FedNow instant payments are about to unlock fintech investment opportunities

The payments industry is on the cusp of a revolution.

Thanks to the Federal Reserve’s new instant payments initiative FedNow, transactions will soon be faster, more secure, and more cost-effective than ever before. This initiative promises to benefit consumers, small businesses, and banks of all sizes. As such, given its potential to completely overhaul the way we make payments in the years to come, many opportunities, as well as challenges, are likely to arise.

Say hello to the tax man

The IRS estimates that nearly two-thirds of income goes unreported due to a lack of third-party reporting. A significant portion of small and mid-size businesses (SMBs), which are highly dependent on hourly workers, typically handle payments via cash and, similarly, consumers do the same with many of their everyday service providers (i.e., gardeners, dog walkers, etc.). The key factor contributing to this is independent contractors’ reliance on instantaneous payments.

The Fed’s initiative has opened up a window for innovation, the effects of which could be realized as early as next year.

With the advent of FedNow, contractors can now get paid immediately, specifically via ACH, which will result in many transactions moving away from cash as the primary medium of payment. Yet, while this is cause for celebration among independent contractors, increased transaction traceability brings with it increased tax reporting requirements and liabilities.

Moving forward, we foresee a heightened focus on assisting independent contractors with tax management navigation, as well as financial planning.

Main Street can now compete with Wall Street

Smaller financial institutions like community banks can now offer the same level of service as larger banks or modern fintech companies, and support further migration to online banking. In effect, this could reduce the need for physical locations, due to the reduction of check flow and improve the margin profile for these smaller financial institutions that have historically shouldered the cost of a large retail footprint.

Given the absence of risk in overdrawing one’s bank account or paying overdraft fees (as banks verify fund levels before initiating instant payments), this will greatly diminish the costs that banks currently incur for settlement fees and fund verification.

FedNow instant payments are about to unlock fintech investment opportunities by Walter Thompson originally published on TechCrunch

Neobanks should take heart from Monzo’s performance in 2022

UK-based neobank Monzo has had quite the bittersweet year. The company’s full-year financial results for 2022 paint a picture of a business that’s growing rapidly, though at the cost of sticky, large losses.

However, it’s not all bad news: Monzo has been cash-flow positive since October 2022, and it “reached profitability” after the end of its most recent fiscal year.

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Monzo has been through a few tumultuous years.

When COVID struck, Monzo laid off staff, closed offices, raised a down round and saw founder Tom Blomfield leave the company. After seeing its valuation fall to a post-money price of £1.3 billion in 2020, however, the company bounced back. In late 2021, it raised a $500 million round at a pre-money valuation of $4 billion, providing it with a massive cash injection and raising the value of its efforts many times.

Since then, Monzo has continued to grow, and now that it is both cash-flow positive and profitable, it can fund its own efforts. That puts it in good company, joining Starling, another UK-based neobank that is also profitable and growing thanks to rising interest rates.

Similar themes are at work at Monzo. Today, we’re diving into the company’s fiscal 2023 results and considering what its recent profitability tells us about its performance this past year (spoiler alert: good things). We’ll close with a few notes on other neobanks worth $1 billion or more. We are compiling an IPO list in our heads, after all. To work!

Yet another benefactor of interest rates

Here are Monzo’s key results, extracted from its annual report:

  • Monzo’s net operating income, defined as revenues less credit loss-related expenses, increased by 88% to £214.5 million from a year earlier.
  • Expenses (staffing, depreciation and impairment, and other operating costs) also rose 42% to £330.9 million in the year.
  • The company’s rising cost basis weighed on its larger revenues, leading to a loss of £116.3 million, narrowing 2% from its fiscal 2022 loss of £119 million.

How did the company grow so much? Its net fees and commissions rose 64% to £132.9 million from a year earlier, as its customers spent more, and its Monzo Plus, Premium and Business subscription efforts drew more customers. The biggest driver by far, however, was interest incomes. Net interest income rose a whopping 382% to £164.2 million from fiscal 2022.

But that growth did not come cheap: Anticipated credit loss expenses skyrocketed to £101.2 million in FY 2023 from only £14 million a year earlier.

Monzo’s vastly bigger loan book powered both this surge in interest incomes and credit loss provisions. According to its results, “total gross loans and advances to customers” expanded to £759.7 million in FY 2023 from £258.8 million in fiscal 2022.

Not all of Monzo’s interest income came from loans, though. The neobank also saw revenue from “cash and balances at central banks” and “treasury assets” rise dramatically.

