Banks are becoming crypto companies while crypto companies are becoming banks 🏦; Has FinTech funding lost its momentum? 🤔; Klarna goes Open Banking 👀

You're missing out... Weekly Recap 🔁

Good morning Everyone,

And happy Saturday! Another week has passed, and it was again hot in the financial technology space! Therefore, without further ado, let’s dive into the three stories that were moving headlines this week. You can uncover other stories, keep the FinTech pulse daily and get at least x5 more by becoming a subscriber. Join the community here:

And here’s a mix of 3 really hot FinTech stories from this week:

Banks are becoming crypto companies while crypto companies are becoming banks 🏦

The news 🗞 Wyoming-based digital asset bank Kraken Bank - a subsidiary of Kraken crypto exchange - moved a step closer toward being granted a Federal Reserve Master Account and gaining the same access to the global payments system as traditional banks, CoinDesk reported.

Once granted, Kraken would be well-positioned to serve the market by effectively being treated as a traditional bank.

More on this 👉 The American Bankers Association (ABA) recently granted Kraken a routing number, bringing it one step closer to receiving one of the highly coveted Federal Reserve master accounts, which would allow it to deposit funds with the Fed and access the global payments system. Custodia Bank (formerly Avanti) was given a routing number last month.

Both Kraken & Custodia is a special purpose depository institution (SPDI), a Wyoming-specific regulatory designation allowing these firms to support digital asset banking activities.

What’s the impact? This is actually huge and part of the transformational trend we’ve started to see more and more in Finance. Here’s the takeaway:

✈️ THE TAKEAWAY

Banks are becoming crypto companies while crypto companies are becoming banks 🏦 5 years ago nobody thought that legacy institutions like traditional banks would ever want to touch crypto. Today, almost all of the biggest banks have introduced crypto products, have crypto exposure directly, or there’s at least a clear crypto strategy in place. In a similar vein, 5, or even 3 years ago, very few people could have thought that crypto exchanges, or any crypto company in that area, would ever want to become a bank, or at least a traditional financial service provider. Yet, the recent news from Kraken clearly illustrates that the lines between Crypto & TradFi are getting more and more blurred. In fact, we can clearly state that banks are becoming crypto companies while crypto companies are becoming banks.

Has FinTech funding lost its momentum? 🤔

New data 📚 I’ve briefly covered this through various lenses over the last couple of weeks, but now we have some data to back up the hypothesis.

Venture capital investing in FinTechs globally has skyrocketed in 2021 to hit several new records, according to a new annual report from PitchBook. Despite beating records, it cooled off during Q4 and so far this year, investors appear more selective about the sectors they’re favoring.

More about this 👉 Things worth knowing:

• The value of VC deals for FinTechs hit $121.6B for the year, up about 153% from $48B in 2020, per the report. The 2021 value was also greater than the past 2 years combined.

• VCs made 4,987 investments in 2021, a year-over-year (YoY) increase of around 54% from 3,232.

• Yet, it’s worth mentioning that the VC investing boom cooled off late in Q4 2021: deal value fell by 11.3% quarter-over-quarter (QoQ) and deal quantity, meanwhile, dropped by 9.1% QoQ.

• It seems that this softening has continued into Q1 2022 too. The funding for the 2 weeks ended March 7, 2022, dropped 63% from the prior two-week period, according to Crunchbase data. The activity in this period declined from 80 FinTechs raising nearly $3B to just 51 getting $1.1B. The global data spanned seed to late-stage rounds.

So what does this tell us about the future of FinTechs in 2022, and what financial technology upstarts can expect this year? Here’s the takeaway:

✈️ THE TAKEAWAY

It will still be a good year for FinTech. Given the uncertainty in public markets as well as the interest-rate growth, one can probably predict that 2021’s momentum will probably not continue this year. But this doesn’t mean that FinTechs are facing an existential crisis right now. Quite the opposite - this year should give a boost to previously slightly ignored FinTech verticals like InsurTech, WealthTech, PropTech, and most definitely crypto (I expect it to lead the funding movement throughout the whole year). Looking more broadly, the big winners and market leaders, as well as those that are are capital-efficient will most certainly continue to be highly desired by investors. Zooming out, a drop in VC funding also means that alternative financing options will have a great year. I have written about this quite explicitly here (+2 other FinTech verticals that should have a great 2022 with it).

Klarna goes Open Banking 👀

The (breaking) news 🗞 Buy Now, Pay Later (BNPL) giant Klarna has set up an Open Banking sub-brand and a business unit called Klarna Kosma, aimed at helping firms connect to its network of thousands of banks across Europe and the US.

