WORKWEEK

Three Fintech News Stories

#1: A New Type of Liability Shift

What happened?

The big banks are devising some new rules for refunding customers who lose money to scams through Zelle:

Banks are required to refund customers for transactions they didn’t authorize, but there is no such protection for customers who are duped into sending money.

Banks on the Zelle network have their own policies for dealing with scams. Some already refund customers who were tricked into sending money into an account other than their own.

The conversations they are having now center on standardizing refund procedures, according to people familiar with the matter. By agreeing to share liability inside Zelle’s system and guaranteeing to reimburse each other, the banks hope more customers will get their money back, the people said.

Here is how the plan would work: If the banks determine that a customer was tricked into sending money, the bank that houses the deposit account where the funds were sent would return the money to the victim’s bank. The scam victim would get a refund from her bank.

So what?

Lawmakers (particularly Elizabeth Warren) have been banging this drum for a while. So has the CFPB, which is currently preparing new guidance aimed at prodding banks to reimburse more customers who fall victim to scams on Zelle and other money-transfer services.

What I find absolutely fascinating is that this public pressure seems to have convinced the big banks to voluntarily take on more liability for fraudulent transactions through Zelle, in an effort to, I guess, forestall more serious regulatory or legislative action in the future.

You don’t see this very often.

Most of the time, if you want to coax industry-wide change, you have to actually shift the liability around, like when Visa and Mastercard forced merchants to upgrade their terminals to accept chip cards by moving fraud liability for magstripe transactions on chip-enabled cards to the merchants.

This is basically regulators and lawmakers bluffing banks into shifting more liability onto themselves.

(BTW – this is the right move for the banks and EWS, and they’re going to come out of this just fine. It’s remarkable how creative and effective banks can be at actually preventing fraud when they’re the ones liable for the losses.)  

#2: Young People Don’t Like Old Tech

What happened?

Taktile, a fintech infrastructure company, raised a Series A:

Taktile today closed a $20 million Series A round co-led by Index Ventures and Tiger Global, bringing the startup’s total raised to $24.7 million.

“The round was preempted by Tiger Global and Index Ventures as they saw strong indications of product-market fit and believed that the time was right to start scaling the business,” Wehmeyer said. “This round will help us further accelerate our ongoing expansion in the U.S., where we have seen rapid growth, increasing our client base by 4x since the end of last year.”

So what?

An easy opportunity in fintech infrastructure is to sell modern versions of tried-and-true software products to fintech startups.

Credit decisioning software exists. It has existed for decades. Most of the legacy credit decisioning software out there can do everything that Taktile claims it can do and a bunch more. It’s mature and battle-tested. It works at scale. It has very clearly defined processes for implementation and support.

But it’s ugly. The UIs feel clunky. The API documentation looks nothing like Stripe’s API documentation. The people selling it are old.

Young people working at fintech startups don’t like buying old tech. They just don’t. This makes them an excellent target market for fintech infrastructure companies selling modern versions of the software that every financial services provider needs.

It wouldn’t terribly surprise me if this maxim – young people don’t like old tech – is a part of Tiger Global’s investment thesis. 

#3: Pipe Dream

What happened?

Pipe, a fintech company that raised $250 million at a $2 billion valuation last year, had some interesting news to share:

The three co-founders of alternative financing startup Pipe are stepping down from their roles as executives of the company in one of the most dramatic management shake-ups seen in the fintech startup world in some time.

Miami-based Pipe said today it is on the hunt for a “veteran” CEO as Harry Hurst, who has been the face of the company since its 2019 inception, transitions from his role as co-CEO to vice chairman.

Fellow founder and co-CEO Josh Mangel will temporarily assume the role of chief executive while Hurst leads the search and subsequent transition in leadership with the help of a global executive recruitment firm. Once a new CEO has been named, Mangel will become executive chairman of Pipe, focusing on product and strategy. CTO and co-founder Zain Allarakhia will remain on the board and serve as a senior advisor to the company. Usman Masood, currently the EVP of engineering, will take over as chief technology officer. 

So what?

This news kicked off quite a storm of rumors on Twitter, which Mr. Hurst felt obligated to respond to. Specifically, he denied that the following things are true:

• Pipe’s Board made the decision to fire the three co-founders months ago.
• Pipe made an $80 million loan to a bitcoin mining company and was forced to write off that loan entirely.
• Mr. Hurst took out a $70 million personal loan against his equity in Pipe.

I haven’t been able to nail down the sourcing on this story yet (if you have any off-the-record information you’d like to share, hit me up on Signal at 406-599-4687), so I’ll refrain from reporting anything. I’ll just add a few general observations:

• Mr. Hurst’s explanation for why Pipe publicly announced that he was stepping down and that the company was looking for a new CEO to replace him – he’s a zero-to-one builder, not a hardcore operator, and they wanted to share this news in order to be transparent with the team – makes absolutely no sense. Announcing that the CEO (and the entire founding team) is stepping down before hiring a replacement never happens. Ever. No PR firm would recommend doing that, nor would any competent Board of Directors sign off on that … unless there is some other reason motivating this disclosure. I’m not 100% what that reason is, but I do not believe that Mr. Hurst and Pipe are being honest about this aspect of the story.  
• In the TechCrunch story linked above, it was reported that $7 billion of ARR (annual recurring revenue) has been connected to the Pipe platform since the company’s founding and that Pipe is on track to 3x its revenue this year compared to last year. That’s cool, but honestly, that doesn’t tell us much about the business. Set aside the “NASDAQ for revenue” framing. This is invoice factoring. It’s incredibly easy to grow a business like that (you’re giving away money!). The hard part is doing it profitably over a long period of time. We really need to stop being impressed by growth and revenue when we’re talking about lending (or lending-like) businesses.
• There has been a lot of criticism from Mr. Hurst and others in the fintech ecosystem directed at those sharing some of the things they’ve heard about this story on Twitter, portraying it as mean-spirited gossip and as non-builders hating on hard-working founders. On the one hand, I get it. Probably some of the things being gossiped about aren’t true, and that would obviously be hurtful. On the other hand, what exactly do you want people to do? The explanation you are giving makes no sense! It’s not being a hater to point that out, and I don’t think it’s morally reprehensible to share what you’ve heard about the situation when the company isn’t being fully transparent.

Two Fintech Content Recommendations

#1: FICO’s Ubiquity and Lender Complacency (by Max Liebeskind and Jeremy Solomon, Nyca Partners) 📚

I can’t tell you how happy I was to read this article by Max and Jeremy at Nyca. I’ve been shouting about credit builder products and the other various ways that fintech companies have been trying (mostly unsuccessfully) to outfox FICO for a while. This article provides some wonderful context on where the credit bureaus and FICO came from, how they work, and how fintech companies should and shouldn’t try to disrupt them.

#2: What to Watch in AI (by Mario Gabriele, The Generalist) 📚

This is the primer you’ve been looking for on all things AI (why investors are so freaking excited, the limitations and potential weaknesses of current generative AI tools, the future implications on knowledge work, etc.)

Typically excellent stuff from Mario.

1 Question to Ponder

What are your best takes on SoFi (current performance, future prospects, etc.)?

I’m going to be writing about them soon and would appreciate any observations or insights you have on them. Hit me up on Twitter or Linkedin!