Barclays Buys Best Egg
Happy Monday, Fintech Takers!
And happy November?!?
I can’t believe it’s November already. No wonder my kids look so big to me. We clearly are in some sort of time warp situation. There’s no way that time is moving at a normal speed. I mean, when I woke up yesterday morning, I could have sworn that it was lighter outside, as if we had somehow ‘saved’ some daylight?!?
Anyway, just an observation. I’ll leave it to the chronometrists to figure out.
My job is to explain what’s happening in fintech. And there is much to explain, so let’s get to it!
- Alex
3 FINTECH NEWS STORIES
#1: Barclays Buys Best Egg Copy anchor linkCopied
What happened?Copy anchor linkCopied
Barclays is acquiring Best Egg:
Barclays is paying $800 million for Best Egg, which was founded in 2013 and arranges personal loans for customers through its online platform. Delaware-based Best Egg sells the loans it makes on to asset managers, earning fees for facilitating and servicing the debts.
So what?Copy anchor linkCopied
The question, in every acquisition, is which party wanted the deal more. Is it an “acquire” situation, in which the company making the purchase was the driving force behind the deal? Or is it a “be acquired” situation, in which the company being purchased was the initiator?
In this case, I would say this is clearly an acquire situation.
Best Egg is old, in fintech terms, and it has been fairly successful to date, facilitating over $40 billion in personal loans to more than two million customers. Its customers tend to be prime or near-prime and primarily use the lenders’ personal loans to refinance debt. From what I can tell, it didn’t desperately need a buyer.
And Barclays is paying above sticker. Best Egg reportedly has tangible net assets of approximately $275 million, which means that, at $800 million, Barclays is paying about 2.9x Best Egg’s tangible book value. Not an insane price to pay, but certainly a premium.
The question is why?
To be honest, I’m not sure.
In the U.S., Barclays is mostly a co-brand credit card issuer, working with companies like JetBlue, Wyndham Hotels, Carnival Cruise Line, Gap, and Barnes and Noble. Its portfolio has been in some flux lately, losing American Airlines to Citi and picking up GM from Goldman Sachs.
I’ve seen some folks speculating that Best Egg’s personal lending product could be a nice complement to (and cross-sell opportunity off of) Barclays’ co-brand credit card business. But the problem with that is that Barclays doesn’t own the customers on the credit card side of its business. Even if it wanted to undercut the profitability of its credit card business by refinancing those customers’ revolving balances, it wouldn’t. Its merchant partners would freak out.
Best Egg had some other, more novel products (a credit builder card, split payments for rent, auto equity lending, etc.), but the reporting from the Wall Street Journal and elsewhere suggests that Barclays doesn’t see those other products as strategically important.
In fact, from what I can tell, the biggest strategic value that Barclays sees in Best Egg might be for its investment bank:
Barclays, which has sizable investment-banking and credit-card businesses in the U.S., aims to use the flow of loans from Best Egg to deepen relations with asset-management clients.
Barclays, one of the oldest and largest banks in the world, bought a 12-year-old monoline nonbank lender in order to deepen the relationships that its investment banking division has with private credit firms that buy that nonbank lender’s loans?
We are living in truly strange times!
#2: Klarna is Ill-Equipped to Compete with Credit Card Rewards Copy anchor linkCopied
What happened?Copy anchor linkCopied
Klarna has launched a new rewards program:
Klarna, the global digital bank and payments provider, today unveiled its new global membership program, introducing Premium and Max. The program delivers premium benefits like cashback, travel perks, and lifestyle rewards in a transparent, monthly plan, without the need to take on expensive credit. The launch marks a major step in Klarna’s evolution into a full-scale digital bank helping consumers manage their money with greater value and control.
So what?Copy anchor linkCopied
All BNPL providers view themselves, fundamentally, as competing with credit card issuers.
If the provider specializes in bigger, longer-term, interest-bearing installment loans (like Affirm does), it’s competing more with the lending side of credit card issuers’ businesses. If it specializes in short-term, small-dollar, 0% interest pay-in-4 loans (like Klarna does), it’s competing more with the payments side of card issuers’ businesses.
It’s much easier to compete with on the lending side of the credit card market because revolving credit card debt is ridiculously expensive. Savvy point-of-sale lenders that underwrite loans transactionally can easily undercut the 20-25% interest rates that credit card issuers charge and still make a healthy profit.
Competing on the payments side of the credit card market is much more difficult. It requires significant investment and massive scale and transaction volume in order to earn that investment back. If you subtract the money that large credit card issuers make from interest and non-transaction fees (late fees, balance transfer fees, annual fees, etc.), you are left with one remaining source of revenue: interchange fees. According to a study from the Federal Reserve, large U.S. credit card issuers invest nearly all the money they make from interchange fees ($41.3 billion in 2019) back into their rewards programs ($34.8 billion).
That’s tough math to make work for a primarily pay-in-4 BNPL provider like Klarna.
You aren’t charging interest. You make a little revenue from late fees, but not enough to subsidize significant investments in rewards. You likely make more money than a credit card issuer does transactionally, but that premium is slowly being compressed. And you want to offer rewards because, to quote Klarna’s Chief Marketing Officer, you “believe consumers shouldn’t have to take on expensive credit to access premium benefits.”
