Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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Can a community bank go all-digital?

Quontic bank storefront

Hello and welcome to Protocol | Fintech! This Tuesday: It's June already? Also: Quontic takes a different approach to neobanking, Lemonade walks back its AI algorithm claims, and a crypto Ponzi scheme falls apart.

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The Big Story

Banking on change

Challenger banks seeking to capitalize on consumer interest in new mobile banking products face a crowded landscape.

But that hasn't dissuaded Quontic, based in New York, from taking on the likes of Chime and Current. It's betting on a few distinguishing features to pave its way.

Not long ago, Quontic was a regular bank. CEO Steven Schnall in 2009 bought what was then called Golden First Bank, a troubled community bank with $24 million in assets that was on the verge of shutting down. He turned it into Quontic.

  • As recently as 2017, it was looking at expanding its branch network to cater to more immigrant communities like those it was successfully serving.
  • But Schnall realized his customers didn't want branches; they wanted the low-document loans he was able to offer them as a community development financial institution, or CDFI.
  • Regulators weren't keen on Quontic's use of wholesale deposits, though, and it entered into a formal agreement with the Office of the Comptroller of the Currency in 2018 to improve its safety and soundness. That's when Schnall started eyeing the success challenger banks were having with attracting deposits online.
  • It currently has one branch, in the Astoria neighborhood of Queens, New York.

Being a bank has its upsides. The downsides are obvious — see Quontic's regulatory scrapes — but the advantages are considerable, which is why it seems like everyone wants to be a bank these days.

  • Non-bank fintech startups have to find a sponsor bank, and can get in trouble by presenting themselves as banks — as happened with Chime recently.
  • Despite its slow start on the consumer banking side, Schnall said Quontic has advantages over other neobanks: "A lot of neobanks like Chime are not even banks. They're bringing in millions of customers, but don't lend money. They don't even hold deposits. People question whether the non-bank neobank model can even be profitable or is just aggregating customers to sell to some bank."

Lending is a key advantage. As a CDFI, Quontic gets funding in return for focusing on underrepresented groups; 60% of its loans must be to low-income groups. That was easy to do in the immigrant communities of Queens, where Quontic made early strides.

  • Quontic's flexible mortgages cater to borrowers whose family members contribute substantial cash to a down payment, which doesn't show up in traditional income documents.
  • "We found a lot of borrowers had good credit and resources to make an equity contribution to a home purchase but most big banks were dead set on documenting underwriting in the traditional way," said Schnall.
  • As a CDFI, Quontic is exempt from traditional requirements on loan underwriting such as income tax returns. The real-estate bubble of the early 2000s also left most big banks very shy of anything that smacked of that era's low- or no-documentation loans.

Attracting deposits is still a challenge. Checking and savings accounts are hard to differentiate, so Quontic is focusing its marketing on immigrants, gig workers and other underserved communities.

  • Because Quontic charges slightly more for mortgages, it can pay slightly more for deposits than other banks, Schnall said. Its high-yield savings account currently pays 0.55% APR, which is higher than Ally or Goldman's Marcus, according to Bankrate.
  • Quontic offers 1.5% cash rewards on debit card purchases, which NerdWallet says is "standard" for cash-back cards. But it also offers an option to get that 1.5% back in bitcoin instead of dollars. It sounds gimmicky, and the recent crash in cryptocurrencies might make it less attractive, but it could draw some bitcoin enthusiasts to the bank.
  • One obvious missing feature Quontic doesn't yet offer: early access to direct deposits and gig-work payouts. That's a highly attractive feature for Quontic's target markets.

Can Quontic distinguish itself? That's the challenge ahead of Schnall, who can draw on a varied business background, including a stint at internet startup Restaurant.com, running a mortgage REIT and conducting a fraught real-estate negotiation with representatives of the singer Taylor Swift.

The bigger lesson to draw from Quontic's transformation from community lender to digital player may be that the lines between banks and neobanks are blurring as fintechs seek charters and established banks build more attractive mobile and online products.