As Monzo detailed in the annual report (emphasis ours):

To safely optimise the mix of our balance sheet, maintain appropriate hedging and improve margins while retaining liquidity, we used some cash balances to invest in treasury assets and for customers to borrow from us. The increase in base rate from 0.5% to 4.0% in FY2023 resulted in interest on our cash balances increasing by £43.7m. The increase in rates and growth of our treasury portfolio to £2.7bn, resulted in treasury interest income also increasing by 1,125% to £29.4m (£2.4m in FY2022).

So here we have yet another example of a fintech company that’s benefiting from the high interest rate environment. Each company is slightly different, but they do share the core element of rising interest-related incomes in recent quarters.

Finally, considering that Monzo managed to get into the black after the end of fiscal 2023, we can infer that the company was working towards profitability throughout the year. If we had a quarterly breakdown of its results, I expect that we would see sequential improvement as the company’s FY 2023 progressed.

Now’s a good time to be a neobank

After seeing how Robinhood and Coinbase benefited from rising interest rates and considering Starling’s performance, we had a hunch that the new interest rate climate was going to prove a boon for fintechs of various stripes. With Monzo’s results, we now have enough data to be confident in our general outlook.

We can see some of our thesis at work in Nubank’s results. The Latin American neobank, worth more than $30 billion today, had this to share in its most recent financial report (emphasis ours):

Interest Income and Gains (Losses) on Financial Instruments increased 103% YoY, or 105% YoY FXN, to $1,255.5 million in Q1’23. The increase reflected mainly higher three factors: (1) higher interest income in the consumer finance portfolio, associated with the ongoing expansion of both personal loans and credit cards; (2) credit mix, mainly associated with the increase of installments with interest within the credit card portfolio; and (3) the continuous rise in Brazil’s interest rates (the interbank deposit rate or “CDI”) which accumulated 3.21% quarterly in Q1’23 versus 2.42% quarterly in Q1’22.

So we’re seeing a positive impact on neobank performance in the UK and Brazil, and likely in the United States as well.

Which neobanks should we expect to benefit similarly? The good news could extend to Chime, Varo and Current in the U.S., to pick a few. We expect that UK’s Revolut and Monese would enjoy similar gains. N26 in the EU is another obvious name to keep in mind.

Is the economy strong enough for more neobank IPOs? Sure, but with the fintech valuations still so depressed, we doubt that any new IPO filings will drop anytime soon. Still, Monzo’s results are one more ray of warm sunshine for this particular subsector of the beleaguered fintech market. And in 2023, all bits of good news are welcome.

Neobanks should take heart from Monzo’s performance in 2022 by Alex Wilhelm originally published on TechCrunch

Klarna’s Q1 results show that the fintech unicorn’s turnaround is in full swing

Last year wasn’t an easy one for European fintech giant Klarna. The company saw its valuation being truncated in an $800 million funding round, and coverage of its 2022 results focused on contrasting its stiff losses against a more conservative market. This column argued at the time of its earnings report that if we looked at Klarna’s quarterly results, things were looking up towards the end of last year:

More platform usage (GMV) leading to more revenue, contrasted with falling credit losses and modest improvements to operating costs, yielded a much less unprofitable Klarna at the end of 2022 than at the beginning. This is the company actually managing what every unicorn is supposed to do today: keep the growth coming and cut the losses.

The good news for Klarna stans — founders, investors and employee shareholders — is that Q1 2023 data from the company supports our generally positive vibes. A few good quarters do not make for a comeback, but there’s lots to like about the company best known for its buy-now-pay-later services.

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This morning, we’re going to parse Klarna’s Q1 2023 results, compare that to where the company was during its time in the barrel, and then close with its notes on AI — an interesting cultural riff embedded in the Klarna investor report that is worth looking at. Sounds good? To work!

Holistic improvements

To understand Klarna’s results, we need to start one step up from revenue. What leads to revenue at Klarna? Gross merchandise value (GMV), or the total worth of stuff that consumers bought using Klarna services.

In the first quarter of 2023, Klarna’s GMV rose 13% to 210.7 billion Swedish Krona ($19.65 billion) from a year earlier. This number isn’t too impressive on its own, but it is significant considering that overall e-commerce growth has been lackluster in the last year. In its investor note, Klarna says the global e-commerce market actually shrunk by 2% between Q1 2022 and Q1 2023.

Put another way, Klarna managed to nab market share in a contracting market, keeping its own growth story afloat despite stiff headwinds.

Klarna’s Q1 results show that the fintech unicorn’s turnaround is in full swing by Alex Wilhelm originally published on TechCrunch

Starling’s results are more proof that high interest rates could be a boon for fintech

Earlier this month, we noticed that several popular American fintech companies were seeing rapid revenue growth thanks to high interest rates. Basically, interest-driven revenue was helping offset declines in consumer trading activity at Coinbase and Robinhood as people pulled back from active trading when the economy soured.

