Fiat Meets Crypto; Bigger, Bolder Acquisitions; David Swensen’s Legacy (May 2021 fintech newsletter)

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Worlds collide: fiat meets crypto

Angela Strange

The digital and fiat ecosystems have long been separate universes. Not anymore. If ever there’s a sign of something going mainstream, it’s when one of the OG core providers gets onboard. In this case, FIS has added the ability for banks on its platform to offer their customers the ability to buy, sell, hold bitcoin as well as to view and manage their crypto holdings alongside their traditional bank accounts.

‌This is just the beginning. Smaller banks, noticing a flight of capital to crypto exchanges, such as Coinbase, are following suit. For now, banks are still using 3rd party providers to store and trade crypto. Although this will also likely change in the future, as the OCC has given the power to national banks to offer custody, with U.S. Bank one of the first to take advantage. Banks’ private wealth divisions are also responding to what is now strong consumer and institutional demand: Morgan Stanley clients reportedly hold nearly $30M in recently offered bitcoin funds, and Chase is set to launch access to bitcoin funds.

‌We have written about the challenges facing most financial institutions that are built on top of decades old infrastructure. Most payments in the US are still not real time, and — as made the headlines recently with GameStop — neither is stock trading. Trading crypto, however, is. Bank of America and others are testing the use of blockchain as a means to real-time settlement.

‌When worlds come together, opportunities are created, often by the need for software/infrastructure to create a seamless experience — for institutions (banks, fintechs, etc.) and for institutional and retail investors. Future infrastructure companies will address the seams of the fiat and digital worlds: infrastructure to offer credit cards with crypto rewards, embeddable crypto IRA/brokerage accounts, and so much more. Now if only there was infrastructure to reduce the bitcoin volatility from high-powered tweets…

Fintech acquisitions get bigger and more ambitious

Seema Amble

While late stage and public fintech companies have always made acquisitions, there’s been an evolution in the types of acquisitions. In the recent past, fintech acquisitions have been either acquihires and/or acquisitions for specific technical capabilities. But recently, we’ve seen a spate of larger, strategic acquisitions to build out complementary product sets, which can oftentimes be harder to build internally: Bill.com announced it will buy Divvy for $2.5B, Affirm acquired Returnly for $300M, and Stripe plans to acquire TaxJar.

‌With each of these acquisitions, unlike in smaller acquihires, the acquired company’s product lines will be largely maintained and offered to the acquirer’s customers. For a large platform like Stripe that manages payment processing and billing, sales tax automation software makes sense to add, but ingesting the tax code is complicated and takes time to build from the ground up, making it faster and easier to acquire a specialized company like TaxJar that does this. Similarly, it makes sense that an accounts payable / accounts receivable company like Bill.com would acquire the spend management company Divvy to become the one-stop-shop for SMB financial operations. And while Returnly, which helps merchants process returns, adds another tool to Affirm’s merchant value proposition, managing the returns flow is complex and different from Affirm’s core buy-now-pay-later business.

‌Why are we seeing these acquisitions now? Larger fintech companies are sitting on warchests of cash, and many have opportunistically raised more money in public or private markets. Hiring talent to build internally is expensive and time consuming, and launching new major business units internally gets more complex with scale. We’ll continue to see more acquihires because talent is scarce, but expect to see the big fintech platforms make a handful of larger acquisitions when buying is less complex than building.

The legacy of David Swensen

David Swensen, who sadly passed away earlier this month after a courageous battle with cancer, redefined institutional asset management. In 1985, at the age of 31, David took an 80% paycut to leave Lehman Brothers and lead Yale’s endowment. David’s heretical idea was that endowments, at the time a relatively boring corner of the asset management industry, should be more broadly diversified, specifically in illiquid assets like private equity, hedge fund, and venture capital.

‌Since 1985, Yale’s endowment has grown from $1B to $31.2B (as of 2020). More importantly, it has outperformed peers by delivering average returns of 10.9% versus 7.4% for other college and university endowments. In seeking to deploy capital into private markets, David also became a “venture capitalist of venture capitalists” by providing some of the first institutional capital to early fund managers.

‌David’s approach earned the moniker “the Yale Model”, and today is the standard for many universities and foundations. However, the ascendency of the Yale Model was not always clear. In 1988, only a few years after he assumed the helm, Yale’s endowment was down modestly, while Harvard’s was up. More recently, following the Great Recession, some have argued that the Yale Model has certain deficiencies or can be better replicated using other techniques that don’t require highly compensated managers. But the fact remains, that the Yale Model is the benchmark against which new approaches must measure themselves after an incredible 30+ year track record.

More fintech news

Goldman Taps Uber Executive to Run Its Consumer Bank (WSJ)
Peeyush Nahar, a former engineering executive from Uber and Amazon, will join Goldman to lead Marcus, the bank’s digital bank offering.

JPMorgan, Others Plan to Issue Credit Cards to People With No Credit Scores (WSJ)
A new government-backed pilot program aims to bring more underbanked Americans into the financial system by encouraging banks to share deposit history to help determine new means of consumer credit-worthiness beyond traditional FICO scores.

Fintech Marqeta Files To Go Public, Discloses Revenue Doubled To $290 Million In 2020 (Forbes)
Oakland-based Marqeta’s S1 reveals a pandemic-fueled boost in online transactions.

Fintech Bright Spot: Africa Catches Up in Bumper Funding Year (Bloomberg)
Fintech investment on the African continent rose to a record-breaking $1.35B according to a new report.