This first appeared in the monthly a16z fintech newsletter. Subscribe to stay on top of the latest fintech news.
A few weeks ago, SoFi and Robinhood both announced they would start allowing their customers to buy shares of companies going public, before they hit the market in an IPO. This type of access was previously only available to institutional investors and high-net-worth clients through investment banks. With SoFi and Robinhood’s new offerings, now mainstream investors will have access to IPOs – and the potential “pop” in share price.
While this idea is not new (online brokerage firms like Schwab, Fidelity, and E*Trade already offer it for select IPOs), such access has traditionally been reserved for the wealthy. Fidelity, for example, requires at least $100,000 or $500,000 in non-401(k) assets (depending on the IPO type), then chooses qualifying customers based on their assets and revenue. That’s far more than SoFi’s offering, which only requires $3,000 across a customer’s SoFi investment accounts.
But while brokerage firms have secured access, they often do not get an allocation to the most highly sought-after IPOs. Ultimately, if Robinhood or SoFi want access, the company issuing the IPO stock needs to make room for these platforms to get an allocation. Investment bank underwriters are likely to push back, since they want to reserve allocation for their clients. They are typically willing to make room for someone like Fidelity because of its mutual fund business, which is made up of the same institutional investors that might traditionally buy into IPOs. But given the rising importance of retail investors – as we’ve seen with GameStop – issuers might be more incentivized to offer some allocation.
One potential approach might be to manage directed share programs (DSPs), which are targeted IPO share purchase options set aside for employees, customers, or other “friends and family” of the company. Consumer companies often want their customers to be shareholders because it can help generate goodwill and loyalty. Uber, Lyft, and Airbnb have offered shares to their drivers and hosts through DSPs. Even this idea is not new – back in 1995, the Boston Beer Company sold customers discounted shares by attaching coupons to six packs of beer – but it seems to be making a comeback.
SoFi plans to become an underwriter, meaning that it will buy the securities from the issuer then sell them back, as opposed to strictly acting as the broker. This makes sense, given CEO Anthony Noto’s background as a Goldman Sachs investment banker. However, it is unlikely that SoFi, as a newcomer, will be chosen as the lead underwriter with pricing and allocation power. The process of going public is one of a company’s most high-stakes decisions; historically, they have been hesitant to take a risk on a new allocation strategy or to counter their investment bank’s advice, especially if it’s unclear how retail investors will react. This is also part of the reason why SoFi has a longer “flipping” period, the wait in which the stock cannot be sold: 30 days, versus 15 days for Fidelity. Companies prefer investors to hold their stock long term, which is part of the reason they typically favor institutional investors. By imposing a longer flipping period, SoFi wants to ensure that its clients hold on to the IPO shares they purchase, making them more appealing buyers for the issuing companies.
The takeaway: while more companies may be tempted to follow in SoFi and Robinhood’s footsteps and offer mainstream customers access to IPOs, their challenge will be in securing allocation. We’ll see what creative ways new fintech companies will offer to get this access.
— Seema Amble, a16z fintech deal partner
The Brazilian fintech company Nubank is now the largest neobank in the world, with 33 million customers and a $25 billion valuation. That valuation is already half that of Itau’s market cap, the largest bank in Brazil, which has been around for more than 75 years. Even among fintech enthusiasts, Nubank’s rapid rise seemed to come out of nowhere – from slightly more than 1 million applications in 2016 to more than 30 million in a few short years. Nubank has become one of fintech’s most impressive companies in teerms of scale, growth, and velocity. One key advantage? Nubank figured out early on what has since become obvious to the rest of the world: there is an enormous amount of untapped opportunity in Latin America for financial services of all types.
Latin America is currently experiencing an explosion of fintech activity. There are many historical and structural reasons for the latent demand for fintech, which we explore in detail here. But a combination of factors indicate that this is finally fintech’s tipping point in the region:
As a result, we see four core areas of opportunity for new fintech players in Latin America.
