Don’t Chase a Bad Hand
By Alex Johnson
3 Fintech News Stories
#1: Attacking Money-adjacent Problems
Daylight raised a Series A:
Daylight, a digital bank that pitches itself as LGBTQIA+-friendly, announced a $15 million Series A round led by Anthemis Group with participation from CMFG Ventures, Kapor Capital, Citi Ventures and Gaingels.
I first wrote about Daylight in an essay called Unicorns are Boring. The focus of that essay was on the critical role that community-focused banks play in the larger financial services ecosystem. The challenge with community-focused neobanks, as I explained in the essay, was that it would be difficult for any of them to achieve the scale and/or profitability that investors (eventually) want to see.
I think most community-focused neobanks have been struggling with this challenge in recent years. However, Daylight appears to have a plan:
Daylight co-founder and CEO Rob Curtis says the new capital will be used to, in his words, “build the financial products and services to help queer people live their best lives” — starting with a subscription plan called Daylight Grow designed to help prospective queer families with financial planning.
When the product launches in early 2023, Simmons says that Daylight Grow will offer a personalized “family creation plan” covering financial, legal and logistical milestones tailored to individual states and needs, “family planning concierges” to provide financial advice and logistical support, a “family-building marketplace” with vetted family attorney networks and recommendations for IVF and surrogacy clinics, and in-person financial and fertility education events.
Smart. This is really smart. As I’ve written about recently, the big untapped opportunity in fintech isn’t building better bank products. It’s building software products to attack money-adjacent problems that traditional bank products don’t solve, but that customers will happily pay to solve. Family planning for LGBTQ people is a great example. It’s a problem that can be better solved with software (lots of specialized knowledge and workflows that can be codified), and it has ample hooks into financial services (payments, lending, insurance, etc.)
#2: Don’t Chase a Bad Hand
Nirvana Money, a consumer-facing fintech company created by industry veteran Bill Harris and launched [double checks notes] last month is shutting down:
I feel bad for all the employees at Nirvana Money (if you’re looking for a new role in fintech, please join the Fintech Takes Talent Collective), but I actually think this news is really good for the fintech ecosystem.
The reason that Nirvana Money shut down is that the company’s leadership realized that the business wasn’t going to succeed. Here’s an excerpt from an internal email to Nirvana Money staffers explaining the decision (first reported by Jason Mikula at Fintech Business Weekly):
In our own market testing, we’ve hit two obstacles. The credit quality of most of the people who enroll is too low for us to give them an immediate credit line. This has contributed to problematic levels of fraud and mis-use.
Equally challenging, the proportion of enrolled customers who fund and become active card users is below expectation. This makes our cost of acquisition and unit economics – the marginal revenue and expense generated by each new customer – unsustainable.
In the earliest stages, building a startup is about testing hypotheses and derisking the assumptions those hypotheses are built on. You raise pre-seed and seed-stage investments to pay for the experiments necessary to do that. If the results don’t go how you want or expect, it’s not the worst idea in the world to fold. Stubbornness is a founder trait that we sometimes over-extol the virtues of.
#3: Our Bank Charter in Action
Not sure how I missed this piece of news:
Varo Bank early Tuesday announced it has become the first digital neobank to be admitted to the Zelle peer-to-peer payments network. The bank, a unit of the 7-year-old, San Francisco-based Varo Money Inc., said it will now offer payments via Zelle through its mobile app.
Varo says it will not charge fees for Zelle transactions. To qualify to use the P2P payment service, which processes transfers in near real time, customers must have made a so-called direct deposit with Varo within the prior 31 days, Varo says. Qualifed deposits are electronic deposits of a paycheck, pension, or government disbursement from an employer or government agency, the bank says.
Whoo boy, I have thoughts. Here are a few:
1.) I absolutely love this framing: “it has become the first digital neobank to be admitted to the Zelle peer-to-peer payments network” I hope that’s just marketing fluff and not a real emotional dynamic that contributed to this decision. Zelle isn’t a nightclub that you feel lucky to get into.
2.) Continuing with the nightclub analogy, I hope Varo is prepared for the bottle service-like prices they will be paying EWS. Zelle is expensive, and Varo, like all other banks, is offering it for free (although it is at least restricting it to customers that have their direct deposits going to Varo). Given that Varo has been running into some challenges on the revenue/profitability side, I’m surprised they are adding this transactional cost into the mix.
3.) I also hope Varo is prepared to deal with new reputational problems. Fraud is rampant in P2P payments, and Zelle seems to get hit especially hard given the size of its network and the fact that it moves the money in real-time. I’m not sure Varo is going to have the stomach to, like most traditional banks, tell customers who have fallen victim to a social engineering scam through Zelle, “sorry, you authorized the transaction, and there’s nothing we can do.”
4.) I just really don’t get why Varo is doing this. It almost feels like they are falling into the same trap that a CEO at a mid-size bank falls into when he concludes that his bank has to offer some new fintech gizmo – my 13-year-old granddaughter and all of her friends use this … we have to offer it too, or we will become irrelevant.
I mean, take a look at this quote:
“Adding Zelle to our product lineup is our bank charter in action”, said the company’s founder and chief executive, Colin Walsh, in a statement. “We are excited to welcome millions of Americans to access Varo’s full range of benefits on our modern, secure, digital-banking platform that now includes the ability to quickly send and receive money.”
If by saying this “is our bank charter in action,” he means “this is our bank charter brainwashing us into thinking about our strategy and product roadmap the way that a bank would,” then yeah, I guess that’s true.
2 Fintech Content Recommendations
#1: Guide to Maximizing Interchange Revenue (by Eduardo Lopez, Lithic) 📚
This week’s content recommendations are very Lithic-heavy, for good reason. They are putting out a lot of great content and resources for builders in the fintech space. I learned a lot reading this one, which delves into detail on the different interchange rate tiers and strategies for maximizing interchange revenue. If you’ve ever had questions about interchange, this guide will help you.
#2: Open (the) Banking (Floodgates) (by Reggie Young, Fintech Law TL;DR) 📚
This is one I had been waiting for. Reggie Young (who works at Lithic) did a deep dive on EVERYTHING you might want to know about what the CFPB is doing on open banking and 1033 rulemaking. Seriously, this should be your go-to resource for the next couple of years on this topic. It will be for me.
1 Question to Ponder
Which fintech company that has acquired a bank charter has been most successful so far? Which one will be the most successful 20 years from now and why?
If you have any thoughts on this, please share them with me on Twitter or LinkedIn.