Hey hey, Julie and Ian here! Weird week, but some fintech stuff happened that you should know about. Let’s dive right in.
Square (CashApp) Earnings:
by Julie Verhage
Honestly, I’d forgotten Square was reporting earnings this week until I started getting alerts on my phone. Guess I was a little preoccupied with some of the other things going on in the news cycle...
You know all those concerns about customer service at Square? Well, it seems to be doing ok despite them so far (this won’t last and they need to make changes, but hear me out). In its earnings report Nov. 5, the payments giant said Cash App generated $2.07B of revenue and gross profit of $385M in its fiscal Q2. Even if you take out Bitcoin, Cash App revenue was $435M, up 174% year over year. Not bad…
Part of the reason they are still doing ok despite the customer service hiccups? The market is MASSIVE. If you’re an FTT+ subscriber, you may recall me writing about this a few weeks ago. According to an FDIC survey from October, about one in three households that had smartphone access or home internet access made P2P payments in 2019. That leaves a ton of room to expand.
Even without expansion, current customers are using the platform more. Square said the number of average daily transacting active Cash App customers nearly doubled from a year before. And while we often talk about the Robinhood trader, Square has a lot of people trading stocks for free on its platform now too a year after its launch. Cash App has now attracted 2.5 million customers who’ve used it to purchase a stock. (You can’t trade options on Square, could you imagine how high that number would be if you could?!) *sigh*
Ant Group Pauses IPO After China Introduces Micro-Lending Regulation:
by Ian Kar
Ant Group has some awful luck with Chinese financial regulations; for the second time, China has dramatically shifted Ant Group’s business plans with tighter financial regulations.
The draft rules, which allow for comments until Dec. 2, are aimed at the digital micro-lending business, which is massive in China and for Ant Group. There are nearly 8,000 digital micro-lenders in China, accounting for $135B in loans outstanding as of Sept. 30. Ant Group makes money by connecting consumers with banks that can offer them installment or unsecured loans by leveraging Ant Group’s underwriting technology and distribution to consumers. Lending products made up 35% of revenue in 2019, and 39% of revenue in H12020 for Ant Group.
The new rules say that originators like Ant Group’s need to put up 30% of capital for any loan, can’t lend to borrowers outside of their province, will now be regulated by the PBOC and central bank regulators vs local regulators, and even caps loan size. Pretty crippling for a lender.
The rules are harsh, yes, but they don’t pick on Ant Group unnecessarily. Micro-lending is becoming a massive part of the financial ecosystem in China—the PBOC says it accounts for 22% of personal consumption loans. As new platforms become overwhelmingly dominant, they have to be regulated to reduce to amount of risk it puts on the financial system.
Interestingly, this has happened to Ant Group before, in wealth management. They started a money market fund where consumers on the AliPay platform could easily investment money. In March 2018, Yu'E Bao had $270 billion in assets under management, making it the number 1 money market fund in the world. Thanks to Chinese regulation, that figure dwindled to a mere $144 billion by September 2019.
DOJ Sues Visa To Block Plaid Acquisition Over Antitrust Concerns:
by Ian Kar
Man, this really turned into a big deal, didn’t it? We’re going to have a guest post on Sunday from Matt Janija, General Counsel at Privacy.com and formerly on the legal counsel teams at Square, Stripe, and Bluevine, with his thoughts on the DOJ complaint.
But, to summarize, the DOJ is suing Visa and is arguing that Visa is buying Plaid in an effort to kill a potential competitor. The DOJ is arguing that Visa has a monopoly on the debit card networks and Plaid, because it has direct access to a number of banks and apps that touch consumers, can build a potential Visa competitor for online commerce. Which is why Visa paid so much for Plaid.
My main issues? I think the argument that Visa has a monopoly on the debit market based on the fact that they have a lot of cards issued is flimsy (banks control card issuing, its up to the banks to pick what network their cards are on.) And I don’t think that Plaid building its own ACH network makes sense for a lot of reasons:
Money movement is very different than data movement. The thesis that Plaid can just make an ACH network is more difficult than is sounds. For instance, Plaid doesn’t hook up directly into banks in a lot of cases; this causes issues like an existing connection to break. When it comes to money movement, this breakage is a non-starter for any partner. This is solvable, but where does it fit in the long list of other problems Plaid needs to solve for customers?
Why would Plaid spend resources building this when there are about 30 ACH money movement startups? It makes more sense to be a partner so that Plaid customer can use one of the many ACH vendors who are building specialized technology. This may lead to an alternative network to Visa, but that’s a long shot—not enough to stop this deal.
