Prison payments: An old system incarcerating financial choice

Earlier this month, J.P.Morgan was forced to pay over $400,000 to former prisoners for charging high fees on prison-issued debit cards. The suit and payout shined some light on the shady payments world that prisoners and their families are forced to deal with daily. As the financial industry experiences a renaissance of growing transparency and lower fees that comes with more competition, the captive market consisting of roughly 2.3 million U.S. prisoners has seen its rates get worse with technological advances.

The JPM case had to do with release debit cards, stored value cards issued to prisoners when they’re discharged, loaded with the cash they brought with them into jail. Digitizing prisoner money may stymie theft, but ends up being complicated and expensive when used in practice. Regarding JPM, ex-convicts were charged $10 for withdrawals at teller windows and $2 non-network ATM fees

This isn’t the only release debit card company facing a lawsuit. The Human Rights Defense Center, a 501(c)(3) that advocates human rights for U.S. prisoners, is currently litigating a class action lawsuit against Numi, another release debit card provider with high fees.

The leader of the case is Danica Brown, who was arrested protesting the shooting death of Michael Brown, and experienced Numi’s high fees in the brief time she was held. After being moved from a local police station to a justice center, Brown found herself stranded at 2:30 A.M. without her wallet, cellphone or keys — just 30 bucks on a prepaid debit card. Brown was eventually acquitted of all charges, but the Numi transaction history reports she paid 22% of her funds to fees.

Alex Friedmann, associate director of HRDC, says the issue with Numi is that inmates are forced to use debit cards, allowing service providers to charge whatever they want.

“It’s like going to the teller at the bank and asking for $100, but the teller says you need to pay $10 to get your hundred,” said Friedmann. “You would normally say ‘you’re out of your mind, I’m going to a different bank.’ But in this case, you can’t go to a different bank.”

Fees for prisoner financial and communication services aren’t exclusive to release debit cards. In the digital age, private companies have entered into prisons and profited by providing financial and communication services to prisoners. But the private companies aren’t the only ones who profit. Prisons take a commission on most services provided in jails. Commissions then need to be factored into pricing, leading to rates that are higher than normal.

The HRDC and mainstream media sources have done a good job revealing the exorbitant fees that plague prisoners and their families. It’s not uncommon for a prisoner to pay an interstate phone rate of $1.15 a minute with a 48 percent commission kickbacked to prisons.

JPay, the 800 pound gorilla of prison money transfers, exemplifies the consequences of for profit prisons. JPay facilitates money transfers into most state prisons to be used for things like commissary items. On transactions between $20 and $40, families of prisoners have to pay between 17 and 39 percent fees for online and phone transfers, netting prisons a $0.50 commission on each transfer.

According to Friedmann, prisoners’ families usually don’t have the financial ability to send larger transfers to take advantage of a sliding fee schedule and end up transferring $20 to $40 at a time.

“Prisoners’ families tend to be somewhat impoverished, and can’t send a bunch of money at a time,” he said. “They have to break fund transfers up into smaller amounts when available, and those smaller amounts incur a larger percentage fee.”

JPay does offer free transfer services through money orders from Western Union or MoneyGram. Although the firm claims funds are transferred quickly, the HRDC has evidence of the opposite. In 2014, the HRDC sent eight checks to various prisoners. It took between 8 and 18 days for cash to be received, significantly longer than the seven days JPay claims it takes to process money orders.

Although much attention has been given to the high fees that prisoners and their families deal with, fees aren’t the real issue, just symptoms of a systemic illness. Companies like JPay and Numi fit the bill of fintech upstart; they took a market that was large and archaic, utilized technological advances, and created a business out of nothing.

But really they’re just putting lipstick on a pig, disguising old school business practices as fintech upstarts with catchy marketing slogans and putting a bunch of lower case e’s in front of their products. For customers to see the real changes that has come with the digital age, markets need competition. The lack of competition stifles innovation and leads to what we have in prisons today: An old system masquerading as innovative fintech.

And JPay isn’t even the most egregious of violators. At least they had to win bids with state prisons for their business. On the federal level, Bank of America has an agreement with the U.S. Treasury to provide financial services to prison inmates. J.P.Morgan provides release debit cards to the federal system. The deal had no bid process and has been amended 22 times since it was signed in 2000.

Financial details are vague, as both JPM and BofA have declined to release their fee schedules. The only document available is a redacted contract between the Department of Treasury and BofA. Some reports put the minimum annual payout of $18 million for BofA.

