banking”. This line of inquiry feels very old, and for good reason: to question whether we should have open banking or not is a false debate, and a time-wasting rabbit hole. The real question Canada should be asking itself when it comes to open banking is, “what is the objective we want to achieve here?”
Let’s take a few steps back to realize just how important this question is.
The UK had a very clear vision for their open banking regime. The Competition and Markets Authority had assessed that the oligopolistic dynamics of the banking sector were putting consumers at a disadvantage. Thus, the UK set on their open banking journey with a very precise objective in mind: make it easier for consumers to switch providers. While some take great pride in criticizing the UK’s implementation — stating that its objective was either wrong, too narrow, or poorly executed — the fact remains that they are ahead of the pack. And the UK’s leadership in this area still persists, with the Financial Conduct Authority now studying the question of extending the current open banking regime into a holistic open finance regime.
Meanwhile, in Canada, the government is trying to wrap its head around the big questions, such as the liability framework that should be put in place for an open banking regime to be viable. (In other words, in a system where financial services are decentralized, how do we go about making the consumer whole when something goes wrong?) However, without a decision on what end state we are looking to achieve with open banking, these conversations are doomed to keep looking exactly like they’re looking now: a bunch of market actors with conflicting interests pretending they know what’s best for consumers. Conversations happening in industry groups aren’t much more productive, with the “trench war” dynamics being the trend there as well.
The irony is that the technical aspects of open banking can be dealt with easily. From a technical standpoint, financial data-sharing APIs have proven their effectiveness, and coming up with a shared technical standard should not be too difficult. The real challenge is coming up with a framework everyone — incumbents and new entrants alike — can rally behind, something industry groups have largely been ineffective at.
Canada’s highly concentrated financial services sector is a stable one, but incumbents are not likely to open themselves up to disruption. This is the part where bold political leadership is required.
The clock is ticking
Data sharing is nevertheless picking up, as 4 million Canadians (and counting) have made fintech apps a part of their financial lives. Consumers and businesses who want the benefits of on-demand data sharing must rely on the current generation of financial aggregators, like Flinks. This system may work as a de facto connectivity layer, but the lack of standards results in a clumsy patchwork of bilateral deals between aggregators and banks. It just isn’t a viable way to achieve an open banking regime that levels the playing field when it comes to data portability.
In its report, the Senate’s Committee on Banking, Trade and Commerce states that Canada “risks falling behind” if it fails to implement open banking, and that “without swift action, Canada may become an importer of financial technology rather than an exporter.” It is true that if we keep delaying open banking, our slowness will prove to be a very stingy and lasting price to pay for the Canadian society; this is why we need bold action now. We can’t afford the comfort of waiting until we’ve figured out the 100% perfect solution.
There’s nothing like a real-world example: 2020 opened with a seismic shift when financial giant Visa acquired Plaid, one of the largest US financial aggregators, for over five billion USD. This is hinting at a new phase where markets will consolidate around a few large players; Canada can either ride the tide or get towed under.
It’s time to be bold
In the end, what needs to happen for Canada to move forward with open banking?
Our financial services sector can be compared to those of the UK and Australia, where a few powerful banks control a very large portion of the market. In those two countries, open banking was designed to stimulate competition, and government action was necessary to get things moving.
Right now, the question politicians ought to ask shouldn’t be if — or even how — but why. A why will pave the way and provide a natural direction to sort out the how. In 2019, discussions around open banking lacked this fundamental feature: political leadership centered on a bold, ambitious, consumer-centric mission statement. A why.
So here’s one for 2020: open banking will increase consumers’ choice when it comes to financial services. That would be a good start — and while good is not perfect, it still beats nothing by a landslide.
Visa Acquires Plaid in $5.3 Billion Deal
January 14, 2020
Yesterday it was announced that Visa and Plaid, the financial services company that helps business connect with customers’ bank accounts, have penned a deal that would see Visa purchase the San Francisco-based startup for $5.3 billion. The purchase price is roughly double Plaid’s previous valuation of $2.7 billion after its 2018 Series C investment of $250 million. Pending regulatory confirmation, the acquisition is expected to be completed in 3-6 months.
Founded in 2013 by Zach Perret and William Hockey, Plaid’s API enables companies to easily link with customers bank accounts and connects to a host of apps, such as Venmo, Robinhood, Coinbase, TransferWise, and Acorns. The company claims to have connected to one quarter of Americans with bank accounts and has expanded to both the UK and Canada.
