Steal From the Rich and Live Off the Interest
By Alex Johnson
3 Fintech News Stories
#1: Steal From the Rich and Live Off the Interest
Robinhood is starting to figure out more ways to make money:
Some notable things happened in Robinhood’s results in the second quarter, announced in early August. No, it wasn’t a jump in trading. But average revenue per user ticked higher for the first time since the start of the meme-stock frenzy in the first quarter of 2021, from $53 the prior quarter to $56. Notably, that was helped by a big increase in non-transaction revenue: Net interest income grew by more than a third from the first to second quarter, to $74 million, even as transaction-based revenues dipped from $218 million to $202 million.
Though customer trading remains the bulk of Robinhood’s revenue, the upswing in interest rates is helping show some progress on what the firm can do while many small traders are on the sidelines. Interest earned on corporate cash and investments and segregated customer cash and securities went from $2 million in the first quarter to $16 million.
Robinhood said that interest-earning assets were $16 billion at the end of the second quarter. That cash hoard is partly a legacy of the time when Robinhood had to scramble to meet its obligations in early 2021 during the meme-stock surge. But the company says it now uses very little of its corporate cash to run the business on a typical day. It has also swept up a balance of over $2 billion in customer cash as of the second quarter. Robinhood estimated it is realizing about $40 million of additional annualized revenue for every quarter-point increase in interest rates by the Federal Reserve.
I recently wrote about the potential winners and losers in this rising rate environment, and Robinhood isn’t one that I included. In fact, I missed this entire category of “earning more yield on cash sitting in corporate checking accounts,” but that is obviously going to be a significant boost for companies across the spectrum, from Robinhood to Bill.com to Starbucks.
That said, I do find the framing of this Wall Street Journal article pretty funny. It’s presented as if Robinhood has discovered some secret way to diversify its revenue streams, and meanwhile, every bank that has ever existed is saying, “treasury management. You invented treasury management”.
#2: Underserved Consumers Need More Specific Solutions
A new app called Givers raised a $3.5 million seed round and launched out of beta:
A recent pilot program in Arizona, for example, set aside a million dollars to reimburse families that added ramps and grab bars to their homes—but only ended up distributing $130,000 because they couldn’t effectively get the message out. “This is a multi-100 billion-dollar funding pool for caregivers that is pretty much locked up or behind paperwork and bureaucracy,” [Max] Mayblum [founder and CEO of Givers] says.
With Givers, Mayblum is looking to bridge that gap. When caregivers sign up for the platform, Givers starts analyzing their profiles and expenses to determine what their eligibility might be for a number of potential reimbursements. That can include federal tax credits–like the Child and Dependent Care Credit–as well as tax breaks at the state level that specifically cater to caregivers. Then there are funds for veterans and savings that caregivers can accrue through Medicaid and Medicare. To streamline this process, the company has launched the Givers card, a Visa debit card that members can use to separate out their caregiving expenses.
This is the second one of these that I’ve seen recently. The first one, Aidaly – which I wrote about here – works similarly; automating the process of finding and signing up for financial aid that is available but out of reach for most caregivers. Givers makes money by taking a 40% cut of any savings it is able to generate for customers (like bill negotiation services) rather than charging a membership or subscription fee.
One important thing to note is how much apps like this help traditionally underserved consumer segments. You see a lot of fintech apps focused on serving these segments generically (e.g., a neobank for women), but often the needs of these segments are best addressed with more specific solutions (emphasis mine):
Even prior to the pandemic, at least 53 million Americans were taking on unpaid caregiving responsibilities, according to a 2020 report by the AARP and National Alliance for Caregiving.
Between an aging population and labor shortages across the long term care industry–not to mention the devastation of the pandemic–the burden on family caregivers will only continue to increase, with women disproportionately shouldering the impact.
#3: Stop Saying FICO
Spectral, a provider of credit risk infrastructure for web3, raised $23 million:
The startup built an on-chain equivalent to a traditional FICO score, called the Multi-Asset Credit Risk Oracle (MACRO) Score, which allows users to check their on-chain scores through its platform.
