WORKWEEK

3 Fintech News Stories

#1: Eating Its Way Up the Stack 

What happened?

Plaid is bringing a new product out of beta:

Plaid today announced that after two years in beta, its machine learning (ML) risk engine, Signal, will be available to customers seeking to upgrade their automated clearing house (ACH) transaction services with fraud detection.

Run through Plaid’s open banking platform, Signal operates in a similar way to how card networks and financial institutions’ leverage their network insights to mitigate risk and fraud. Signal offers real-time transaction analysis of ACH returns through data-insights pulled from Plaid’s network.

Using over 1,000 risk factors, Signal uses a tiered scoring system to paint a clearer picture of how accounts are interacting across the ecosystem, offering feedback which can be utilised by business’ risk programs to reduce fraud.

So what?

I recently wrote about the rampant amount of fraud taking place inside neobanks and other B2C fintech companies. Much of that fraud is committed through the ACH Network, exploiting the delays in standard ACH transactions. Plaid actually plays a very important role in (indirectly) enabling this fraudulent activity, by making it quick and simple to link multiple bank accounts together.

So it makes sense that Plaid, given the volume of transactions it sees over its network, would be well-positioned to offer this type of risk-scoring system to its customers. It’s basically Falcon, but for ACH transactions rather than card transactions. Very smart move.

My question is, where is Plaid going to stop?

Plaid is clearly under pressure. It laid off 20% of its staff last week. New rules on open banking are coming soon(ish) from the CFPB, which is both good (open banking is here to stay!) and bad (requiring banks to share data will make it easier for other aggregators to compete on coverage). Plaid needs to find new avenues for growth, outside of its core data aggregation business.

The challenge for Plaid (and any company operating a multi-party network) is where to draw the line. Which value-added services should Plaid build on top of its network directly, and which categories of services should it leave to partners? In the case of payments, it’s a bit unclear to me which path Plaid is taking (it launched a payments partner ecosystem last year, but it also has its own Transfer product in beta right now, and it hired a head of payments recently). 

#2: Robinhood Embraces Paternalism

What happened?

Robinhood launched a new promotion to encourage its customers to save for retirement:

Robinhood is bringing the concept of a 401(k)-style contribution match to its retail customers who may not have access to a retirement plan through the workplace.

The retail brokerage will pay a 1% “match” on contributions its customers make to a Robinhood individual retirement account, the firm said Tuesday.

The firm is billing it as the first-ever match paid to retail IRA customers (i.e., outside of a workplace retirement plan.) Robinhood has more than 12 million active monthly users and 23 million funded accounts, said Stephanie Guild, head of investment strategy.

So what?

Robinhood used to pride itself on the rugged individualism of its users. Sure, it would enable users to take lots of risky bets (options trades, exotic crypto tokens, etc.), but that was their choice. Robinhood wasn’t in the business of telling its customers what to do.

Well, times have changed.

Today, Robinhood is bleeding monthly active users, and its freewheeling trader ethos (which encouraged the exact type of volatile trading that the company was able to monetize through things like payment for order flow) has given way to a new mindset: responsibility.

The modern Robinhood wants you to invest for the long term. It wants you to put money into their app and then log out and not think about it. It wants you to save for retirement, and it is willing, like employers, to match a small portion of your contribution to that retirement account to encourage it. It won’t be mad at you if you don’t, but it will be disappointed.

The actual money here isn’t all that significant (Robinhood would be paying $65 per year per user maximum), but the ongoing transformation of Robinhood from this:

To this:

Is pretty interesting.

#3: Tough Timing 

What happened?

A fintech infrastructure provider raised a Series A:

Setpoint, a startup that has built software to help other companies close loan transactions faster, has raised $43 million in a Series A round led by Andreessen Horowitz (a16z).

Serial entrepreneurs Ben Rubenstein, Stuart Wall and Michael Lam founded Setpoint in 2021 with the goal of “building next-gen infrastructure for all asset-backed lending.” Asset-based lending is any loan that’s secured by an asset. If the loan isn’t repaid, the asset is collateral.

In other words, Setpoint aims to be the “Stripe for credit,” and says it has built an operating system for originators that “makes loan transactions instant, automated and error-free.” It does things like verify and store documents, automate interest rate calculations and digitize assets such as homes. 

“Where Stripe is next-gen payment infrastructure, Setpoint’s goal is to be the funding operating system that companies like SoFi and Opendoor will be using to run their businesses,” Rubenstein told TechCrunch. The end goal, he added, is to make credit more widely available and the underlying assets and loans more liquid.

Opendoor is already a Setpoint customer, along with Offerpad, Orchard, Backflip, Wander and “many other proptechs,” according to CEO and co-founder Wall.

As evidenced by its customer base, Setpoint’s initial focus was on powering real estate transactions, but it is now expanding into asset-backed lending as a whole. The company also serves as a lender itself, providing capital to proptech/alternative transaction companies. By also providing these companies with software that is designed “to help them scale and grow,” Setpoint is attempting to reduce its risk on the capital side.

So what?

First, a plea to fintech infrastructure company founders.

Please, please, please stop using “Stripe for X” to describe your company. You’re not Stripe. And that’s OK! Stripe isn’t a perfect company nor is it a perfect analogy! There are lots of different kinds of models in the fintech infrastructure space that you can use to explain what you are doing.

Let’s be more precise. Setpoint isn’t Stripe for credit. It’s more like LoanStreet, but for connecting non-bank lenders (largely in the proptech space) to warehouse lenders. It is streamlining the antiquated, highly manual process that non-bank lenders currently go through to line up financing to fund their balance sheets.

This is interesting!

Two concerns:

1. The timing here is tough. Setpoint was founded in 2021, when non-bank lending was booming thanks to low interest rates. In a rising rate environment, it will be much harder to a.) find new non-bank lenders that need help lining up capital, and b.) source adequate capital from investment banks and other institutional lenders. Proptech and mortgage will be an especially challenging space to work in, which is probably why Setpoint is expanding into all asset-backed lending categories.
2. I wonder if this model might run into a similar problem to what we’re seeing in the BaaS space, in which the most successful companies built on these platforms end up ‘graduating’ off of them and building direct relationships with their partners. I don’t know exactly how Setpoint monetizes its platform, but if it’s taking a cut on the transaction between the investment bank and the non-bank lender, then there will be an incentive for one or both of those parties to move off of the platform at some point.

2 Fintech Content Recommendations

#1: Generation Rent (by Marc Rubinstein, Net Interest) 📚

No one writes about financial services history as well as Marc does, so when he drops a new piece analyzing some area of finance through a historical lens, I always make time for it.

This piece delves into the history of the UK housing market, and the role that renting has played in its evolution. I learned A TON reading it. 

#2: Payment Cards Deep Dive (by Eduardo Lopez, Lithic) 📚

My friend Eduardo put together this comprehensive primer on all things payment cards, and whether you’re brand new to fintech or you’ve been around for a while, you should read it and probably bookmark it for reference in the future. It’s wonderful.

1 Question to Ponder

If Vegas cared about such things, what would they set the over/under at for the number of fintech companies that go public in the U.S. in 2023? Is an over/under of 1 too low?

If you have thoughts on this question, hit me up on Twitter or LinkedIn.