$50 gets you $100 that the first deal put together between the U.S. Treasury and BofA took place at an upscale restaurant in Manhattan. The lack of a selection process other than ‘Hey, our granddads went to college together, so I might as well throw $18 million your way’ is everything that the new world of finance is trying to change.

While monopoly contracts and high fees may upset people, capitalism is still our system of choice. The founding beliefs of ‘Murica still pulse through our veins: baseball, apple pie, and the idea that if you can figure out a niche to create a new service, you can charge whatever the hell you want. Free markets, laissez faire, and the invisible hand of the marketplace will always be preferred to increased regulation.

But regulation is there for situations like prisons, to protect customers who can’t protect themselves from price gouging and high fees associated with captive markets, where monopolies need to be broken and allow fintech innovators to come in and do what they do best: give new options to under-optioned markets.

Phone companies are the farthest ahead in terms of reform. The Federal Communications Commission put into effect caps on phone rates in prisons last year, and after a year long legal battle that included counter suits and stays, finalized new rate caps were issued earlier this month.

Regulating and reforming the prison payment system is a complex equation with multiple variables. Taking commissions straight out of prisons might be an answer, but the ramifications of the financial loss to the system are difficult to predict. Without these streams of revenues, prisons could end up increasing margins on other items, like commissary, to make up for the loss of commission fees.

According to Friedmann, regulation is the only option out of the monopoly contracts that exist in prisons. The issue that organizations like the HRDC run into is that governmental bodies are the same people benefiting from monopoly contracts, making the battle even tougher. Lobbying for improved financial conditions for prisoners is also a tough sell, because the issue just isn’t on the radar screen of most decision makers.

“Most federal officials that enter into monopoly contracts, or lawmakers that restrict what goes on in prisons don’t care much about the life and well being of prisoners. That’s the reality of the situation,” concluded Friedmann.

Chase Pay lands deal with Shell, access to 20 million daily customers

Chase Pay and Shell partnership

What happens when the largest fuel retailer in the US does a deal with the largest credit card issuer? It means you’ll be able to use Chase Pay to buy your coconut water next time you fill up at Shell.

Chase recently announced it had signed a multi-year agreement with Shell to accept Chase Pay at stations across the U.S. Chase credit and debit cardholders can use Chase Pay, JPMorgan’s digital wallet product, to pay at the pump as well as inside convenience stores, online and within an app.

Competing in payments

Chase’s corporate parent, JPMorgan is one of the largest payments companies in the world across all forms of payment, including credit and debit cards, merchant payments, and wire transfers. The bank’s CEO, Jamie Dimon, has famously said that he expects to win in payments and adding distribution into Shell’s 20 million daily customers is a big step forward for Chase Pay.

Dimon has publicly commented that his firm’s investments in merchant payment technology, which include Chase Paymentech and ChaseNet, should pay off “handsomely”, while the outcome of Chase Pay, which includes P2P functionality, was less certain.

“But we think that the investment will be worth it and that it will help drive more merchants wanting to do business with us and more customers wanting to open checking accounts with us and use our credit cards, ” he wrote in his firm’s 2015 letter to shareholders.

Securing distribution via merchants

Building out Chase Pay requires a delicate seesawing between supply and demand. It’s a classic chicken-and-egg problem that marketplaces must contend with: consumers gravitate to payment tools if they’re accepted widely and merchants typically wait to see some traction from the payment provider before signing up. JPMorgan is inking broad distribution deals like this one with Shell and another with Starbucks to help Chase Pay adoption.

“We recognize consumers are looking to mobile solutions for everyday needs, including shopping, travel, restaurant reservations and more,” said Craig Schneider, Shell GM and Vice President of Retail Marketing North America. “Adding Chase Pay to the multiple payment methods Shell accepts will deliver a simplified, differentiated and personalized customer experience while driving loyalty.”

Distribution deals are necessary (but not sufficient) to help get users on new payment platforms. The lack of organic demand for new payment platforms has set off land grab, keeping business development professionals very busy over the next few years. On one side of the marketplace, broad technology firms, including Google, Apple and Samsung, and banks themselves, including Chase, Capital One, and soon Wells Fargo, are battling over distribution deals for their digital wallets. On the other side, large retailers like Walmart and Starbucks have launched their own loyalty and payments tools.

