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Zopa’s rise into bankhood

On January 19, Zopa announced it had hit £1 billion in deposits since its launch as a bank 18 months ago. 

The news comes about a month after the company said that it’s shutting down its P2P business to focus solely on being a bank. Zopa claimed the reason for this decision has to do with lacking customer trust in P2P investing in the past few years after a number of small businesses’ actions that led to material losses for retail investors. Another reason is the change in regulations, which has made it more costly to run a P2P business. 

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TomoCredit is a fintech that allows people to build and improve their credit score, requiring no previous credit history. Its founder and CEO, Kristy Kim, wanted to develop a solution to the problem of credit accessibility in the US. At first, she wanted to do it with and for the big banks, but they took too long. So she did it on her own. 

Since launching during the pandemic, TomoCredit has recorded more than 2 million applicants, raised $20 million in funding, and has grown its revenues tenfold. 

As a first-generation immigrant, Kim had a difficult journey getting access to credit. She had no idea what a credit score was, and when she found out it felt like it was already too late. She got an education and a job in the United States, but couldn’t get an apartment or a car without a credit score. 

Her frustrations led to the idea of creating a technical underwriting solution that would allow immigrants and others without a credit history to build a credit score. The plan was to license it out to the big banks, so around 2018, she talked to Wells Fargo and American Express to let her build the technology for them to use. 

The banks agreed that access to credit is a big pain point for younger consumers who don’t have a credit score, and that they’re missing out on those high-potential customers. They knew the problem, but weren’t eager to work on a solution. 

“I didn’t intend to start a consumer credit card company because I felt that issuing credit cards on my own would be too difficult. I quickly realized that selling into banks can take 10 years – I didn’t want to wait that long, so I decided to just do it on my own,” Kim told Tearsheet.

Kim started with a basic question – what is required to issue credit cards in the US? 

The first step was finding a bank partner, and then recruiting a compliance person. Kim talked to more than 80 banks in the US that were even slightly interested in partnering with a startup for a banking license. The seed round of investment was the toughest, as nine out of ten investors she pitched agreed on the problem, but hesitated on her solution as she didn’t have a big customer base.  

Overall, it took her about one year to figure everything out and be ready to launch.

“It sounds like a fast turnaround, but imagine doing that for one year with no customer nor a card – that was quite frustrating to me to be honest, because you work on it without any consumer feedback. It was a lot of just believing in this idea,” Kim said.

At the beginning of 2021, TomoCredit received $7 million in seed funding with participation from investors including KB Investment, a subsidiary of South Korea’s Kookmin Bank, along with Barclays, Knollwood Investment Advisory, BAM Ventures, Passport Capital, Ulu Ventures and Strong Ventures. Angel and individual investors included Backstage Capital founder Arlan Hamilton, ex-Venmo COO Michael Vaughan, and James Kim, former head of finance at Tinder.

TomoCredit targets Gen Z and Millennials, as more than 80% of them don’t have a credit score, and they’re also more willing to try a fintech product rather than go to a bigger bank, said Kim. 

“They’re looking for the next cool product in finance. I think that helped us during the pandemic because we don’t have any branch – we are 100% online. Our customers don’t go into the bank, they just sign up for Tomo on their mobile app or online.”

Despite having no marketing budget, TomoCredit managed to acquire more than 2 million organic applicants within 12 months, and its revenues jumped tenfold in the same period.

This motivated Kim to continue growing the company, raise more money and hire more people. The team grew more than five times within one year to 50 individuals, and half of its executive leadership is female. 

How it works

With the Tomo Credit Card, one has access to a $10,000 unsecured credit limit, the ability to build a credit score, and all the points and benefits of a credit card. Approval can be done within two minutes. There are no fees, no interest rate. Unlike every other major credit card, Tomo doesn’t require a credit score and works independently of FICO.

Another selling point is being able to avoid overspending and APR fees, as the credit card gets paid every week from the customer’s debit account. If a weekly payment is missed, the card is temporarily frozen and cannot be used until that payment is made. Plus, the weekly payment frequency feeds credit scores faster, incentivizing customers to pay off their balance.

TomoCredit wants to incentivize responsible spending behavior, and discourage people from spending more than they have in their bank account. The company makes no money from APR charges as traditional credit card providers do. Its revenues come solely from the 2% merchant fees when customers use their credit card. 

At first it was an easy sale to customers, who were happy getting a high credit line without having a credit history. But as they build and increase their credit scores, customers start getting offers from other banks, as they can now go to any lender and get approved. This begins a point of competition for TomoCredit, but the company wants to keep up with increased expectations and roll out new products.

Crypto integration is a new feature Kim wants to launch this year, especially given that most of the company’s customers are Millennials and Gen Zers. Kim says they don’t have to know anything about crypto – the fintech will make it as easy as possible for anyone who wants to try it out.

One plan is to allow them to leverage their crypto wallet to get approved and get a higher credit limit. 

“Right now, when you sign up with TomoCredit, you can add your bank accounts, your stock account, you can add Robinhood or Charles Schwab – on top of that, we are letting you add Coinbase Wallet. If you have all three and show us your portfolio, that will increase your chance of getting approved and at a higher credit limit,” Kim said.

The fintech is also getting into the NFT game, allowing card holders to earn NFTs as rewards.

“Anyone who is slightly curious about NFTs can choose to receive the rewards in an NFT format. Depending on the customers’ feedback, we can continue to do it or keep it as a one-time event,” she told Tearsheet.

The company is keeping up with the latest digital trends, but doing everything online can have its downsides when it comes to human interaction. And here comes a crucial aspect in the digital banking experience, which is customer service. It’s hard to convey that personal touch in an app, to develop a relationship with your customer like one would have with an account manager at a physical branch.

Customer support is very important to Kim, and she wants to make it as accommodating as possible. What that means is longer hours, phone calls, text messages, emails and live chat, to serve every preference of how a customer wants to reach out. She also focuses on quality, making sure 100% of the fintech’s customer support is based in the US.

“Even though I have to pay extra to hire people in the US instead of outsourcing it, I will keep it in-house as much as possible so we can provide an overall higher quality of experience,” Kim said.

Leading by example

The pandemic forced everyone in banking and finance to start doing things differently, to move online and offer digital and mobile services. Plus there’s Gen Z and Millennials having different banking and investment preferences compared to other generations, so change is truly coming from multiple directions.

“I think it only makes sense for the financial industry to adapt to the change and new consumer behaviors, instead of trying to fit the younger generations into the legacy system,” she said.

Kim believes that the success of her product would signal to the industry that the needs of customers are different from what the traditional system has to offer. 

“It’s giving a really good example to the industry so they can also innovate on their own and try to adapt more to customers,” she added.

And she’s not stopping at credit cards. The data the company gathers over time is its backbone, a proprietary asset that it doesn’t sell or share with anyone. The experience and insights the company has been able to develop thus far give it a strong position to tackle other lending products in the future. 

“Credit cards are just our starting point to prove that we are able to do better lending without FICO. After credit cards, we can do mortgages, we can do auto loans, there are so many other products that we can do,” Kim told us.

But for now, it’s about developing the brand and building trust with the customer. Kim is focusing on today, and profits can come later on.

Tearsheet’s inaugural annual series – Gens Under the Lens – is a look into the evolving financial archetypes of the generations, from Boomers to Gen X to Millennials to Gen Z. We look at the current research into their beliefs and habits, giving a sharper view for marketers and product people to better understand what drives today’s financial services customers.

