The Weekend #187—The Great Fintech Freeze

The fallout from Evolve Bank

Matthew Goldman has a great writeup on the Synapse fiasco with Evolve bank and how it impacts the future of the card landscape in the U.S. (via Chris Lewis)

As Goldman points out, the U.S. is unique in that it requires you to be a bank to directly access payment networks as a card issuer. Places like Canada and Europe have licensing regimes that allow fintechs to directly offer their own card programs.

For Evolve Bank, that has, up to now, been an opportunity, as it quickly ramped up its fintech partnerships—although the bank may have bit off a bit more than it could chew.

Here’s Goldman:

For the past six or seven years, Evolve Bank and Trust of Arkansas has been known for its willingness to say yes to new programs. However, they can’t say yes to anything anymore due to the recent intense scrutiny. (And I’m not sure anyone wants to work with them.) 

For those of you who haven’t been following along, Synapse, Evolve's largest fintech partner for sub-programs, recently went bankrupt. Although Evolve and Synapse were already in the process of disconnecting parts of the relationship, the bankruptcy led to significant scrutiny over missing funds and the harm they have caused to many consumers in the process. (Current estimates are missing over $50M in funds.) Under a recent consent order, Federal regulators found multiple deficiencies in Evolve's operations, preventing them from taking on new projects from any partners.

Other programs, whether operating independently or with Evolve's assistance, are now distancing themselves from the bank. These incidents leave the industry with one less bank willing to support new initiatives. As some other writers have acknowledged, maybe Evolve's willingness to say yes to many programs was a feature and not a bug, although it led to their recent situation. Evolve likely agreed to some projects they shouldn't have and grew faster than they were prepared for. Many fintechs overlooked these risks and were eager to get their programs approved. Now, numerous providers, including those working with other banks, are in a bind. 

That’s horrible for users, but, as Goldman describes, is bad for industry innovation as well as it puts a freeze on future programs, significantly raising the bar for new entrants.

In the long run, that might not be a bad thing:

The reality is that the bar for innovation is rising, and progress is slowing. It is unfortunate that major institutions like Chase are simultaneously threatening to increase fees while the companies that innovate for customers face new hurdles. This period may feel like winter, but companies can navigate through it with the right resources. As a proof point on this, today, fintech card startup Aven announced a monster $142MM investment round for its credit card that is secured by your home equity.

Good ideas will prevail, and the increased diligence, scrutiny, and capital requirements will ultimately lead to stronger companies.

Have a great weekend!