Using p2p to scale up

Another way for consumer payments technology to wage battle on marketplace dynamics is by propagating virally. To that end, Chase Pay can be used to pay other users, whether they bank at JPM or not. Using this new product, QuickPay, JPMorgan customers can send payments directly to one another and access them immediately from an ATM.

“Consumers expect immediate action in our real-time world,” said Barry Sommers, CEO of Consumer Banking at Chase. “That’s why we’re making this faster service available for our customers.”

The interbank hookups come via the clearXchange network, a consortium of 6 banks representing over 60% of the U.S. digital banking population. The group was acquired by Early Warning, a fraud protection and risk management company that shares critical data between 2300 financial institutions. Early Warning, itself, is owned in part by seven of the largest banks in the U.S. JPMorgan Chase joins firms like Wells Fargo and Capital One which, as part of the network, enable their customers to transact directly and immediately to their bank accounts.

Chase customers sent $20 billion in person-to- person transactions through Chase’s P2P tool, QuickPay last year. Chase Pay has a distinct advantage: its sheer size. Chase customers have more than 90 million consumer credit and debit card accounts, and nearly 24 million actively use the Chase Mobile app.

Add more A-list retailers and Jamie Dimon might very well get his winning way.


Top 10 things JPM’s Jamie Dimon said about fintech

When it comes to fintech, the CEO and Chairman of the US’s largest bank by assets is very vocal. JPMorgan’s Jamie Dimon frequently hits the road to visit startups in Silicon Valley, he’s hitting the podcast circuits to talk fintech, and he dedicates a lot of ink in his firm’s yearly investor communications to discussing the future of finance.

Dimon’s always happy to talk about fintech and he’s outspokenly encouraging and critical of the industy.

In Dimon’s world, fintech isn’t really anything new. During his banking career, technology has always played a major role in creating new products, reducing costs, and providing a better consumer experience. But as CEO, it’s his job to understand exactly what advantages fintech is bringing to the financial ecosystem and then partner, build, or buy his way to bring these new technology to his current and future clients.

Fintech, Silicon Valley, and Incumbent Banks

Kara Swisher does a good job getting Dimon to open up on her Jamie Dimon’s interview on Recode Decode , though when you listen to the audio, he tries hard to stick to his talking points. Dimon isn’t in the Valley to mess shit up; instead, he’s there to make peace, to identify promising technology, and to partner. Sure, fintech’s a threat for incumbent financial institutions but in Dimon’s world, everyone can find a way to work together.

On traveling to tech hubs like Silicon Valley:

  • “I come [to Silicon Valley] all the time and so does much of our management. We use these trips to learn about what’s keep our people a little bit scared, to make sure we learn how to use things things to better serve our clients.”

On how fintech isn’t really new:

  • “I don’t buy that fintech is completely different. Technology has been changing the world since we invented agriculture. My whole business career technology has been a critical part of what a bank does. Fintech isn’t just about good technology but about solving business pain points.”

On how fintech threatens (or doesn’t) his business

  • “I’m not nervous about fintech changing the way people are changing their banking habits but I think, in a capitalist world, it’s good that your business model gets attacked. I applaud that. That’s why we’re all here in Silicon Valley. Some of our businesses will be hard to attack — others will be easier to attack. Like payments. There are weaknesses in these systems that were built a long time ago.”

On JPM’s commitment to payments

  • “I expect to win in payments.”

When asked about how financial technology is replacing real jobs:

  • “There are downsides to flying — people die every now and then. Do you want to stop all air flights?”

Bloomberg’s John Micklethwait’s feature interview with Dimon

Jamie Dimon Bloomberg interview
Cover artwork: Kelsey Henderson

Earlier in 2016, John Micklethwait saw with Jamie Dimon to conduct what turned out to be a pretty wide-ranging interview. The Bloomberg reporter questions the JPM CEO on his firm’s role in the financial crisis, how the banking sector has (or hasn’t) rebounded afterwards, fintech’s role in the financial ecosystem, and how banking has evolved through Dimon’s 30 year career.

When asked if he thought banks were more moral than markets:

  • “A bank is a relationship. I can’t desert you and expect to have a strong relationship afterward. If I told someone, “I know you’ve been buying milk from me and you need milk to survive. But the price is no longer $2 a gallon. It’s going to be $40 a gallon. I’m going to bankrupt you.” What do you guys think of me? You would hate us. I mean, obviously some of these banks did bad stuff. Yet even in the depths of the crisis, banks didn’t materially change the prices for clients.”

