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Paying the sitter: where social, payments, and taxes collide

In the age of social media, a number of tech solutions have sprung up to address the Babysitting Problem; i.e., the difficulty involved in finding a trusted babysitter and securing his or her services. That tech companies would want to capitalize on childcare shouldn’t come as a shock to anyone: the global daycare market was worth $44 billion in 2011 and is expected to increase to nearly $67 billion by 2017.

Fatherly.com put together a comprehensive top 10 list of apps and services to make finding, managing, and paying babysitters easier, but the basic premise of most of these apps is that they enable parents to utilize an online community (either through Facebook Connect or a private network) to rate and share babysitters.

The fintech component of these babysitting apps is in mobile payments: most of the apps let parents pay the sitter directly through the platform. The payment processing leader of the industry is Paypal’s Braintree; of the 5 apps on the list that have payment capabilities, 3 are facilitated by Braintree — the other two use direct deposits through the app (a fresh new offering in the UK, Bubble, also uses Braintree for payments).

Banks are just entering the P2P payments scene with clearXchange, but the mobile and online payment battle for the niche industries such as babysitting and car and house sharing has already been won by Paypal. Though Paypal does have other payment competitors like Stripe and Square, the competition is far behind: Datanyze’s payment market data reveals that Paypal controls a whopping 82% of the online and mobile payment industry.

Babysitting apps fuse fintech and social media to create really simple, mobile solutions for sitters themselves as well as for parents.

However, with great fintech comes great taxibility. If the traditional cash payment model lets babysitters avoid taxes with ease, signing up as a sitter on any of these platforms makes it more difficult to avoid Uncle Sam’s tax requirements (or the Queen’s, if you’re using Bubble).

While some babysitting apps just remind sitters to file taxes, other apps are more directly involved. For instance, babysitters who use the Payment Feature on Sitter receive a 1099-K tax form generated by Braintree by January 31st of each year, and online childcare pioneer Care.com’s HomePay product bills itself as “Nanny taxes, made easy”.

With fintech and social media increasingly partnering to solve for particular industries, the question of taxes and regulation will loom ever larger. If Airbnb is turning into the Sheriff of Nottingham, the fintech-social media cocktail could turn out to be simplicity making life harder for independents.

Photo credit: Parker Knight via Visualhunt.com / CC BY

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High Five! The five fintech stories we’re following this week

5 trends we're tracking in finance

Not a great year for incumbent share prices

2016 hasn’t been kind to big bank share prices, which have plummeted by nearly half a trillion dollars since January. A number of issues are at play here – the Chinese economy, U.S. interest rates, oil prices, and yes, Brexit (more on that below). The concern is that these losses could trigger a cycle of bank executive inaction and bank employees selling their stock. 

Yes, we still need to talk about Brexit

Britain’s decision to leave the EU is still reverberating through the finance industry. The long-term impact of the Leave vote on UK finance/fintech is largely uncertain, though this has not stopped finance experts and reporters from adopting the dystopian lexicon of a young adult novel to describe Britain’s impending financial doom.

Whatever the gloomy short-term effects of the referendum, long-term the future doesn’t look so bleak: the $30b mega-merger between the London Stock Exchange and Deutsche Börse is still going ahead, and the two companies still expect to deliver cost savings and revenue synergies worth a combined $780m a year after five years.

New and improved

Thanks to the explosion of fintech, incumbents are no longer the only financial service providers in the economic pond. As a result, banks are being forced to deal with a new reality in which owning the entire value chain isn’t really such a good thing.

Some incumbents are rolling with the changes, not only by rebranding but by transforming the products they offer and the way in which they communicate with their clients. Travelex, a 40 year old foreign exchange company that realized that whatever the future of payments is, it ain’t cash, went through a massive redesign to make digital its core. Its first product, Supercard, frees its users from foreign transaction fess and unfavorable forex rates.

Stateside, national bank TCF Bank rolled out ZEO, a suite of services that partners with Western Union to provide quick and efficient access to and transfer of funds. For the unbanked, ZEO is a godsend – you don’t have to bank with TCF to use ZEO, but you still get the security of the bank and can get expert advice from a banker. 