— Tomio Geron

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From Protocol | Fintech

Debunking payment for order flow myths. The rebates to brokers hurt prices for all investors, says a trading expert who worked at a top hedge fund.

Square's banking expansion. The financial services company is reportedly preparing to offer checking and savings accounts as it expands beyond payments and lending.

China's Bitcoin crackdown. A top government agency has added "bitcoin mining and trading activities" to a list of financial risks to prevent.

The Acorns SPAC. The deal to take the savings and investment app public will value it at $2.2 billion.

SEC charges five in Bitconnect case. The agency alleges a group raised unregistered securities worth over $2 billion.

Overheard

  • "A poorly worded tweet of ours … led to confusion as to how we use customer videos to process claims. We do not use, and we're not trying to build, AI that uses physical or personal features to deny claims." —Lemonade responding to backlash over comments suggesting it used AI to auto-deny insurance claims.
  • "My understanding is that mining for cryptocurrency is not itself illegal but clearly abstracting electricity from the mains supply to power it is." —Jennifer Griffin, a U.K. police officer, on a raid at a suspected cannabis farm, which turned out to be an illegal bitcoin mine powered with stolen electricity.
  • "NFTs are so much more than just a JPEG minted on the blockchain. … They are just one more tool for overturning gatekeeper control and replacing them with the gatemakers."Emma-Jane MacKinnon-Lee, founder of digital fashion project Digitalax, on the future of NFTs.
  • "There are some real questions about who is benefitting and investor protection."SEC Chairman Gary Gensler on the growing popularity of SPACs and the agency's plan to consider new investor protections.

3 Questions With...

Dee Choubey, CEO, MoneyLion

What fintech trend is most troubling for you?

I think one trend that is particularly troubling is retail investors getting hurt by fad investment themes due to the lack of understanding of risk. We have seen a few big examples recently where people are getting caught up in what they think are quick-win momentum investments. As a result, they then put off using the power of compound growth of a diversified strategy that historically has shown to drive better results over the long run. Creating greater access to the financial markets is just one aspect of enabling wealth for more people.

What fintech company (besides your own) have you been most impressed with this past year?

We have seen an increasing labor shift to the gig economy and we really care about empowering hard-working Americans to not only save and invest, but also to earn more. The type of fintech[s] we are impressed by are those that allow creators to earn by leveraging their passions, such as selling bespoke goods to a marketplace or earning more through providing services pseudonymously. That's going to be a big trend over the next five years, the act of untethering services from identity.

What fintech sector or company is most underrated and overrated right now?

The most underrated sector is providing credit to consumers and the most overrated sector are mono-transactional marketing-led digital banks, because in the long term, banking is about providing advice and credit, not just a free debit card marketed by an influencer on TikTok.

Need to Know

  • Funding Circle and Atom Bank joined forces. The small business platform and the app-based bank have formed a partnership to offer loans to about 4,000 small businesses in the U.K.
  • Apifiny unveiled a digital asset trading platform. The digital asset trading and mining company's new service, called Apifiny Connect, gives professional traders access to more than 20 exchanges.
  • Paybby will add crypto investing. The challenger bank geared to communities of color said it will offer crypto investing services on its Wicket by Paybby app.
  • Google is expanding its shopping integrations. The tech giant, which recently announced an integration with Shopify, said retailers on WooCommerce, GoDaddy and Square will soon be able to add listings to Google for free.

Deal Flow

Data Point

200%

That's the increase in mobile banking registrations in early April as a result of the pandemic and the shift to remote banking. Mobile banking traffic also jumped 85%.

A MESSAGE FROM BLOCKCHAIN.COM

Trusted since 2011, there are over 73M Blockchain.com Wallets that have transacted nearly $1T in crypto.

Whether you want to trade, earn, custody, or access full-stack institutional solutions, Blockchain.com is a market leader in retail and institutional crypto products.

Learn more

Thanks for reading — see you Friday.

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