So, you roll out a rewards program with two different tiers. You help pay for it by charging an annual fee of roughly $250/year (for the Premium tier) or $620/year (for the Max tier). Those programs offer the following benefits:
Premium:
- Subscriptions to any of the following: BILD, Blinkist, ClassPass, Clue, Condé Nast (Vogue & GQ), foodora, Headspace, Laundryheap, Omni, Picsart, SvD, The New York Times, The Times and The Sunday Times, WELT, Viaplay
- 0.5% cashback everywhere when using Klarna balance.
- Global travel insurance
- 16g metal card (silver or black)
Max:
- Subscriptions to any of the following: ASMALLWORLD, Audiobooks.com, BILD, Blinkist, ClassPass, Clue, Condé Nast (Vogue & GQ), foodora, Headspace, Laundryheap, Omni, Picsart, SvD, The New York Times, The Times and Sunday Times, WELT, Viaplay
- 1% always-on cashback when using Klarna balance
- Comprehensive travel, rental-car, and cancel-for-any-reason insurance
- Unlimited airport lounge access worldwide via LoungeKey Pass (1,600+ lounges and travel experiences)
- Exclusive 16g rose gold metal card
Is that good?
Ehh.
It’s probably reasonably compelling in Europe, where credit card interchange fees are capped and, thus, credit card rewards for consumers are fairly stingy. That’s where Klarna is launching its global membership program first.
But the press release says that the program is coming to the U.S. in the coming weeks, and I just don’t see how that’s going to work. In the U.S., a premium credit card with a $250/year annual fee usually comes with 1x–2x reward points as a base, with big category multipliers (e.g., 4x dining/groceries). A $620 annual fee buys you even higher cashback rates, with comparable or better airport lounge access to what Klarna’s Max plan offers.
Klarna may make the rewards in the U.S. more generous. However, if it does, I can’t imagine it will be able to sustain that increased generosity for long.
#3: Coinbase Partners with ApolloCopy anchor linkCopied
What happened?Copy anchor linkCopied
Well, this is interesting:
Coinbase Asset Management (CBAM), the global investment manager and wholly owned subsidiary of Coinbase Global, Inc., is launching a strategic partnership with Apollo (NYSE: APO), a leading alternative asset manager, to bring Coinbase stablecoin credit strategies to market.
This initiative serves as a bridge for the stablecoin, private-credit-lending, and tokenization economies, seeking to unlock high-quality credit opportunities in the rapidly expanding stablecoin ecosystem.
So what?Copy anchor linkCopied
There’s a short-term story and a long-term story here.
In the short term, the plan appears to be to give Apollo and its investors access to the collateralized lending that is being done through Coinbase to individuals and companies (the blog post mentions stablecoin issuers, payment-service providers, neobanks, and fintechs) and to give Coinbase users access to the yield generated by Apollo’s private credit assets. This will diversify the funding sources for both Coinbase’s lending and yield services, which are both currently very dependent on demand for leverage from crypto traders (which is a very volatile funding source).
In the long term, my guess is that the vision is to use the funding available from yield-hungry private credit firms like Apollo to power uncollateralized lending, which is the real prize for crypto exchanges and platforms like Coinbase. The challenge with uncollateralized lending on-chain is getting the counterparties that are providing the funding comfortable with the risks. I’m guessing this is an early step in that direction for Coinbase, and I’d expect to see investments in on-chain identity and risk scoring from the company soon, as well as, perhaps, experiments in extending debt facilities to crypto neobanks built on Base (Coinbase’s Ethereum L2).
This, by the way, is the nightmare scenario for banks, which are violently opposed to yield-bearing stablecoins and other stablecoin-like tokens and (I’m guessing) deeply worried about the infusion of private credit funding into on-chain lending ecosystems.
I’ll be curious to see what, if any, concerns are raised by policymakers in this area.
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2 READING RECOMMENDATIONS
#1: It Is Trump’s Casino Economy Now. You’ll Probably Lose. (by Kyla Scanlon, New York Times) 📚Copy anchor linkCopied
Kyla Scanlon, doing what she does. Connecting the dots and making me existentially depressed!
#2: Gambling is Killing Sports and Consuming America (by Joon Lee, New York Times) 📚Copy anchor linkCopied
More depressing content on the infusion of gambling into every aspect of our culture, including, obviously, sports.
Fun! Super fun times!
Bonus: Cross River and the Digital Asset EconomyCopy anchor linkCopied
Most banks still treat digital assets as an edge case; Cross River built it into their core. Its API-driven bank core powers 24/7/365 settlement, direct liquidity to stablecoin issuers for fiat-crypto conversions, and card options for everyday spending. Explore the platform.*
*This rec is brought to you by one of our fantastic brand partners
1 QUESTION FROM THE FINTECH TAKES NETWORK
There are a TON of interesting questions being asked in the Fintech Takes Network. I’ll share one question, sourced from the Network, each week. However, if you’d like to join the conversation, please apply to join the Fintech Takes Network.
Sports betting has been widely available in Europe for a long time. Is that a reason for optimism, in the long-term, regarding the legalization of sports betting in the U.S.? Or will U.S. exceptionalism create unique, long-term challenges for American consumers?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
