The Big Story

Targeting Robinhood

Robinhood had a few more arrows shot in its direction this week, one from a key regulator and the other from a potentially serious challenger. It was enough to spook investors.

On Monday, SEC Chairman Gary Gensler said in an interview that the agency could ban payment for order flow, the lucrative but controversial compensation scheme that makes up a big chunk of Robinhood's revenue.

That same morning, CNBC reported that PayPal was thinking of rolling out its own stock-trading service, which could mean the fintech powerhouse might soon join Robinhood's growing list of rivals.

The double whammy sent Robinhood's stock sliding as new questions emerged about the newly-public online brokerage's future.

A complete ban on payment for order flow is "on the table." Robinhood makes a ton of money — 75% of its total revenue in 2020 — from rebates it receives for sending trade orders to market makers.

• Critics, including Gensler, argue that the system poses serious conflicts of interest since Robinhood has an incentive to encourage customers to make as many trades as possible, even when it's not in their best interest.
• Robinhood has pushed back on the criticism, touting the innovation that made it a trailblazer in retail investing: eliminating commissions. Payment for order flow "is a better deal for our customers versus the old commission structure — it allows investors to invest smaller amounts without having to worry about the cost of commissions," Chief Financial Officer Jason Warnick said in a statement.
• Gensler, who took up his post in April, has said that the SEC "could substantially limit or ban" payment for order flow, as other countries have done. His comments this week sent the strongest signal yet that payment for order flow may be on its way out. If it does, Robinhood had better make plans for other ways to make money.

Is PayPal about to crash Robinhood's party? Robinhood, which already faces competition from the likes of Public, Square and SoFi, could find itself going toe to toe with another fintech powerhouse, PayPal.

• The payments and financial services giant is looking into building its own stock-trading service, according to CNBC, citing unnamed sources.
• PayPal has said that it has a grand ambition to build a "super app" that would make it easier for customers to manage every aspect of their finances, including investing. In some ways, it's a throwback to Elon Musk's original vision for X.com, which became PayPal: Two decades ago, the startup had ambitions to be a one-stop shop for financial services, including investments, but it ended up focusing on person-to-person payments.
• The company hasn't announced anything. But PayPal has apparently just made a key hire in Rich Hagen, a financial services industry veteran who was co-founder and president of Ally Invest.
• Hagen just edited his LinkedIn profile which now says he is CEO of Invest At Paypal and is "leading PayPal's efforts to explore opportunities in the consumer investment business."
• Robinhood apparently isn't shy about competing with PayPal. The company is reportedly planning to roll out a new feature that lets users receive their pay two days early via direct deposit, competing with similar offerings from PayPal, Chime and an increasing number of banks.

Robinhood faces a bumpy road ahead. Robinhood's "success and challenges have created significant competition," Jonah Crane, a partner with Klaros Group, told Protocol. Robinhood blazed the trail in commission-free investing, but now there are clearly cracks in its business. Regulators are watching. And rivals are eyeing the huge market opportunity it uncovered.

-- Ben Pimentel

A MESSAGE FROM CHAINALYSIS

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Protocol Live

Future of voice

From speakers to phones to cars, voice control has quickly become ubiquitous. How can the entertainment industry craft new voice-powered experiences, what kind of new business models are emerging in a voice-first world and how will voice control evolve in a world with multiple assistants?

On Sept. 9 at 12 p.m. PT / 3 p.m. ET, Protocol's Janko Roettgers will gather a panel of experts from across the industry to discuss what's next for voice. RSVP here to save your spot.

Overheard

• "To be able to IPO successfully we need to be at least in the few billion dollars range of revenue a year." —Nik Storonsky, Revolut CEO and co-founder.
• "The multi-CBDC shared platform ... has the potential to leapfrog the legacy payment arrangements and serve as a foundation for a more efficient international settlement platform." —Fraziali Ismail, the assistant governor of Bank Negara Malaysia, discussing a cross-border payments trial by the central banks of Australia, Singapore, Malaysia and South Africa to use central bank digital currencies.
• "[Glenn] Arcaro and his confidantes preyed on investor interest in cryptocurrency. As a result, a staggering number of individuals lost an enormous amount of money." —Acting U.S. Attorney Randy Grossman on the the BitConnect director who pleaded guilty to defrauding investors of over $2 billion.

3 Questions With …

Jesse Proudman, CEO, Makara

What do you see as the biggest challenges in fintech?

I think it's a talent problem. You have domain expertise that is valuable in the specific financial services domain coupled with the technology expertise required to deliver a lot of these applications. It's already hard to find technical talent to begin with. Coupled with the lack of domain expertise, it makes it very challenging for firms to grow aggressively.

What fintech company have you been most impressed with this over the past year?

We've been pretty enamored with Plaid. Obviously we've used them for integration. The moment you begin to deal with any kind of traditional bank infrastructure, you realize how fragmented and broken those tools are. So for an organization like Plaid to create a modern interface on top of an incredibly legacy infrastructure, the deeper we've got the more impressed I become.

What's been your biggest professional blunder, and how did it help you?

I had anticipated when we started this business that it would be easy to raise capital for the hedge fund and challenging to raise equity capital. I very quickly discovered it was actually inverse. Raising hedge fund capital proved to be very challenging, up until about Q3 of 2020, and raising equity capital was much simpler. I think we put the wrong amount of effort on the wrong side, originally. It took us a while to sort of figure that reality out and redirect energy appropriately.

Need to Know

• The IRS is going undercover to catch crypto cheats. An agent posed as "Mr. Coins" on LocalCryptos.com, according to Forbes.
• The OCC, FDIC, and Fed issued guidelines for banks working with fintechs. The 20-page document advises due diligence across several areas.
• The comment deadline for the FedNow payments system was extended. The Fed had asked for comments on its real-time payments network slated for a 2023 launch, but has extended the deadline to Sept. 9.

Making Moves

• John Hunter of JPMorgan is now CEO of Swift's Americas and U.K. operation. He was previously a managing director at the bank. Swift recently announced Swift Go, a system for low-value, cross-border payments for individuals and small businesses.

Deal Flow

• Jeeves is worth a half a billion. The Andreessen Horowitz-backed expense management startup's $57 million series B was led by CRV.
• Kakao Pay lowered its IPO target to $1.3 billion. South Korea's payment giant is 55% owned by Kakao Corp. and 45% by Alipay Singapore Holdings.
• India's Razorpay eyes $250 million. The Sequoia Capital-backed payments service is talking with venture investors to raise at about a $4 billion valuation, per Mint.

Data Point

$3 billion

That's the volume of sales of non-fungible tokens on OpenSea in August, which was more than 10 times the prior month, as meme-stock traders and bitcoin buyers moved on to digital collectibles.