There’s been no shortage of big payments and FinTech announcements over the past few days, such as Apple’s bundle bet, Goldman Sachs’ move to bid on the General Motors credit card or Square’s decision to test small-dollar, short-term loans.
Meanwhile, not-quite-household names (yet) like Blend are quietly snapping up big investor dollars and impressive valuations to push laggard industries into the digital commerce ecosystem. Bessemer Venture Partners Partner Charles Birnbaum joined Karen Webster for the latest edition of This Week In Payments to talk about all of the industry’s key developments.
Here’s what they discussed.
Birnbaum noted that many FinTechs benefited from facilitating the U.S. government’s Paycheck Protection Program (PPP). And he said free stock trading apps (like Robinhood) will probably pick up some new long-term customers amid Wall Street’s recent volatility, but that the short-term volume bumps they’ve seen will likely subside.
“But just the need for financial services companies to wake up and finally digitize it all the way they’ve been talking about doing for a long time, I think that is the real enduring tailwind for the FinTech market,” Birnbaum said.
The New Future of Bundling
Birnbaum said that for all the attention bundle building is getting today, it can be a bit striking to realize that a decade ago, everyone’s favorite buzz word in FinTech was “unbundling.” Many focused on breaking out of the big financial services bundle model of the past in favor of taking one thing and doing it much better and efficiently than everyone else.
But Birnbaum said what was obvious even at the height of unbundling fever was that FinTech firms always had the intention of adding more layers to their services.
“It was always clear that these companies had planned on layering in more and more, and that had started happening quite a while ago,” he said. “And then the next wave of the rebundling was the non-FinTech players layering in financial services” — with some like Shopify going on to become “financial services giants in the eCommerce world.”
“This shift in FinTech 2.0 is pretty obvious now, but it's been happening for quite a while,” Birnbaum said.
From that perspective, moves by Google, Facebook and Apple to move so avidly into financial services seemed pretty inevitable in retrospect. Those who’ve been surprised by such moves likely “misunderstood how prevalent this all is already,” he said.
Moreover, when one looks at things like Square’s expansion into short-term consumer lending, it also becomes apparent that firms are taking expertise they built on their merchant services side and using it to expand into customer-facing services.
Birnbaum said Square “is layering in stock trading, crypto trading and now they're moving into lending. But they had already done this on the merchant side and were wildly successful with it.”
And while that success is often attributed to Square’s superior data, he noted, what gets underplayed is the fact that what Square also had was distribution — an advantage it shares with players like Facebook, Apple, Google and Shopify.
The hardest thing in financial services, Birnbaum noted, can be to get the customer through the door. But once they’re there, it’s comparably easy to get them to spend more.
“I think you'll see more and more from these really sophisticated players like Square and Shopify over time that are very vertically focused,” Birnbaum said.
The Connected Car’s Coming Potential
Speaking of vertically oriented play, Webster and Birnbaum discussed the report this week that Goldman Sachs is making a move on GM’s credit card business, reportedly to tap into the connected car commerce experience.
On Goldman’s specific motives, Birnbaum noted, it is hard to say how much that commerce hub potential in cars really mattered. After all, big banks like Goldman have complex reasons for the moves they make.
But more broadly, he noted, a connected car market and competition to be the dominant force driving it are certainly going to emerge.
And what will be interesting to see, he noted, is how that emerging commerce center will affect the wider worlds of underwriting, fraud, know your customer (KYC) and all the things that determine where the risk lies and what entity is responsible for it.
“There are going to be some interesting applications in the middle of the value chain to the payments space when things like this start to really emerge,” Birnbaum said.
The Gig Economy’s California Woes
Speaking of cars — although not those driven by consumers — Webster and Birnbaum also discussed the potentially disturbing implications of a California court ruling this week that would force Uber and Lyft to reclassify drivers as employees.
A judge ruled the firms can’t classify drivers as independent contractors under the state’s new law known as Assembly Bill 5 (AB5). Both Uber and Lyft have claimed such a requirement would lead them to withdraw from California.
Birnbaum noted he’s no expert on this topic or the legal intricacies involved, but the ruling could set up a losing situation for companies, drivers and the state’s tax coffers.
“There's people that get hurt by these services getting shut down,” he said. “And if people are even more underemployed, then there's an impact in their state in terms of collecting tax revenue from these companies. I think it's a lose-lose-lose situation, and the decisions here are unusually short-sighted.”
It’s a common symptom of issues getting overly politicized and finding the most rational solution stops being the main priority, he noted.
The Digitized Future
But on the upside, practical solutions do sometimes win out.
Consider Blend’s $75 million fundraise this week to digitize mortgage services. Combined with a pandemic-related easing of mortgage signature rules changes, that seems like good news.
Birnbaum said that Blend’s success has grown from a very simple point. The firm has taken mortgage services — a generally miserable, time-consuming and overly physical interaction — and found a way to push as much of it as legally possible into the digital realm.
In so doing, it’s built a better experience. Not that building a “better” experience than the standard ones of the past is really that hard, since mortgage closings have traditionally taken up to 45 days and many states required wet signatures on loan documents.
Birnbaum said requirements for wet signatures “should have never been in there in the first place. It was really protected by a lot of interests that don't want to see that go away.” But he noted that shelter-in-place orders have finally changed things.
And that, he said, will be the lasting change of COVID-19 — removing all the things that weren’t working and enabling a seamlessly digitized future to really work.
“The digitization of core financial services that some people take for granted like this already happened,” Birnbaum said. “I think we will see places like the insurance industry, the mortgage industry, the banking industry making that big jump of just getting into the cloud.”
“Before we get into the more advanced stuff, just getting everything into the cloud — getting rid of notarization, wet signatures, manual processes — there's still tremendous opportunity there,” he said. “And I think the pandemic has only accelerated the tailwinds for some of the companies that have been building those solutions for the past five or so years.”