In this Fintech in Focus
Industry Developments
Cryptocurrency
According to Bloomberg, emerging cryptocurrency exchange platform Bullish is slated to merge with Far Peak Acquisition Corporation in a deal that values the company at around $12 billion. Bullish is launching under Block.one, a software company known for its EOSIO open source blockchain platform, which utilizes features like smart contracts to build a more transparent public ledger ecosystem. Using Block.one’s existing digital infrastructure, Bullish will offer portfolio management, market making, and lending tools through decentralized finance (DeFi) protocols, according to Yahoo Finance. Bullish would become the second publicly traded cryptocurrency exchange in the United States and would directly challenge Coinbase, which debuted in April via a direct listing but has experienced some negative volatility since its initial climb to $429 on its first trading day, according to Business Insider. Kraken Financial has also indicated a desire to go public via an initial public offering in 2022, as reported by Fortune. Meanwhile, UK-based cryptocurrency platform Binance has not experienced the same regulatory tailwinds as its American counterparts. Binance’s cryptocurrency exchange was blocked in the UK by the Financial Conduct Authority due to money laundering concerns as the British government continues to crack down on crypto services and assets, according to Bloomberg.
Venture capital firm Andreessen Horowitz recently launched its $2.2 billion crypto fund dedicated to investments in emerging blockchain technologies, as reported by Wired. The venture, called Crypto Fund III, comes after the firm’s successful investment in Coinbase amidst a frenzy to capitalize on the trillion-dollar crypto market. Among Andreessen Horowitz’s next wave of investments is Solana Labs, an incubator studio paving the way for new DeFi applications and innovations with its high-performance blockchain, which uses proof-of-history to validate 50,000 transactions per second. Typical blockchains utilizing proof-of-work protocols are slow; Solana’s theoretical peak capacity is 10,000x faster than Bitcoin and 2.5x faster than Visa, demonstrating scalability that could legitimize DeFi for the future. Solana does this by coordinating timestamps among different nodes according to a synchronized clock, which removes transaction delays and makes the process more energy efficient. For DeFi applications to gain prominence, high-performance blockchains like Solana must be reliable and accessible, and their speeds must rival those of legacy financial services. This is also why dedicated crypto growth initiatives like those undertaken by Andreessen Horowitz are so necessary; without sufficient capital, high-performance blockchains will be unable to scale efficiently and onboard as many new applications as possible.
E-Commerce and Payments
E-commerce startup Tapcart has raised $50 million in Series B funding to continue its mission to create a more inclusive and customizable mobile-app-building platform for Shopify stores, according to TechCrunch. Tapcart offers full integration with Shopify, so there isn’t a need to rebuild the e-commerce infrastructure or the application programming interfaces (APIs). Instead, the company focuses on helping businesses build a seamless brand experience with drag and drop design features and automated marketing resources, all while charging a flat fee without consideration of total sales. In a recent Cisco study, 72 percent of small businesses stated that they were advancing their digitization goals in response to COVID-19, demonstrating significant demand for improved e-commerce capabilities. Of the same businesses surveyed, the second leading motivation for expanding digitization was to improve online sales and better support digital payments, both of which Tapcart attempts to address. The synergies between Tapcart and Shopify could create an important model for the e-commerce landscape; there is no need to reinvent the wheel, as partnerships built upon existing digital infrastructures may be able to scale more quickly and keep costs lower.
PayPal is adjusting the merchant fees on its proprietary services, according to Bloomberg. Beginning August 2, PayPal will raise its rate on merchant transactions to 3.49 percent of the sale value plus a flat fee of $0.49, a significant change from its previous scheme that charged 2.9 percent plus $0.30. However, PayPal will be also be lowering its fees for non-proprietary services like Visa and Mastercard payments processing, according to Reuters. The reduction to 2.59 percent plus $0.49 model for non-proprietary payment processing is meant to keep PayPal competitive with rivals like Stripe, but the overarching goal of these key structural changes is to help merchants understand where PayPal provides value. The company is confident in its offerings, like PayPal Checkout and Pay with Venmo, and demand for these services after the price changes are instituted will show how price elastic PayPal’s small business and enterprise customers are.
Digital Banking
Daylight, a banking platform built for the LGBTQ+ community, raised $5 million in a seed funding round, according to TechCrunch. The platform uniquely recognizes the financial difficulties that the LGBTQ+ community often faces and will offer products and coaching to specifically meet those needs. From putting preferred names on cards for transgender customers to coordinating financial advising for users undergoing expensive hormonal treatments, Daylight is using FinTech to help a community that has been historically underserved when it comes to personal finance. Daylight’s growing prominence shows the ability for FinTechs and neobanks to increase equity and make banking more comfortable for everyone, regardless of race, gender, or sexual orientation. The Federal Deposit Insurance Corporation estimates that about 5 percent of the United States is unbanked, but with more FinTechs beginning to target the underrepresented groups that make up this percentage, there is hope that America can approach a reality where almost all residents are banked.
According to The Wall Street Journal, Visa has begun its expansion into open banking with its recent $2 billion purchase of Tink, a Swedish startup that aggregates economic information across different user accounts and utilizes APIs to better understand each individual’s financial needs and wants. Payment giants like Visa have recognized the need to adapt in order to keep pace with smaller banking startup’s innovation, as open banking is advancing user-focused disintermediation that allows people to utilize their financial data effectively. As regulations adapt and third-party data sharing becomes more prominent, smaller FinTech startups will be able to offer the personal financial management guidance many banks have not yet achieved or scaled. However, as companies like Visa have most likely noticed, the rise of open banking is an opportunity to pursue bolt-on acquisitions of companies that can make innovative use of consumer financial data.
Global Developments
Latin American FinTechs
While COVID-19 has disrupted Latin American economic and health infrastructures, government stimulus disbursements have increased the prominence of digital banking in the region, according to The Wall Street Journal. General distrust, exorbitant fees, and corruption have turned many away from the traditional financial system in the past, leaving many Latin Americans unbanked and without access to savings and credit. However, about 15 percent of the population in Latin America have opened a bank account in the last year, sparking $1.8 billion in total FinTech investment in the region. Neobanks like Nubank and Movii have been able to earn the trust of the population by providing easy access to government stimulus during the pandemic, but these companies could have an even greater impact in the post-COVID-19 economy. Access to credit for both businesses and individuals is imperative for economic growth, and about 87 percent of small and medium enterprises (SMEs) in Latin America have been estimated to have unmet financing needs, according to the World Bank. FinTechs have an opportunity to not only encourage more formal private savings but also spur commercial investment by creating more transparent credit reporting systems with fewer information asymmetries.
Iran
Iran has its sights set on building a financial free zone on the island of Kish in the Persian Gulf, according to Bitcoin.com. The Iranian government sees the island as a potential cryptocurrency exchange hub, encouraging the potential development of more crypto mining farms in the region.
However, Iran has had issues in the past with unlicensed energy consumption stemming from crypto mining, which caused blackouts in May 2021, according to BBC. Outgoing president Hassan Rouhani banned crypto mining activities until September 22, but despite the energy costs of cryptocurrency, Bitcoin will remain an important part of the Iranian economy for years to come. Bitcoin’s decentralization and encryption are useful for Iranian individuals and companies seeking to circumvent US banking sanctions, as reported by The New York Times. Bitcoin and DeFi are both innovations that open Iran to international commerce, which is why proposed financial free zones and cryptocurrency exchange hubs have become popular topics of discussion.