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P2P or B2B? Payments for the hustle economy
Peer-to-peer (P2P) payment transfers have seen impressive growth over the past year: P2P grew 42 percent in volume over 2020 compared to 18.9 percent the prior year. Zelle reported 58 percent growth over the year prior, while Venmo grew 56 percent in volume. And Cash App’s gross payment volume increased 332 percent. While peer-to-peer primarily refers to money exchanged between consumers, small business payments have been a meaningful factor in all this growth.
Today’s small business owners represent a wide range of pursuits, from side hustles to solo entrepreneurship. They include everyone from eyebrow threaders to freelance web designers to pop-up bakers at local farmer’s markets. Not only are these business owners getting paid for goods and services via P2P money transfer apps, but many also pay suppliers and contractors this way. Why would these entrepreneurs be interested in using a consumer app for transfering money?
Over 80 percent of small businesses owners are solo entrepreneurs running their business from homes. They want to get paid instantly and easily by customers, rather than waiting to set up merchant acquiring accounts. During the pandemic, in particular, they want payments to be contactless. They want a consumer experience that is simple, cleanly designed, and mobile-first, rather than clunky desktop software or external hardware. They want easy, immediate access to their funds. And because many of these business owners spend out of these earnings, they want their personal and business accounts to be connected.
As side hustles have become increasingly common in recent years, P2P apps with consumer products have seen an uptick in business usage, as well. Over time, these apps have introduced business-targeted features. This summer, for example, Venmo launched a Business Profiles pilot: sellers could build simple pages for their businesses and get discovered via Venmo’s social feed. Zelle has partnered with Bank of America, Chase, and Citi to drive SMB usage; with Zelle, money lands directly in the entrepreneur’s bank account, rather than a separate app. Smaller banks and credit unions in particular have been eager to join Zelle’s payment network – the offering not only helps drive customer engagement, it allows these banks to compete with fintech apps like Venmo and Cash App.
It’s not only P2P platforms that are catering to this trend. The digital payments company Melio not only allows entrepreneurs to get paid quickly, like P2P platforms, but it also enables them to easily pay invoices by snapping a photo with their phone. CashDrop and Profitboss claim to help entrepreneurs set up a storefront in a few clicks, connect their social media to payments, and more. Shop Pay, which launched on Facebook and Instagram this month, provides an easy payment and checkout option for small sellers. Tools like these are just the start. As side hustle culture and the creator economy grows, so will these easy-to-use tools that resonate with younger audiences.
— Seema Amble, a16z fintech deal partner
The future of mortgage servicing
Owning a home has long been the American dream: nearly two-thirds of Americans have purchased a home, most often with the help of a mortgage, yielding nearly $10 trillion in residential mortgage debt. Today more than 5 percent of mortgages are currently on forbearance payment plans. That’s nearly 3 million homeowners who are concerned about their long term ability to pay for and stay in their homes.
The company to whom homeowners remit their mortgage payments is called the mortgage servicer. That term can sometimes seem perplexing – there is nothing service-oriented about most mortgage servicers. Want to check your balance? You’re likely visiting a website that was built in the 1980s and doesn’t work on mobile. Try to set up autopay or request a payoff letter? You’ll find yourself printing, signing, and faxing paperwork. Want to figure out the status of your escrow account? That’ll likely require 15 calls to a call center.
As the adage goes, a crisis is a terrible thing to waste. The perils facing many homeowners will add focus to the opportunity: a new mortgage servicer built from the ground up.
For homeowners, imagine a trusted confidant that could not only help you better digest this complex financial product, but also to navigate the process when financial challenges arise. Can you pause your payments? Pay a lower rate? When do you have to make up for the missed payments? More crucially, what can you do to stay in the home you worked so hard to buy? In times of lesser financial stress, when rates drop, such a servicer could automatically alert you and guide you through the refinancing process.
For originators, a modern, regulatorily compliant servicer will become a competitive advantage in the market. A tech-forward servicer with higher gross margins and easy onboarding processes could support lenders at any scale and provide the tools necessary for them to continue working directly with the homeowner throughout the life of the mortgage. And for investors, the economic case for a new full-stack servicer is even stronger. With software handling most tasks, rather than call centers, a new software servicer could reduce transaction costs, reduce credit loss by helping consumers avoid foreclosure, and increase returns.
We believe the future of mortgage servicing is software-driven and mobile-first. These companies can transform what’s typically been an antiquated, often stressful transaction into a transparent, tech-enabled experience that actually serves homeowners, in good times and bad.