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Part of that economic spoiling was caused by interest rates rising around the world, but with countries taking a more measured approach to interest rate hikes, you could argue that we’re nearing the current economic cycle’s peak rate environment. Regardless, this increase in interest rates has created a massive growth opportunity for fintechs, both public and private.

Enter Starling, a UK-based neobank that has raised $1.1 billion to-date, per Crunchbase. The company’s in the news today due to its long-time CEO and founder Anne Boden stepping down. As TechCrunch’s own Ingrid Lunden pointed out in her piece, if “there is an underlying story behind the timing of the departure, it’s not completely clear what it is.”

But I have a hypothesis. Reading the company’s latest annual report, it’s clear that the neobank is on improving financial footing. For a long-time founder, getting their company to the point of clear success is a reasonable time to take some a break. That’s my guess.

And what is driving Starling’s strong results? There are several contributing factors, but chief among them is — you guessed it — rising interest-based income. Let’s peek at the numbers this morning to see if we can expect other neobanks to enjoy similar gains.

Starling takes flight

In the financial year ended March 31, Starling reported total income of £414.8 million on revenue of £452.8 million. If you’re wondering as to the accuracy of those numbers, rest assured they’re correct. Total income at Starling is the sum of net interest income, net fees and commissions, and other income. Net revenue, meanwhile, is the combination of net interest income, fees and commissions, and other income.

In short, revenue doesn’t discount fees and commissions expenses, which totaled £38 million in the year.

Starling’s results are more proof that high interest rates could be a boon for fintech by Alex Wilhelm originally published on TechCrunch

How our fintech startup became SEC-compliant

After the recent failures of financial institutions like FTX and Silicon Valley Bank, regulators have been blamed for poor examination processes and enforcement regarding the regulations financial organizations in the U.S. must follow. However, our experience with the Security and Exchange Commission’s licensing and examination appeared legitimate. From our perspective, they help protect clients.

Initially, obtaining registered investment adviser (RIA) status in the U.S. allows companies to deliver personalized investment advice and comply with relevant laws. As a fintech startup operating in the investment advisory domain, it is impossible to offer services in the U.S. without RIA status, but it also helps to build trust with prospective clients.

In our case, we obtained RIA status approximately 18 months ago. The process involved preparing multiple documents and incurred expenses of approximately $50,000 for legal services and filing fees, which took around three months to complete.

What our experience was like:

  • We got a call out of nowhere.
  • Next step: an introductory two-hour meeting.
  • The list of documents they requested.
  • Adjustments during the review and outro call.

At some point after obtaining status, you can expect to be examined by the SEC. The agency routinely conducts examinations to ensure that companies or individuals providing financial services or advice comply with securities laws and regulations. Even if there are no claims against your company, these examinations can happen at any time to review your policies, services and records.

As part of the process, the SEC may conduct interviews, scrutinize existing policies and marketing materials, and request a detailed description of the financial services provided to clients. The duration of the examination process can vary depending on factors such as the size and complexity of the firm being examined. A complex examination can take up to six months or more.

We incurred expenses of approximately $50,000 for legal services and filing fees; the examination process took around 3 months to complete.

After conducting the examination, the SEC will provide a letter that outlines its findings. If no major issues are discovered, your firm will have two months to address any concerns raised by the SEC. It is important to take these findings seriously and address any issues promptly to ensure compliance with applicable securities laws and regulations.

We got a call out of nowhere

It was just a regular workday when a call came in to our company phone number and the speaker introduced themselves as a part of the SEC office in San Francisco, double-checked the email information of our company executives and announced that we were under examination as part of the standard practices with SEC. I was also told that soon we would need to arrange an introductory meeting with their team.

I didn’t even know the SEC had an office in San Francisco.

Next step: An introductory two-hour meeting

When we arrived, there were three people representing the SEC end and two representatives from our company: me and Chief Investment Officer Mike Stukalo. As I remember, our discussion was not recorded, which felt like a nice touch. I was impressed by how well prepared they were; they had clearly read our website, blog posts, marketing materials and ADV brochure, the primary disclosure document that we update each year as a company with registered investment adviser status. They had a pretty decent understanding of our product before the conversation.

After an introduction and basic questions, they asked very specific questions about how exactly our product worked to understand every little detail. The majority of these two hours of conversation were related to a product and what it does. Everyone was very polite and nice: It felt more like a demo call to a potential customer.

How our fintech startup became SEC-compliant by Walter Thompson originally published on TechCrunch