Let the FIN Begin!

Welcome to the best weekly newsletter covering the fintech revolution

Number of the Week: $200 million (explanation below)

Hi! So Why FIN?

In January 2007, in a FORTUNE magazine conference room, Steve Jobs put an iPhone prototype in my hands. I could just *feel* the way this would change the world.

I’m launching FIN because I believe that fully-functioning fintech is in that realm, or even higher, because it’s about money and not merely voice and data. We are in the early days of a profound transformation of how money moves from place to place.

So many financial interactions — especially in the West — have been stuck in inefficient ruts for decades or even centuries. How we pay daily expenses; how we get loans and mortgages; how we buy and sell property; how we give money to, or get money from, friends, relatives, employees and employers—all of this is in the process of being overhauled, and the implications need to be teased out.

If you’ve not tapped a loan from SoFi, or refinanced a mortgage with Rocket, it might be hard to grasp the impact of this revolution through mere words, just as the iPhone impact was abstract until you used it, but: everything is faster and oh-so-easy.

In some ways, fintech can be viewed as an outgrowth of the iPhone. A big part of the “tech” in the fintech transformation is artificial intelligence and the global growth of smartphones. Deregulation in many markets is also a contributor. But adding to the fintech urgency is the COVID pandemic, a dramatic accelerant, as it has been in so many fields. According to a survey of large banks, there was a 200% rise in online U.S. bank account registrations in April 2020, and an 85% rise in mobile banking traffic. Depending on region and sector, the pandemic has quickened the pace of fintech adaptation by at least 2 years. This opens a tremendous opportunity for nimble startups, as well as leading fintech giants like Square and PayPal. The size of the fintech market is predicted to triple within the next five years, reaching over $300 billion (still small compared to the overall financial services market, but nonetheless the growth is striking).

Another factor in fintech’s urgency is that it is a truly global force, with major players in multiple regions, which hasn’t always been true in earlier tech booms. Latin America may not have produced its own version of Google, but Mercado Pago is fast approaching a billion financial transactions a year. This week India’s Razorpay (more on this below) got a new round of investment that valued the company at more than a billion dollars.

And during a moment when the U.S. is having powerful debates about diversity and inclusion, the idea of overhauling the financial system —with its horrendous legacy of discriminating against people of color — has an undeniable appeal (I will write more about this in coming weeks).

But FIN isn’t about hyping the fintech sector. For starters, there is a conceptual trap that I’d like to see corrected. Many, perhaps most, fintech companies position themselves as disruptors. That’s understandable as marketing, but the reality is that many incumbents on Wall Street (such as Goldman Sachs) and in payments (such as Visa) are heavily invested in fintech companies. This mixture of old and new will only intensify when the fintech sector hits an inevitable consolidation period (a few years out, I’d wager).

Furthermore, a fast-growing financial sector that is regulated poorly or through a feeble lattice of overlapping jurisdictions is subject to abuse. A well-reported New York Times story last week documented how fraudsters are using fintech platforms to rob consumers.

Then there is systemic risk. When I was the editor of Inc., we ran a great feature story (now behind a paywall) about fintech mortgage providers, which wrestled with the question of whether America, given the 2008 financial meltdown triggered by the subprime loan market, really wants to make it that easy to get a mortgage. The maximalist case — that fintech represents basically Subprime 2.0, ripe for catastrophe— was made in this Intercept piece by my excellent former colleague Alyssa Katz.

Still, these real or potential market convulsions will not be prevented through denial, complaint or shoulder-shrugging. If we require new legislation, regulation or other reforms, I say bring it. What fintech needs in this critical expansion moment is transparency and frank, honest discussion. The industry might not always provide it, but that’s what FIN promises to deliver every week, and I seek your help to achieve it.

The COVID accelerant, in microcosm

An interview published this week with an executive from TD Bank Group provides illuminating details about how the COVID pandemic has accelerated fintech growth (the story is behind a paywall, so I am helpfully summarizing it here). Based in Canada, TD is the U.S.’s tenth largest bank, measured by asset size. Like most big banks, it’s wanted for years to amp up its offerings with advanced technology but hit many barriers: cost, complexity and the readiness of the tech to fit specific needs.

