On Wednesday, December 9th, we have a fun community event for FTT+ subscribers: a 1 hour off-the-record Q&A with Blend CEO Nima Ghamsari. Blend started out as a software platform to help mortgage lenders improve the origination process. The company has expanded to a suite of digital software solutions for institutions, including auto loans and insurance.
FTT+ subscribers will be able to access the entire Q&A and ask questions in the chat. Just sign up here:
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The near term effects of COVID have been clear—while the global pandemic is having a massive effect on the worldwide economy, you could argue that its impact is more significant in fintech than in other sectors. That’s because in fintech, COVID has accelerated the relationship between regulators and fintech companies, shifted consumer behavior in favor of digital consumer financial companies, and has forced banks and traditional institutions to either partner with or develop their own digital strategies.
All of these things are happening concurrently, creating massive ripple effects across the industry. It’s like the pond of fintech was suddenly flooded with water (or capital), and there were 3 boulders throw in the middle of it.
Today, let’s focus on the macro: what’s changed there?
The consumer behavior shift towards digital services has helped consumer and infrastructure companies alike. The tremendous growth across the industry is also illuminating new problems around integrating, automation and real-time money movement; data movement across a number of different financial services products like payroll, small business accounting, and credit; capital needs for both consumers and businesses; reducing friction around buying and onboarding; identity...and so much more.
But COVID is also impacting fintech in other ways. The US government has relied on fintech companies to distribute capital to businesses and average Americans during the pandemic crisis. Something none of us could have imagined even just a couple of years ago. As the country potentially enters another form of a shutdown, we think that the relationships between fintech companies and the government will only get tighter.
So far, companies like PayPal and Square have been working with the SBA to facilitate loans to small business through the PPP program. While the situation was unfortunate for business owners, fintech companies were uniquely positioned to help. For much of Fintech 2.0 (which we covered in Part1), most of the business-focused startups pitched that using technology to offer more personalized services to small businesses and help them acquire customers through digital channels would save a number of mom-and-pop shops. They had the data and the mechanisms to distribute and offer PPP loans to merchants, but the hardest part was the fact that loans still needed to be issued by a financial institution. This added piece of complexity made the operational side of the PPP loan program a mess. I wonder if fintech companies like Square had had the ability to hold deposits before COVID, how arduous would the PPP process have been? The US government could have gone directly to the fintech companies, who could have distributed it directly.
Of course, the PPP program is still playing out, but even with its issues, it seems to be a big win for fintech and what the industry can do for the financial system and those that rely on it.
On the consumer side, fintech companies also worked with the government to help Americans that had lost their jobs or were otherwise financially impacted by COVID. Neobanks took an aggressive approach in helping their customers—companies like Chime funded $1200 stimulus payments days in advance of the US government’s cash disbursements. Current, PayPal’s Venmo, and Square’s consumer brand, Cash App, also made it easier for qualified Americans to easily access stimulus funds through their products.
These are clear cut wins for the fintech industry. Yes, there are still millions of underbanked Americans without access to basic financial products, but neobanks are helping make that figure consistently smaller.
The last significant development has been both the number of fintech companies becoming chartered banks, an increasingly speedy process, and the general interest in charters.
An obvious question is why? Focusing on a software solution rather than becoming a regulated charted institution seems to make more sense for startups. But some fintech firms see a bank charter as a significant competitive advantage against other technology driven firms. Not only are US regulators becoming more open-minded in regards to granting charters to fintech companies, the process is becoming faster too. It took Varo 2 years, but Figure’s Ashley Harris said at a LendIt event in November that it took the firm about 3.5 months from the start of the application to to getting the charter granted.
Generally, I think this is a good thing, and we’ll see a ton of pushback from traditional financial services firms who don’t want fintech companies to have the benefits of being a regulated firm (the ability to hold and lend off of deposits is a significant one on its own, not to mention other benefits.) In fact, we already are—the American Bankers Association filed a complaint against Figure Bank just yesterday.
Next week, we’ll take a deeper look at the changes to consumer behavior due to COVID. Accessing and using financial products have shifted in fintech’s favor, but it’s leading to other ripple effects as well.