On the mundane world of lending and why fintech does it faster:

  • “Let’s look at lending, where they’re using big data for the credit side. And it’s just credit data enhanced, by the way, which we do, too. It’s nothing mystical. But they’re very good at reducing the pain points. They can underwrite it quicker using—I’m just going to call it big data, for lack of a better term: “Why does it take two weeks? Why can’t you do it in 15 minutes?”

On how he’s positioning JPM to speed up the lending process:

  • “For example, they might lend to one of our customers who’s got a $200,000 JPMorgan Chase loan, and this person wants to get another $20,000 for a new truck or a piece of equipment. And what does he do? He goes with them, because he gets it in 15 minutes. If he goes back to the bank, he may have to go through this whole big long process for that $20,000. Can we do something like that? Of course we can. I’ve asked our people, “Why don’t we just put a revolver on top of our basic loan?” Make it easier for the client.”

An investor’s perspective: Fintech and JPMorgan

In his yearly missive to investors, fintech discussion has become kind of a regular column. It’s within his periodic communication to investors [.pdf] that Jamie Dimon is at his most comfortable discussing the technological challenge to banking. It’s also where he’s at his most vulnerable, as the NYT’s Ron Lieber recently took the bank CEO to task for some seemingly disparaging comments he made regarding fintech startups (comments that Dimon said were taken out of context).

On banking’s general appetite for new technologies:

  • “If you look at the banking business over decades, it has always been a huge user of new technologies. This has been going on my entire career, though it does appear to be accelerating and coming at us from many different angles.”

On how some fintech startups are selling consumer data way after a user stops using the technology:

  • “Many third parties sell or trade information in a way customers may not understand, and the third parties, quite often, are doing it for their own economic benefit — not for the customer’s benefit.”

Photo credit: Fortune Live Media via VisualHunt / CC BY-ND

Is fintech really headed for a downturn?

corporate real estate financing big data

Is financial technology really deserving of the excitement surrounding it?

The easy answer is a clear “yes.” In terms of venture investment, the sector has exploded over the past four years, growing from $3 billion in 2012 to more than $19 billion in 2015 and $5.3 billion during Q1 2016 alone, a 67 percent increase over the same period last year.

As a result, the fintech world appears to be on a singular trajectory: ascendant. Roboadvisors are now estimated to manage about $19 billion in the United States alone. Marketplace lending is expected to reach $122 billion in originations by the year 2020, with some analysts predicting the sector could his $1 trillion by 2025. For at least the past 18 months, the news media has been flooded with stories and analysis about fintech startups “transforming” the finance industry.

Wall Street is paying attention

Even more significantly, finance industry incumbents like JP Morgan, Citi and Goldman Sachs have clearly taken notice, and have set technology on their radars: In March, JP Morgan Chase & Co. announced the establishment of an enormous, 125,000 square foot fintech hub on Manhattan’s West Side, and is expected to spend $3 billion on technology investments this year. Every major bank is working hard to study the use of blockchain technology. Goldman Sachs says it employs more engineers than Facebook. And the list goes on.

In short, there is plenty of reason to be optimistic for fintech professionals to feel confident about 2016 and the future.

Apple leads tech down

And yet, there are indications that the coming period could herald sobering times for the new darling of the technology world. Apple’s poor Q1, which marked the end of the company’s 13-year run of quarterly revenue growth, was not directly related to the finance world. But the company’s mobile payments platform Apple Pay has yet to offer meaningful revenue, and neither Apple Pay nor its android cousin, Samsung Pay, have had any real impact on the spending economy.

Furthrmore, the first quarter of the year saw a sharp drop in mergers and acquisitions over Q4 2015. And Tradestreaming has reported several times in recent weeks about a slowdown for marketplace lenders.

In addition, anecdotal evidence suggests that many working professionals have yet to connect to the world of technological finance. Asked whether new retirement savings tools meant anything to them, one Seattle, Washington couple told me they are not familiar with any online financial services and felt no need to move in that direction.

“It doesn’t really mean much to me,” said 44-year-old Becky Blixt. “My partner and I both have 401k plans with no fees.  I’m not familiar with web services like NerdWallet but we don’t need to use an app like that because we have most of our investments with Fidelity. Because we have over a certain amount, we have free financial advising services with them. We meet with a guy twice a year and talk retirement and investments. So the online stuff isn’t really relevant for us.”