This guide for marketers starts off with the oldest generation, currently in their golden years – Boomers – who have a lot to deal with, from retirement coming up and Covid-induced inflation seeping in. After them are the busiest, and often forgotten, financial consumers – Gen Xers – in the peak of both their earning and spending years. Then the biggest and most racially diverse generation yet – Millennials – balancing high student loans and inflation as they set their sights on first major purchases. And finally the youngest financial consumers today – Gen Z, or Zoomers – the most tech-savvy group leading the demand for digital-first finance.

Download the guide to learn about the generational differences across financial consumers:

• The archetype of each generation
• Their money troubles: why they worry
• Their financial literacy: what they know (or don’t)
• Their saving, investing, and spending behaviors
• How they feel towards financial services
• The financial tools and companies serving each generation
• A look into each generation’s upcoming financial future

Download the guide here.

Last Friday, after the company’s earnings release, Marqeta’s stock closed the day down by more than 5%. Some analysts in the space decreased their target price for the firm, but without changing their buy recommendation for investors. 

What’s going on with Marqeta?

More red

A red flag was raised when the firm published its Q3 2021 reports. The bottom line on Marqeta’s income statement remained red, with the company posting a net loss of $45.7 million in the quarter, as against $12.3 million in Q3 2020. When reviewed under the year-to-date lens, the firm’s losses mounted to $127.1 million in 2021, nearly quadrupling from its losses of $33.9 million in the same period in 2020.

Though the company attributed these losses to rising expenses, it nevertheless alarmed investors. As Marqeta pushes for expansion, these expenses were attributed to an increase in the firm’s headcount, as well as compensation and benefits for existing employees. Q3 2021 was Marqeta’s largest hiring quarter, adding a net 77 new people to its ranks.

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Climate-focused fintechs are developing solutions to analyze lending portfolios through a climate lens

New innovations in fintech are bridging the gap between financial institutions and understanding climate risks in loan portfolios. Lenders can leverage software services to uncover climate-related risks, comply with a changing regulatory environment, and begin implementing more sustainable investment strategies.

Regulators have been stressing that the tools the financial system currently has at hand are insufficient for proper climate-related risk assessment. Investors, regulators and market participants need better data, including enhanced and transparent disclosures to create an accurate picture of financial risks posed by the changing climate. 

This gap in the market is being addressed by climate-focused fintechs that aim to help financial institutions with assessing their loan portfolios’ climate-related risks. 

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New innovations in fintech are bridging the gap between financial institutions and understanding climate risks in loan portfolios. Lenders can leverage software services to uncover climate-related risks, comply with a changing regulatory environment, and begin implementing more sustainable investment strategies.

Regulators have been stressing that the tools the financial system currently has at hand are insufficient for proper climate-related risk assessment. Investors, regulators and market participants need better data, including enhanced and transparent disclosures to create an accurate picture of financial risks posed by the changing climate. 

This gap in the market is being addressed by climate-focused fintechs that aim to help financial institutions with assessing their loan portfolios’ climate-related risks. 

One such company is Aquaoso, a software as a service cloud-based platform, which uses data science and machine learning to help financial institutions make informed decisions on their loan portfolio from a climate perspective. 

The fintech has developed tools for lenders to fill out due diligence components of climate risks related to loans. It uses a scoring system, such as a water security score for example, which ranks the risk of a particular operation from a water standpoint.

Lenders can also analyze their portfolios as a whole by bringing in bank data into Aquaoso’s platform, such as loan data, appraisal data, customer data, sales, valuations, etc. The fintech then layers various climatic events to allow its customers to pinpoint where they’re most at-risk within their loan portfolio. 

“That’s incredibly powerful from a risk decisioning model, helping them understand what types of risks exist inside of their loan portfolio. But it also allows them to have better conversations with their customers and better connections with their borrowers,” Aquaoso CEO Chris Peacock told Tearsheet.

Lenders can also use this capability to undergo stress testing inside of their portfolio and do scenario analysis, which can then be used to report up from a regulatory standpoint. This feature is becoming increasingly meaningful as government watchdogs have been stressing the importance of such exercises for financial institutions, and regulations in this area are expected to change under the current administration. 

Cervest is another company that developed an open and AI-powered climate intelligence platform for businesses, investors, and financial regulators. Its first product, Earthscan, enables companies to calculate the combined climate events (floods, fires, extreme heat, etc.) to their specific global assets and disclose that financial risk accurately.

Another product the firm is developing is EarthCap, which embeds climate intelligence in transaction-level decisions to build a personalized asset portfolio, as well as find opportunities or vulnerabilities within that portfolio.

“Banks, asset managers and insurance providers will be able to use the climate risk capabilities of EarthCap to integrate cutting-edge climate modelling research into risk and investment decisions,” said Partha Bose, head of capital markets at Cervest. 

“Fundamentally, the industry needs support to reprice risk, optimize allocation of funds, and introduce innovative financial instruments that incentivize a climate positive industry,” he added.

Cervest raised $30 million earlier this year from notable business and climate leaders such as Salesforce’s Marc Benioff and Lowercarbon Capital’s Chris Sacca. 

Data is another big problem when it comes to assessing climate-related risks. The Financial Stability Oversight Council highlighted in its most recent report that there is a huge gap in this area as current research is limited, and proper data is key to understanding the risks faced by banks and the financial market as a whole. 

But expecting banks or other financial institutions to develop such data capabilities on their own isn’t realistic or scalable, according to Aquaoso’s Peacock. Historically, climate data has been fragmented, and the technology has evolved significantly over the last few years, making it cost-prohibitive for a company to do it in-house. In his opinion, this is why banks have been struggling to understand the climatic impacts in their loan portfolios. 

“It’s expensive for a bank to go build all of that technology stack and then maintain it. The majority of banks can’t afford to build a platform like this. They’ve relied on their internal team and large consulting firms that would do large studies, but those studies become stale over time and can’t be used across an entire portfolio of loans,” Peacock added. 

At Aquaoso, the focus was water-centric at first, developing its platform by essentially scraping water data together from various sources, building its datasets from the ground up, and incorporating more weather and climate aspects into its platform over time. 

This ground-up approach is a big challenge around climate data, Peacock argues, as most information exists at a macro level, which doesn’t necessarily showcase a risk’s real-world implications. This is why he aims to bring together both the macro and the micro sources of data into a single platform that allows for more holistic analysis.

“I think in the long run, climate analytics is going to be commoditized and become easier to use as folks like Google, Amazon and Microsoft, and all of the other big players in the space make that data more available as a public good. But then the challenge becomes how to use that data,” he said. 

The technology advancements of the past few years, such as artificial intelligence, blockchain and machine learning, have also been helping to fill in the gaps of the data where it didn’t necessarily exist before. Now companies like Aquaoso can leverage this technology to geospatially map specific loans to specific climate risks, and then surface what’s going on across those loans, Peacock said.

The end goal is to help financial institutions understand how things are going to change, and how to weather the change from an economic standpoint. A key aspect is understanding that historical returns failed to account for environmental impacts, and these mounting consequences can’t be avoided much longer. 

“There are returns on investment that have to be made from a business standpoint to keep certain operations in place, but those operations can’t stay in place if there’s huge environmental damages associated with it. If it’s not sustainable environmentally, that becomes unsustainable economically as well,” he said. 

While climate change is altering the status quo, it is also opening up lots of possibilities for lenders, especially if they’re looking to have a positive impact. The market for sustainability-linked lending products is growing exponentially, surging from $5 billion in 2017 to $120 billion in 2020, according to S&P Global data. 

“We’re in business to both make money and an impact in the world. We see major opportunities, and we don’t see any conflict with doing good. In the long run, we believe all of those things are very much working in harmony together,” Peacock concluded. 