Professional investors are tooling up

Professional investors are using new technology to make themselves relevant (and cool) once again. Point72 Asset Managements’s marketing weapon of choice is social media, and it’s using LinkedIn, Facebook, Google+, Glassdoor and soon Twitter to aggressively pursue traders.

Meanwhile, legendary hedge fund Renaissance Technology is taking on high speed traders through the patented the use of atomic clocks, which will sync orders to within a few billionths of a second. Talk about radioactive.

Alternative SMB financing solutions are becoming mainstream

The SMB online lending marketplace is heating up, with old and new players aiming for a piece of the SMB loan provision pie. On July 7th, online payment lead PayPal announced that it had provided $2 billion of funding to 90,000 SMBs globally through PayPal Working Capital – its small business finance program.

Though $2b and 90,000 SMBs might seem paltry compared to Wells Fargo’s $40b (of a 5-year $500b lending goal), these numbers show that PayPal is serious about entering the SMB loan market. What differentiates PayPal’s SMB loan model is that repayments are applied automatically as a fixed percentage of daily sales that the business owner selects in advance; thanks to this proportionate system, business owners don’t have to live in dread of their loans.

PayPal isn’t the only innovator trying to make itself heard in a space that’s becoming increasingly crowded. Credit mogul American Express will be rolling out a new online loan platform later this year, and from the release it sounds like they’re aiming to win the marketing battle with supply chain financing.

Orchard’s eagle-eye take on the online SMB/consumer loan market is that it’s an attractive and stable yield opportunity – no doubt we’ll see more incumbents jumping on this loan wagon in the near future.

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Has PayPal soured on crowdfunding?

paypal sours on crowdfunding

Does PayPal’s announcement that the company will eliminate its Purchase Protection coverage for crowdfunding payments indicate a lack of confidence in crowdfunding?

PayPal says ‘no.’ In an email exchange with Tradestreaming, PayPal said the payment company is the only platform that has customized its policy and processes to support crowdfunding, and added that the firm would continue building strategic partnerships with crowdfunding platforms “to make it even easier to offer flexible and secure payment options, so that it is simple for people with great ideas and important causes to raise money.”

But the move is the latest chapter in a historically rocky relationship between the online and mobile payments giant and the crowdfunding industry. It reverses a March, 2014 commitment to closely examine crowdfunding projects to ensure they fit legal definitions of “donation” (as opposed to “commerce”) but to continue offering buyer protection for payments made to crowdfunding sites. That program offers to refund a buyer’s money if an item purchased online doesn’t arrive, or doesn’t match the seller’s description.

The 2014 decision followed a series of clashes between PayPal and crowdfunding project owners, mainly focused on unilateral decisions by the company to freeze donations to campaigns that PayPal determined to be pre-selling merchandise instead of fundraising.

At the time, PayPal kept crowdfunding payments under the umbrella of its Purchase Protection scheme, but also added that the company would “engag[e] directly with campaign owners ‘early on’ to ensure they comply with PayPal policies and government regulations — and help bring them up to snuff if they don’t.”

(Crowdfunding) times are a changin’

“Together with the crowdfunding sites, we identify if campaigns are strictly fundraising or pre-selling merchandise,” said PayPal’s chief risk officer, Tomer Barel, said in a blog post at the time. “We enable their campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.”

Two years later, however, PayPal appears to have decided the risk associated with crowdfunding is too great to shoulder. One London-based representative for the company would not confirm that the decision represents a “lack of confidence” in crowdfunding as a source of fundraising, but at the time she stressed that the move “is consistent with the risks and uncertainties involved in contributing to crowdfunding campaigns, which do not guarantee a return for the investment made in these types of campaigns.”

At issue is the legal distinction between the categories of “donation” and “pre-sales”. In the latter case, the seller makes a clear commitment to eventually provide goods, and buyers have a reasonable expectation of receiving a refund in the event they do not receive the goods they have purchased. For “donations”, there is no such expectation, but PayPal has now decided not to address that distinction by removing crowdfunding payments from its buyer protection program altogether.

Accountability problems

In addition to legal ambiguities, there are some indications that the move was also driven by concerns about the crowdfunding industry.