Wall Street not fully listening

And then there is the reaction from finance sector incuments. One individual active on Wall Street said that for whatever lip service JP Morgan, Goldman Sachs and others may pay to fintech upstarts, in reality those reactions are little more than media statements intended for public consumption, but with little intent of altering their core businesses.

Even worse, some analysts say Wall Street is openly disparaging of the startup industry.

“Innovation in US fintech is not rewarded. It is considered suspect,” writes John Biggs, the East Coast Editor of TechCrunch and former editor of Gizmodo in Why US fintech is a joke. “Sure, there are folks out there trying mightily to change the way things work, but they are not being rewarded. Sit down and talk with some old-guard financial types and you will see that improvements to their creaking ships are unwanted and seen as too difficult or frightening to implement.

“Amazing ideas – ideas that will pull the banking industry out of the coming doldrums – are suspect,” Biggs concludes.

The numbers indicate they are correct: For example, take just one area, roboadvisory. The $19 billion in roboadvisor AUM is a tiny fraction of the $1.7 trillion currently under management by JP Morgan alone. Even if the industry fulfills expectations to expand to $1 trillion in the next decade, it will remain a poor cousin in comparison to the Wall Street. From that perspective, one could argue that there is little reason for JP Morgan or Goldman Sachs management to lose sleep over the challenges presented by Betterment or Wealthfront.

Quickly growing up

None of which indicates, of course, the the fintech sector is in trouble. Rather, the current trends in the industry are more likely explained by the ancient proverb “all beginnings are hard”. Yes, the fintech industry has experienced expansive growth in recent years, but at the end of the day, the sector is still in its infancy, or at least in early childhood. PayPal, one of the earliest successful fintechs, was founded in 1998, less than 20 years ago. In contrast, the genesis of the London Stock Exchange dates back more than 300 years to 1698, when John Castaing first issued a detailed list of market prices called “The Course of The Exchange and Other Things”.

The coming period, then, will likely be a time of growth and maturity for the fintech industry. It remains to be seen how banks, asset management firms, credit card companies and other finance professions will respond to the challenges presented by fintech startups.

But it is clear that they will respond in some fashion, either by outsourcing services to technology companies, purchasing or licensing new technologies and services, or developing in-house solutions to serve customers and maximize profits. That process could mean a short term search for the right path forward, but in the long-term, it should lead to a more mature industry with the ability to maximize profits as well as to serve an ever-broadening clientele.

Photo credit: CJS*64 “Man with a camera” via VisualHunt / CC BY-ND

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

  1. How Payoff is shifting the conversation about consumer debt to financial wellness (Tradestreaming): Payoff seems to be genuinely interested in helping its clients find their way out of debt and start saving. Pretty weird for a company that extends credit.
  2. Banks should take fintech seriously, not panic, but make a gameplan (McKinsey): A new McKinsey report hit the wires this week – it’s a sanguine analysis meant for finance professionals. “Specifically, this means that banks should be less preoccupied with individual fintech attackers and more focused on what these attackers represent—and build or buy the capabilities that matter for a digital future.” Worth a read.
  3. J.P. Morgan acquires nearly $1 billion worth of LendingClub loans — Sources (Nasdaq): J.P. Morgan has agreed to acquire nearly $1 billion worth of personal loans arranged by LendingClub, according to people familiar.
  4. Why one of the best fintech investors, Foundation Capital’s Charles Moldow, invests only in B2C (Tradestreaming): Foundation has one of the strongest fintech portfolios and General Partner, Charles Moldow (LendingClub, OnDeck Capital, Envestnet, Motif Investing) explains why he sees so much more room to run in disrupting finance.
  5. Quicken Loans getting into personal loans (Detroit Free Press): Quicken this week launched RocketLoans, an online service offering cash loans of $2,000 to $35,000 to prospective borrowers with good credit scores and financial histories. The loans have fixed terms of three to five years and carry interest rates ranging from just over 5% to the low or mid-teens.

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletter .[/alert]

1. Goldman, JPMorgan Seen as Fintech Winners While AmEx Suffers (Bloomberg)
Goldman Sachs and JPMorgan will probably benefit most from the coming wave of financial technology disruption, rather than being supplanted by startups driving the change, according to a new survey.