Profile 

Current is a six-year-old challenger bank based in New York. The company was founded by Stuart Sopp, a veteran in the financial industry who served as head of trading both at Morgan Stanley from 2009 to 2014, as well as Citi, between 2008 and 2009. Sopp started the challenger bank as a way to address financial inequality through technology.

As a challenger bank, Current’s features are pretty standard. But what differentiates it is that it has its own core banking infrastructure. That’s given it more flexibility to develop its own features and products without going through a third party provider.

Today the company, which is currently private, has around 200 employees, a $2.2 billion valuation, and has raised $339 million in funding.  As of April 2021, the company reported reaching 3 million users. In 2020, it hit the 1 million mark. 

The challenger bank’s average user is 27 years old, earns $45,000 a year, and lives in cities like NY’s Brooklyn Borough, Chicago, Las Vegas, and Atlanta, according to an article by CNBC.

Banking products overview 

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B2B is digitizing fast. A growing number of B2B ecommerce marketplaces have started to emerge recently, speeding up the digitization of business-to-business trade. Insider forecasts that B2B ecommerce sales volume in the US will reach nearly $1.8 trillion in 2022 – a 12% increase from a year prior.

Naturally, this rapid growth of B2B ecommerce sales is leading to increased demand for dedicated payments solutions to help ensure a smooth online checkout experience for business customers.

This is where Balance comes in. The Israeli startup claims it’s the first B2B ecommerce payments platform that offers a consumer-like checkout experience for merchants and marketplaces. Balance offers flexible payment terms and gives buyers various payment options including credit card, ACH, wire transfer, and check. It also enables merchants to receive payments instantly.

Companies using Balance’s platform range from startups to publicly traded firms across industries such as steel, freight, hardware, food delivery, medical supplies, apparel, and more.

Bar Geron, co-founder and CEO of Balance, says that much of B2B is still “living in the stone age”, and the average US firm has to wait 33 days to receive a cross-border payment. But that’s changing fast. Industries that hadn’t seen much change in over a century are now starting to sell online – from metal and steel to oil and pharmaceuticals.

Geron has a number of predictions for what’s ahead in 2022 around the supply chain and B2B payments. He believes the key to solving the current global supply chain crisis is in digitizing transactions to improve supply chain efficiency.

Let’s hear from the man himself about where he sees B2B ecommerce and payments headed in 2022 and beyond.

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If you want to understand just how imperative it is for banks – particularly community banks – to move to digital, you’re going to want to listen to Dan O’Malley. Dan is co-founder and CEO of Numerated, a firm that digitizes the loan experience. He’s working with over 100 FIs who he believes are finally getting the gospel on the need to digitize. 

For smaller banks that have differentiated on service, the next step is to automate with technology. And if they can’t or don’t do it fast enough, Dan actually believes it’s an existential issue for thousands of financial institutions in the U.S.

Subscribe: Apple Podcasts I SoundCloud I Spotify I Google Podcasts
The following excerpts were edited for clarity.

The mission

Our customers are traditional financial institutions, banks, and credit unions, some of which have been around for literally over 200 years. These institutions are typically the lifeblood for capital in the communities that they choose to serve. We digitize how they lend to businesses — we’re a digital lending platform for business lending. That means being able to take an application — anytime, anywhere, online, over the phone at the branch — incredibly easily, utilizing all of the rich data that financial institutions have on their customers and all the data that’s available. This allows you to create a completely different lending experience, one that is free of friction, that’s a positive engagement between a bank and a potential business customer.

We create a great experience for the borrower. We create a great experience for the bank in that we are able to reduce the amount of internal work to do a loan (everybody knows banks have a lot of internal processes) by 75%. It’s awesome for them. The net result of all of what we do is that more capital flows more easily to more businesses in communities.

The spectrum of SMB lending

I’d say almost every traditional financial institution is doing some sort of business lending. For most of them, that is their core business. We work with 130 financial institutions – over 100 have business and commercial lending as their core business. And so, they’re mostly already in the market, and they’re looking to transform. They’ve reached the point where their core business is just not as competitive as they need to be, thanks to the other institutions in their market digitizing, and thanks to non bank fintechs coming in and competing away some of their customers. So, they’re at the tipping point where they have to transform to be able to stay relevant.

Bank and non-bank competition

I have been working in the digitization of business lending for, gosh, like, seven, eight years now. And I will tell you COVID clearly changed the conversation. Prior to COVID, we were trying to say, real soon you’re going to have a problem where your customers just aren’t going to like engaging with you. And these institutions all depend on their relationships and great service to compete. 

And then COVID comes in and makes every bank of the United States a digital bank for a few weeks. And it was just a game changer. There was the Paycheck Protection Program, which got $600 billion to $700 billion out to businesses, largely facilitated through banks. And banks had to digitize if they wanted to be successful with that program. And more or less, maybe 75% to 80% of all banks did do that program. So it was just this forced digital transformation moment. 

And now the conversation is totally different, even in the boardroom of these banks. Boards are scared about how quickly they need to go and transform. So there’s real energy behind this in a way that I have never seen in my 20 years of fintech.

The role of technology and service

The core model of most traditional financial institutions is to differentiate on service. All money is green – it’s the same everywhere. And if you’re going to borrow money, or let your bank keep your money, it’s service that defines the choice of who you bank with. And so when it comes to lending, it used to be, hey, we just work really hard. We’re there for you, you call us, we pick up – it’s great service.

The big differentiation today is that that’s not good enough. I actually have to talk to you for everything I need to do with my financial life. That sucks. I don’t like that. As a business owner, I say that personally, not just professionally – as a business, I don’t want to talk to my bank to get something done. And so I think banks realized that they need to invest in removing friction from the sales process for additional financial products. You might still talk to a business, that’s great. But they don’t want to have to answer questions that you already know the answer to. They don’t want to go and fill out paperwork. They don’t want to get together in person. They just want it to be fast and easy. And that’s got to be technology enabled. So that’s the big change we see in our backs is their core model is really different due to technology today.

Business ecosystems, apps

Banks don’t [think about integrating into the business apps their customers use]. That’s my candid answer. They’re starting to talk about it, which is cool. I’ve seen over 130 banks and only maybe like 5% or 10% are talking to us about, hey, could you take your platform and embed into this other platform that we’re doing a partnership with? Now we can power lending through that platform. So I think it’s starting to happen. But it’s pretty early stages for our customers. 

Acquiring Fincura and spreading technology

We acquired a company called Fincura, which automates what’s called spread. Spreading is basically the process of taking a business’s financials in whatever format they’re in. There are no laws for private companies exactly how your financials have to work. And so you could call your inventory 30 different things, across businesses, and classify your revenue into whatever categories you want. So the bank or any kind of lender when it’s going to do a loan to a business, you have to translate their financials into how you look at financials for a business in that industry. That’s called spreading. And so what Fincura does is pretty cool. It takes a financial statement or tax return or whatever, in any format – digital or paper scanned in, upside down, turned to the side, coffee stain on it, however you got it – and it converts that image into the spreads, the financials that the bank wants to use.

There’s a number of different applications of machine learning to do that, from using machine vision to pull the text off the page, understanding how to categorize whatever crazy categories the business has for their financials, translating it to the bank’s categories, and then running some analysis on top to figure out, is this business actually a good business? Are they growing? Can they take out the debt?

And so all of that is fully automated. Any level of machine learning is going to have errors at a point in time. Banks don’t really tolerate errors in financial analysis because the regulators get upset. So banks need a higher level of accuracy. Fincura’s, and now Numerated’s, spreading has this awesome user interface that will actually highlight where a bank underwriter needs to do some work like, hey, this looks off to us, you should take a look at these parts of the financials. They’re probably messed up – the coffee stain was too heavy for us to actually correctly interpret these financials. It’s really neat technology that helps our banks automate financial analysis in like a tenth of the time that it would normally.

