The People’s Financial Institution
By Alex Johnson
3 Fintech News Stories
#1: PayPal Wins. Apple Wins More.
Apple and PayPal have made up:
PayPal and Apple have struck a deal to start accepting each other’s payments products within their separate ecosystems.
The pair have agreed to let US merchants accept contactless payments on their iPhones – using Apple’s new Tap to Pay technology – through the PayPal and Venmo iOS apps.
Meanwhile, Apple Pay will be added as an option in PayPal’s unbranded checkout flows on merchant platforms.
And, from next year, US customers will also be able to add PayPal and Venmo network-branded credit and debit cards to Apple Wallet.
This story is framed as a win-win for both companies, but if we look more closely, I think it’s fairly clear that one is winning a lot more than the other. Let’s break it down.
PayPal and Venmo credit and debit cards are being added, next year, to Apple Wallet. I have seen no evidence that the PayPal/Venmo payment cards have gotten any meaningful customer adoption. I doubt that’s because they weren’t compatible with the Apple Wallet. This costs Apple nothing to enable, and I doubt PayPal will benefit much. Slight win for Apple.
PayPal is getting access to Apple’s new tap-to-pay feature for merchants. Given that this is a new feature that Apple is trying to drive adoption of and catch up to Square (which has a 10+ year headstart), I would say that getting PayPal (which offers its own card reader to micro-merchants) signed up as a partner to push this feature is a win for Apple.
Apple Pay will be added as a payment option in PayPal’s merchant checkout flows. This is a big win for Apple. Apple Pay for in-store transactions is a bit of a red herring. The media loves to write about it, but I think Apple Pay for e-commerce has gotten much more traction in the market and is the bigger opportunity for Apple, at least in the short-to-medium term. Getting access to PayPal e-commerce merchants is a big win for Apple.
(BTW, If you want to dive even deeper into this news story, take a listen to the latest 11:FS Fintech Insider podcast.)
#2: The People’s Financial Institution
Elon Musk, perhaps drawing on his experience at PayPal, has a plan to make Twitter into “the people’s financial institution”:
“Give them some amount of money, like ten bucks or something, that they can send anywhere in the system,” he said, according to a transcript posted by the Verge. “We need money transfer licenses for that, which we’ve applied for.”
Twitter on Friday filed paperwork with the Treasury Department to become a payments processor, according to the Financial Times.
Musk talked about establishing a high-yield money market account “so that having a Twitter balance is the highest-yield thing that you can do.”
The basic idea here seems to be that because most users are going to pay for Twitter anyway (verification is off to a great start, BTW), they might as well just keep their money in the Twitter ecosystem. If they do, then they can get a super high yield on their deposits and the ability to send money to other users and maybe even access to loans at some point?
During the call, a Twitter employee noted the services Musk outlined resembled that of a bank, and asked if Musk planned to offer loans on the platform.
“Well, if you want to provide a comprehensive service to people, then you can’t be missing key elements,” he replied.
I don’t know. Maybe Musk can pull this off, but I have my doubts. In addition to the general level of incompetence he has shown so far as the leader of Twitter, this banking super app plan doesn’t seem super well thought out. How is Musk going to pay for the high yields he wants to offer? Does he realize that there are already plenty of other options for consumers to make P2P payments? What unique reasons is he giving Twitter users to keep their money in his ecosystem (i.e. Starbucks’ loyalty program makes the experience of buying from Starbucks more enjoyable)? And don’t even get me started on the general level of terror I feel about Elon Musk getting into consumer lending.
Also, this isn’t really related, but Elon said this about advertising on Twitter during the same call, and it’s just an amazing quote:
I’d love to see ads for gizmos…Even if they’re not that great, I’ll still buy gizmos. I love technology. I’ll see content for gizmos but not an ad or an ability to actually buy the gizmo. So then I have to send it to my assistant like, ‘Please buy this gizmo.’
#3: Maybe This is Too Complex?
