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Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
May 4, 2021
Hello and welcome to Protocol | Fintech! This Tuesday: how Wealthsimple's move into DIY trading paid off, the OCC gets a new head and fintech APIs pose new risks.
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The Big Story
Wealthsimple became one of Canada's most valuable financial startups this week, raising the equivalent of $609 million for a valuation north of $4 billion, triple its last round just seven months ago.
It soared to that height by figuring out the answer to a crucial question: Do retail investors want to trade stocks on their own to capitalize on a bull market, or leave it to a roboadvisor to mitigate risk?
For Wealthsimple, the answer was yes.
- The Canadian startup originally focused on roboadvice, but in March 2019, it added commission-free stock trading.
- It doesn't use payment for order flow, which isn't permitted in Canada, and it's not completely free: Wealthsimple charges 1.5% in currency exchange fees on U.S. stock trades.
- The pandemic has drawn more customers. "Demand for investing is broadly speaking at record levels across the board," said CEO Mike Katchen. "For sure the business that had the most tailwinds last year was our trading business."
The startup's big leap in value is a dilemma for other roboadvisors. Will they also have to reconsider their model?
- Active investing has grown largely due to Gen Z investors' appetite for risk and technology and business models that increase accessibility to trading, Andreessen Horowitz's Anish Acharya and Matthieu Hafemeister recently wrote.
- Offering trading alongside managed portfolios may not be on brand for companies that have touted their AI capabilities. But it may be hard to resist as free-trading apps continue to grow.
- Wealthsimple got a celebrity boost in its latest round: Famous Canadians Ryan Reynolds and Drake invested. They could help it reach more young consumers.
But stock trading is just one part of Wealthsimple's goal to be a one-stop shop for financial services. It also offers peer-to-peer payments, tax filing and crypto trading. It intends to roll out other products such as mortgages or insurance as well. "We want to be the primary financial relationship across someone's entire financial product suite," Katchen said.
Other companies want to be the financial superapp for their customers: Look at expansionary moves by PayPal, Square, Chime and Current for examples. The challenge will be to do those new things as well if not better than specialist rivals.
— Tomio Geron
A MESSAGE FROM INTEL AND MICROSOFT AZURE
Financial fraud isn't waning, and as it increases, security tools designed to protect the data in use need to get stronger to combat more complex fraud. Confidential computing is going to play a big role in the future of financial services.
From Protocol | Fintech
Crypto peacemaker: Marqeta's Salman Syed thinks digital and fiat currencies can coexist.
- "Most professionals learn their job through an apprenticeship model, which is almost impossible to replicate in the Zoom world. Over time, this drawback could dramatically undermine the character and culture [of the company.]" —JPMorgan Chase CEO Jamie Dimon telling employees to prepare to return to their offices by July.
- "The laws around crypto are still very gray. This isn't an enterprise software company." —Ran Ben-Tzur, partner at Fenwick & West, on how the Coinbase IPO highlighted the legal and regulatory work ahead for the crypto industry.
- "We continue to adapt to changes in customer behavior, with many of our clients coming to our branches less and less often and opting instead for digital products." —Deutsche Bank CEO Christian Sewing on the accelerating transition to digital banking.
- "The weight and the anxiety of student loans not only take a huge emotional toll but also hold young people back, making them less willing to take risks, such as switching jobs or professions, moving to a new place, or starting a business rather than earning a steady paycheck." —Ex-CFPB Director Richard Cordray, who was just named chief operating officer of Federal Student Aid, in his 2020 book "Watchdog."
3 Questions With...
René Lacerte, CEO, Bill.com
What are you most excited about in fintech?
The tremendous breadth and rapid pace of the industry. The global pandemic has served as an inflection point for innovation across many industries. Particularly in fintech, there's been high visibility into how to solve financial problems for both consumers and businesses, especially small and midsize businesses, now more than ever. Additionally, there's a flurry of activity around new infrastructure being built to help bridge this digital divide between those who use digital tools and those who don't. With UX and data now connected to the foundation that powers our financial systems and processes, there's a lot of opportunity ahead.
What fintech trend is worrying for you?
The strength is also the weakness. In the race to APIs, there is a risk to the security of customer data. Obviously we do a bunch on APIs. But startups don't have the resources that large companies have. We're audited by 50 states. This area is one for all of us in fintech to pay attention to.
What was your biggest blunder and what did you learn from it?
Over the last 22 years of running several companies, there have been plenty. Many of them have been around delaying the inevitable, whether that be changing focus from a partnership or customer acquisition program or a necessary organizational change. Waiting for the "right time" is the blunder itself, as there never is a right time to make an executive decision. On top of that, delaying action on a challenge makes the eventual outcome much harder. While learning to do the homework is important, my key takeaway has been to lean into gut decisions, especially the tough ones.
Need to Know
- Michael Hsu will be named acting comptroller of the currency. Treasury Secretary Janet Yellen plans to name associate director of the Fed's bank supervision division to oversee 1,200 banks, or two-thirds of the U.S. banking system, the WSJ reports. Senate Democrats had criticized existing OCC head Blake Paulson for lobbying for a rule they say is "predatory".
- OppFi faces lending questions. The Chicago startup, which is going public via a SPAC, lends to people with low credit scores. D.C. Attorney General Karl Racine says it's operating without a license, which OppFi disputes.
- PayPal is talking about a stablecoin. The payments giant has talked to industry stablecoin developers and could work with a third party to launch one, according to the Block, a crypto news site. It wouldn't be the first: Coinbase backs USDC as part of a consortium.
- Flywire is going public. The payments company said it has filed IPO documents with the Securities and Exchange Commission with Goldman Sachs, J.P. Morgan and Bank of America Securities as underwriters.
- Trustly shelved its IPO plan. The Swedish payment company postponed its plan to go public because of a regulatory review by the country's Financial Supervisory Authority.
- Sezzle plans to go public in the U.S. The "buy now, pay later" company, whose shares already trade in Australia, is planning to list them in the U.S.
- Qredo raised $11 million. The digital asset management infrastructure company said the seed round was led by G1, Gumi Cryptos, Maven 11 and other investors.
- Coinbase is acquiring Skew. The crypto exchange said buying the data analytics service would enhance its ability to provide real-time analytics to institutional clients.
Stock holdings of U.S. households as a percentage of total financial assets in April, which is a record going back to 1952.
Thanks for reading — see you Friday.