Several publications, including Consumer Reports, have documented a lack of accountability among people who run crowdfunding projects, and about difficulties that donors have had in recouping their donations. In one recent example, a smart watch campaign by Central Standard Timing ended when the company declared bankruptcy, leaving over 7,600 backers with no watch and no recourse.

Also, industry observer Glenn Fleishman noted in February that the collapse of the Zano drone project resulted in a messy refund situation that was made more complicated by the fact that some customers who pre-ordered a personal drone outside of Kickstarter received their units before crowdfunding investors. The investigation also revealed that customers were able to receive refunds, while people who had backed the Kickstarter campaign had trouble receiving their money back.

In an industry that raised $34.4 billion in 2015, and could surpass total venture capital investment in 2016, even a small percent of chargebacks from crowdfunding sites would add up to a lot of money that could potentially have to be refunded.

Crowdfunding platforms moving on

Notably, the only major crowdfunding platform that will be affected by PayPal’s decision appears to be the only one that accepts payments via PayPal, Indiegogo. Some smaller platforms, including Fundrazr, also work with Paypal, but other platforms, such as Kickstarter and GoFundMe, accept payments via online payment platforms such as Stripe and WePay, but not PayPal.

GoFundMe simply says the platform “no longer uses PayPal to accept donations for campaigns,” and instead refers donors to the Stripe and WePay websites, both of which offer a series of tools designed specifically for marketplace sites, including fraud protection.

PayPal spokespeople said in response that the company would “continue building strategic partnerships with crowdfunding platforms like Indiegogo and FundRazr to make it even easier to offer flexible and secure payment options, “so that it is simple for people with great ideas and important causes to raise money.”

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Swipe for charity: How mobile apps are enabling a future of giving

mobile donation apps

Perhaps the most astounding facet of the global mobile technology market is the sheer speed with which it continues to grow. Whereas a century ago it took 38 years for radio to reach 50 million users, and later it took 14 years for television to reach the same sized audience, the mobile phone industry has reached more than 2 billion people in less than 10 years. Mobile internet use has grown from 50 million global users in 2010 to 4.4 billion today, a number that is expected to hit 6.4 billion by the end of the decade (of which 5.6 billion are expected to be smart phones and other mobile technologies).

According to the 2016 Global NGO Online Technology Report, published jointly by the Public Interest Registry and nonprofit Tech for Good organization, online donations continue to lead the philanthropy industry, with 77 percent of millennials, 66 percent of GenXers and 54 percent of Baby Boomers prefer to donate to charity online. And although the report also says that just eight percent of donors would currently prefer to use mobile donation apps, that number is certain to rise as millennial users – individuals who often have no email addresses and have no recollection of a pre-mobile era – mature and enter the workforce in the coming years.

Of course, the expansion of mobile technologies such as PayPal and microfinance loan platforms such as Kiva presents new challenges to traditional financial institutions, but they also present opportunities for individuals and non-profit organizations trying to capitalize on existing micro-finance and P2P platforms to streamline donations. As far back as 2013, mobile donations represented about a quarter of charity given in the United Kingdom, a number that is certain to have grown  Last August, Facebook introduced a Donate Now button for non-profit organizations; websites like microgiving.com provides a Kickstarter-like platform for private individuals and small organizations to raise cash from a large number of small donors.

The ability to appeal to small donors has also led a slew of philanthropic-minded entrepreneurs to focus on for-profit business models for the benefit of non-profit organizations. One, Charity Miles, is a simple mobile exercise app that uses GPS technology to track the user’s exercise, and the company makes a donation (25 cents a mile for walkers and runners, 10 cents for bikers) to a charity of the user’s choice. Donations are made by companies like Humana, Johnson & Johnson, Timex Sports and Kenneth Cole, and there are several dozen organizations to support.

For instance, Britain’s Commonpence is a donation platform using the London Oyster Card, contactless credit cards and NFC (near-field communication) smart phones to allow commuters to donate spare change left over from train and bus travel in the United Kingdom. The model is simple: Using the touch payment technology of credit cards and devices that use RFID (radio frequency identification), Commonpence will create donation panels, to be placed in Underground stations and at bus stops around the UK, advertising the charity or non-profit organization they support. Commuters can tap or swipe the panels with any supported payment method, and the the spare change that is left on their transportation cards will be donated to the advertised charity. In the initial stage, the company has created a prototype panel to benefit Prostate Cancer UK; future beneficiaries include the Leukemia and Lymphoma Research and Lifeboats organizations.

