Tough Sledding … Without a Sled!

#1: Tough Sledding … Without a Sled! 

What happened?

A fintech infrastructure startup emerged from stealth after raising $6 million without a product:

CapStack, a startup formed by Pipe co-founder Michal Cieplinski, has raised $6 million toward its effort to build an integrated operating system for banks.

In simpler terms, Cieplinski described CapStack as the “first bank-to-bank marketplace,” giving the institutions the ability to share and have visibility into one another’s portfolios.

Cieplinski started CapStack in March with Tzvika Perelmuter and, interestingly, says they managed to raise the capital almost immediately after launching the company and right before the meltdown of Silicon Valley Bank — not only pre-revenue, but pre-product.

“Something I saw is that banks are islands,” Cieplinski told TechCrunch in an interview. “Each bank operates on its own and there is no connectivity…And they’re all searching for an ability to diversify capital sources.”

Small and mid-sized banks in particular, said Cieplinski, are limited by geographical footprint with most of their customers residing near a bank branch.

“We don’t necessarily realize how serious that is,” he said. “Especially because small and mid-sized banks are not investment banks — they don’t get money other than deposits.”

What Cieplinski envisions building would give not only these banks, but larger financial institutions as well, a way to invest deposits and loans and “de-riskify their portfolios.”

“Over 60 banks agreed to join the platform even before the first line of code was written and a single employee was hired,” Cieplinski said. “And with that I went to VCs.”

So what?

Unless I’m missing something, what we’re talking about here is a digital platform to facilitate loan sales & participation (and maybe loan syndication).

And the thing is … that’s already a thing! We have platforms like LoanStreet, ALIRO, PeerIQ, Quilo, Octaura, Intralinks, SyndTrak, Syndifi, and Versana (to name just a few) doing different variations of this exact thing.

And it’s tough sledding for all of them!

The basic challenge with loan participation is supply and demand. The demand for high-quality loans is always far greater than the supply, and Chief Credit Officers aren’t typically willing to compromise on those standards when they are purchasing loans from other banks.

It’s not clear to me how CapStack will address this problem or even differentiate itself from the existing platforms that also struggle with this problem. And I’m not sure how it could be clear to anyone, given that they don’t have a product yet.   

#2: What is Square Doing?

What happened?

Lots of stuff!

A credit card:

The new American Express-powered Square Credit Card, which Square announced Wednesday, rolled out recently in a “beta” mode, enabling business owners to access credit lines based on their sales volume if they use Square’s merchant-processing services.

The card’s unique rewards program inverts Square’s usual role by giving users $1 in free credit-processing services for every $3 a Square Credit Card user spends on the card toward business expenses.

A change to loan underwriting:

Square is also allowing business owners to add more data to their loan applications than just their merchant-processing receipts, which Square has typically relied on when granting loans.

“We’re letting business owners tell us more about their other revenue streams and credit score so we can get a fuller picture of their entire business to make them a loan that might be larger,” Riechers said.

And some tweaks to the checking account product:

Square has also added a couple of new features to improve cash flow for business owners who use the firm’s checking account, which is offered through the $1.9 billion-asset Sutton Bank in Attica, Ohio. One new capability speeds up sellers’ access to ACH funds earned through other channels (like Amazon or delivery apps) by up to two days, which Riechers said is a plus for business owners in a tightening economy.

Later this year Square will also switch on the capability for a business owner to connect up to four additional debit cards to a Square checking account to share with colleagues and coworkers to make business purchases. Through Square’s dashboard, or the checking section of Square’s POS app, business owners will be able to track authorized users’ spending on each debit card, Riechers said.

So what?

I like all these things, individually, but the overall strategy seems increasingly murky.

Square has always been focused on small businesses and micro merchants, but it sorta seems like Square is trying to gently nudge its way into the corporate card and expense management space, with its new credit card (and its cost-saving rewards structure), and the coming ability to offer employee debit cards. Maybe it’s trying to move towards the ‘M’ end of the SMB spectrum?

Square has always been focused on creating a comprehensive, closed-loop ecosystem for merchants, but the addition of 2-day early access to sales proceeds from non-Square channels and the ability to qualify for loans using non-Square data would seem to undermine that ‘the-more-you-do-with-Square-the-more-you-get’ value prop. Maybe the ecosystem strategy is, temporarily, shifting to the back burner?

Maybe, maybe. It’s hard to say for sure, but these are a couple of areas worth watching.  

#3: The Importance of Aligned Incentives in Fraud Management

What happened?

Mastercard is rolling out a new fraud detection tool in the UK:

Nine of the UK’s biggest banks, including Lloyds Banking Group Plc, Natwest Group Plc and Bank of Scotland Plc, have signed up to use the Consumer Fraud Risk system, Mastercard told Bloomberg News.

Trained on years of transaction data, the tool helps to predict whether someone is trying to transfer funds to an account affiliated with “authorized push payment scams.” This type of fraud involves tricking a victim into moving money into an account falsely posing as a legitimate payee, such as a family member, friend or a business.

The tool comes as UK banks prepare for new rules from the Payment Systems Regulator that will require them to compensate customers affected by APP scams from 2024. Historically banks haven’t been liable for this type of fraud, although some signed a voluntary agreement to pay back victims.

So what?

If banks were honest, here’s how they would explain to their customers the difference between fraud and scams:

Fraud is when bad guys try to steal money directly from us or from you in a situation in which we’re legally liable for your losses. It hurts our bottom line, so we take it extremely seriously and invest millions of dollars a year to prevent it from happening. Scams are when bad guys try to steal money from you in situations where we can avoid liability. They don’t touch our bottom line (even though they can ruin your life), so we don’t care!

The key word here is liability.

Fraud is a solvable problem. We’ll never be able to completely eliminate it, but with the proper application of technology, analytics, customer education, and friction, we can transform it into a chronic annoyance, something we can live with rather than something that will ruin our lives. 

The key is to align incentives. When banks aren’t liable for losses, they will act like fraud is this unstoppable and uncontrollable force of nature, a hurricane that customers just need to hope doesn’t hit them. When they are liable for losses, they treat it like they treat everything else – another risk to be managed.

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2 FINTECH CONTENT RECOMMENDATIONS

#1: Brex’s Second Act (by Mario Gabriele, The Generalist)

An interesting look at Brex, in the wake of its decision to exit the small business market and focus entirely on serving venture-backed startups. I wasn’t wild about that decision, but I understood it, and it certainly seems to have helped sharpen the company’s focus. I’ll be curious to see how the move from startups to larger enterprise customers continues to go. 

#2: Ripple Labs Ruling Throws U.S. Crypto-Token Regulation into Disarray (by Preston Byrne)

This is the most balanced and honest piece of analysis I’ve found on the recent Ripple Labs ruling.

It’s absolutely worth reading in its entirety, but the key takeaway is that two-thirds of the ruling (the portions that went Ripple’s way) were unexpected, out of line with established precedents, and decently likely to be overturned on appeal. Fascinating stuff! 

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1 QUESTION TO PONDER

Where is American Express going?

I know that’s both a very broad and very specific question. Apologies. But I’m fascinated by AmEx. They seem to be doing a lot more fintech stuff these days (including the Square credit card!), and they seem much more open to competing with Visa and Mastercard purely on a network level (a four-party model vs. their traditional three-party model). What are they up to? How are they trying to grow?

Any insights are appreciated (Twitter, LinkedIn, email, etc.)