We got to know the Fincura team for almost six months before we did the deal, including doing a proof of concept to make sure that the platforms would sync up. So before we even announced the deal, we had that done. And then I tell you, the response from customers has been awesome. Within a month of announcing the acquisition, we already sold the technology twice, and we have customers getting ready to use it in Q1 2022. And so we’re moving really quickly.

All-in-one lending platform

Many lending platforms have some form of spreading incorporated into the product. We don’t think anybody’s particularly good at both [the underwriting workflow and spreading]. That’s our whole goal: to be a consolidated digital lending platform, from soup to nuts. Eventually, for every single business credit inside of a bank, we will take your loans with a higher degree of automation than any other platform in the market.

Customer engagement

On the customer’s digital transformation, it’s very early days. Most businesses got a taste of some sort of digital in the PPP process. By the end of the PPP program, most banks offered some sort of digital experience. And one of our customers said, hey, Dan, you have unfortunately created a monster. You’ve shown our customers how great engaging with us can be. And now we can never go back to the old way. Now banks are trying to figure out what to do with it, but they really haven’t put out digital experiences for most of their products. Maybe 5% of products across all banks are digital.

Digital transformation?

I think the conversation at most bank boardrooms now is, can we digitize fast enough to be a winner? And if we can’t, let’s understand, we’re going to sell the bank in the next two, three years. And so you’ll see, literally thousands of banks and credit unions getting sold in the next three years. Banks don’t really go out of business – they sell. That’s going to be what happens to banks that don’t think they can make the move to digital.

Revenue is an existential problem. If you can’t get more of it, then you probably need to go away. And so, on the efficiency side, how much can you change your operations to bring your cost down? And that, too, is existential, but it’s maybe not quite as urgent. Now, the way that banks look at it is they talk about efficiency ratios. And what that means is like, what percentage of the money that they make from a loan do they have to give up to operational cost? Historically, in the industry, when banks were in the good times, you could have an efficiency ratio of 70% or 80% and only make a modest margin. 

That’s changed. Good banks are in the low 60s, getting into the 50s. And everybody’s talking about a 40% efficiency ratio being where everybody needs to get to to be best in class. And so, costs have to come down substantially, and competition is going to get ruthless, even between banks and fintechs, who don’t have the branch footprint cost problem. I think we’re like two to three years away from that driving some banks out of business. That will be the next wave of banks tapping out and saying, I just can’t change my operations enough to get as cheap as everybody else, and I keep being not cost competitive on loans. So it’s gonna happen.

2022 goals

The goal we put out with our team for 2022 is to be the best digital lending platform for all business loans. Our history as a firm was to do fully automated smaller credits and do better than anybody else in the world. And we do that with the Fincura acquisition. And our other investments, we’ve now been able to expand to a larger class of loans where the bank is going to do a little work. It’s not fully automated. So by the end of the year, we want to be the best and standard choice for banks looking to transform how they do business lending – not just for small credits but for all the credits.

This week, I’d like to focus on a fintech trend that’s been taking place over the past few years: fintechs using cash flow underwriting to make it easier for people to have access to credit and build their credit history. 

Enter TomoCredit, Kafene and Petal – these companies skirt the FICO system by creating new ways of determining a person’s credit worthiness by using their bank account data. 

They essentially link a person’s bank account with a credit card, and establish regular payments – some do weekly payments, as a higher payment frequency helps with building a better credit score. 

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Leading fintech firms are increasingly turning their sites to prepare for the internet of the future, Web3. Payments platform Checkout.com raised $1 billion at a $40 billion valuation last week with eyes on investing in blockchain.

“By combining an elegant technology stack with industry expertise and an ‘extra-mile’ approach to service over the past decade, we’ve built deep partnerships with some of the world’s most innovative companies. Our Series D is a validation of that work — but given we’re still in ‘chapter zero’ of our journey, it will also fuel our efforts to unlock the enormous untapped opportunity ahead,” said Guillaume Pousaz Checkout.com founder and CEO, in the company’s announcement. 

Among the primary projects that Checkout.com’s latest round will fund will be the firm’s expansion into Web3.

Web3 can be understood as the third generation of internet services run on blockchain technologies, creating a more secure, decentralized, autonomous, and open worldwide web. 

Payments are a key component of the Web3 ecosystem. Web3 payments promise to be fast, seamless, and borderless. For companies like Checkout.com, which have already found a firm place in the world of online payments, Web3 payments are the obvious next step. There is a race among firms to power Web3 technologies like cryptocurrencies and NFTs.

“We see the adoption of cryptocurrencies and NFTs driving global ecommerce to grow faster than traditional commerce,” Bradley Riss, Chief Commercial Officer at Checkout.com, told Tearsheet. “As consumers increase the share of wealth locked in cryptocurrencies, merchants start experimenting with offerings for these early adopters. Our role is to make those connections and offer a broader range of options.”

Checkout.com is already deeply involved in the cryptocurrency space. The firm’s payment rails power some of the biggest exchanges in the world, including Coinbase, Crypto.com, FTX, and MoonPay. This represents almost 80% of the global crypto trading volume, according to the firm. The platform also serves fan token providers, notably Socios.com. Fan tokens are a type of cryptocurrency that grants owners access to membership perks, governance like voting on club decisions, and rewards, for example. Socios.com works with leading sports franchises like FC Barcelona and the Boston Celtics. 

Checkout.com has also already tapped into the Metaverse with its blockchain-based digital wallet solutions. Most notably, it powers Novi, a digital wallet allowing international money transfer, run by Meta. 

“We see the adoption of cryptocurrencies and NFTs driving global e-commerce to grow faster than traditional commerce—and our Series D round will help strengthen our position in that space.  In terms of prospects, we see a lot of the tools now being pioneered in Web3 being applied to the Web 2.0 world to help traditional fintechs boost the speed and ease of how funds are transferred,” Riss said.

Checkout.com has been beta testing a new program that helps merchants settle transactions using digital currencies. While Riss was reluctant to share any further information or an expected release date at this stage, he did tell us this: “Beta testing suggests there is a solid benefit for those merchants looking for transactions to be settled in digital currency.” 

Referring to the Checkout.com team as ‘technologists at heart’, Riss insists these emerging technologies can enable merchants and their communities to thrive in the digital economy, and that his firm’s platform is capable of powering this shift. “Thanks to the payments infrastructure we have created over the past decade, we’ve developed a platform that is modular, and effectively enables merchants to pick and choose features and products to create a custom solution,” he said. 

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To this end, Checkout.com has been busy building out its leadership. Last month, the firm hired Meron Colbeci, formerly the Head of Consumer Product Management at Novi, to serve as its Chief Product Officer. In addition, the firm also completed several other C-level hirings, including a new Chief Technology Officer, Ott Kaukver, a Skype and Twilio alumnus.

The funds raised by Checkout.com will be also used to power two other projects: its push for growth in the US market and to launch the firm’s new marketplace payment solutions.

The firm has grown notably in its home market of EMEA over the last year, reportedly tripling its transaction volume for the third year in a row. With aspirations of similar growth and scalability in other major markets, it is now focusing on the US, where it already offers its complete payment processing platform.

“Our focus this year is meeting that demand and that’s why we are increasing our hiring efforts across North America to grow our employee base by over 200% in 2022,” Riss told us. “We’re also aiming to strike more U.S partnerships and expand the capabilities of our platform to address native U.S needs, release new products critical to effectively run their operations, and give merchants an international payments partner able to offer the best performing payments.”