Venture capital invested more than $42 billion into approximately 2,000 fintech startups in 2020, according to CB Insights. That figure stands in stark contrast to the number of new financial institutions approved by the FDIC in recent years. From 2011 to 2020, only 38 banks were approved. (In 2012, 2014, and 2016, zero new banks were approved.) This shift is partly due to more stringent government regulation since 2008. But it also reflects the emergence of new paths for fintechs to operate without becoming a bank. In the U.S., fintechs have few options:
In comparison, Mexico has taken a different approach, as we note above. Mexico’s fintech law allows crowdfunding platforms to take capital from retail investors (Instituciones de Financiamiento Colectivo, or “IFC”) and provides a new form of depository institution for neobanks (Instituciones de Fondos de Pago Electrónico, or “IFPE”). More than 93 fintechs in Mexico have applied for regulatory approval.
The Mexican fintech startup Cuenca recently received an approval letter from the National Commission of Banking and Securities (CNBV) to become a licensed fintech (though there are still conditions to be met before it publicly becomes a licensed financial services entity). It has obtained its own Bank Identification Number (BIN) to become a direct card issuer. This marks a significant milestone in neobanking regulation: now Mexican neobanks can obtain a single license as an IFPE and be regulated directly, without needing to rely on a bank partner.
The Mexican fintech law raises two interesting points. First, this is a classic case of an emerging country leapfrogging the U.S. in regulations. It’s not the first time! Mexico has already surpassed the U.S. in financial infrastructure. Since the 2004 introduction of SPEI, Banco de México’s electronic funds transfer system, real-time payments have become the de-facto payment method in Mexico. Meanwhile, in the U.S. ACH transfers still take up to three business days to process. (This, of course, has given rise to Venmo, Zelle, and Cash App.)
Second, regulation can be used in a positive way to encourage financial innovation and inclusion. As the Mexican government continues to approve fintech companies, the outdated technology and predatory practices of legacy Mexican banks will hopefully become a thing of the past. Though the partner bank model has helped many smaller banks modernize in the U.S., Mexico’s pro-fintech mandate demonstrates that it’s not the only way – or necessarily the best way – to spur further fintech innovation.
Conventional wisdom holds that passive trading is the rational investing strategy. Active traders are often portrayed as gambling rubes or lucky opportunists who will (eventually) be handily beaten by index funds. But the steady growth of platforms like eToro and Robinhood, coupled with the acceleration of investing communities like WallStreetBets, has tipped the power from institutions back to individuals and created a renewed interest in active trading.
The internet has always aggregated fringe behaviors; now it enables individuals to coordinate trading strategies in a way that was previously only possible through institutions. That technological shift, coupled with cultural upheaval – thanks to a combination of loose monetary policy and an uncertain economy, younger Americans’ path to financial progress is steep – has catalyzed a lean-in mindset around investing, particularly among Gen Z. The reasons behind this shift are part psychological, part structural, which we delve into deeper here.
As a result, we’re seeing of four types of active investing emerge, supported by a growing set of dedicated tools:
Most Big Debt Collectors Backed Off During the Pandemic. One Pressed Ahead. (WSJ)
Sherman Financial Group has bucked industry trends during COVID-19, filing more lawsuits to collect cash from people behind on their credit-card bills than it did pre-pandemic.
Auto Loans Get Their SoFi Moment (Bloomberg)
The online lender Social Finance Inc., best known for reworking student debt, is partnering with MotoRefi to refinance auto loans.
All the Fintech Companies in Y Combinator’s Winter 2021 Batch (Fintech Brain Food / Substack)
A round-up of all 43 fintech startups.
Walgreens to Launch Bank-Account Offering Through Partnerships (MarketWatch)
The bank-account product will be linked to a Mastercard debit card issued by MetaBank.
Bank of America Acquires Healthcare Tech Startup Axia (American Banker)
It’s the latest move in the bank’s efforts to build out payments offerings in healthcare, an area that still relies heavily on paper bills and checks.
Ensemble, an App to Help Divorced Parents Avoid Arguing About Money (TechCrunch)
The expense tracking app aimed at reducing tension among co-parents is coming out of stealth.
Instacart and DoorDash Plan to Launch Their Own Credit Cards (WSJ)
The delivery companies hope the cards will reinforce customer loyalty; the banks aim to diversify beyond travel rewards cards.