Small banks are leading in crypto adoption. Here's what big banks can learn💡; FTX is swimming in cash and looking at a massive acquisition 🤯; Can sustainable investing be the future? 🤔

You're missing out big time... Weekly Recap 🔁

Aug 28, 2022

👋 Hey, Linas here! Welcome back to a 🔓 weekly free edition 🔓 of my daily newsletter. Each day I focus on 3 stories that are making a difference in the financial technology space. Coupled with things worth watching & most important money movements, it’s the only newsletter you need for all things when Finance meets Tech.

If you’re not a subscriber, here’s what you missed this week:

As for today, here are the 3 FinTech stories that were making a difference this week. It was arguably the most awesome and intense week this year! (definitely check all the above stories!)

Small banks are leading in crypto adoption. Here's what big banks can learn💡

Trendspotting 🔍 Startups and smaller companies almost always move faster than their large competitors or legacy players. The same trend can be seen in banking and digital asset adoption.

More on this 👉 When cryptocurrency and digital assets started to get more attention globally, small banks saw an opportunity to compete and grow while providing a service that most larger banks stayed away from.

Hence, banks like Silvergate, Signature, Customers Bancorp, or LHV took on billions of dollars in deposits from crypto exchanges, investment firms, and stablecoin issues striving to become the de facto banking partners for the digital asset businesses.

A different year thus far 📊 2022 has been quite different thus far. The abovementioned banks felt that too:

Silvergate Capital saw its deposits fluctuate by $5B in Q2. But by the end, deposits remained stable at $13.5B.
Signature Bank reported a decline in deposits for Q2, only the second time this occurred over the past 10 years. The bank faced some struggles when one of its major clients, Celsius Network, filed for bankruptcy.
As for LVH, while the banking group’s consolidated net loan portfolio grew by EUR 172M in a quarter (EUR 75M in Q1 2022), consolidated deposits decreased by EUR 44M (for comparison, a decrease of EUR 397M in Q1 2022), while deposits related to payment intermediaries decreased by EUR 94M (a decrease of EUR 397M in Q1 2022).

What does it mean? 🤔 Here’s why we are seeing these fluctuations, as well as the lessons to be learned by big banks aiming for a larger role in the world of crypto. Here’s the takeaway:

✈️ THE TAKEAWAY

Lessons to learn 🧠 First and foremost, we must realize that smaller banks often struggle to maintain a healthy level of deposits as customers are lured away by bigger banks’ wider offerings and other incentives. Yet, the crypto market offered smaller players an alternative to boosting their deposits - providing corporate accounts for crypto firms (think Coinbase, Binance, Kraken, or Celcius), which made it easier for those firms to provide liquidity to customers or purchase digital assets fast. But increased volatility and a sharp drop in trading volumes have changed the game. For now. When it comes to the lessons to be learned, bigger banks that consider entering the digital asset market should think about this. First, stocks for banks more deeply involved with crypto firms are trading more like a crypto firm’s stock (or tech company’s) than a bank’s. So far this year, Silvergate Capital’s stock is down 30%, while Signature Bank and Customers Bancorp’s stocks are down 40%, after doubling and tripling in value last year. LVH group is down around 19%. Second, the increased deposit volatility risks triggering runs on the holding bank, and in a tough crypto market, poor stock performance will make it harder for these banks to raise additional capital for operations (this is especially relevant in the current environment). Zooming out, we must conclude that the risks are still worth the rewards. Despite the challenges, many of these smaller banks are still profitable. Silvergate and Signature both recorded record profits in Q2. The same could be said about LHV - the bank’s net profit at the consolidated level amounted to EUR 16.9N in Q2 2022, which was EUR 2.1M more than in the previous quarter (EUR 14.9M in Q1 2022) and EUR 0.4M more than in Q2 2021.

FTX is swimming in cash and looking at a massive acquisition 🤯

Leaked 👀 Crypto exchange giant FTX doesn’t seem to be feeling winter as its YoY revenue is up 1,000%, according to reporting by CNBC.

More on this 👉 The news network claims access to internal documents that detail some interesting (& massive!) figures. Here they are:

Revenue growth from $90M in 2020 to $1.2B in 2021.
Operating income grew by 1,842.85%, from $14M to $272M.
Net income experienced a 2182.35% increase from last year's $17M to $388M.
According to CNBC, FTX had a profit margin of 27% in 2021, with $2.5B in cash by the end of the year.

