3 FINTECH NEWS STORIES
#1: Marqeta Overreactions and Underreactions
What happened?
Marqeta’s stock price plunged:
Marqeta shares tumbled more than 30% in extended trading on Monday after the company issued weaker-than-expected guidance for the fourth quarter.
While third-quarter results showed a slight disappointment on the top and bottom lines, Marqeta’s forecast for the current period was more concerning.
The payment processing firm said revenue in the fourth quarter will increase 10% to 12% from a year earlier. Analysts were looking for growth of more than 17%
So what?
As I am fond of saying around here, the stock market is dumb.
The primary reason for the selloff is that Marqeta was unable to get new programs into production in Q3 as fast as they had expected due to the increased regulatory scrutiny on the sponsor banks that they work with.
That’s it. Demand didn’t slow down. They didn’t lose a marquee customer like Block. Profitability didn’t dip (in fact, it was up). It was just a temporary delay in getting some new programs into production due to the fallout from BaaS bank consent orders and the Synapse bankruptcy.
Specifically, Marqeta had forecasted that 15 new programs would go into production in Q3. Instead, only 5 went into production in Q3 (and much later than they were supposed to), 9 were pushed to Q4, and 1 was pushed to Q1 of 2025.
I don’t know. That doesn’t seem like a good reason to flip out, but as I have learned since I started writing this newsletter — public market investors don’t need a good reason to flip out. Any reason will do.
Interestingly, there was a nugget from the Marqeta Q3 earnings call that I found much more useful for understanding the challenges facing the banking-as-a-service and issuer processor space right now, but it didn’t get nearly as much attention.
Here’s Mike Milotich, Marqeta’s CFO:
A few highly sophisticated long-term fintech customers are moving quickly to take ownership of more of the program components in this heightened environment, lowering gross profit growth by two to three points. We have two customers quickly shifting their resources to take on more program management responsibilities, one customer bringing more risk services in-house and three customers connecting their platforms directly to their end users to reduce their reliance on card usage.
Now, see, that’s interesting.
Card issuing and processing has historically been an area where a little third-party program management is acceptable (unlike in BaaS for deposit accounts, where it has never worked well). This is a service that Marqeta makes a nice margin on, and if the programs that reach scale will increasingly take these program management components in-house, Marqeta (and other issuer processors) could have a problem.
I didn’t expect regulators’ distaste for intermediate platforms to impact issuer processors, but if it does, the ripple effects could be meaningful. Until, of course, the winds out of Washington, D.C., start blowing in a different direction.
#2: BNPL For Divorce Lawyers
What happened?
JustFund raised a $5.7 million Seed round:
A fintech startup funding the legal fees for family law disputes has raised $5.7 million in a Seed round. Sydney-based JustFund launched in 2022 cofounded by former lawyers Andy O’Connor and Jack O’Donnell, and fintech entrepreneur Craig Carroll,
The fintech also took on $7 million in venture debt, while more recently there’s another $11m in mezzanine funding from family offices.
Global Credit Investments has also offered a $75 million senior debt facility for the startup’s line of credit facilities for legal bills.
JustFund has built a network of over 600 accredited law firms nationally, approving more than $95 million in legal funding for their clients.
So what?
It’s remarkable how many massive niche businesses are out there, just waiting for fintech to build a better, more tailored solution.
Apparently, BNPL for divorce lawyers is one such niche.
I’m not familiar with how this process works or how much (if at all) traditional lenders play a role in this space, but the idea that JustFund can add value by embedding its solution into the workflows of family law firms and underwrite consumers for loans using an assessment of their legal entitlement to relationship assets rather than their income, employment, or credit score is intriguing.
Here’s the big question I have for JustFund — What does their roadmap look like?
Once you’ve saturated the BNPL-for-divorce-lawyers market, what do you expand into next?
I’d have to assume there are some intriguing adjacencies in this market that you could attack through a combination of fintech and vertical SaaS.
#3: Tipping in Fintech is Complete Bullshit
What happened?
Dave, the public fintech company that provides cash advances to lower-income consumers, was sued by the FTC:
US federal regulators accused a popular financial app of targeting struggling borrowers and misleading them about the terms of its cash advances, the latest blow to a generation of fintech firms that cast themselves as friendlier alternatives to mainstream lenders.
The agency said the company misled consumers about how much money they could get, charged undisclosed fees, and made it hard to cancel memberships.
So what?
I am generally a fan of earned wage access and other lower-cost alternatives to payday lending. However, as long-time readers of this newsletter know, I hate tipping in fintech. I hate it.
The FTC’s suit against Dave is a good illustration of why:
Consumers who take advances from Dave are often charged a surprise fee of 15% of their advance that’s described by Dave as a “tip.” Many consumers are either unaware that Dave is charging them or unaware that there is any way to avoid being charged. One consumer cited in the complaint said, “The interface is set up to trick you into giving the tip. . . I feel cheated/scammed by this whole process.”
How exactly does Dave trick users into providing a big tip?
Well, one of the strategies is to guilt them into it. Here’s the FTC again (emphasis mine):
In addition, consumers are shown a screen featuring a cartoon of a small child surrounded by food, and the options for “10 Healthy Meals,” “15 Healthy Meals,” and “20 Healthy Meals,” representing that, based on the consumer’s payment of a “tip,” Dave will provide meals to people in need.
Dave’s interface leads consumers to believe that, for every percentage of tip they are giving, Dave is donating an actual healthy meal to a needy child. But, according to the complaint, Dave donates just 10 cents for each percentage in “tip” the consumer clicks on and keeps the rest of the “tip” amount. Dave’s donation does not pay for the food required to actually provide a meal. Consumers who discover they can leave a lower tip and attempt to do so see food taken away from a cartoon child until the image of the child is finally replaced by an image of an empty plate.
If your business model incentivizes you to try to emotionally manipulate your own customers, you have a shitty business model, and you need to change it.
No more tipping in fintech!
2 FINTECH CONTENT RECOMMENDATIONS
#1: What Can We Learn From Banking Policy In Trump’s First Term? (by Jason Mikula, Fintech Business Weekly) 📚
A really good recap from Jason on President Trump’s impact on banking policy between 2016 and 2020 and what his reelection may mean for banking policy moving forward.
#2: Wallet Wars: The Battle for Your Digital Life (by Simon Taylor, Fintech Brainfood) 📚
Simon has been banging the drum on “wallets are the new arena of competition in financial services” for a while now, and you know what? He’s right.
This is a great exploration of the topic.
1 QUESTION TO PONDER
Are there circumstances where the end customer in a BaaS bank-fintech arrangement wouldn’t be considered the bank’s customer from a legal and compliance POV?
Some of the comments submitted to the OCC, FDIC, and Fed in response to their RFI suggested that there might be, but this doesn’t jive with my understanding.
