Did Robinhood Get a Good Deal?

#1: Did Robinhood Get a Good Deal?

What happened?

Robinhood made an acquisition:

Robinhood announced on Thursday that it was acquiring X1, a no-fee credit card startup, for $95 million in cash.

X1, which offers an income-based credit card with rewards, raised a total of $62 million in venture-backed funding from investors like Soma Capital, FPV, Craft Ventures and Spark Capital since its 2020 inception. The company announced its most recent raise of $15 million in December, when it also touted a 50% boost in its valuation.

On the one hand, while X1’s valuation is not known, it looks like Robinhood is getting a good deal with $95 million. If you take a look at recent raises by other credit card companies, you might say that X1 raising $62 million should yield a high valuation in the hundreds of millions. So, the purchase price may reflect the dip in fintech valuations we’ve seen in the past six months.

So what?

Two things here.

First, we need to dispense with the assumption that Robinhood got a good deal. Yes, they acquired a company for only $33 million more than that company had raised from investors, which is presumably far less than what those investors were valuing the company at. 

But so what? That doesn’t tell us anything about the value of the actual asset Robinhood acquired.

The real question is this – would it have cost more than $95 million for Robinhood to build a credit card (and acquire a customer base for it) comparable to what X1 has done?

This brings me to my second point – I don’t think the asset Robinhood acquired is especially valuable or differentiated.

Despite its extravagant marketing claims (“The Smartest Credit Card Ever Made”), I’ve never seen anything from X1 that has struck me as revelatory or difficult to replicate. X1 can approve customers based on their income rather than their credit score (cash flow underwriting is fairly common in fintech these days). It offers a premium physical card and set of rewards (so do big issuers like AmEx and Chase). The coolest feature IMHO – the ability to create unlimited virtual cards for stuff like free trials – isn’t unique (Capital One, among others, offers it), nor would it be challenging to build (as long as you were working with a modern issuer-processor).

Also, I don’t know how many customers X1 has, but I doubt it is a number big enough to impress Robinhood (there’s also likely a fair amount of overlap between the two customer bases).

So, did Robinhood overpay for X1?

Eh, probably. However, as many folks pointed out on Twitter, big public companies are weird. They often have a lot of cash on hand, and they have strange incentives for how to spend that cash. Maybe it was worth $95 million to have a good story to be able to share with investors in their next quarterly earnings call.  

#2: Yendo!

What happened?

A B2C lending company raised a Series A:

Yendo, an issuer of a credit card collateralized by car ownership, raised a $24 million Series A, led by FPV Ventures.

So what?

This news surprised me.

Most VC investors aren’t huge fans of B2C fintech companies these days. Even less so when those companies are lenders. And even less so when the companies’ target customers are credit-invisible and subprime consumers.

And yet, Yendo raised $24 million from FPV Ventures (the same firm, ironically, that backed X1).

Yendo’s pitch is interesting. It is basically trying to outflank secured credit cards on one front (by offering a higher-limit card without requiring a cash deposit) and title and payday loans on the other (by offering a lower APR).

I’m a bit skeptical. The population of consumers who are either too creditworthy for title loans or interested in a credit-building product that is substantially riskier than a traditional secured credit card doesn’t seem like it would be huge to me. And the endorsement of FPV Ventures, which doesn’t specialize in fintech or have a lot of experience in consumer lending, doesn’t reassure me.      

#3: Be a Beacon

What happened?

Plaid’s identity team is on a roll. Here’s their latest:

Plaid is launching Beacon today with 10 founding members, including Tally, Credit Genie, Veridian Credit Union and Promise Finance.

Beacon represents Plaid’s effort to give fintechs a way to report fraud instances to each other. Participating members of the network will contribute by reporting instances of fraud — including stolen, synthetic and account takeovers — to Plaid. From there, they can then screen new signups or users against the Beacon network to detect if a specific identity has been associated with fraud on other Plaid-powered platforms or already within their own organization.

So what?

A new fraud data consortium! Fun!

(if you want to read about the history and surprising influence of consortiums in banking, check out this essay)

This effort by Plaid, which follows in the footsteps of similar efforts by Unit21 and Sardine, is absolutely needed. As I have written about previously, fintech has a massive fraud problem (which many fintech companies have been negligent in addressing), and most of the existing fraud data consortiums in the industry don’t allow non-bank fintech companies to participate in them (which is absolutely asinine).

So, we need to build new consortiums.

The challenge for Plaid will be twofold:

1. As with all networks, size matters. The more participants that are contributing data, the more effective the network will be in providing useful intelligence. Plaid has 8,000+ companies in its ecosystem, so, theoretically, it should be able to scale up its consortium quickly. However, the 10 founding members are, no disrespect, not exactly household names. There are also aren’t any traditional banks (there is one credit union). Will larger companies join the consortium? Will big-bank consortiums like EWS and TCH push their members to stay away?
2. Once you solve the cold start problem, the next problem you need to worry about is maintaining a good signal-to-noise ratio. The companies using intelligence supplied by this network need to be able to trust it, which means they need to trust the companies that are supplying the intelligence. This isn’t an easy thing to do. Fraud is hard to identify and, perhaps paradoxically, even harder to categorize. And most fintech companies aren’t employing fraud analysts with decades of experience. One thing that might help – focusing on a narrow set of fraud types or use cases to start (it doesn’t appear Plaid is planning to do this, but perhaps they’ll adjust).  

(BTW, if you caught the subtle movie reference in the subtitle for this section, well done. You deserve an all-expenses-paid trip to Tahiti.)

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2 FINTECH CONTENT RECOMMENDATIONS

#1: On Banking FinTech’s (Part 1) (by Walt Cox, Valley Bank)  

Walt’s been working on this one for a while, and it shows. This is an absolutely excellent primer on all the nitty gritty details that a bank needs to understand if they are going to provide money movement services as a program sponsor.

This article focuses on the sponsorship model for facilitating money movement in the U.S. It doesn’t get into BaaS or embedded banking more broadly, but I look forward to subsequent articles from Walt on those topics! 

#2: Sharing Our Field Notes: The State of Generative AI in Financial Services (by Bain Capital Ventures)

The folks at BCV continue to do an outstanding job sharing useful thoughts on the impact of generative AI in financial services.

This isn’t your typical VC fluff. It’s sharp and honest analysis. The type of stuff fintech startups need to read.

One example – the BCV team rightly points out that generative AI is not a disruptive technology, but rather a sustaining technology, and as such, it will likely prove to be more of a boon to industry incumbents rather than startups (with some important exceptions).

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1 QUESTION TO PONDER

Would it be interesting to hear a podcast with experienced fintech VC investors talking about their biggest misses? Would the fintech VCs that we all respect be willing to participate in such a podcast?