Checkout.com also said it is ready to launch its solution to service marketplaces and payment facilitators later this year, having already tested with multiple global merchants. These new solutions include identity verification technologies, split payments, treasury-as-a-service, and an upgrade of its Payouts offering. The firm’s Payouts offering processes billions of dollars in payout transactions for the likes of TikTok and MoneyGram.

“Our marketplace product is a new suite of features announced in our Series D fundraise and one which we are incredibly excited by,” Riss said. “We’ve seen the dramatic shift to digital during the pandemic and the continued growth of the gig economy for several years prior to that, and have developed a comprehensive new solution for integrating payments into online marketplaces. We will launch our solution to service marketplaces & payment facilitators (payfacs) later this year.”

Checkout.com’s Series D funding saw its valuation more than double since its $450 million Series C a year ago, where it was valued at $15 billion. The new round was led by Altimeter, Dragoneer, Franklin Templeton, GIC, Insight Partners, the Qatar Investment Authority, Tiger Global, and the Oxford Endowment Fund.

The following was produced by Tearsheet Studios. We worked with small business lender BlueVine to produce a four part series on creating financial solutions serving historically underserved small businesses.

In this episode, I spoke with Herman Man, CPO of BlueVine, about the importance of customer-product fit, and what’s next for digital-first banking solutions and the fintech ecosystem.

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The following excerpts were edited for clarity.

Herman Man, BlueVine: I’m the chief product officer at BlueVine, and I lead our product and design team here at the company; it’s about envisioning and building the next generation of products for BlueVine’s customers. I got connected with BlueVine’s co-founder and CEO Eyal and was enthralled with the mission, which is to enable a better financial future for small business owners. And that’s a key thing that I’m here to do: to build a purpose-built solution for them.

Herman came into his role as BlueVine’s chief product officer with a lot of experience as a computer engineer, developing products and managing projects at Microsoft, Hearsay, and Xero. Joining BlueVine meant transitioning from software into financial services. 

Herman Man: It was a great transition, and it was obviously a learning experience as well. Having it be regulated obviously handcuffs you, so to speak, in terms of what you can or can’t do. However, it was such an exciting time because at Xero, I started doing more of core fintech when I left. When I was running the Americas product strategy, we were driving what we call the ‘financial web’ at Xero, which was to take Xero data and help lenders lend better using the balance sheet. And so me being exposed to that, and having the opportunity to work on it full time at BlueVine was really exciting. 

Given that I had the background already on a lot of this, it really was around taking the theory and implementing it in practice. And, so that transition was a learning experience, but a pretty natural one, and one that I really craved.

Just as important as his technology and finance background, was Herman’s experience running a small business; it made him fundamentally motivated and equipped to address the problems BlueVine sets out to solve.

Herman Man: My time at Xero basically taught me that small businesses are vastly underserved. No one has their back. And it was such a prominent problem. I talked to small businesses, and they really told me about their struggles. And, and for me, having the ability to work on something that directly impacts them, and can make a difference in their lives is a game changer. And that’s what I want to do. That’s what gets me excited in the morning when I wake up.

In 2010, I did a startup with some friends. And like all great things, it was about food. Our question was, ‘What are the best chicken wings in Seattle?’, and we couldn’t get an answer. We realized Yelp was about taking you to a destination, but once you’re there, what do you order? So we built an app called Chewsy. Being a startup, we were at least fortunate to have access to capital through investors, but what really stood out for me was the poor banking experience. That has really resonated with me until today. It has really helped me sympathize and empathize with small businesses.

His identity as a small business owner informs Herman’s ability to understand and cater to the pain points of other small business owners when it comes to banking. I asked him, What is it exactly about the banking experience that fails the small business, and how can it be fixed?

Herman Man: I won’t say what bank we were using, but what I can say is that everything was in person; access rights and controls to the bank account were really complicated and frankly, didn’t work. I couldn’t even see the balance that was in the account. It was a bit of a mess, and so the experience there has really stayed with me today. It’s what drives me, and keeps me focused on who our customer is, and the fact that we have to build something compelling for them.

We built a common layer of infrastructure and technology that can be reused as we launch new products, so we don’t have to build everything from scratch all the time. And this has enabled us to build things and launch things faster, and create cohesive experiences across those products. 

So for example, a customer that comes to BlueVine, whether or not they’re a checking account customer, lending customer, or a bill pay customer, they’ll get that same consistent integrated experience once they enter the BlueVine dashboard. 

The small business customer is changing. And with it, so should the products and experiences serving them. Having worked at the intersection of customer and product for some years now, Herman and his team work proactively with the evolving nature of the small business, measuring their success along the way.

Herman Man: With customers, we’ve been able to solicit feedback and hear real time feedback just by looking at metrics and analytics – one of the core benefits of SaaS. And we’ve been able to really tailor experiences around that. 

Number two, because we’re in fintech, we also get to see a lot of their cash positions. And we know upfront how they’re doing, and what they need from a fintech product perspective, so we’re able to build the products that they will actually use and they actually need. So from that standpoint, I’d say that we’re very close in working with our small businesses. We have a lot of information up front, and so we’re able to stay close to them.

We look at engagement metrics in terms of number of logins and time in use. We look at churn metrics as well, just to make sure that customers aren’t churning because of poor experiences that we’re building. Those are the key ones that I would say we look at. And then obviously there are other ones that are more infrastructure, product specific like uptime and whatnot, but those are the key ones. And then the overall I would say is NPS in terms of customer satisfaction.

Being a small business owner is never simple or easy – and definitely not over the past two years. During the pandemic, between Covid mandates to shifts in economic demands, many small businesses took a hit and almost all of them had to change the way they did things. 

Herman Man: If anything, that pandemic reemphasizes what we knew: small businesses don’t have the needed financial support that they so desire and at BlueVine we want to change that. 

Back in 2020, when COVID first hit, the Small Business Administration (SBA) was launching a brand new program to help these small businesses because they’ve been hit by the pandemic. We were able to leverage our risk logic and customized business rules to launch PPP to serve the customers. 

And if you recall, in the beginning, the SBA rules were constantly in flux. And it’s because of this platform and the way that we programmed it that we were able to react so quickly and serve our small businesses. 

And with that, I’m really proud to say that we funded 8.9 billion in loans serving 300,000 small businesses, with an average loan size of just north of 24,000, which truly are the micro small businesses. And what’s even more important, in my opinion, is that we really serve the minority owned small businesses. We’re really proud of that accomplishment. 

With huge inflows of both market funding and new players and acquisitions this past year, it’s a safe bet that 2022 will be a major year for fintechs. While the pandemic held back most things around the world, it did wonders as a catalyst for technological advancement and the shift to digital.

Herman Man: I recently read something from Benedict Evans, where he talks about 2022 being a great rebranding. It was an interesting perspective. He talked a lot about crypto now being called Web3, and AR/VR now being called the Metaverse. And while there is that rebranding, there’s also a larger scope in terms of what Web3 is and what Metaverse is. As the technology matures, it’ll be interesting to see how it actually gets adopted. 

When mobile phones first came out, we knew they’re powerful, but no one ever envisioned that they’d be what they are today, which is the computing power of a PC in a small little device, and being tethered to us all the time. When Bitcoin first came out, people thought of it as a currency but the reality is that it is a speculative asset. So as this matures another year, which will be huge around Web3 and Metaverse, it’ll be interesting just to see what happens over that in terms of its adoption and usage.

One of the greatest takeaways from the pandemic has been the desire and need for contactless payments and digital first banking solutions – which definitely benefited fintechs. Looking into 2022, what types of innovations can we expect from the fintech market toward better serving customers? 