2. 2015 Automated Platform Performance Review: Betterment vs. Wealthfront (Meb Faber)
Meb Faber with some good analysis on how Betterment performed this year vs. Wealthfront (and where Schwab and Vanguard come in). Hint: roboadvisors are neither “safe” nor are they one-size-fits-all.

3. Inside J.P. Morgan’s Deal With On Deck Capital (WSJ)
As part of the deal, OnDeck won’t put up any capital and will get fees to originate and service loans for J.P. Morgan, many with a value up to $250,000, previously considered too small to move the needle at the big bank. OnDeck also can use data it gleans from the partnership to improve its lending models. “We think it’s a watershed partnership,” said OnDeck CEO Noah Breslow.

4. Microinsurance Is The Answer To The Insurance Industry (TechCrunch)
In the wake of Lemonade’s giant seed round, the tech industry is buzzing thinking about the potential of disrupting insurance. Whether it’s peer to peer models or microinsurance, Silicon Valley is coming.

5. Nasdaq Linq Enables First-Ever Private Securities Issuance Documented With Blockchain Technology (Nasdaq)
Transaction by Marks Significant ‘Proof of Concept’ and Major Step Forward in Use of Blockchain. Blockchain Holds Potential for 99%.

JPMorgan: King of the online lending ball names his queen, launching OnDeck stock

JPMorgan partners with OnDeck

Online lenders have an issue (especially the publicly traded ones, like OnDeck Capital ($ONDK) and Lending Club ($LC)). They may have come from nowhere over the past couple of years to be presently underwriting billions of dollars of loans a year. But this growth comes at a price, as borrower acquisition is proving to be quite expensive.

A recent WSJ article described how the marketplace lenders (in this case, Lending Club and Prosper) are resorting to old-school direct marketing techniques, sending millions of monthly offers via the postal service, to feed their appetite for loan acquisition. Efi Pylarinou conducted an interesting analysis this week that demonstrated that for the short term, at least, customer acquisition costs (CAC) for the online lenders should outstrip their margins.

Partnerships between bank and online lender are win-win

So, to grow profitably, the publicly traded online lenders (private ones aren’t subject to this level of transparency) must find a more efficient way to onboard new borrowers at scale. One immediate way to do this is via partnerships. Large institutions who own the relationships with individuals (personal loans) or SMBs (business loans) but are not yet in the online lending space are looking to make build/buy decisions right now. In rolling out their own online lending offerings, these incumbent financial institutions have to build their own platforms or partner with existing online lenders and leverage their technology platforms.

Partnerships like these have the potential to significantly benefit both incumbent and startup. A partnership enables a large bank to launch quicker, leveraging the operations and technologies of a partner. The younger online lender brings its technology to the party and gets a partner who is going to take care of borrower acquisition — the partner already owns the relationships.

OnDeck stock jumps on JPMorgan partnership
OnDeck stock jumps on JPMorgan partnership

JPMorgan is the crown jewel of these types of partnerships. It’s a massive financial institution, owns retail and business banking relationships and doesn’t have its own online lending platform in the market, yet. So, just a slight mention of a potential partnership yesterday by the bank’s CEO, Jamie Dimon, at a Washington panel was enough to send OnDeck’s stock tanking almost 10% on the day. It was assumed at the time that the partnership would go to Lending Club as there was some speculation JPM would buy LC at some point. But that never materialized — so when it came to a potential partnership, speculation was rife that it would go to LC, sending LC stock up nearly 6% on the day.

But a funny thing happened later last night: JPMorgan announced it was partnering up with OnDeck instead. Today, ONDK soared +30% on the back of the news, picking up an upgrade and price target hikes along the way. According to the WSJ, here’s the early look of the partnership:

Many details of the arrangement still need to be worked out, but the loans will be marketed under the brand of J.P. Morgan Chase and reside on the bank’s balance sheet, according to a person familiar with the matter. That would make OnDeck more of a technology vendor for the bank than a lending partner.

Of course, this is big news for the upstart online lender and there’s still longer-term risk that JPM uses the partnership to enter the market while it continues to build its own platform. But for the time being, JPMorgan has indeed chosen his queen.

Photo credit: mark sebastian / VisualHunt / CC BY-SA

JP Morgan, Motif Investing open up IPO investing

motif investing and jp morgan launch ipo trading

Since its launch, Motif Investing has championed creating low-cost, high-value portfolio creation tools for individual investors.