Then COVID struck. TD closed many branches and reduced hours at those that stayed open. As part of its toolkit, TD built Web-based forms for customers to apply for relief. It tapped an existing partnership with New York-based Kasisto to build a chatbot to handle COVID-related customer queries separately; the bot was up and running in three weeks, according to Rizwan Khalfan, TD’s chief digital and payments officer. The bank also partnered with Toronto-based Flybits to automatically customize services to help TD customers navigate banking under lockdown. These tools have been used more than a million times over the last few months.

The result, says Khalfan, is that “TD Bank’s digital banking roadmap is two years ahead of where [he] thought it would be at this time.”

Granted, a certain hype discount should apply here. The article says that 57% of TD customers now use online or mobile banking; at least for the online part, that number would be below the industry average. But similar notes are coming from across the industry: “never let a good crisis go to waste” applies in banking as well as politics, and these up-and-coming firms like Kasisto and Flybits have been perfectly positioned to take advantage.

Pulling Up Root

There’s a fair amount of excitement around the imminent IPO of Root, the Columbus, Ohio-based car and rental insurance provider—unsurprising, given the market splash that Lemonade, a similar company, made this summer. Root’s pitch is classic fintech: safer drivers deserve lower premiums, and Root tracks your driving habits via a mobile app to determine whether you warrant a lower rate.

The proposition has certainly attracted a lot of venture capital and all the big underwriters. Pre-IPO chatter says that Root will be valued at around $6 billion, much bigger than Lemonade’s public debut.

While Root’s growth is impressive—150% increase in auto policies from 2018 to 2019—it has also lost a staggering amount of money: some $600 million since 2018, which is more than the total amount the company raised from venture firms.

It’s not merely the red ink that is troubling, but also the company’s explanation for it. “The principal driver of our losses to date is our loss ratios associated with accidents by our customers,” says the Root S-1. “Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, loss adjustments expenses…and other costs. If we do not accurately assess the risks that we underwrite, the premiums that we charge may not be adequate to cover our losses and expenses, which would adversely affect our results of operations and our profitability.”

This is a windy way of saying that they’re not charging customers enough. So, arguably, Root’s growth to date is attributable at least as much to undercutting its rivals on price as to its cool tech tools. Given how competitive and capital-intensive the insurance business is, it’s hard to see how a tide of IPO cash alone solves that problem; if Root raises prices, it will lose customers. (I requested comment from Root, but because of the IPO the company is in a quiet period.)

From an investor’s point of view, the big question is: Will any of this matter? The market (in general; for tech; and for fintech in particular) is so unaccountably giddy right now that such trifles as half a billion dollars in losses may well be overlooked. Some day, though, Root may need to explain how it will get out of this bind.

FINvestments

🦈Number of the Week: There was a time when “Nigerian payments startup” would have been the punch line to a joke about e-mail scams, but this is no joke: this week Stripe bought the Lagos-based Paystack for $200 million. This is Stripe’s biggest acquisition to date, and one of the biggest acquisitions ever for a Nigerian company not involved with natural resources. Stripe cofounder Patrick Collison noted that his company expects African online commerce to grow at annual pace of 30%.

🦈Square stock (SQ) hit an all-time high this week, closing Friday at $186 a share. I haven’t bought individual stocks in a long time, but I won’t pretend I’m not sorry I neglected to buy Square at $9 a share in 2016.

🦈I don’t feel like Razorpay gets enough attention from the Western press. As best I can tell, for example, the Indian payment processor has never been mentioned in The Wall Street Journal. And yet this week the six-year old company raised another $100 million and became the first Indian “neobank” to hit a $1 billion valuation.

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That’s it for this week; what did FIN get right or wrong? What would you like to see more or less of? You are literally FIN’s first readers so your voice really matters.