Herman Man: I think there are going to be four. One is really focused on sending and receiving payments digitally. Checks are still a big part of how small businesses pay one another today – around 40% of B2B transactions use checks. And so I think there’s still a huge opportunity to simplify the sending and receiving of payments digitally. And that goes from onboarding all the way through to removing friction, while sending and receiving payments. 

The second one, I would say, is improved credit access. I listened to your podcast with Rania Succar, and she had mentioned 60% of small businesses don’t have necessary access to capital. And my time at Xero said the exact same thing; it was the number one thing that small businesses are worried about. And so the combination of technology and machine learning to provide credit just in time will be something that I think will be more prominent. 

Then the third one, I would say, is the consolidation of banking with other business services. We’ve talked a lot about embedded finance, where finance is embedded in non-financial apps, but I actually think that there’s an opportunity for the other way around. We’re seeing solutions about embedded payroll being launched with different solutions, and I think with fintech and banking there’s an opportunity to put that together – Gusto and Check are playing in this space today.

And then the fourth one, I’d say, is the nascence of crypto. It’s not quite mainstream, but there are more players playing. If you look at the stats, there was 26 billion in 2021 for funding, compared to 4.5 billion, which is just close to 500% over 2020 in terms of investment. Io I think there are going to be a lot of investments there as well.

As challenger banks and digital first offerings become more prevalent, they are bound to impact the financial services landscape. Fintechs and incumbent financial institutions will likely work closer together. 

Herman Man: It’ll be driven by customer demand, and the action will be through partnerships and acquisitions. As customers adopt more traditional and fintech solutions alike, they’ll just naturally have a desire to have them be integrated together and have them play nice together. For example, today, fintechs aren’t a part of the Zelle network. And as customers adopt more of this, there’s going to be a push to change that. I also think that part of this will happen through the consolidation of players, as well.

While the pandemic is still waxing and waning, the funding market is definitely on the rise, with about $90 billion coming into fintech in 2021. Given this drastic growth over such a short period, what challenges can fintechs expect scaling their businesses this coming year?

Herman Man: It’s a really good question. I think the biggest challenge here will be regulation and regulatory pressures. We’re seeing the FTC investigate Big Tech, like most recently Amazon and AWS. They’ve investigated Meta in previous acquisitions and future acquisitions. And I believe that will extend across fintech as well. The previous OCC nomination of Saule Omarova, which has since been rescinded, signaled a strong desire by the administration for more control and regulation.

Despite expected changes in regulation, today’s fintech ecosystem is vibrant, and much of that is thanks to being able to deeply reimagine and improve the banking experience. Fintechs have gotten some important things right when it comes to small businesses, improving upon the ways banks traditionally treated SMBs. 

Herman Man: If you look at the way that banks have worked previously, as small businesses go into the bank, they’d try to size them up: Are you a retail customer? Are you a commercial customer? And the reality is that they’re neither of these. Small businesses are on their own. There are 30 million of these small businesses and they create two thirds of the jobs in the US economy, yet they don’t have a solution that’s built for them. 

What fintechs have done right is understanding who their customer is, and building for them. At BlueVine, we realized that banking was just not something that legacy players focused on for the small businesses, so we built that. Another one is Chime, with consumer banking. They really target the underserved segment of $100,000 and less in revenue, and they focused on things like helping them get paid two days faster, which has since been copied by others, but they really focused on that experience and made sure that they would delight those customers. So that’s number one — really understanding their target segment and building for them. 

The other is taking complexity out of banking. We make things like self-service operation very possible. You don’t have to call in to change your password on your debit card, or to lock it, you could do it completely online. We’ve also made it simple for them to understand the very fundamental thing, which is their cash position – they can easily see money in and money out. So we’ve made the experience tailored to what a small business is, and what their knowledge of banking is, so that it’s very simple for them to manage and efficient to use. 

Despite the growth of the fintech ecosystem, much of the banking still happens at incumbent banks, who are the obvious competitors for fintechs like BlueVine. But at a time when customers get personalized products and services at their fingertips, fintechs are also competing with services like Amazon.

Herman Man: In terms of inspiration, we look at different companies that have done a great job in the consumer space around creating delightful experiences. We don’t view ourselves as an enterprise company trying to build software for small businesses. We ask ourselves: How do you create an experience that is like Google, or like Airbnb? So that the consumers can be just enthralled and excited to go use and love the app.

Understanding the target customer and then using this data to eliminate friction points is definitely the way forward. But there’s still work around providing a perfect banking experience, especially as these fintechs scale up.

Herman Man: One thing that I would say around the opportunity is to make sure that we’re empathetic and sympathetic to these customers that we serve, no matter what the circumstances.

Sometimes, as you scale and as you do things that haven’t been done before, you can run into issues like fraud. And as fintechs, we may take action to curb some of the bad actors or bad behavior on the platform, and we have to remember that we’re going to have some false positives there, and sometimes the good actors or the good customers are negatively impacted. We have to think beyond just numbers – there are human beings and small businesses there at the end of the day that we have to attend to.

Ford and Stripe have entered a five-year agreement to modernize the carmaker’s e-commerce and payments experience. Stripe will act as a premier payment service provider for Ford and its dealers across North America and Europe.

Ford Motor Credit Company, the carmaker’s financial services arm, will use Stripe’s technology to process digital payments in markets across North America and Europe, the companies said earlier this week. 

For the dealers currently offering digital payment services, Stripe is expected to help with e-commerce payments processing, such as vehicle ordering, reservations and digital and charging services.

Ford also plans to use services like Stripe Connect, which facilitates payments and purchases between third-party buyers and sellers, to serve as its e-commerce backbone and direct customer payments to the right dealership. 

The automaker expects to roll out Stripe’s technology in the second half of 2022, starting in North America.

The partnership makes Ford one of Stripe’s biggest clients, which include Shopify and Salesforce. The fintech’s name has become synonymous with modern payments solutions, and touts one of Silicon Valley’s largest valuations at $95 billion.

Meanwhile, the technology upgrade is part of the Ford+ restructuring plan under CEO Jim Farley, who took over in October 2020. The company’s market cap topped $100 billion for the first time ever last week, fueled by the automaker’s plans to introduce new electric vehicles this year.

The strategy is to use Stripe’s platform for simple payment experiences in any channel customers choose and have faster scale improvements, according to Marion Harris, Ford Motor Credit Company CEO.

“As part of the Ford+ plan for growth and value creation, we are making strategic decisions about where to bring in providers with robust expertise and where to build the differentiated, always-on experiences our customers will value,” Harris said.  “Stripe has developed strong expertise in user experiences that will help provide easy, intuitive and secure payment processes for our customers.”

Embedding payments in cars

The Ford-Stripe partnership serves not just to improve Ford’s online payment capabilities, but to essentially embed payments inside cars, which has been a growing trend.

Customer expectations of seamless digital payments experiences, reinforced by the pandemic, have taken over nearly every market, and the auto industry is no exception. This has driven increased attention to in-car payments, which are predicted to rise significantly over the next decade. 

Source: Grandviewresearch.com

“During the pandemic, people got comfortable paying online for groceries, health care, even home haircut advice from barbers. Now, they expect to be able to buy anything and everything online. Ford is making e-commerce possible, too, and scaling that strategy with Stripe’s help.” said Mike Clayville, chief revenue officer at Stripe.

Most large payment solution providers, including MasterCard, Visa, and PayPal, have partnered with automakers around the world to develop new payment processes in automobiles. Mastercard partnered with GM back in 2017 to develop in-vehicle payments solutions, and Visa struck a deal with SiriusXM in 2019 to transform its vehicles into a transactional ‘hub’.

