The Banking Podcast Ep. 18: Faced with a bad market, will financial super-apps-in-the-making revert to what they’re good at?

Welcome to episode 18 of Tearsheet’s Banking Podcast. Zack Miller, Tearsheet’s editor-in-chief, and Josh Liggett, investment team principal at OurCrowd, are your hosts.

In this episode, we’ll discuss:

• How a bad market might impact fintechs: Stock prices are down massively, for both newly minted public fintechs and for those operating in the market for years. Zack posits that the rebundling trend – that had monoline operators expand into adjacent markets and products – would end and companies would return to their roots.
• Revenue potential for banks moving into BaaS: BaaS platforms are increasingly working with multiple banking partners. Fintechs continue to look for licensed banks as partners to launch banking products and services. A recent report looks at the business model and revenue potential for banks to move into fintech partnerships. Josh is suspect that the market can support a sizable number of new partner banks.
• Regulation is coming for BNPL: As consumer debt grows, the various agencies active in consumer finance are interested in providing new rules and regulations for BNPL companies. Josh feels this is necessary light shone on shadow debt markets that aren’t connected to the traditional credit reporting system.
• Crypto-backed mortgages are here and more options are on the way: Crypto mortgages can be useful for those who are crypto-rich and cash-poor and have a lot of their wealth invested in cryptocurrency. These types of loans are still very new and Bitcoin's fluctuating value makes crypto mortgages a risky option for homebuyers. Zack can’t see himself leveraging up to buy land in the metaverse. Josh thinks mortgages tied to volatile currencies is just a bad idea.

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The following excerpts were edited for clarity.

Bad markets signal a reversion to basics

Josh pokes fun at those people who thought markets would rise forever. "Wait, you're telling me that the stock market doesn't move up into the right continuously?" he said. He thinks that what's happening is healthy for markets.

Zack thinks the rebundling trend -- where a fintech starts with a monoline product and adds in adjacent products -- will revert in a down market. "I feel like when when it hits the fan, now, we're going to see those companies go back to their roots -- their core businesses -- and drop off some of that stuff that was ancillary," he said.

Josh doesn't necessarily agree. He sees an opportunity for some of the companies that have recently raised money to go shopping for distressed assets.

"People really forget there is still a lot of money in the market, from the VC and private equity side. There's so much money out there that needs to be spent because these massive funds were raised. There's still going to be fundraising, and there's still going to be acquisitions happening -- the good companies are gonna get back [on their feet]," he said.

"There's still a lot of capital in the market, and if you're a good company, if you have good unit economics, good companies are still going to thrive long-term and possibly come out better if they're able to pick up some really interesting companies in the interim."

Bank consolidation
Zack wants to talk about the number of banks in the US. A couple of guests on Zack's podcast recently have said they expect to see thousands of banks consolidate over the next few years. Cornerstone also had a research report out recently that looked at the revenue potential for banks, particularly smaller ones that are undifferentiated geographically or product wise, moving into banking as a service and becoming a partner bank to tech firms and fintech firms.

Josh isn't buying it.

"Here's the question I have for you, Zack: how many partner banks do we actually need?" he asked. "It's not one, but it's not infinity. There isn't room for thousands of these players. I don't even know if there's rooms for hundreds."

The inevitability of BNPL regulation

Josh hopes regulations will come to the market in a positive way that allows for growth and protects consumers. "To me, no regulation is a problem, and over-regulation is also a problem. It's the regulators getting involved at the right point for the right idea. For BNPL, which is like a different version of a credit card, to not have that jive with FICO with an understanding of a person's holistic financial well-being is a problem," he said.

He believes it's going to lead to defaults and people getting into a new version of credit card debt. He wants regulation to come in and help provide transparency. Indeed, the major credit bureaus have plans to track BNPL debt.

Crypto mortgages

There's been some product innovation on crypto mortgages recently, but Josh just thinks crypto mortgages are a bad idea. "Using crypto as collateral on any sort of debt product, nothing could go wrong there," he said.

Josh related that old joke that the top of the market is when your cab driver, or Uber or Lyft driver, or your barber is giving you stock tips. "To me, the bottom of the market is when you start hearing some crazy stories about the blood, people in horrible situations." For Josh, those stories are on their way in crypto — not 20% or even 50% losses, but total wipeouts where people lose everything. So, using very volatile crypto as collateral is just a bad idea from the start.

Josh and Zack agreed crypto mortgages make sense for people with a lot of wealth in crypto assets -- that's probably a good use case where a buyer doesn't need to liquidate or stake her holdings. Josh wants to see movement in the industry so that providers know whether the Bitcoin that was used as collateral is really clean from other obligations.