Protocol | Fintech
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The huge banking market startups may be overlooking

Community banks and credit unions are a promising market for fintech.

Hello and welcome to Protocol | Fintech! This Tuesday: small banks and credit unions get another look, why AmEx invested in Stripe, and Mastercard buys Ekata.

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The Big Story

Small is beautiful (and profitable)

Community and regional banks and credit unions often get overlooked by innovators trying to disrupt the financial world. But they play a key role in reaching customers and a number of startups are now eyeing them as potentially profitable customers and useful partners.

There's a big opportunity in smaller banks. There are about 10,000 deposit-taking institutions in the U.S., according to FDIC and NCUA data. About 95% are community banks or credit unions, one fintech expert told me.

  • It's easy to think of smaller financial institutions as under-resourced and behind in technology.
  • But community banks have improved their financial position in recent years, narrowing the earnings gap with larger banks, according to an FDIC study.
  • That same study found that technology adoption had a lot to do with the institution's general optimism, growth prospects and competitive vigor — not just size.

Some banking-software firms are targeting this sector. One thing that's helpful about smaller banks is that they're often willing to move faster than big banks, which is attractive to startups.

  • Mantl announced today it has raised $40 million led by Alphabet's CapitalG. Its software provides a digital account-opening service.
  • Its service, which takes an average of two minutes and 37 seconds to open an account, is often replacing "decades-old" technology, Mantl said.
  • Narmi raised $20 million in a round led by NEA in February. It also provides digital account-opening as well as consumer and business digital banking.
  • Demand for digital banking increased 70% during the pandemic, Narmi CEO Nikhil Lakhanpal said.
  • Treasury Prime, whose APIs connect banks and other fintechs, says it's also serving smaller banks.

Small banks can be partners, too. Startups that focus on technology often need a bank to open customer accounts, issue debit cards and conduct other business.

  • The best example of this is Sutton Bank, which works with Marqeta. The two companies won an industry award last year.
  • "There was a real openness and willingness to talk to a bunch of payment innovators out of Silicon Valley," Marqeta's Omri Dahan told Tearsheet.
  • Sutton's FDIC notice is so ubiquitous on cards it issues for the likes of Square's Cash App and Robinhood that the bank had to put instructions for getting customer service on its website.
  • There's historical precedent: Elon Musk's X.com, a predecessor to PayPal, issued a debit card through First Western National Bank. That was over two decades ago.

Time to cash in? The FDIC noted that the relationship between bank size and technology adoption has been declining over time, as hardware gets cheaper. Cloud technologies and banking-as-a-service will likely accelerate this decoupling. That means it's a good time to put aside traditional assumptions about catering to big banks.

— Tomio Geron

A MESSAGE FROM BROADRIDGE

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most.

Learn more

From Protocol | Fintech

The return of Alfred Chuang: The former BEA Systems CEO is back leading at the helm of a new VC firm eyeing opportunities in post-COVID tech, including fintech.

Overheard

  • "Our goal is not to replace the U.S. dollar or any other international currency. Our goal is to allow the market to choose." —Li Bo, a deputy governor of the People's Bank of China, on the digital yuan that has been rolled out in four cities in China.
  • "It's still early in the game. Opportunity remains for investors to participate and secure a first-mover advantage."Dave Chapman, executive director of BC Technology Group, which operates the digital-asset platform OSL, on the Dogecoin rally which led its market value to jump to $50 billion last week.
  • "We will see more regulation coming. We think there is going to be even more volatility going forward."Eva Ados, chief investment strategist at asset manager ERShares, on Bitcoin's big drop over the weekend.
  • "Fintech has continued to grow in scope and impact on the venture capital landscape, and Latin America is no exception to that."Ben Savage, a partner at Clocktower Technology Ventures, on growing VC interest in fintech startups in the region.
  • "There is a gigantic acquisition opportunity for us. There are a lot of good companies -- with top technology, good people and good structure -- but that are lacking capital right now."Raphael Zagury, Open Co's chief financial officer, on the Brazilian lending company's plans after getting a $270 million credit line from Goldman Sachs.

3 Questions With...

AmEx Ventures' Harshul Sanghi

You founded AmEx Ventures in 2011. What's your investing approach?

We invest in companies in the early stage. We drive partnerships between them and our business units. Over two-thirds of our portfolio has active partnerships with [American Express]. That brings benefits to the startups and to us as early adopters of innovation.

You invested in Stripe in 2013. How did AmEx Ventures get involved so early?

Financial services is about an ecosystem. You need the entire ecosystem of all the players to come together for success. With Stripe they cannot be successful unless they have the network their business relies on. We're one of those networks. They are visionary founders who understood that very early on. You need to have strong integration to enable the acceptance of the card and acquire the merchants. So we could help with that. Today you have a lot of APIs. Back then, there was still a lot to be done. We had to sort of co-create some of these things and help figure them out together. Their vision, in turn, then drove us.

What trends are you excited about in fintech?

A lot of friction can be removed in enabling B2B commerce. We've spent a lot of time on this. There are many different pain points in B2B commerce that can be unpacked. It doesn't get talked about because there's not the sizzle people like to see; if you ask the average Joe if they've heard of Stripe or Plaid they probably haven't. But these are big companies. [AmEx] also has the largest SMB franchise in the country and many parts of the world. We also acquired Kabbage.

The future of travel is another area. I have family on the other side of the planet, so I'd like to get there as quickly as possible. People spend a lot of time on travel, from actually traveling to booking to discovery. But there's actual travel itself — to make that a real great experience that we used to have 20 or 30 years ago. [Our portfolio company] Boom Supersonic is a good example of that.

Need to Know

  • Earnest has a new CEO. The student loan refinancing company named David Green as its new chief executive, replacing Susan Ehrlich, who has retired from the company though she will remain on Earnest board.
  • Stripe expanded in Europe. The payments infrastructure company said its service for issuing digital and virtual cards is now available in 20 countries, including France, Germany, Greece and Austria.
  • Barclays is shutting down Pingit. The UK-based bank confirmed that its pioneering mobile payments app which launched in 2012 will be closed on June 30.
  • The Bank of England and Her Majesty's Treasury are exploring digital currency. The two government agencies haven't decided yet whether to issue a CBDC.

Deal Flow

  • Mastercard will acquire Ekata for $850 million. The financial services giant said buying the digital identity company will enable it to offer more security features to its network.
  • Revolut is reportedly aiming for a $10 billion valuation or more. The digital payments startup is said to be in talks with FT Partners, for a new equity raise.
  • Razorpay raised $160 million. The India-based business payments company's series E round, which was led by Singapore's sovereign wealth fund, GIC and Sequoia Capital India, boosted its valuation to $3 billion.
  • Starling Bank raised $69 million. The British digital bank's funding round was led by Goldman Sachs and will be used for its European expansion and M&A.
  • Zilch raised $80 million. The British buy-now-pay-later company's series B round, which values Zilch at over $500 million, was led by Gauss Ventures and M&F Fund.
  • Clearbanc changed its name and raised $100 million. The ecommerce investor has rebranded as Clearco. Its series C round, which was led by Oak HC/FT, values the company at nearly $2 billion.
  • Routable raised $30 million. The business payments company's series B funding was led by Open AI CEO Sam Altman and Lattice CEO Jack Altman.

Data Point

864,000

The number of crypto futures liquidations during a price downdraft on April 17 — a single-day record, according to The Block. About 70% were on crypto exchange Binance.

A MESSAGE FROM BROADRIDGE

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most.

Learn more

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