Meanwhile, many financial institutions have also entered the auto industry to facilitate this technological transition. 

Just last September, JP Morgan became the majority owner of Volkswagen Payments when it bought three quarters of the company with plans to develop a “platform for new markets and industries outside of the automotive sector where mobility-focused payments will become central,” it said.

And back in 2020, as Goldman Sachs and Barclays were eyeing to buy General Motors’ credit card portfolio for $2.5 billion from Capital One, it was reported that both banks pitched the idea of turning cars into e-commerce portals – an idea the automaker embraced as the first major car company to allow drivers to order products and services from a car’s dashboard screens. 

Goldman Sachs ultimately won over its British rival, and announced last week that its consumer-facing business, Marcus, partnered with GM to launch a new co-branded credit card and rewards program. This marks the investment bank’s second big retail partnership after issuing the Apple Card in 2019.

Overall, it seems like the race to start embedding financial products onto a car’s dashboard is speeding up, with banks and payment intermediaries each looking to take a cut in this digital transformation. 

This hype around new generations of cars – the switch to electric, tablets on dashboards, voice control, e-commerce – is bound to continue to produce such partnerships between automakers, fintechs and banks who want to keep up with competition and bring more convenience to their customers.

This is the second in our series of articles on how the right external data can enrich internal data to unlock new opportunities and create competitive advantages for fintechs targeting SMBs. In our previous article, we discussed how the right data could assist in B2B credit risk assessment. This time, we’re focusing on how fintech companies can sharpen their analytics to generate quality leads and accelerate their sales pipeline.  

Many players in the fintech industry are targeting the small and medium-sized business (SMB) segment. Fintechs offer financing to SMBs that they may not get from traditional banks. SMBs’ flatter hierarchies shorten sales cycles for growth-hungry fintech start-ups. With as many as 32.5 million small businesses in the US, the market is ripe with opportunities, but the competition is fierce.

Fintech companies looking to stand out from the competition need a strong, data-driven sales and marketing strategy that attracts and captures the right leads with precision and accuracy. The best way to do so is by enhancing valuable internal data with external data to enrich leads and create more accurate lead scoring models.

If you’re in the fintech space, especially if servicing SMBs, Tearsheet would like to learn more about your relationship with data in the survey below:

^{Survey: How do you use external (alternative) data?}

Here are three ways fintech companies can leverage external data to boost marketing efforts and streamline the sales process:

1. Refine customer segmentation analysis to better target ideal customer profiles — those that are low-risk and more likely to pay on time.

There’s only so much information a company can get from internal data gathered via form fills, website engagement, and page visits. Refine customer segmentation by incorporating external data to overcome the two top challenges fintech companies face when marketing and selling to SMBs, which are:

• Struggling to find leads that are both qualified and have a propensity to become profitable. This is because data on SMBs is fragmented with low match rates and limited variety coupled with rule-based models that are either too simplistic — everyone is a lead — or too complex — hardly anyone qualifies as a lead. It represents a lost opportunity to identify and sell to new customers quickly.
• Identifying the percentage of potential customers (out of millions of SMBs) who are open to their products and services and likely to convert. Unless they find these businesses and effectively market and sell to them, growth will be slower. 

2. Optimize the lead qualification process for better conversions

Boost marketing efforts and streamline the sales process by guiding sales teams to accounts more likely to convert to profitable customers. 

3. Pre-screen and accelerate approvals for improved customer experience

With third-party data, fintech companies can get a complete picture of customers, especially their financial performance and capacity to repay their loans on time. The ability to pre-screen and process loan applications faster would appeal to and create more value for prospects.

External data is only effective when combined with your internal data and an insightful understanding of your market.

We see our customers create lead scoring models that incorporate third-party data such as credit ratings, previous history with bankruptcy, revenue trends, loan repayment history, assets owned, and social media presence and engagement. The result is better targeting, improved conversions, streamlined operations, less time wasted pursuing bad leads, and less money spent on recovering defaulted loans that were extended to incorrectly qualified leads.

Some unique attributes that our customers have leveraged using external data include:

• SMB company data — for example years in operation, company type, and number of employees
• Business funding information
• Location-specific income and financial stability indicators
• Business owner verification, email, and phone validation
• Social media activity, which can help to legitimize a prospective borrower by determining a social media presence, following, and engagement on relevant channels such as LinkedIn.

External data platforms like Explorium can centralize access to a wide variety of external data without the costs and overhead of managing contracts with multiple providers. Not only are the data sources curated for quality and reliability, but they also form a single, collective, inter-compatible catalog, so you can treat them as a single resource, lifting out only the details you need. 

For more insights, download our white paper, The Definitive Guide to External Data for Fintech.

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In October last year, overdraft fees were reported to have reached a record high of $33.58, according to research by Bankrate. 

Still, the amount of money banks are actually bringing in through overdraft fees has been going down – that’s largely due to the pandemic, and banks waiving overdraft fees in response. 

In 2020, revenue from overdraft fees was $8.82 billion – down almost 3 billion compared to 2019, according to research from S&P global intelligence. In the first 9 months of last year, revenue from overdraft fees was around $6.13 billion.

Overdraft fees’ footprint in banks’ revenue stream may be shrinking. 

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In JPMorgan’s earnings call last week, the largest US bank reported record profits and a plan to build 400 new branches. But it also said it was increasing its yearly technology budget to $12 billion. That’s up from $9.5 billion in 2020.

Analysts had a hard time accepting the big increase in tech spending. The increased tech budget pushes total expected expense growth to 8%, which could cause the firm to miss profitability targets this year and perhaps in 2023. They want to understand the growing tech budget better.

CEO Jamie Dimon was tough with analysts who wanted more clarity and specifics on the firm’s expanding tech spending, including an understanding of when the firm expects these investments to yield profits.

“A lot of you want payback tomorrow and stuff like that. We’ll not disclose those numbers, but we are there for the long run. We’re going to be adding products and services and countries for the rest of our lives. So I doubt, over the long run, we’ll fail.”

What’s in the budget

For a bank the size of JPMorgan, defining what’s a technology investment and what’s not is a bit tricky. That’s because it spends a lot of money on just keeping the technology lights on, managing its legacy systems. And while this might seem like necessary maintenance, moving technical investments to the cloud may ultimately enable the bank to make more money in the future.

Defensive and offensive spending

JPMorgan likes to split out its investment in technology into two categories, which it calls run the bank and change the bank. Run the bank technology spend has to do with maintaining the legacy infrastructure, keeping the lights on — “foundational and mandatory” spending. Change the bank spend is about investing in the future. The bank will split its $12 billion tech budget this year about evenly between the two types of technology investments.

The bank will continue to spend on regulatory-related investments, modernization and the retirement of technical debt. Jeremy Barnum, the bank’s CFO, cautioned analysts and investors not to look at this type of spending as merely “defensive”.

“I wouldn’t actually describe retiring technical debt as playing defense,” Barnum said during the firm’s latest earnings call. “I think that’s actually a great example of the whole point of this conversation, which is that retiring technical debt is an easy thing to not do if you’re applying defense focused on short-term targets. But if you’re playing offense for the long term, it’s exactly this type of decision that creates some of the frustration… that’s critical for the long-term success of the company.”