More traditional charities are also making use of technology to expand their ability to help. In Israel,  Colel Chabad, an Orthodox Jewish organization provides pre-paid debit cards to poverty-stricken families. In order to maximize effectiveness, the organization partnered with local supermarket chains and with IsraCard, the local operator of MasterCard, to create a smart card that is only valid to pay for “legitimate” purchases of food and household necessities, but not for “frivolous” items such as tobacco or alcohol.

“Our goal here is to ensure that people who have fallen into poverty will be treated with dignity, and given the tools to escape from their predicaments,” said Rabbi Mendy Blau, Israel Director of Colel Chabad.  “A credit card allows them to make their purchases without any sense of shame or being different and also gives us the proper way to channel charity and monitor that it is being used in ways that will really help the beneficiary.”

Chabad officials say a mobile app is “on the way”, but have not specified a release date as of yet.

Photo credit: OnlineTradingAcademy

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Venmo wants to power B2C payments, not just P2P

pay with venmo

Ask any late teen or twenty-something if they Venmo and the answer will likely be yes. Venmo is a preferred payments app for millennials, who use it to split rent, pay for dinner, and other activities. The company reported $2.5 billion of total payment volume (TPV) in Q4 2015 , up 174% year-over-year. But now that Venmo’s parent, Paypal, has been spun out of eBay, Venmo needs to get serious about monetization and that means penetrating business payments.

Coinciding with PayPal’s earnings cycle, Venmo just announced the launch of Pay With Venmo, a set of integration tools that enable merchants to accept Venmo payments from customers.

The new API creates a payment button that appears in 3rd party ecommerce apps, so that Venmo users don’t need to input their credit card credentials to make a purchase. For launch, Venmo went live with just 2 partners: Gametime, a last-minute ticket broker for sports and music events, and gourmet meal delivery service, Munchery.

While the company has communicated it plans on doing a wider release of Pay With Venmo, it hasn’t yet set a date to do so. That’s because it wants to take its time as it wades into B2C payments. Venmo’s success has come from its engaging user experience that makes payments social and mobile. It doesn’t want to lose that edge when it integrates into merchant sites and apps. “Right now, we’re focused on listening to user feedback on the new feature, so we can make it even more enjoyable,” a company spokesperson said.

venmo transaction growth 2015
Source: Company filings

Getting merchants to integrate Venmo shouldn’t be too difficult for the company given the merchant network Paypal has developed. Originally used as a payment platform to help eBay buyers and sellers transact with one another, Paypal claims it has over 8 million businesses that already accept Paypal. This can prove to be a strong install-base when it comes time to role out Venmo venmo moves into appsmore generally. Given Venmo’s strong userbase which is said to use the payment app multiple times weekly on average, Venmo expects Paypal merchants would be willing and interested in dipping into the mobile payment’s pool of young consumers. “The great thing about Venmo is that it is organic and doesn’t distract from the experience consumers are trying to have,” a company spokesperson explained. “By accepting Venmo, merchants will be opening their doors to millions of socially connected consumers who already love to pay friends and family with Venmo multiple times every week.” 

Last fall, Paypal told investors it would get serious about monetizing Venmo, which is free to use to send money between individuals. It was then that the parent company signaled its intentions to move Venmo into B2C payments, which has a clear revenue model attached to it. Merchants integrating Venmo will pay the same fees they pay to use Paypal.

For the time being, the parent company plans on promoting both Paypal and Venmo as two different payment options. “We see the services as true complements,” a company spokesperson said when describing both products. “This feature not only provides great value to a number of existing Venmo users by enabling them to pay seamlessly for good and services, but we’ll be able to bring our very desirable Venmo base to our PayPal merchants.”

Photo credit: dpstyles™ via Visual hunt / CC BY

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In today’s market, is everyone an online lender?

hedgeable podcast

How do you compete when everyone’s an online lender?

