#308—Why fintechs should be banks

Also, Kamala on crypto

Sep 23, 2024

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out our last report here.

This week:

Why fintechs should be banks
An increasingly crowded stablecoin market
Digital assets remain a central theme of the election
Stuff happens

1. Why fintechs should be banks

It wasn’t long ago that Fintech Brainfood’s Simon Taylor wondered if being a bank even made sense for innovative fintechs in the U.S. and Europe:

Two years ago, I wrote a piece called "Do you really want to be a bank?" I argued that in markets like the US or Europe, it is better to avoid being a bank until you really need to.
A lot can change in two years.
Back then, I cited Revolut as an example of a company who had avoided being a bank in the UK (its largest market) which had enabled it to extend its product set much faster than competitors. This has driven it to over 45m users.
Today, Revolut is on a path to a bank licence in the UK, as well as one in Mexico and Lithuania.

That was before we saw interest rates over 5%—which, incidentally, allows Tether to be the most profitable company in the world per capita.

Taylor’s “rant” as he calls it is in turn a response to an a16z post from last month mapping out their arguments for fintechs becoming banks:

But for companies where financial services are their core offering and lending will be an important part of their long-term strategy, becoming a bank can be transformational. The most impactful financial benefit of a bank charter is superior lending economics through accepting and lending out customer deposits. You also are more firmly in control of the regulatory process and your product roadmap and able to market yourself as a bank — benefits that will accrue across all your financial services products, not just lending. Pairing these benefits with a fintech company’s unique advantages of distribution, product, and/or brand, a bank charter can accelerate growth, improve profitability, and create a durable competitive advantage.

Taylor agrees, outlining why it’s never been a better time to be a bank:

Being a digital bank is an amazingly profitable endeavor if interest rates are high enough.
The prize for success in western markets has increased with rising rates, and changing investor sentiment\
Regulation is harder than ever, but the way through is persistence over time
Being a bank doesn't make sense for the embedded finance universe, therefore embedded finance will bifurcate into those that own the workflow (User experience) and those that own the balance sheet and infrastructure (headless banks)

Moreover, Taylor concludes, that’s exactly what the U.S. needs—”more innovative and efficient banks”:

In the next five years, at least a handful of multi-million customer Neobanks in consumer and giant spend management companies will become banks. The fears of revenue multiples and the regulatory burden are outweighed by the size of the long-term revenue and profit potential.
The path there won't be easy, but sometimes the pull is too great to ignore.
In much of the world, Fintech innovation is a direct mechanism for growing GDP. Brazil, India, the UK, Singapore, China, Hong Kong, Vietnam, Colombia, and even the entire Middle East are actively promoting their Fintech industries through policy, state investment, regulation, and infrastructure to unlock growth.
Whether it's real-time payments in India and Brazil or neobanks like Nubank or Revolut becoming banks, these companies consistently create jobs, serve new social segments, and increase competition with stale incumbent offerings.

As an aside, when profiled by the Wall Street Journal last year, Hard Yaka founder Greg Kidd singled out not investing in Revolut’s seed round as one of his biggest career misses:

Greg Kidd, a co-founder of early-stage venture firm Hard Yaka, got in on the first round of Robinhood through another fund. But he is still smarting over passing up on the seed round for Revolut, which got a $33 billion valuation in its most recent funding round in 2021.
“I don’t know why I was so concerned about the company making money from Day 1,” said Mr. Kidd. “It was a hit and I blew it. I tried to cover up my mistake by buying in at a later round at a much higher valuation.”

Relevant: Why Greg Kidd bought a bank.

2. An increasingly crowded stablecoin market

Speaking of Revolut, they’ve got their eyes on a stablecoin. Here’s Coindesk:

Revolut, a London-based fintech company that offers cryptocurrency trading, intends to issue its own stablecoin, according to four people who have heard about the plan.
The company, which snagged a U.K. banking license in July and was valued at $45 billion earlier this year, is said to be quite far along in creating the stablecoin, according to two of the people.
Asked about its stablecoin plans, a spokesman for Revolut said the firm wants to expand its crypto offering, taking a compliance-first approach to become a safe harbor for the entire crypto community.
“Crypto is a big part of our belief in banking without borders and we have a clear mission to become the safest and most accessible provider of crypto asset services,” the spokesman said in an email.
The highly lucrative stablecoin sector, dominated by Tether's USDT with a market cap of about $119 billion, has seen a growing crop of new entrants. Circle’s USDC ranks second, at about a third of the size. Last year, payments service PayPal started issuing a stablecoin, with blockchain firms Ripple aiming to join in the coming weeks and BitGo announcing a planned introduction at Token2049 in Singapore earlier this week.

Relevant:

3. Digital assets remain a central theme of the election

Last week, my walk home was interrupted by a caravan of black Cadillac Escalades filled with military personnel. It’s not often that the busy pedestrians of New York City will stop and talk to each other on the street, but this was one of those rare moments.

“That’s Trump,” one bystander remarked.

The former President had apparently been hanging out in the West Village, buying burgers for his supporters at a crypto-themed bar called Pubkey, according to Bloomberg.

That same week, President Trump unveiled his own crypto initiative, World Liberty Financial (which may have its own stablecoin plans). Here’s the NYTimes:

“Crypto is one of those things we have to do,” Mr. Trump said on X. “Whether we like it or not, I have to do it.”
Beside him were his collaborators, including a family friend; Mr. Trump’s two oldest sons, Donald Trump Jr. and Eric Trump; and two little-known crypto entrepreneurs with no experience running a high-profile business. Together, they were rolling out Mr. Trump’s crypto venture, World Liberty Financial, a project that has already raised concerns about the former president’s conflicts of interest and even alarmed some of his most vocal supporters in the industry.
…
For years, Mr. Trump was a crypto skeptic who denounced Bitcoin as a “scam.” But on the campaign trail, he has morphed into a vocal supporter, speaking at a popular industry conference and drawing donations from crypto executives. “You have a very hostile S.E.C.,” Mr. Trump said on Monday. “My attitude is different.”

Then it was Vice President Kamala Harris’s turn. Over the weekend was the much ballyhooed Wall Street fundraiser event—tickets ranged as high as $1 million—where Harris made a rare personal appearance.

She’d use the opportunity to talk about crypto publicly for the first time. Here’s Bloomberg’s Jennifer Epstein, who attended the event:

VP Harris' first comments on crypto as Dem nominee: "To build that opportunity economy, I will bring together labor, small business, founders and innovators and major companies. We will partner together to invest in America's competitiveness, to invest in America's future. We will encourage innovative technologies like AI and digital assets while protecting consumers and investors. We will create a safe business environment with consistent and transparent rules of the road."

Relevant:

Yaka Stuff

#308—Why fintechs should be banks

Also, Kamala on crypto

1. Why fintechs should be banks

2. An increasingly crowded stablecoin market

3. Digital assets remain a central theme of the election

4. Stuff happens

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