PayPal Jumps Into Advertising

3 FINTECH NEWS STORIES

#1: PayPal Jumps Into Advertising 

What happened?

Following in the footsteps of JPMorgan Chase, PayPal has officially launched an advertising business:

PayPal is formally launching PayPal Ads, its arm that sells digital ads using data about what people buy across its properties within the U.S. PayPal Ads is led by Mark Grether, an advertising executive who previously built Uber and Amazon’s ad businesses.

PayPal is pitching aggregated transaction data from its 400 million active users across its properties, Grether told ADWEEK in an interview.

“The sheer amount of transaction data that we have at our fingertips is just incredible—it’s much more than any single retailer would ever have,” Grether said.

So what?     

A few thoughts on this:

• If you’ve worked in an executive role at a large company that has recently built out an advertising platform powered by first-party data, you are sitting in the catbird seat. Mark Grether worked on Amazon’s ad platform before being poached by Uber. And now he’s at PayPal. I’m guessing he’ll cash a few more checks from other companies before he retires, and anyone with similar experience should be running the same playbook. Every financial services company above a specific size is going to be launching an advertising network within the next couple of years.
• There are a few different ways this can work. The simplest model is to use your consumer-facing properties to display ads. The more properties you have (and are willing to plaster with ads), the better off you are. PayPal (which also owns Venmo and Honey) is especially well-positioned in this regard. Another common model is to enable merchants operating on your platform to do targeted advertising to their customers and prospects operating on your platform. This closed-loop advertising value proposition can be seen in the integration between Square and Cash App in the Block ecosystem, and PayPal started testing a similar in-network advertising capability earlier this year. Finally, and most interestingly, you have what PayPal is planning to launch soon — the ability to display ads on the properties owned by merchants in the PayPal network. This model intrigues me because it (presumably) will act as a revenue driver for PayPal’s merchants, as well as allowing PayPal to fully capitalize on the unique cross-retailer dataset that it has on its 400 million active users.
• I’m guessing Rohit Chopra at the CFPB hates this. That’s not a hot take (he hates a lot of “innovation” in financial services), nor is it a problem for PayPal (or JPMorgan Chase) at this moment, but it’s an interesting concern to consider long term. These first-party advertising networks tend to work on an opt-out model, meaning the companies’ customers are included unless they explicitly request not to be. This opt-out consent model for secondary data use cases like advertising doesn’t seem to be something Director Chopra is personally aligned with (if the CFPB’s draft open banking rule is any indication!) I can’t envision a scenario in which a Democrat-controlled CFPB doesn’t eventually push open banking in the U.S. in a direction that is more hostile toward what PayPal and JPMC are doing. Obviously we don’t know how next month’s election will turn out, but this is a tail risk that large banks and fintech companies should at least keep in mind.      

#2: How Disciplined Is Private Credit?

What happened?

Private credit’s shift from corporate lending to asset-based financing (which includes funding consumer loan products like auto loans, personal loans, and BNPL) is well underway.

Elliott (which is a weird name for a hedge fund) is buying up a bunch of Klarna’s loans:

Klarna is offloading most of its UK “buy now, pay later” portfolio to US hedge fund Elliott for undisclosed terms, in a deal that will free up as much as £30bn for new loans, according to people familiar with the matter.

The deal with Paul Singer’s $70bn hedge fund is expected to bolster Klarna’s capitalisation and allow the fintech to continue to pursue ambitious growth targets ahead of a highly anticipated US initial public offering. As part of the deal, Elliott has bought a junior note in a vehicle that will hold the loans.

Fortress is snapping up SoFi loans:

SoFi Technologies Inc. reached a deal to use $2 billion of Fortress Investment Group LLC funds for the origination of personal loans.

The online bank, which aims to be a one-stop shop for financial services after starting out in student-loan refinancing, said the agreement will expand its loan platform business of brokering deals for pre-qualified borrowers and originating loans on the behalf of third-parties.

And Blue Owl Capital, which has made a big push into asset-based finance with its acquisition of Atalaya Capital Management, has made a deal with Upstart: 

Blue Owl Capital Inc. has agreed to buy up to $2 billion of consumer installment loans from financial technology lender Upstart Holdings Inc. as part of an effort to push into asset-based finance, according to a statement seen by Bloomberg News.

The private credit lender will snap up the debt over the next 18 months, through a so-called forward-flow agreement, where a buyer agrees to purchase loans before they have been originated. The deal also includes $290 million of personal loans that have already been handed out, according to the statement. 

So what?     

Tighter capital requirements after the Great Recession forced banks to pull back from both corporate financing and consumer and small business lending, creating an opening for private credit (in its modern form). 

(Editor’s Note — You can read more about the history of this shift in this essay.)

