3 FINTECH NEWS STORIES
#1: Stripe Ditches Evolve
What happened?
Fifth Third, which has made some major investments in BaaS and embedded finance over the last couple of years, announced a big new partnership:
Fifth Third Bank is pleased to announce a collaborative agreement between Newline by Fifth Third, a leading embedded payments provider, and Stripe … Later this year, Newline will power Stripe Treasury, a service that enables software platforms on Stripe to offer embedded financial accounts to their customers. Newline by Fifth Third is an API platform that enables enterprises to launch and scale payment, card, and deposit products directly with Fifth Third Bank.
So what?
As a reminder, Stripe Treasury is Stripe’s BaaS middleware business, or what banking regulators are now calling “intermediate platforms”. It allows Stripe’s customers to offer embedded bank accounts, open-loop wallets, and cards and accounts for on-demand workers to their customers, through a single API.
Stripe launched its Treasury product in December of 2020. Its primary bank partners at the time were Evolve Bank & Trust and Goldman Sachs.
It’s unclear to me if Goldman Sachs ever got much into production with Stripe before pulling back on all non-investment banking activities, but we do know that quite a bit got into production with Evove, including Shopify’s embedded banking product Shopify Balance. Evolve has also been the bank partner behind Stripe’s own embedded banking product, which now appears to be deprecated in favor of third-party products from Mercury and Novo.
Obviously, Evolve turned out to be a bad bank to partner with (even though I’m quite confident that its incompetence was, at the time, a feature not a bug).
Regardless, Stripe now appears to be moving away from Evolve (a process that will take a long time to fully play out) and toward Fifth Third, which is one of the smartest and most aggressive over $10B in assets banks in the embedded finance/BaaS space.
Given the climate in BaaS these days, this strikes me as a great choice for Stripe, but it won’t be without its challenges:
- The unit economics will likely be worse for Stripe and/or its customers. In BaaS, you have technology platforms and you have banks. Someone has to pay for both of those things. Fifth Third is a bank but also a technology platform (Newline). Stripe Treasury is a technology platform. Either Stripe or Fifth Third will have to reduce their prices, or Stripe’s customers will have to pay for both.
- It’s unclear to me how many debit cards Evolve was issuing on behalf of Stripe, given that Stripe also works with Celtic Bank for its Stripe Issuing product. Regardless, Fifth Third will not be able to offer the same Durbin-exempt interchange rate that Evolve was offering (unless Fifth Third was willing to take a haircut to win the business).
- The temptation for any developer-centric BaaS platform, like Stripe Treasury, is to abstract away their end customers from any of the unpleasant realities of building a software product on top of a bank. The way that this is often accomplished is through program management, in which the bank partners rely on the middleware platform to handle much of the day-to-day risk, governance, and compliance work. In the past, Stripe’s marketing for Stripe Treasury has emphasized this program management aspect, and there has been evidence in other Stripe products of this program management function not working as well as it probably should have (take a look at this article about a “No KYC” prepaid debit card launched through Stripe Issuing, for example). I am quite sure that Fifth Third will not be as pliable as Evolve was, which is undoubtedly why they were an attractive alternative for Stripe at this point. However, it’s also likely to be a source of annoyance for the Stripe Treasury team and its customers.
#2: Learn How to Use Debt Productively
What happened?
Sora Finance launched a new product for wealth management advisors:
Super excited to launch Sora Finance’s new Debt Tolerance Assessment today. As an advisor, you’ve long had the ability to assess your client’s risk appetite when it comes to investing (e.g. Nitrogen, TIFIN, Morningstar). Sora’s newest offering is designed to help you understand your client’s comfort with debt.
So what?
The basic idea here is to give wealth management advisors an assessment tool that they can share with their customers in order to help the advisors understand their customers’ tolerance for debt. Based on that understanding, the advisor can then make informed recommendations. For example, if the tolerance is low, the advisor might recommend a personal loan to refinance a more expensive debt obligation. Or if the tolerance is high, the advisor might recommend that the customer take out a loan against their existing assets in order to fund a new investment.
I love this.