— Angela Strange, a16z fintech general partner
The case for default insurance
Imagine you never had to think about buying insurance – that it was automatically attached to everything you own. Your apartment is broken into? Renters insurance came with your lease. Your dog breaks his leg? Your vet bills are covered. Your business gets hacked? You got cyber when you bought your domain name.
Unfortunately, we are frustratingly far from this intuitive, risk-reduced life. Insurance purchases are most often decoupled from your purchases. Perplexingly, you acquire the valuable thing (you buy the house or the car, you register your business), then you have to go somewhere else to get the insurance. The purchase and the risk transfer are oddly discrete events. It would make a lot more sense to not only unify the buying experiences, but to make insurance default ON. At minimum, insurance should be a convenient opt-out experience, rather than an inconvenient opt-in situation. Buying insurance at the same time as your purchase sounds simple – obvious even – but it’s still far from the norm.
It’s time to transition from a disjointed and time-consuming process to a one-click, “check box for insurance” experience that happens at the time of purchase. We see three opportunities for new fintech and insurtech companies to step in:
Retail trading and the Payment For Order Flow debate
In the wake of the GameStop short squeeze, Payment For Order Flow — the practice of market makers paying brokers to execute customer orders — has fueled no small amount of debate: Is it a tactic deployed by large capital markets institutions to steal money from the less informed, or is it an enabler of low cost, highly efficient stock trading for all?
Much of the recent scrutiny is based on a misunderstanding of the underlying market and the complexity of the forces driving it. How does an order given to a broker like Robinhood or Schwab or E*Trade become a trade? And if trading is now free, does this mean that you—the investor — are not the customer, but the product being sold? The answer (a definitive no) requires a closer look into the structure of markets and market making.
In 2005, the SEC passed the Regulation National Market System, known as RegNMS, requiring brokers to obtain “best execution” for their clients within the NBBO, National Best Bid and Offer.. But remember: there are dozens of exchanges, and the broker has an obligation to get the best bid (if executing a sell) or best offer (if executing a buy), also taking into account execution speed. Market makers, however, can give the retail order “price improvement” by executing it at a price that is better than published prices and warehousing the risk to offset it against existing or future retail orders. Schwab publishes exactly how much price improvement their customers get, as does Robinhood, and it is substantial. The vast majority of trades that retail brokers execute have better prices than are found on any market.
But the retail brokers aren’t stupid; they know that market makers are profiting on spreads (small difference between bid and offer, repeated many times per day). Retail brokers could do the market making themselves (“internalizing” orders vs sending them to exchanges), or they could route every order straight to an exchange (sometimes earning maker fees directly, but also paying taker fees). So some retail brokers ask for a share of the market maker profits. Retail brokers typically route orders to a handful of market makers, allocating more to the market makers that provide the highest amount of price improvement to the retail investors.
What would happen if instead we decided to get rid of Payment For Order Flow and just have retail brokers either internalize (be their own market makers) or send all of their trades to the exchanges? It would mean less choice and thus less competition; consumers will likely face bigger spreads and less liquidity. Ultimately, the retail brokers would be forced to raise fees on trades, which would be bad for the retail investor. In fact, there is real data (from SEC 605 statements) that shows that wholesaling saves customers money: $3.57 billion of price improvement in 2020 alone.
As with many areas of capital markets that are not clear at first glance, trying to “fix” something based on a misunderstanding of how it works will make it worse. More liquidity in our public markets is a win for everyone, and the complex system that we have today provides more liquidity than at any time in history. It may be imperfect, but it’s extraordinarily effective.
More from the a16z fintech team
The Big Ideas Fintech Will Tackle in 2021
Democratizing investing, embracing social+, embedding insurance, revamping distribution, empowering community, and disintermediating the banking system.
— Alex Rampell, Angela Strange, Anish Acharya, Seema Amble, Rex Salisbury, and Matthieu Hafemeister
The Holy Grail of Social + Fintech
How the intersection of social and finance – as well as shifting attitudes around what we share about money online – is transforming financial services.
— Anish Acharya, D’Arcy Coolican, and Lauren Murrow
A Year in Fintech in 50 Words
The ideas and themes that defined the year, based on 50 of the fintech team’s most-used words in 2020.
— Alex Rampell, Angela Strange, Anish Acharya, Seema Amble, Rex Salisbury, and Matthieu Hafemeister
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