As private credit has grown rapidly, everyone has had the same big question: How disciplined will private credit firms be in not chasing excessive amounts of risk once all the low-hanging fruit has been plucked?

As Steven Kelly, author of the wonderful Without Warning newsletter, recently wrote, many of the reassurances that private credit firms offered about macro risks are sounding less and less reassuring. Take leverage, for example:

While data is scarce, leverage is increasing in private credit by all accounts. Private credit is increasingly making use of net-asset-value (NAV) financing, subscription financing, collateralized fund obligations, seller financing, and more. These various structures have different designs/uses, but they all allow private credit funds to do more financing on less client funding. That is, they raise leverage.      

Related — Blue Owl Capital’s purchase of Upstart’s loans is being financed by Apollo Global Management.

Leverage!

#3: A Vexing Acquisition

What happened?

Invex Ventures acquired Manigo:

Manigo, a prominent London-based fintech infrastructure platform, today announced its acquisition by Invex Ventures, a seasoned investor in the FinTech sector.

The integration of Manigo under Invex Ventures will enhance the platform’s core banking and vendor orchestration capabilities, further refining what Manigo can offer to its current and future clients. The firm has made a notable impact on the FinTech landscape by enabling businesses to save around £4m and reducing development times from nearly two years to just two months.

So what?

I’ve long thought there was a certain logic in VC firms owning their own BaaS middleware platforms. VCs are always asking how they can be helpful. Providing a BaaS platform, at cost, to its early-stage portfolio companies would be one hell of a value-add, especially if the VC firm in question was one of the ones with a large percentage of banks as LPs (because then the banks could also be the suppliers to the BaaS middleware platform).

This was the first thing I thought of when I saw this news.

That’s not what this is.

Despite referring to themselves as “a prominent London-based fintech infrastructure platform” and “a seasoned investor in the FinTech sector,” I had never heard of Manigo or Invex Ventures before yesterday.

As it turns out, there was a good reason for that.

Manigo is an early-stage fintech company founded in 2017 to provide, well, I’ll let this Fintech Futures article explain:

The Manigo app provides multi-currency accounts with Mastercard debit cards linked to them, along with a social payments facility as part of a built-in messaging application and a standalone budgeting function. The same technology runs business accounts with expense automation and international payments via web dashboards as well as merchant services with omnichannel checkout solutions.  

Those are things!

I’m not sure what all that means, but I guess it sounded compelling in 2017.

By 2023, Manigo had pivoted into BaaS, but that apparently didn’t work out:

Manigo, a London-based fintech infrastructure platform enabling businesses to launch branded financial services, has entered administration.

This is according to a filing made with the UK’s Companies House on 20 September, which reveals that Paul Ellison and Chris Errington of KRE Corporate Recovery Limited, based in Reading, were installed as Manigo’s administrators a week prior.

A source close to the company’s latest developments tells FinTech Futures that the administration was expedited when a “big project failed, which brought everything down”, adding that “everything happened very quickly”. 

So Invex Ventures acquired them out of administration (which is a bit like Chapter 11 bankruptcy in the U.S.), which would seem like a savvy move, except, upon further investigation, it appears that Invex Ventures isn’t as much an investment firm as it is a holding company for the startups of a single entrepreneur — Shahid Munir. 

In addition to being the listed Founder or Co-founder of multiple companies in Invex’s portfolio, Mr. Munir is also the General Partner (and only employee, according to my research) of Invex Ventures.

I’m not sure what Mr. Munir is planning to do with Manigo, but it seems like it will be much less interesting and much more confusing than I initially assumed.

If anyone has any insight into this story, please let me know!   

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2 FINTECH CONTENT RECOMMENDATIONS

#1: “Troubled” Axiom Bank Retaliated Against AML Whistleblowers, Ex-Staffers Say (by Jason Mikula, Fintech Business weekly) 📚  

Some great reporting from Mr. Mikula on Axiom Bank (Rogue CFPB had the best take here — never piss off your General Counsel and Chief Compliance Officer) and TomoCredit, which is an absolute shitshow that deserves significant attention from regulators ASAP.

#2: Freeing Financial Advice from Financial Advisors (by Amias Gerety, Open Banker) 📚

A really great op-ed from Amias on the perils and promise of AI-powered financial advice.

This is a topic that we, as an industry, need to have a conversation about ASAP because AI-powered financial advice is fast becoming a reality, whether we want it to or not.

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1 QUESTION TO PONDER

What compelling opportunities exist in financial services to build physical hardware?

It’s OK if your answer is “There are none.” That’s where I’m leaning, but I continue to see examples of fintech companies building cold-storage wallets and POS terminals, and I’m wondering if I have this wrong. 

Everyone says building hardware is hard, but maybe it’s worth it?