An interesting fintech company, which raised a $16 million seed round from Andreessen Horowitz earlier this year, emerged from stealth:
Enter Tellus. The six-year-old fintech startup claims it can offer people yields of 3.85% to 4.5% on their savings balances by using the money to fund certain U.S. single-family-home loans.
There is a lot to unpack here.
As far as I can tell, Tellus is three things:
- A robust property management platform for landlords, property managers, and renters, which is offered to all parties for free.
- A California-based Super Jumbo mortgage lender (Super Jumbo is, believe it or not, a technical term for non-conforming mortgages above $1 million), which has originated roughly 40 such mortgages since 2016.
- A provider of high-yield cash accounts, which is basically a savings account (in that it offers a yield of 3.85% to 4.5% on cash, which can be pulled out at any time) that is not technically a savings account (in that Tellus is not a bank and funds are not FDIC insured).
All of these different components make up the Tellus flywheel – the property management platform provides leads and market data for the mortgage business, the cash accounts provide the funding for the mortgages, and the mortgages provide the yield for the cash accounts.
It’s an interesting example of fintech, by reducing everything in banking down to these little composable bricks, allowing startups to build really unique and rather complex products and business models.
There are also some red flags:
First, the loans Tellus is making are risky. According to the TechCrunch:
[Tellus] targets existing homeowners who wish to upgrade to larger homes without selling the homes they live in, which makes it difficult for them to get approved for loans by traditional mortgage lenders.
it’s offering to lend money to American single-family-home borrowers “in prime cities” who would otherwise not be able to get such loans.
So, short-term multi-million dollar loans at above-market interest rates to second-home buyers who can’t get mortgages from any other lenders? Eeek.
Second, Tellus doesn’t have a lot of history doing this type of lending. They’ve only made about 40 of these loans, total, since 2016. And I’m guessing most of those loans were made when interest rates were extraordinarily low. How well does this model work in a high-rate environment in which property values are stalling out (or maybe even falling)? Tellus says that it, quote, “has not yet seen any defaults because the majority of its borrowers go on to soon after refinance their loans at more favorable terms.”
Saying you haven’t seen any defaults yet sounds comforting, but it’s really not. I want you to have seen defaults! I want you to know how your lending business is going to perform, ideally across different macroeconomic conditions!
Third, given all of the above, the fact that retail customers’ cash isn’t FDIC insured is pretty scary. And Tellus stating on its website that, “To date, Tellus has met every payment obligation” doesn’t really reassure me.
2 Fintech Content Recommendations
#1: Startups Should Prepare for ‘Second-Order Fallout’ From FTX Collapse (by Kate Clark & Erin Woo, The Information) 📚
FTX is going to be a theme in this week’s content recommendations.
First up is this reporting from Kate and Erin at The Information on VC firms warning of extended fallout for startups due to the failure of FTX. The article quotes Arjun Sethi, a co-founder of Tribe Capital, warning startups to prepare for an extended period of uncertainty and cutbacks.
The notable thing about this to me is that Tribe Capital, while a backer of FTX and plenty of other crypto companies, is also a backer of a lot of non-crypto fintech companies as well (Bolt, Carta, Pipe, Cardless, etc.) How far-reaching will the FTX fallout be?
#2: The Casino and the Genie (by Mario Gabriele, The Generalist) 📚
There are a lot of smart people who write about tech and crypto. Mario is my favorite because, beyond his excellent analysis and his gorgeous prose, he is intellectually honest.
Mario is an optimist about crypto, and he has written about it a lot, including a three-piece series on FTX last year (here’s part 1). After the events of last week, a lot of folks in Mario’s position would have pretended that those prior pieces were never written. Mario didn’t do that, which I respect enormously.
In this essay, Mario grapples with the fallout from FTX and what it means for crypto, as both an industry and as an area of personal interest and inspiration for him.
1 Question to Ponder
It appears that the CFPB’s rulemaking on Dodd-Frank 1033 will, initially, only cover consumer deposit accounts. How quickly (and in what order) will consumer lending, consumer investing/wealth management, consumer payroll, and small business banking be folded into these regulations?