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Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.

Fintech’s big cash haul

Fintech’s big cash haul

Hello and welcome to Protocol | Fintech! This Friday: a VC bonanza, Goldman's quantum timeline and fintech's impact on inequality.

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The Big Story

Money in the bank

Private fintech companies had a huge first quarter. Startups raised a record $22.8 billion from venture capital firms in the first quarter, nearly doubling year-over-year, according to CB Insights's latest State of Fintech report.

That beat the previous high of $22.4 billion in the second quarter of 2018, which included $14 billion raised by just one company, Ant Group. This year's first quarter featured more fintech winners and another record: 57 of the deals — 69% of the total — were mega-rounds involving funding of $100 million or more.

"The power of digital finance": That's what the pandemic demonstrated, and what's driving heightened VC interest in fintech, CB Insights intelligence analyst Oliver Yu told Protocol.

  • The pandemic crisis clearly accelerated the adoption of digital software in finance. Mobile banking and payments software "filled a really great void," Yu said.
  • That's certainly true for big financial institutions, including investment banks and trading platforms, that have turned to fintech startups to manage their data and automate their operations. Capital-markets startups were among Q1's big winners, drawing roughly $8 billion in VC.
  • Payments startups were also hot, pulling in $6 billion. European startups, led by Klarna in Sweden and Checkout.com and Rapyd in the U.K., were among the biggest fundraisers.
  • Wealth management also drew strong VC interest, raising $5.4 billion. That's largely because of Robinhood. Yes, the trading app had a rough time in Q1 in the wake of the GameStop fiasco. But Robinhood also scored two of the top five funding rounds in the quarter.
  • Stripe raised $600 million in the first quarter. That deal boosted its value to $95 billion.

Investors now want to challenge the challengers. Banking remains an important space which drew roughly $3 billion in VC funding. It's emerging as an even more dynamic and competitive arena.

  • CB Insights cited major milestones: SoFi bought a bank; Square got a bank charter; MoneyLion said it's going public via Fusion Acquisition's SPAC.
  • The banks representing the old guard of finance are "starting to roll out their responses to digital challenger banks," Yu said. The report cited JPMorgan Chase's new digital consumer bank and HSBC's launch of a mobile bank for small and medium-sized businesses.
  • Then there's the rise of community-focused banks, such as Greenwood, which is geared to Black and Latino customers; Cheese, which serves the Asian community; and Daylight, which is geared to the LGBTQ community.

Now, VCs have to sort out what the lasting effects of the pandemic are. Fintechs clearly are on a roll and will continue to disrupt finance. But the economy is still wobbly and there are worries about unreasonable valuations, Yu said. "The big question is: Is it sustainable? Is it rooted in reality? Coming out of the pandemic, how will the momentum trend?"

— Ben Pimentel

A MESSAGE FROM FUNDRISE

Relative to a traditional portfolio composed of 60% large-cap stocks and 40% bonds, a portfolio with a 30% allocation to private real estate would have generated a higher return with more annual income and lower volatility over the past 5, 10, 20, and 40 years. Power your portfolio with Fundrise.

Learn more

From Protocol | Fintech

Payday lending 2.0? Earned wage access is growing, but consumer advocates and regulators warn that it's a new form of predatory financing.

Visa, Mastercard, Shopify beat Wall Street: The three financial services companies posted solid results that exceeded expectations.

Overheard

  • "If you accounted this way in the private sector, you wouldn't be in business anymore. You'd probably be behind bars." —Former U.S. education secretary Betsy DeVos in December, addressing the government's student loan miscalculations.
  • "[P]ersonal loans will be our near-term economic driver and will pave the road to our broader future as a full-service digital bank." —LendingClub CEO Scott Sanborn, discussing the company's lending growth on its first-quarter earnings call.
  • "Attackers are building increasingly advanced capabilities to target core banking systems and becoming more aggressive, harming victims' ability to respond to attacks." —BAE Systems Applied Intelligence's head of cyber Adrian Nish, describing a rise in cybercrime against financial institutions during the pandemic.

3 Questions With ...

Brett King, founder and chairman, Moven

What was your biggest professional blunder and what did you learn from it?

I previously ran a financial services professional association. I had partnered with a U.S. lawyer who would sue anyone that he didn't like, and so forth. That became very problematic. Investing a number of years in building that business was probably my biggest mistake. You have to think beyond the current partnership. You have to think where the partnership is going, where it'll evolve to. Is this a partner that you can take with you on the journey? Do you share the same mindset? That sort of became very critical.

What do you see as the most exciting fintech trend?

What's really interesting is the redefinition of the day-to-day bank account. When a bank account switches from being this passive value store which just stores your money to a financial coach that helps you manage your money and become financially healthier, I think that's a switch we've been waiting for for 700 years really. That is going to really change the relationship of you to money. It is the biggest change that banking will see.

What fintech trend are you most worried about?

It's more a trend globally that fintech has a role in: the problem of inequality. Inequality is, apart from the fact that it creates a huge amount of strain on young people at the bottom of the pyramid, extremely inefficient from an economist's perspective. Inequality results in lower economic activity and in more political and social upheaval. There's no upside to inequality except billionaires getting richer. If I were to look at the biggest problem that I think fintech needs to solve — but is going to have a tough time solving — it is inequality.

For more: Listen to King's "Breaking Banks" fintech podcast.

Need to Know

  • TD Ameritrade won a case on payment for order flow. The Schwab-owned brokerage saw a potential class-action suit get tossed out in federal court. The plaintiffs had alleged that the broker, now merged with Schwab, didn't meet best execution standards.
  • Goldman Sachs says quantum finance is five years away. Financial markets could be using quantum computing within five years, the bank said. It has done research with startup QC Ware.
  • Deserve is offering credit cards as a service. The Goldman-backed startup's "digital-first" Mastercard is used by companies such as Sallie Mae, BlockFi and OppFi.
  • Some credit card ads violated Facebook rules. The way the card offers were targeted by age violated Facebook's anti-discrimination policy, the Markup reported.

Deal Flow

  • Paxos is now worth $2.4 billion. The crypto infrastructure company raises $300 million led by Oak HC/FT. It provides crypto buying and selling services for Venmo and recently received conditional approval for a Trust Bank charter.
  • Current tripled its valuation in five months. The challenger bank, which Protocol covered recently, raised $220 million at a $2.2 billion valuation led by Andreessen Horowitz. The deal comes five months after a previous round valuing it at $750 million.
  • Step raised $100 million. The teen banking app's round was led by General Catalyst.
  • Stripe acquired TaxJar. The payments giant bought a provider of cloud-based tax services.

Data Point

52%

That's the proportion of spending by kids and teens ages 6 to 18 that occurred online in 2020, compared to 30% in 2019, according to a report by Gohenry.

A MESSAGE FROM FUNDRISE

Relative to a traditional portfolio composed of 60% large-cap stocks and 40% bonds, a portfolio with a 30% allocation to private real estate would have generated a higher return with more annual income and lower volatility over the past 5, 10, 20, and 40 years. Power your portfolio with Fundrise.

Learn more

Thanks for reading — see you Tuesday.

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