The Stock Market is Dumb

3 Fintech News Stories

#1: How Many Intermediaries Are Too Many Intermediaries? 

What happened?

Fiserv partnered with Akoya on open banking:

Fiserv Inc. is working with data aggregator Akoya LLC to enable consumers to share their financial data with fintech and third-parties with which they do business in a way that doesn’t expose a consumer’s full banking credentials.

The partnership will provide Fiserv with access to consumer data from Akoya’s network of financial institutions and brokerage firms through application programming interfaces and allow Akoya to access consumer data from Fiserv’s more than 2,800 financial institutions through Fiserv’s AllData Connect portal.

So what?

Remember a few weeks ago, when everyone was confused about Rightfoot’s new password-less data connectivity product? And I guessed that they were going through the core banking providers to enable that experience?

I’m pretty sure this is that same thing. Here’s how it works:  

Fiserv’s AllData Connect portal allows consumers to provide consent to share their financial data with third-party applications without having to share their log-in credentials. Instead, AllData Connect validates consumers directly with their bank or credit union and issues a token that the third-party uses to access and update consumer data via AllData Connect.  

Fiserv is essentially playing the same role that Visa and Mastercard play in the digital wallet space. They are providing a token, which essentially acts as a substitute for the consumer’s banking credentials in flight, which minimizes the required work for the bank or fintech on the front end (all they need to do is validate the consumer’s identity) and makes the entire transaction more secure.

A couple of things I’m curious about:

• Does the use of this service limit the value that Akoya (or other data aggregators that partner with Fiserv) provide? It sounds like the actual retrieval of the banking data is being done through Fiserv (after it validates the consumer and issues the token) rather than through Akoya, which would (I think) mean that all Akoya is doing in this instance is bringing the consumer-facing bank or fintech to the table.
• How defensible is Rightfoot’s product if all they are doing is selling a re-skinned version of the same service that Fiserv is selling directly?
• How do Fiserv’s bank customers feel about it building a suite of open banking and data connectivity products? Do customers need to opt in to participate, or are they opted in by default?
• How will the CFPB’s coming rules on open banking deal with these emerging layers of data aggregation intermediaries? How many intermediaries are too many intermediaries? 

#2: The Stock Market is Dumb

What happened?

Affirm reported quarterly earnings:

Affirm shares popped 28% on Friday, a day after the buy now, pay later firm reported fiscal fourth-quarter results that topped expectations and gave optimistic guidance for the first quarter.

So what?

You might remember me writing about Affirm’s stock price falling back in February after the company reported a loss per share of $1.10, $400 million in revenue, and $5.7 billion in gross merchandise volume (GMV) for Q2 of 2023.

Now I’m writing about its stock soaring after it reported a loss per share of 69 cents, $446 million in revenue, and $5.5 billion in GMV for the latest quarter.

This is dumb. This is making me feel dumb.

Nothing is fundamentally different. The company is still struggling with the inherent challenges of a high-rate environment, although it has (predictably) worked through some of the issues that rapidly rising rates created for its business. Credit quality is still holding up fairly well, although Affirm recently warned that student loan repayments resuming may have a negative impact. And it’s still helping merchants sell a lot of their products.

I’ve become convinced that stock market analysts don’t know what the fuck they’re doing. They build models to project a company’s performance. We all pretend like those models are brilliantly constructed and, thus, infallible. And therefore, when a company’s earnings miss the projections output by those analysts’ models, it must mean that the company screwed up. And, conversely, when a company’s earnings beat analysts’ projections, it must mean the company is absolutely killing it.

This is the same shit that dragged down Adyen a while back. It grew revenue by 21% year-over-year, and it had $20 billion wiped off its market cap in a single day because analysts were expecting a 40% year-over-year increase in revenue because of … reasons!

The stock market is dumb.    

#3: Building a Better Score for Landlords

What happened?

A new fintech/proptech company has built an interesting product:

One proptech startup has made it its mission to offer landlords a more equitable way to screen residents, and verify their income. Founded by two former executives at a large Chicago-based institutional REIT, Rent Butter’s screening tool aims to level the playing field for people who may have fallen on hard times in the past but have managed to turn their finances around and yet still are penalized for long-ago mistakes or payment transgressions.

Rent Butter works by connecting to an applicant’s bank account to give a leasing team access to assess them based on alternative data such as banking account information, rent payment history, an analysis of their credit behavior and income/expense information. The company argues that it can provide more than just a credit score; it claims it can reveal how that actual score is trending as well as provide insight into applicants’ credit and banking behavior. 

So what?

This is smart.

The FICO Score is a very robust model, but it wasn’t designed to specifically predict the likelihood of a tenant paying their rent. Additionally, the FICO Score was created well before the advent of things like open banking.

It’s not unreasonable to believe you can build something that performs better, particularly when your target customers aren’t subject to the same regulatory requirements that banks and non-bank lenders are.

There are lots of interesting questions to explore within this world. Can you identify consumers with poor credit scores that resulted from a single, severe instance of financial instability that has since been overcome? Can you identify consumers with poor credit scores who are habitually irresponsible with other credit obligations, but never with their rent? Can you de-risk certain high-risk consumer segments by getting direct access to their payroll accounts and creating payroll-linked rental assistance products?

Feels like there’s a lot of room to run here.

2 Fintech Content Recommendations

#1: Is It Time to Worry About Consumer Debt? What Is Going On in Seven Charts (by Telis Demos, Wall Street Journal)

I’ll be honest, I have no idea what’s going on with consumer credit right now. Credit card debt held by U.S. households just hit an all-time high. Interest rates for auto loans and mortgages are the highest that they have been in decades. Student loan repayments will be resuming soon. And yet … consumers are doing fine? 

I don’t really get it. I’m not sure how to square these signals with the broader confusion that economists seem to have about the chances of a recession. It’s all very weird.

The charts in this WSJ article won’t necessarily clear things up, but they may help sharpen up some of the questions you have about what is going on right now. 

#2: What Do SMBs Want In A Small Business Bank Account? (by Ron Shevlin, Forbes)

Megabanks and regional banks hold nearly 90% market share of SMB checking accounts in the U.S. 

What do community banks, credit unions, and fintech companies need to do to take some of that share away?

Ron has some good ideas.

1 Question to Ponder

I’m looking to learn more about the private credit market, debt facilities, and warehouse lines of credit. I want to know what the current state of that market is and what trends have been impacting it. Who should I speak with?