April 3rd: Chime’s Stimulus Experiment — Fintech Companies Try To Tackle PPP, But Bigger Issues Remain
Hey everyone, Ian here. Hope everyone’s doing well and staying safe.
I’m getting a little stir crazy hanging out at home all the time, but luckily everyone in my family is doing well. I bought a basketball and started playing hoops in the driveway again; definitely feels like I’m back in middle school and it’s a bit weird.
I made a playlist that’s...all over the place frankly. Drake put out a song and music video of him walking around his Toronto mansion. Frank Ocean is back with two new tracks. Rosalía put out a song too, and its great. I put some random old songs that Pharrell was in/produced because I was in a Pharrell mood earlier this week. I finally got around to listening to Joyner Lucas and the album is absolutely 🔥. PartyNextDoor put out an album and the highlight is that Rihanna is on it! Even if its only for like 30 seconds, any RiRi is better than no RiRi (especially since she hasn’t put anything out in 3 years.)
Like I said, the playlist is all over the place. But I like it. I hope you do too.
We’re working on a lotta cool developments for FTT that’ll be out this month, I’m excited for y’all to check it out. We’re running two surveys right now to help with product development and strategy: one’s around virtual events we’re planning and another is a concept we’re developing to help people looking for jobs in fintech and companies looking to hire passionate and talented folks in our network. Would really appreciate if you could fill out the survey; as a thank you, 1 random respondent from each survey will get a 6 month free subscription to FTT+! (No, if you fill out both survey you can’t combine them for a free year, nice try though.)
FTT+ This Week
Hi all, Julie here.
On Sunday, I'll be taking a deeper dive in to how fintech can play a role in helping small businesses during these unprecedented times. It's hard to even put your head around the gravity of the situation, but I also want to note how important the coming days, weeks and months will be for fintech across the board.
We've already proven that there's no shortage of ways for startups to help solve consumer pain points during boom times (free investing, free trading, transparent financial services, yada yada). This new era is even more important though. This is the time fintech can prove that they are just as valuable, if not more valuable, than some of the incumbent players. This is the time that fintech companies can prove they are more than just a startup, and a crucial source of innovation in financial services.
This is fintechs' chance to put itself on the same playing field as the big guys.
FTT+ is $50/month, but as an introductory price, if you sign up now, you’ll get locked in at $25/month for the first year.
In The News:
In last week’s FTT+, Julie explored different ways digital banks can make it easier for the government to disperse funds to Americans, particularly the underbanked. This week, Chime figured out a unique way to make that happen: just send them $1200 bucks.
There’s a *lot* that’s interesting here from a product development perspective. First, it’s a pilot; Chime is picking 1,000 customers randomly through its SpotMe overdraft protection product. For those who are unfamiliar, SpotMe protects Chime users from overdrafting and incurring fees from their banks. In some ways, its a microlending product; Chime’s “spotting” customers $100 and they get that back later on. Other fintech startups like Albert have similar features.
Another key part is that Chime is funding this off their balance sheet. That does mean there’s some risk here that the customers don’t actually use Chime to deposit their $1200 stimulus checks. Chris Britt, Chime’s CEO, told CNBC’s Hugh Son that if there was a way to determine that customers can’t move stimulus checks to other bank accounts, they’d roll out the program to more customers.
But there are ways to mitigate that risk, some of which Chime is already implementing. In the company blog post, Chime notes that the 1,000 members who received the $1,200 met “certain criteria, such as having already set up direct deposit, become eligible for SpotMe, and deposited a tax refund into Chime.” The tax refund solves two issues: its a great indicator that the customer uses Chime as a primary bank, and it also determines whether or not the Chime customer is eligible for the return too.
Another way is to explore securitizing these “loans” and selling them to financial institutions. From what I understand, Chime’s direct deposit advance product—which gives customers access to direct deposit funds 2 days in advance—is basically a loan that they securitize. Since its funds that are extremely low risk (direct deposits are most likely going to come unless you lose your job), there’s probably an appetite a small, low risk, security product in the capital markets. If Chime can spot customers the $1,200 and guarantee they’ll put in their stimulus check into their Chime account, they could do the same thing here too. That’ll open up access to a wider group of Chime customers while also reducing the balance sheet risk to Chime.
I spoke to some friends in the FTT Slack about this. Another option that startups are looking into are a refund anticipation loan; this would allow startups to offer the stimulus payment to Americans at scale. The short term loan product has previously been used to disperse tax refund payments to customers quickly and without having the IRS involved; there are some complexities that need to be worked out—like we mentioned about about making sure customers deposit their check into the startup’s bank account and not another one—but this would reduce the balance sheet risk while also allow consumers faster access to funds when they need it. The problem? Startups don’t really have experience with RAL’s—or more importantly, the infrastructure or operational license—so figuring it out has been a bit difficult.
(Random Sidenote: such a flex in this CNBC article…CEO Chris Britt chatted with Mark Cuban about how to help Americans during this crisis[Chime sponsors the Dallas Mavericks.])
Rho and Divvy working on products to help small businesses with PPP loans, but PPP’s Ripe With Problems:
In the small business area, there’s also a lot of fintech innovation happening to help businesses access the $350 billion in loans thats been made available for small businesses through the Payroll Protection Program.