✈️ THE TAKEAWAY

What does it mean? 🤔 Let’s set some context first. Although FTX has certainly ramped up its retail expansion efforts, it’s still mainly a venue for more sophisticated traders using derivatives – either futures or options. In fact, according to the leaked docs about 2/3 of their revenue came from futures trading fees, while roughly 16% came from so-called spot trading. This brings us to the key point here - a massive acquisition is approaching. And as Jeff Kauflin has correctly pointed out, there are a few reasons why FTX might do a gigantic acquisition soon. First, its US crypto exchange is very small - with just 212,000 monthly active users it falls way behind Coinbase which counts 9 million MAU. Second, FTX's average trading fees are less than 0.05% compared with 0.35% and above for Coinbase. So when you think about it, FTX doesn’t really need Celsius, Huobi, BlockFi, or Huobi - what it needs is their users. And a big influx is definitely underway. It’s only a matter of when & who will be bought.

Reread: FTX is Crypto’s Berkshire Hathaway while its CEO is the new J.P. Morgan 🎩

Can sustainable investing be the future? 🤔

The money 💵 Berlin-based start-up SageWealth has closed a pre-seed funding round worth €500,000. Investors in the seed funding were said to include Dr. Marta Ra, founder of Women in Sustainable Finance, and Marie Louise Seelig, the founder of digital debt technology firm CrossLend.

The USP 🥊 Founded in 2020, the start-up offers a mixture of digital banking and investing with a sustainability-focused bent aimed at millennial and Gen Z investors.

SageWealth offers a mixture of sustainability-themed investment options, with both growth-focused equity-based options and safety-focused bond and commodity-based options available. SageWealth claims all its investments abide by EU sustainability guidelines as defined in articles 8 and 9 of the Sustainable Finance Disclosure Regulation.

✈️ THE TAKEAWAY

Looking at the future of investing 🔮 I’ve covered retail brokerage apps quite extensively recently and one of the critical moments there was to realize that regular features are not enough anymore. Further, if users are hesitant to invest their money (because they might not have their job anymore, for example), your whole biz model becomes irrelevant. Hence, this is why it’s interesting to watch what SageWealth is building. Not only they are following the aforementioned advice (which might indicate what the future of investing could look like), but they are also vertically focused and aimed squarely at the Millenial and Gen Z demographics. That said, it will be very interesting to see whether verticalisation will extend beyond neobanking and payments.

🔎 What else I’m watching

1st Mexican FinTech on Nasdaq!🇲🇽 Mexican digital banking platform Covalto is planning to go public via a special purpose acquisition company (SPAC) merger, a move that would make it the first Mexican FinTech to trade on the United States markets 🥳 The company’s deal to list on the Nasdaq puts it at an implied $547M pro-forma enterprise value, Reuters reported. Covalto, formerly known as Credijusto, said the deal could generate as much as $177M of capital before expenses. The listing comes with $60M in the financing, half of which has already been announced, according to the report. The rest will come from LIV Capital, the parent of LIVB, which is the SPAC. Covalto could not immediately be reached for comment Thursday. We can remember that last year, Covalto — then still called Credijusto — bought Banco Finterra, a bank geared toward financial offerings for small companies and the agriculture industry. It will be very interesting to see how FinTech IPO will perform in the current climate. Watch this out!
Stripe layoffs? 🤔 Payments giant Stripe has reportedly laid off some employees who worked at tax compliance startup TaxJar, which it acquired in 2021. There were likely around 45 to 55 layoffs, and those who were let go were invited to apply to internal jobs at the company, a report from Economic Times of India says. A Stripe spokesperson declined to comment. The layoffs come as Stripe looks at winding down TaxJar’s go-to-market efforts. And it comes as TaxJar co-founder Matt Anderson quit the company in July. He was then followed by some employees in sales, marketing, and partnerships.

💸 Following the Money

Singapore-based Safeheron, a self-custody solution for small-to-medium enterprises in the Web3 space, raised $7M to bring institutional-grade self-custody to small-to-medium businesses. Software wallet MetaMask will also use Safeheron’s multi-party computation technology to provide multi-factor authentication features.
A payments and financing startup specializing in the construction industry BlueTape closed $50M in debt funding and $5M in seed capital to assist small and medium-sized businesses (SMBs) in the sector pay for building materials.
Healthcare FinTech company Nitra has raised $62M in a seed round and is launching its first product — a Visa Business card for physicians.

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

Linas's Newsletter

Discussion about this post