More about this 👉 Klarna Kosma promises to provide financial institutions, FinTechs, and merchants with the connectivity to build financial services apps and services by providing simple and secure access to 15,000 banks in 24 countries through a single API. These companies can now leverage Klarna’s API to access account statements, initiate payments, and fetch banking information, among other things.

Since 2014 👀 One must note that Klarna first entered the open banking space when it acquired Sofort, a direct bank-to-bank payment service in Germany, in 2014. Since then the Swedish giant has developed the service, expanding it into two dozen markets, and begun to use open banking to power additional in-house services.

✈️ THE TAKEAWAY

This is huge. First and foremost, it’s clear that Klarna is following both the money and the trends, and all have been increasingly in favor of Open Banking (OB). The global OB market was expected to grow from $11.79B in 2020 to $15.13B in 2021 at a compound annual growth rate (CAGR) of 28.4%, as per various reports. Although there’s no recent data, Visa snapping Tink and Apple buying Credit Kudos just last week clearly show that both the stakes and the interests are very high here. Furthermore, it must be noted that in addition to Account Information Service (AIS), Klarna Kosma customers can also programmatically initiate payments with compatible banks, and that has always been the ultimate long-term promise of OB. If this takes off, it could potentially replace card payments or e-wallets like PayPal, Venmo, among others. The giants - including Klarna - understand that and definitely want to have a product ready if/when we get there. Finally, it further adds to Klarna’s ultimate FinTech or Super App strategy. It’s no longer a BNPL player (though it’s very strong there) only, it’s a FinTech giant to be reckoned with.

🔎 What else I’m watching

• Revolut Bank in Ireland🇮🇪 After launching more than 20 new banks across Europe in the last year, Revolut Bank has opened in Ireland. The bank will be available to the FinTechs more than 1.7M Irish customers – which accounts for roughly a third of the country’s population, as per AltFi. This means that customers in Ireland who upgrade to Revolut Bank will have deposits of up to €100,000 protected under a guarantee scheme. This will be covered by the Lithuanian State company Deposit and Investment Insurance, where Revolut is based for its Irish customers.

• LatAm expansion 🌍 DriveWealth, a B2B fintech powering fractional investing for the likes of Revolut and Robinhood, is entering the Latin American market, Through a  deal with Sproutfi, a social-first investment platform expanding low-cost access to investing in the U.S. markets to Latin America users, DriveWealth has entered the region as it continues a rapid expansion plan. Accounts opened through the Sproutfi platform will be held at DriveWealth. Users will now be able to invest on a dollar equivalent basis (i.e. fractional shares) in over 6,000 U.S. securities and ETFs.

• Interoperable CBDC 👀 In a speech before the European Parliament on Wednesday (March 30), Fabio Panetta, member of the board of the European Central Bank (ECB), said that several central banks around the world, including the Federal Reserve, the Bank of England (BOE) and the ECB, are discussing how to align their projects to have interoperable central bank digital currencies (CBDCs). Panetta delivered a speech summarizing the benefits of a digital euro for the region but emphasizing that there are still many questions that need to be answered at the political level such as the level of privacy and anonymity, the role of the banking system to hold and distribute retail CBDCs — or even if users should be discouraged from having large amounts of digital euros, for instance by penalizing large deposits, to prevent crowding out private initiatives. 

💸 Following the Money

• Denmark-based FinTech Lunar has announced it will buy Instabank for EUR 135M. Lunar and Instabank have entered into a transaction agreement on acquisitions, and the Board of Directors of Instabank has unanimously decided to recommend the offer of 3.75 per share. It values Instabank's total share capital at EUR 135M. Instabank, established in 2016 and listed on the stock exchange in 2020 with a market value of EUR 43.1M, is a bank that offers consumer loans, secured loans, credit cards, and savings.

• Savings and investing app Chip raised £6.5M from over 9,000 investors this week in its latest crowdfunding round, taking the next step on its journey to becoming a super app.

• CRB Group, the parent company of Cross River Bank, a technology infrastructure provider that offers embedded financial solutions, has announced a $620M financing. 

👋 That’s it for today! Thank you for reading and have a productive weekend! And if you enjoyed this newsletter, invite your friends and colleagues to sign up:

P.S. This is a free and short issue that might not be published every week. Subscribe now and keep the FinTech pulse daily, make sense of what’s happening in the financial technology space every day and stay ahead. You will save at least 180 minutes. Every week!