2022’s technology spending includes:

• Modernization, which includes migrations to the cloud, as well as upgrading legacy infrastructure and architecture. Jamie Dimon said that this year, roughly 30% to 50% of the firm’s apps and data will be moving to the cloud.
• Data strategy that enables the bank to extract value in its proprietary data by cleaning it and staging it and deploying modern techniques against it
• Attracting and acquiring top talent with modern skills
• A “product operating model“

CFO Barnum said the product operating model was “a popular buzzword… that reflects the simple reality that the best products get delivered when developers and business owners are working together iteratively with end-to-end ownership. Underpinning all of this is our continued emphasis on cybersecurity to protect the firm and our clients and customers, as well as maintaining a sound control environment.”

Late in 2021, Rohan Amin, Chase’s Chief Product Officer, shared some insights on the firm’s product operating model. This includes shortening the product development lifecycle to be able to deliver more value to customers more frequently. Chase embarked on a transformation project to organize its technology, product and design teams around structured areas of focus so that the organization wasn’t shifting resources around in a typical project with a waterfall-based structure. It also wanted to create more collaboration across the product design and technology teams, so that they could deliver faster and better with a customer experience focus. Lastly, the transformation project would extend all the way through the organization. 

“You have to be comfortable with change because change is constant. And so why not have an operating model that actually is built around the fact that everything is changing around you?” Amin told Tearsheet.

In addition to maintenance spending, the other half of JPMorgan’s investment spend is intended to drive innovation across its businesses and with client-facing products.

“We believe it’s critical to identify and resolve customer pain points and improve the user experience. And we’re attacking the problem with a combination of building, partnering and buying,” said Barnum. He cited Chase’s digitization of existing product offerings with apps like Chase MyHome, the firm’s digital home mortgage offering, and its launch of a cloud native digital bank in the U.K.

The firm has also extended its tech budget to include tech-adjacent spend, reflecting its recognition that tech means more than software development. It also means data and analytics, AI, as well as the physical aspects of modernization, like data centers.

Tech spending is also earmarked to partner with and acquire fintech firms. In 2021, JPMorgan acquired 55ip and OpenInvest to build an algorithm-based digital platform for tax-efficient and ESG investing. It also bought Nutmeg, a digital wealth manager, to complement its UK retail investment platform. And in September, it partnered with Thought Machine to migrate the firm’s core banking software to the cloud.

“Bobbing and weaving”

JPMorgan is also spending to compete with big tech’s aspirations in finance and banking. To compete, Dimon says his firm is battle-engaged. “Some of these people do a very good job. But we have the capability, the economies of scale and all these things,” he said.

“Look, the competition is very bright. They’re bobbing and weaving.”

With 59 million digital Chase users, JPMorgan somehow continues to position itself as a scrappy underdog, competing against fintech and big tech. It continues to pony up the money to ensure it stays competitive with its products and services, according to Barnum.

“So taken together, our strategy and investments are critical to ensuring that we can compete with the most innovative players out there, whether we’re the ones pushing the envelope of innovation or responding quickly to the creativity of our competitors but doing so at scale,” he said.

2021 was all about digital. Digital banking, digital payments, and digital currencies all enjoyed significant time under the spotlight. People moved further away from their bank branches, as they performed all they needed to do over their mobile apps.

As we gear up for 2022, let’s look back at the mobile applications spearheading this shift to digital. Apptopia recently released its global download data from the past year, showing which applications led across different categories.

The US witnessed a boom of downloads in the mobile banking category. A fair mix of digital-first and traditional brick-and-mortar banks made the top 10 list of most downloads in the category. Chime, a mobile-first neobank, led the ranks. It topped the download charts, ahead of more traditional banking apps, like Bank of America and Chase. Chime counts 13 million customers, of which 8 million claim to use the bank as their primary service provider. Current, another neobank, also made the cut at the 6th position.

In 2020, the top three crypto apps totaled 18 million downloads worldwide. Last year, this figure jumped to 145 million. This data is a great way to demonstrate the global uptick in crypto adoption. The top three apps in the category – Binance, Crypto.com, and Coinbase – have now become regular mentions in table-top conversations and sporting sponsorships.

As of October 2021, Binance was estimated to have 28.6 million users. The company boasted record transaction volume, processing $76 billion a day. That makes it the biggest crypto exchange in the world.

Online shopping is another field where fintech applications now feature regularly and have made a space for themselves with offerings like reward programs and BNPL. Fetch Rewards came in at number 7 for the most downloaded shopping apps in America in 2021, and Klarna took the number 10 spot.

Financial services and fintech firms are fighting for new customers. The pandemic has accelerated the move to digital and that means more competition for brands to acquire new customers and to retain their existing ones.

So much of today’s story around financial services and fintech firms centers around acquiring new users. Challenger banks acquired millions of new users this year. Incumbents are deconstructing their customer journeys. Service and retention have become paramount during the stresses of the pandemic. Customers expect the same experiences from their financial services providers that they get from other favorite brands. Marketing will only intensify in 2022.

Tearsheet’s Acquire Conference brings together top modern financial institutions to discuss the attributes of successful branding, marketing, product, and customer service in today’s market.

Join us for a full day of insights — online February 22, 2022 — and new connections with an influential group of decision makers.

Get your (free) tickets here

Papaya is an app that uses AI to simplify bill payments for consumers, and to help merchants and billers get paid faster. The Papaya app lets users take a photo of any bill – parking tickets, utilities, phone bills, medical invoices – and then pay it directly through the app. Users can choose from a number of common payment methods including bank accounts, debit cards and credit cards.

Papaya recently announced a $50 million Series B funding round led by Bessemer Venture Partners with participation from Sequoia Capital, Twitter’s Dick Costolo, and others. The firm’s executive team hails from big names including GreenDot, Acorns, IdeaLab, and Blackhawk.

I recently had a chat with Papaya’s co-founder and CEO, Patrick Kann, to understand why he felt it was essential to create Papaya, what the app offers, and where he plans to take it from here.

Here’s my conversation with Kann.

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As American banks’ ongoing efforts to go digital took center stage in 2021, challenges big and small marred their paths to customer satisfaction. J.D. Power’s National Banking Satisfaction Study found overall satisfaction for American banks has dropped by 5 points in 2021, standing at 652 points on a 1000-point scale, against 657 in 2020. 

Individually, however, some banks performed better than others. While some had great success in terms of customer satisfaction, others fell short. 

Capital One topped the charts for highest customer satisfaction with 692 points. PNC Bank finished second, earning 684 points, while TD Bank stood third with 673 points. Chase Bank and U.S. Bank stood 4th and 5th, tied at 663 points. 

It is worthwhile to note that, among America’s top 5 largest banks, only Chase and U.S. Bank made the top 5 in customer satisfaction. Big players like Citibank, Bank of America, and Wells Fargo, all ranked below the industry average.

However, that isn’t to say that big banks are not improving in satisfaction versus smaller banks. Historically, mid-sized banks have dominated the satisfaction field. As early as 2018, big and mid-sized banks were separated by a 17-point gap. This year, the gap is down to 4. What’s driving higher satisfaction? Convenience, tailored account offerings, and helping customers save time or money, says the report.

The Covid pandemic hit the American populace hard. Banks that assisted their customers the most walked out on top. They fared better on satisfaction rankings and gained higher customer retention rates. Nearly two-thirds (63%) of retail banking customers said their bank supported them during their time of crisis. This increased their likelihood of using the bank’s services by up to 86% and led to a 48% decrease in complaints. Specific bank actions that fell under this umbrella of support are waiving charges/fees, supporting the community, offering additional advice/guidance, and providing late payment forgiveness.

The report found that general banking satisfaction increased as the banking world moved towards digital. Before the pandemic struck, just 30% of the retail banking customer base operated as digital-only – today that figure stands at 41%. Banking satisfaction has increased the most among users with high digital engagement with banking products and customer service.