As we turn the page on a less than memorable year, it’s important not to banish everything that happened to the same corner of our mind where 2020 will rest. In fintech at least, the industry moved at such a fast pace that I had difficulty condensing all the developments into a summary. As such, I present the biggest version yet of my annual recap.
1 - Buy Now Pay Later
Without hesitation, the honor of my top fintech story of 2020 goes to “buy now, pay later” (BNPL) schemes. Though my choice is sure to elicit strong opposition, particularly from the crypto crowd, the impact of this payment method on consumer spending is too compelling to ignore.
The premise is simple. A digital version of installment payments popularized by department stores, BNPL allows customers to split the cost of purchases over a few months, with the term varying by provider. Unlike credit cards, there is usually no interest charged for missing a payment. Instead, a penalty/fee is levied.
The concept grew like wildfire over the past twelve months as some providers hit remarkable milestones. Klarna for example reached 11 million customers in the US, Australian counterpart Afterpay saw sales and customers rise 112% and 116% respectively and Affirm announced (but later delayed) plans for an IPO.
The momentum was not lost on established players who introduced their own versions. In Australia, the NAB StraightUp card and the Commbank Neo card came to market mere days apart. Fellow American bank Chase introduced a similar offering with the My Chase Plan. As did Goldman Sachs. Credit card giants Visa and Mastercard joined the fray, with the latter also taking a stake in a company offering white-label BNPL services to banks. Even fintechs jumped on the bandwagon as PayPal introduced Pay in 4.
2 - Deal-Making
Consolidation swept the industry with big-dollar transactions. Though payments saw the bulk of the action, other deals also left a mark. Some of the biggest ones included:
Visa bought Plaid, a company that helps fintechs connect with financial institutions through APIs. The deal however is not certain to close as the US Department of Justice sued to block the sale.
Not to be outdone, Mastercard bought Finicity in a similar transaction. This one however did not face opposition as the acquisition successfully closed in November.
Payments processor Worldline bought competitor Ingenico, potentially creating the fourth largest global player in payments.
SoFi bought payment processor Galileo to capitalize on the shift to digital payments.
Banking-as-a-service (BaaS) operation Railsbank made an opportune pickup by purchasing Wirecard’s UK operations.
Peer-to-Peer lender Lending Club bought Radius Bank to access cheap funding in a deal characterized by the buyer’s chief executive Scott Sanborn as a “no-brainer”.
The pandemic slashed values for online lenders, creating bargains for Amex which bought Kabbage and Enova International which bought On Deck.
Morgan Stanley bought E*Trade as trading commissions came under pressure from companies like Robinhood offering zero-dollar trades. Remarkably, this was the largest deal by a major Wall Street player since the crisis.
Intuit bought Credit Karma, a start-up that grew to fame with free consumer credit scores.
Bonus: Pittsburgh based bank PNC bought the US operations of Spanish bank BBVA. Though the deal may not suggest implications beyond the consolidation of two smaller US players, consider that BBVA is a global fintech stalwart with major investments in open banking and BaaS. Additionally, the transaction brings US challenger bank Simple under the PNC wing.
3 - Regulators Push for Digital Banking
As Covid-caused lockdowns propagated globally, consumers shifted their buying habits online and banking was no exception. With branch numbers already in decline, the pandemic exasperated the move away from physical channels. Coincidentally, digital banking enjoyed a moment with regulators in numerous jurisdictions emboldening the business model with regulation.
Nowhere was this more apparent than in Asia. After shortlisting fourteen for potential licenses, the Monetary Authority of Singapore finally granted only four, snubbing major applicants such as gaming hardware maker Razer. Winners included a joint venture between regional super app Grab and telco Singtel as well as Ant Group. In Hong Kong, all eight digital banks finally launched with Fusion Bank, backed by tech powerhouse Tencent, the last to enter the market. Not to be outdone, fellow regional jurisdictions continued their own digital banking agendas as the Philippine central bank released its licensing framework while Malaysia’s central bank continued to refine guidelines it introduced earlier in the year.
4 - Everyone Wants to be a Bank
Banking is a difficult business to enter. Just ask Varo Bank which spent three years and nearly 100 million to acquire its US license. This was not enough to discourage others from applying. Payment processor Square received a banking license in the form of an “Industrial Loan Charter” with plans to offer deposits and small business loans in 2021. Not resting on its laurels following a major acquisition, fintech SoFi also gave it a go as a standalone bank by applying as well.
The lack of a license did not deter some from entering banking. Instead, they relied on the BaaS model to leverage the infrastructure of existing players. Google for example revamped its Pay app with a chequing account where deposits are held by 11 partner institutions. There’s also Samsung Money by SoFi, a no-fee high-interest cash management account with backing from 6 partner institutions. Shopify introduced Balance, targeting small businesses with a checking account, a debit card with ATM access and a rewards program with cashback and discounts. The product is backed by Stripe Treasury and Evolve Bank.
The year was also remarkable in the number of fintech players buying existing banks. In addition to Lending Club’s purchase of Radius Bank, little know savings app Jiko purchased Minnesota based Mid Central National Bank. Over in Asia, Indonesian super app Gojek purchased a large stake in a local bank to bolster its portfolio of products. Coincidentally, the deal was announced roughly two weeks after rival Grab was granted a banking license in Singapore.