Not being Visa’s first interaction with Plaid, the startup had previously received investment from its new owner, along with other recognizable names like Mastercard, Goldman Sachs, Citi, and American Express.
“This fits well, strategically,” commented Al Kelly, Visa’s CEO, in a call with investors on Monday. “We’re excited about new business and the ability for this to accelerate our revenue growth over time.”
Speaking to CNBC, Perret told CNBC that “We feel fortunate to have been there for the early days of fintech, and to have helped develop that ecosystem … This represents an important milestone, and the ability to work with Visa to make our products much bigger and better – both domestically and internationally.”
Whether such developments mean added features, further expansion to new territories, or something else entirely remains unclear. However, much like Google’s acquisition of Fitbit late last year, this merger witnesses the passing on of a treasure trove of data, with the curtain being pulled on the financial details of millions of transactions between startups and consumers; leaving Visa better positioned to understand and pre-empt what exactly is happening in industries where unpredictable disruption is valued above all else.
Canadian Lenders Summit Recap
November 23, 2019
The Canadian Lenders Association’s largest annual event brought together hundreds of executives from the fintech and lending industries. It was hosted at MaRS, a dedicated launchpad for startups in Downtown Toronto that occupies more than 1.5 million square feet and is home to more than 120 tenants, many of which are global tech companies.
After OnDeck Canada CEO Neil Wechsler was introduced as the new chairman of the association, the day kicked off with a presentation by Craig Alexander, the Chief Economist of Deloitte Canada. Alexander explained that after some major warning signs sounded off late last year and early this year, Canadian growth and positive economic indicators have returned. He opined that politics in Canada and the United States will play a strong role in the economic outcomes of both countries going forward.
Panels on a variety of topics dominated the rest of the day with an interlude keynote from author Alex Tapscott who spoke about the financial services revolution.
The sessions concluded with an award ceremony focused around the Top 25 Company Leaders in Lending and the Top 25 Executive Leaders in Lending. The Canadian Lenders Association will make videos of the sessions available online. deBanked was in attendance.
Google to Begin Offering Checking Accounts in 2020
November 16, 2019
This week Google announced that it plans to offer checking accounts to customers in 2020. The news comes after the release of the Apple Card, Apple and Goldman Sach’s controversial joint project, in August; this week’s release of Facebook Pay; and the mass exodus by payments companies from Facebook’s Libra Association last month.
Titled as Google’s ‘Cache’ project, the accounts will be the result of a partnership between the tech giant and a selection of banks and credit unions. Thus far, Citigroup and a credit union based in Stanford University have been confirmed as partners, with more to be announced. Speaking on the venture, Citigroup spokesperson Liz Fogarty said the “agreement has the potential to expand the reach and breadth of our customer base.” Whereas Joan Opp, President and CEO of Stanford Federal Credit Union, remarked that the deal would be “critical to remaining relevant and meeting customer expectations.”
As of yet, not much is known beyond these partners and that the checking accounts will be in some way “smart” according to Google spokesperson Craig Ewer. Whether or not there will be fees attached to the accounts, or who will be the target audience remain unsure. The latter especially given Google Pay’s poor take up in America.
As well as all this, it is equally unclear what exactly Google will be bringing to banking that is new. In his statement, Ewer said that “we’re exploring how we can partner with banks and credit unions in the US to offer smart checking accounts through Google Pay, helping their customers benefit from useful insights and budgeting tools while keeping their money in an FDIC or NCUA-insured accounts.” Such “insights” and “tools” are yet to be expanded upon and may give cause to alarm, as the company has recently come under fire for its questionable use of data after it was revealed that Google has secretly gathered the personal medical data of 50 million Americans from healthcare providers; and has recently been accused of using both human contractors and algorithms to tweak search engine results, potentially exhibiting favoritism as well as a willingness to change results related to at least one major advertiser.
When asked by CNBC about Google’s plans to enter finance, Senator Mark Warner (D) was apprehensive, remarking that “large platform companies have not had a very good record of protecting the data or being transparent with consumers.” Warner, who was a tech entrepreneur before entering politics, believes more regulation should be in place as the number of tech companies looking to enter finances continues to increase, saying, “once they get in, the ability to extract them out is going to be virtually impossible.”
Such comments come in the wake of Facebook CEO Mark Zuckerburg’s testimony to Congress last month, in which he told the representatives: “I view the financial infrastructure in the United States as outdated.” Just how outdated Zuckerburg and his contemporaries believe it to be will become clearer as more of these Big Tech-Wall Street hybrids are released.