Founder and CEO of Motif, Hardeep Walia joined me on the Tradestreaming Podcast early in the company’s maturation cycle to talk about how Motif fits into the historical narrative of opening up investing tools and tech to individual investors:

So, what we do is we create indexes around these ideas and we focus on making investing very intuitive. It is as simple as, “I see something, an idea that I want. I want to put money to work and I don’t necessarily want to spend tons of time messing around with research in stocks, because I believe the index will do its job.” Then, we have very sophisticated investors who say, “You know what, just give me a starting point for a portfolio of stocks that actually act on these ideas,” and that’s what Motif is.

Motif announced today that it would take another step to opening up a traditionally opaque part of the investing world: IPOs. As part of a partnership with JP Morgan, the online broker is offering everyone access to IPO shares with as little as a $250 investment.

The new partnership “will broaden access to IPOs to more individual investors,” said Michael Millman, Co-Head of Americas Equity Capital Markets and Head of Technology Investment Banking at J.P. Morgan, in a statement. “Motif’s innovative and easy to use platform is a cutting-edge, differentiated way for issuers to reach investors.” J.P. Morgan will be encouraging its IPO companies to participate in the Motif program. Source

Motif appears serious in bringing its style of investing to the IPO market and it looks like JP Morgan may be the first of bulge bracket firms that bring offerings to the startup online broker.

IPO markets: Profitable, broken, and in need of fixing

IPOs have traditionally been a black box of the brokerage industry. “Book building” for IPOs, the process through which brokers went out to their clients to match supply and demand for shares, was completely opaque. Because IPO shares frequently pop after they list for trading, shares of top offerings were frequently reserved for the best customers of brokerage firms (high net worths and hedge funds).

In sought-after IPOs, it was very hard for general investors to get their hands on them. Because of such scarcity, investors requested larger than appropriate allocations for their portfolios in the hope that they’d end up with a better size allocation when the brokerage firms cut back their customers back . Because of this dynamic, in lackluster public offerings, investors frequently got “stuffed” with more shares than they really wanted.

The IPO process is one of the last holdouts in the face of digital disruption and that’s because IPOs play an important role in the brokerage business — they were a way for the brokerage firms to reward their best customers. Investment banks frequently underprice shares on their floats, providing quick profits to buyers of shares. The other side of this coin is that companies going public leave money on the table because of this underpricing. Investment banks come out looking good and brokerage firms are lauded by their customers.

Historically, there have been various attempts at disrupting the IPO process, including:


[x_icon_list_item type=”dollar”]Dutch auctions: Investment bank, Hambrecht pioneered a form of dutch auction for IPOs, something it calls OpenIPO. In this model, the investment bank collects bids from all interested investors, big and small, and groups them by how much each is willing to pay for a share. Its bankers then count down from the top bid until they reach the highest price at which the selling company could sell all of the shares it wants to offer. The company can choose that price or, for various reasons, a lower one. Hambrecht then sells at the chosen price all the shares that were bid at that price or higher. One of the most famous IPOs to implement the OpenIPO process was Google, but few companies have really followed suit.[/x_icon_list_item]

[x_icon_list_item type=”dollar”]Equity crowdfunding platforms: With various new regulation in place (2012’s JOBS Act), the market has been kind of waiting to see equity crowdfunding platforms (like AngelList, CircleUp, and OurCrowd have popularized) perform the role of taking a private company into the public realm. It hasn’t quite happened, as regulation still relegates participation on crowdfunding platforms to accredited investors. It will take some more time before the general public will get a chance to transact in private companies.[/x_icon_list_item]

[x_icon_list_item type=”dollar”]Direct to consumer: There are a few firms like Cutting Edge Capital that working on Direct Public Offerings, a takeoff of the IPO but simpler and more accessible to general companies looking to list on a local exchange. Paperwork, filings are all easier to get going and it enables a company to market its securities to a local audience. Other firms, like Loyal3 , are creating investment platforms that make ease the IPO marketing for consumer brands and help them provide shares to loyal customers. Companies like GoPro and GoDaddy have used Loyal3 to distribute shares to their customers.[/x_icon_list_item]



Motif Investing’s approach is to create a personalized investing experience around individual investors. Individual investors can create thematic portfolios (called, motifs) and trade them with one click for a low fixed fee. Motif customers can share and implement company-built motifs or use those shared by others on the platform.

Who knows, maybe an IPO Motif is in the works.

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