Some of my favorite financial product ideas start out as features for wealth management advisors. But what gets me really excited is thinking about how those features can be automated and combined with other capabilities for a non-high-net-worth user base.
One of consumers’ biggest financial challenges — and this has been borne out in multiple surveys that I have seen or commissioned over the years — is figuring out how to use debt productively. Debt is a tool, but most consumers don’t know how to use it well, and many of the money management cults out there (hi, Dave Ramsey!) encourage their adherents to stay away from it at all costs.
I wonder if we can carve out space for a middle ground between crippling credit card debt and credit invisibility?
For example, could you combine a version of Sora’s debt tolerance assessment with generative AI (for understanding and communicating with the customer in natural language), consumer-permissioned liability data (via someone like Method), and debt repayment optimization algorithms (like what Tally and Payitoff have built) to create the ultimate “learn how to use debt productively” PFM tool for consumers?
#3: A Digital Identity Wallet
What happened?
Tim Berners-Lee is launching a digital wallet for identity:
Tim Berners-Lee is eying the next phase of the web as his company Inrupt launches a white-label “data wallet” that lets people store, manage and share their data.
With a multi-purpose data wallet, organisations can access and verify government-issued credentials like passports, educational certificates and entitlement benefits, even across state and national borders. The wallet could also be used to share demographic information, memberships, event tickets, professional credentials, purchase histories, buying preferences, and other personal data.
The wallet is built on Inrupt’s Enterprise Solid Server (ESS), which the firm says makes it easy to reuse the personal data stored in other apps, services and AI systems. Consent for access is always coupled with each piece of data, so users can trust their data is used the way they want, and organisations can be confident they’re in compliance with regulations.
So what?
If the inventor of the World Wide Web is launching a new product, we will cover it in Fintech Takes. That’s a promise.
And specifically, if he wants to fix identity verification and authentication for the Internet, we will take a keen interest in it here because, as I have written about before, digital identity is the key to solving some of the most vexing problems in financial services.
Inrupt’s approach to solving the digital identity problem is to provide organizations (companies, governments, etc.) with the infrastructure to set up their own servers (in the cloud or on-prem), which will then host individual consumers’ Personal Data Stores (or PODs). A POD can, with the consumer’s consent, store personal data from a variety of different sources and be permissioned, in a granular way, to attest to the veracity of that data to third-party apps and services.
It’s an intriguing concept, which is largely consistent with the regulatory direction being taken in jurisdictions like the EU, as well as the technical vision articulated by the folks working on decentralized digital identity standards.
I have two big questions:
- How is Inrupt tackling data security? A big argument for digital identity running through Apple and Google is that, by keeping identity data secured on individuals’ devices rather than in the cloud, we can minimize the risk of massive data breaches. On the other hand, I (and many others) have a natural distrust of big tech companies and there’s always the question of “what happens if I lose my phone?” I wonder how Inrupt is approaching data security and the use of encryption and tokenization.
- How sure are we that the average consumer is interested in going out of their way to proactively configure and manage a separate digital identity wallet? This is always the peril of tinkerers like Berners-Lee designing solutions for the mass market. They tend to overestimate the amount of work the average consumer is willing to do and the amount of friction they are willing to endure.
2 FINTECH CONTENT RECOMMENDATIONS
#1: The CFPB Weighs in on EWA and the Definition of “Credit” (by Jonathan Joshua) 📚
For a deep deep dive into the CFPB’s recent proposed interpretive rule on earned wage access and its implications for the industry, I would recommend Jonathan’s excellent write-up.
#2: French Hill on Crypto Reg, Housing Reform, SVB Lessons, and Bank Consolidation (by Rob Blackwell) 🎧
I’ve been meaning to recommend Rob’s podcast — Banking with Interest — for a while because, well, it rules. If you’re at all interested in bank and fintech policy topics, this is a must-listen.
1 QUESTION TO PONDER
Does anyone have any intelligent takes on the FTC’s recent efforts around surveillance pricing?
They’re looking at companies in financial services (Mastercard, JPMC, etc.), so I feel like it has implications for banking and fintech. I’m just not sure what they might be.
Any thoughts are appreciated!
