September 21st – September 27th
PERSPECTIVES by Eric F. Risley
The urgency to own it.
For the past fifteen years, fintechs have often been elegant and effective applications that solved a consumer or business problem and built enviable customer bases and volumes. Well-known examples include Chime, Wise, SoFi and Mercury.
However, each was dependent upon others’ infrastructure. Over time, this dependency began to demonstrate risks and cost ramifications. A good case study in risk was the broad dependency on companies like Synapse and Wirecard. Both failed suddenly, with Synapse freezing roughly $200 million of customer funds and Wirecard freezing hundreds of thousands of customer accounts. As a fintech scales, cost ramifications tend to evolve and owning and controlling becomes a viable option. The economic impacts can be significant: SoFi’s deposits now cost 155 to 190 basis points less than its former warehouse lines, worth over $600 million a year.
Stablecoin-native payment businesses are subject to many of the same dependencies, many relying upon the same sponsor banks and payment businesses for core infrastructure and a new group of crypto-native companies like Zero Hash, Paxos and MoonPay for further capabilities.
We are now in the midst of a “we want to own it” trend. Examples within more traditional fintech include bank acquisitions like SoFi | Golden Pacific and Chime | Stride, and Stripe’s merchant acquiring bank charter in Georgia, which opened for business in May. Notably, Chime is keeping its second sponsor bank, since renting still pays better for payment card interchange.
Crypto is seeing its own version of this. Stablecoin orchestration transactions include Stripe | Bridge, Ripple | Rail and Kredete | Gravv, announced this week (Gravv was built by Kredete’s own leadership). On- and off-ramp transactions include Circle | Tazapay, Polygon | Coinme and OSL | Banxa (Architect Partners advised Coinme and Banxa). Then there is the striking trend of OCC charters, with Circle, Ripple, Paxos, BitGo, Fidelity Digital Assets, Bridge, Crypto.com and Coinbase receiving national trust charter approvals and Erebor a full bank charter.
Five years ago, owning was rarely an option. The OCC approved those nine charters in under six months, and the Fed’s payment account rule is expected by year-end. The game plan has become relatively clear for fintechs and crypto-native businesses. It’s just a question of when and how to “own it.” This will continue to be a very important trend driving M&A for the foreseeable future.