5 - Headwinds in Digital Banking
Some digital banks faced significant challenges over the past year.
The UK ones were among the hardest hit. Monzo suffered a down round in its fundraising effort amidst the economic uncertainty created by the pandemic. The 40% valuation loss was followed by the CEO co-founder ceding his seat to a more season banker. Berlin headquartered N26 exited the UK citing uncertainties created by Brexit while RBS’ Bó closed abruptly after only a few months of going live. The project suffered setbacks early which hindered its momentum: the app’s reviews were alleged fakes, its features did not compare well with peers and it was forced to reissue numerous debit cards after a technical oversight. To make matters worse, the name directly translated to “cow” in Irish.
The bad news also spread outside the UK. Australian challenger bank Xinja relinquished its license to regulators and returned deposits to customers. Though it blamed Covid and a failed capital-raising effort for exiting the digital banking space, its struggles may have predated the pandemic as its auditors raised flags around commercial viability earlier in the year.
6 - Institutional Interest in Crypto Peaks
With bitcoin hitting record highs, I would be remiss if I left crypto out of my annual recap. As I write this, its price is in record territory and continues to rise with no signs of slowing down.
The record ascent didn’t go unnoticed by established financial institutions, likely motivating them to enter the space. Singaporean bank DBS announced plans to launch a crypto exchange whereas stateside, money manager Fidelity filed paperwork for an upcoming bitcoin fund for wealthy investors. Others took a more direct approach by outright buying bitcoin, such as century old insurer Mass Mutual’s $100 million bitcoin purchase.
The retail side wasn’t ignored with payment companies stepping in as well. PayPal announced that it would allow US customers to buy, hold and sell cryptocurrencies as well as use it to shop at the millions of merchants in its network. It followed in the footsteps of Square which already had a similar service and which made a large bitcoin purchase in October. Finally, credit card giants attempted to grow their respective ecosystems with crypto. Visa partnered with BlockFi for a bitcoin rewards credit card whereas the Wirex Mastercard offers users 1.5% back in bitcoin for every purchase made with debit.
7 - Crypto Crackdown by the SEC
Institutions weren’t the only ones to take major steps in the crypto world. The US Securities and Exchange Commission (“SEC”) took decisive action when it sued Ripple as well as two executives, including co-founder Christian Larsen and current CEO Brad Garlinghouse.
The regulator alleged that the sale of the company’s XRP cryptocurrency, the third largest behind bitcoin and ethereum, amounted to a $1.3 billion unregistered security offering, depriving “potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system."
The news took a toll. First, XRP’s price tumbled on fears that it would become untradeable in case the SEC succeeded in its action. Next, funds and exchanges distanced themselves by liquidating their positions and delisting the cryptocurrency, including Coinbase, one of the largest exchanges which was awaiting on the SEC's approval of its IPO.
8 - Ant Comes Into Government Crosshairs
Ant Group, the financial subsidiary of Chinese mega company Alibaba and one of the world’s largest fintech companies, was forced to suspend its Shanghai IPO. The $34 billion share offering was planned to be the biggest in history.
Though the announcement came as a surprise, events leading to the stock’s debut suggested that trouble was already brewing. The suspension was preceded by the Chinese government expressing concerns with the rapid growth of fintech companies. In addition, top financial regulators had summoned Alibaba founder Jack Ma and two Ant executives for talks days before the IPO. This was enough for the Shanghai stock exchange to classify the discussion as a “material event” worthy of postponing the stock’s debut. The company also pulled its dual listing in Hong Kong.
The bad news for the fintech giant didn’t stop there. First, its parent Alibaba came under an antitrust investigation by China’s market regulator for suspected monopolistic practices. Then, China’s central bank took a harsh approach, asking the company to refocus on payments and “rectify” its lending, insurance and wealth management services. Ant was also accused of poor corporate governance, an aversion to regulatory requirements and engaging in regulatory arbitrage.
9 - China Moves Ahead with Digital Currency
Though China is already a predominantly cashless society with the ubiquitous use of Alipay and WeChat pay, the government still pushed ahead with its plans to issue a digital currency. Whether a hedge against Facebook’s Diem crypto or the dominance of the US dollar in global trade, its widespread use would provide the government with better insights into the flow of money in the economy and discard the anonymity associated with cash.
The most advanced of many other projects still under consideration by central banks, China’s version can simply be boiled down to a digital version of the yuan meant to replace coins and bank notes.
In the works for almost six years, the central bank started testing the concept in earnest in 2020. In the tech hub of Shenzhen, 10 million yuan worth of digital currency was handed out through a lottery to be spent within a designated district. Similar tests were also held in three other cities and involved major merchants like Walmart, state banks and online mall JD.com.
10 - The Wirecard Saga
Until recently, consumers had likely never heard of Wirecard. The company worked in the background of e-commerce helping merchants collect payments. Over the past decade, it expanded rapidly through acquisitions and a large cash infusion from Softbank. Its fortunes took a turn for the worse when auditor KPMG revealed in April that it could not confirm the authenticity of profits from 2016 to 2018. This led to a chain reaction of bad news with a police raid of the company’s offices, criminal investigations against management, an admission of missing billions and finally insolvency.
The Financial Times, which has been investigating for years, has a great timeline of events leading to Wirecard’s collapse.
As always, all thoughts are my own.