A decentralized credit score would allow web3 users the opportunity to engage in an alternative and potentially “more equitable” risk infrastructure, [Sishir] Varghese [co-founder and CEO of Spectral] said. Given the current structure of creditworthiness today, users have little control over their scores.
First of all, web3 continues to prove that it is the best at naming things. MACRO is a great acronym and “oracle” being one of the words making up that acronym is terrific. This whole thing sounds like a James Bondian-plot to take over the world (they should have just embraced it fully and named the company SPECTRE).
Second, Spectral (like pretty much everyone in fintech and web3) thinks the FICO Score is bad and needs to go:
The inefficiencies of existing credit risk mechanisms were made apparent by shocks like the Global Financial Crisis and the Covid-19 pandemic — latter, albeit not at the same scale. Despite having access to humongous amounts of new data, the credit infrastructure at many institutions remains rigid.
So, it built the MACRO Score to replace this outdated, “points-based model”:
The MACRO Score is created by connecting either a single wallet or a bundle of several wallets to Spectral’s App. The App retrieves all DeFi and non-DeFi-related transactions associated with this wallet (or wallets), engineers a number of features from these transactions (see below for details), turns them into a vector, and uses this as an input into a number of machine learning (ML) models to generate a Score ranging from 300—indicating very low creditworthiness—to a maximum Score of 850, representing very high creditworthiness.
And I have a few observations:
- I love that they want to replace the FICO Score, but are keeping the 300-850 score range. Talk about skeuomorphic design.
- One of the benefits of centralization and KYC is that it allows lenders to feel confident that they are evaluating applicants’ full credit histories. However, with MACRO, I’m not clear on why someone wouldn’t just have a bunch of web3 wallets for interacting with DeFi protocols and, when it comes time to borrow, only connect the wallets that will positively contribute to their MACRO Score.
- MACRO is presented as a replacement for the FICO Score, but if you look at what it’s predicting (liquidation risk) and the factors that it looks at (transaction and liquidation history, wallet balance, market conditions), it’s clear that it’s not comparable to FICO. FICO predicts a consumer’s willingness to repay a loan. The MACRO Score is really more of a combination of a cash flow-based ability to pay score and an investment skill score. Those may be very valuable insights for DeFi, but it’s not at all like the FICO Score. Fintech and web3 companies need to stop saying FICO.
2 Fintech Content Recommendations
#1: Why Web3 Might Not Follow the Standard Adoption Curve (by Frank Rotman, QED Investors) 🧵
Frank (or Fintech Junkie, as he is known on Twitter) is the most rigorous thinker in fintech. You should follow everything he does and read everything he writes. This thread, in particular, is incredible. Frank lays out why web3 might not follow the same adoption curve as all other technologies. I won’t spoil any of it, but his “imagine what the adoption curve would have been” tweets in this thread blew my mind.
#2: Leading With Software When Building a Lending Business (by David Haber, a16z) 📚
The caloric value of this article is wonderfully high. In just a couple of paragraphs, David succinctly explains why a lot of fintech companies focused on lending struggle with poor unit economics (they spend too much money on acquisition and underwriting) and explains how to avoid this challenge (wrap software around your lending product so that you can push it to the right customers at the right times).
Bonus Recommendation: Interspace (by Samir Rao, Unit) 📚
You’re a fintech nerd, so you likely already follow Samir on Twitter, where he frequently unleashes deeply useful threads on various fintech topics. Well, now all of those threads have a home – Interspace, a place for “over-engineered posts on fintech, stratfin and unit economics nerdery”
Subscribe to this. Trust me.
1 Question to Ponder
Which fintech infrastructure companies should be getting a lot more public attention for the value they provide or the traction they are getting?
In my experience, some fintech infrastructure companies are great at building useful products and delivering for their clients but suck at telling their stories or generating publicity. Plus, these companies’ clients are often disinclined to help them get publicity (through testimonials or case studies) because they don’t want to tell their competitors about their secret sauce.
Do any companies like this come to mind? Please hit me up on Twitter or LinkedIn.
BTW – if you reply to this question by saying something like “my company” or “the company that I do PR for,” you will earn yourself 1,000 Fintech Takes Bad Place points. You have been warned.