Divvy letting small business apply for PPP loans through its platform in a partnership with Cross River Bank (a SBA-approved lender.) The application process seems super easy: Just connect your bank account, schedule a chat with you account manager, get the necessary paperwork, and you’ll get an email when the application opens up.
Rho Banking, a business banking startup based in NYC (and one I’m really bullish on), is helping companies apply for PPP with its SBA-approved bank partners. Although Rho’s bank partners are not processing applications yet (and encourages businesses that need funding immediately to apply with their current bank), one pre-application with Rho is an opportunity to apply with 5 of the top SBA lenders in the country, and a route directly to whichever one is processing PPP the quickest. It’s an innovative model to tackle this problem; the issue for many small businesses is a) developing the relationship with multiple banks and b) doing multiple, tedious, applications. With this quasi-marketplace model, Rho solves both the relationship and applications problem in one swoop.
There’s a lot of room for innovation here, through partnerships between fintech startups and banks. But the April 3rd start date for PPP is a pipe dream: the entire process was rushed by legislators, who didn’t think about how exactly they would disperse $350 billion to small businesses.
There are a ton of issues with PPP as of right now. Just yesterday, the SBA changed the loan application. Last night, they bumped up the interest rates on loans from 0.50% to 1% (50 basis points to 100 basis points), to make the loans more appealing for banks. Because of the low interest rate, most banks were going to lose money on these loans: banks would get a 5% origination fee, but that probably wouldn’t even cover the servicing costs necessary to. Automated servicing programs probably costs anywhere between 25 to 100 basis points (0.25% to 1%). With the interest rates getting bumped up to 1%, banks can now make a little money to cover costs. The cost of capital is still around 75 basis points, leaving only a 25 basis point spread for the bank that is borrowing funds to fund the loans.
The incentive for fintech companies is to issue these loans and get it off your balance sheet by selling them to a bank. But banks have a ton of questions too: If you make the loan, how do you fund? Does it come from your balance sheet, or the Treasury? If the US government is funding it, how do you sell that back to the government after you issue it? If the loan goes bad—which will probably happen to a lot of loans since some companies unfortunately won’t be able to survive this downturn, how do banks and institutions get reimbursed? On top of all that, banks and institutions need to build out completely new processes around lending—from origination to servicing—because everyone’s working remotely; something that traditional financial firms aren’t used to.
All of these need to be sorted out before loans can get issued; in the meantime, it’s the small businesses and their employees that are getting the brunt of the effect.
It’s easy to blame banks for not issuing loans here. You might here a lot of chatter and articles about awful it is banks aren’t lending to small businesses at a time they need it most. It would be very on brand for me to pile on, but in my opinion, the issues lie with the poorly conceived legislation and the lack of implementation strategy. Congress clearly wanted good PR around helping small businesses and Americans, but have no idea how to do so.
I worry this’ll get worse in the short term, but this is a clear opportunity for fintech startups to step up and help small businesses moreso than ever before.
Tweets of the Week:
Ayo Omojola wrote a great piece on the concept of “vertical neobanks,” that is an absolute must read for anyone in fintech. I’ll be diving into this a bit next week:
Q1 looks pretty stable for fintech companies...the issue is going to be Q2.
A lotta folks shared this on finance twitter...skimmed it a bit but definitely worth a read:
Everything is fintech, Animal Crossing edition. (I don’t know what Animal Crossing is but apparently its a video game for Switch...idk I’m not cool enough to get it.)
Interesting piece on how COVID-19 is forcing us to work remotely, and how that might spur innovation in the remote work space. Have heard from big bank CTO’s that remote work has forced them to be more proactive about oversight and managing their systems, and that they actually have more visibility in to their businesses than ever before. Will be interesting to see a) if remote work continues after the COVID-19 ends and b) what internal and external tools pop up to facilitate remote work and c) whether financial institutions will be able to upgrade their processes, or fintech startups (many of whom have had remote working system in place before the outbreak) can pick up some of the slack…I’ll probably have more about this sometime.
I’m obsessed with NuBank, and this profile in the Financial Times is a great example of how big the business is already, and how much potential there is for NuBank and the Latin American fintech market as a whole.
Funding of the Week
Lunar, a Nordic neobank, raised another €20 million in its Series B round. The firm raised €26 million in August in its Series B, bringing the round total to €46 million. The round was led by Seed Capital with investments from Greyhound, Socii, and Augustinus, and Monzo’s ex head of product is joining the company’s board of directors.
The company has a blanking license and launched free accounts and a subscription product, Lunar Premium, and a small business banking product. Over the next few months, the neobank plans to launch other products like credit facilities and loans.
Kyash, a Japanese fintech startup, raised $45 million from Goodwater Capital and Greenspring Associates. The company is aiming to be a “full stack mobile banking” solution in Japan. Since Japan’s a cashless society, I think there’s a lot of room for growth here for challenger banks and fintech products. .
Job of the Week
No specific job this week, but my friend Jai from NEA put out a doc on startups hiring during COVID-19. Check it out, please add to it, and share it if you can!