The interest surrounding online lending has seen hundreds of millions billions of dollars (debt and equity) being poured into the space. In fact, the amount of money raised by US online lending startups through Q3 2015 was greater than all of 2014. Most of this capital has gone to pureplay startups — like $275M to Earnest, for example) to build out their technology stacks. Marketplace lenders have raised huge amounts of capital — from both the private and public markets — to attempt to get a foothold in the massive lending market. Online balance sheet lenders are participating heavily here, as well.

But that’s not all that’s happening. Ecommerce firms, without a traditional focus on finance, are getting into the action. PayPal just announced it had surpassed $1 billion in working capital it extended to its merchants. Amazon is expanding its lending program to sellers in multiple countries around the world. Chinese ecommerce sites and social networks and now, with Baidu getting into the game, a search engine, are providing financial services. And there are smart investors like Blue Elephant’s Brian Weinstein providing capital to get access to these new channels of finance.

So what does the market look like when everyone turns into an online lender?

 

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Banks being disrupted…by search engines?

banks being disrupted by search engine

Traditional banks are finding out new competition lurks everywhere.

Pureplay startups like marketplace lenders, Lending Club and Prosper are originating billions of dollars of loans every quarter. Though volumes are small compared to total SMB outstanding loans (which in 2013 stood at $585 billion), some banks are turning to the marketplace lenders to buy loans, opting to partner instead of compete.

This move towards alternative lending, core to banking services, isn’t just a US phenomenon. Funding Circle, another leader among the current class of startup online lenders, has global aspirations.

Funding Circle’s co-founder, Sam Hodges recently explained to  Tradestreaming:

Our vision for Funding Circle is as a global lending exchange, where business from all over the world come to find finance from an army of investors, big and small. Small businesses are underserved in most of parts of the world, and we believe our marketplace model can help millions of businesses and investors to get a better deal. At the moment, we are focusing all of our energy on building a successful business here in the UK, USA and Europe.

There are high hopes for marketplace lending. Some investors, like Foundation Capital’s Charles Moldow, are betting on the market, between cannibalization and traditional banks moving into marketplace lending themselves, can grow to be a trillion dollars.

From banks to ecommerce platform

It’s not just marketplace lenders taking aim at banks. Traditional ecommerce players want in, too. Amazon is offering loans to handpicked sellers on goods on its ecommerce platform.

Like marketplace lending, ecommerce firms entering financial services isnt’ just happening in the US: PayPal’s Working Capital loans for small businesses has lent more than $1 billion to over 60,000 small businesses in the U.S., U.K. and Australia. Alibaba, the giant Chinese ecommerce platform, launched a money market fund for sellers to store their working capital. Within just 10 months, the fund, called Yu’e Bao had more than $90 billion in short term capital. That’s money that used to be kept in banks.

Search engines becoming lenders

On the heels of Alibaba’s success in money markets, Chinese search engine Baidu appears ready to launch its own banking solution. Looking to avoid some of the regulatory commotion around Alibaba’s own financial service offering, Baidu intends to partner with Citic, the 7th largest Chinese bank with 600 physical locations.

While Google got out of the direct lending business to its advertisers, it is now running a pilot with Lending Club. The marketplace lender is offering advertisers on Google a loan to fund their AdWords campaigns.

The nature of banking is changing and therefore, the players leading the charge are rearranging themselves. [x_pullquote cite=”TechCrunch” type=”right”]This year, over $11 billion has been invested in financial technology services companies. That’s up over $5 billion from the previous year, and the highest amount invested into financial services technology companies in the past five years[/x_pullquote]Pureplay lenders are filling an important role and ecommerce platforms have found a way to offer financing to some of their best customers. As this plays out, there are more companies popping up to help banks compete. Firms like LendKey provide banks with the tools, technology, and process optimization employed by nimble tech startups. More companies keep launching to help make the banking sector more competitive to the demands placed on them by consumers who are demanding the same speed, transparency, and service commonplace in other industries disrupted by technology.

This opportunity hasn’t been lost on investors, who are pouring money into alternative financing businesses. Lending Club and OnDeck both had well-received IPOs that gave the companies billion dollar marketcaps.

In 2015, there’s been hundreds of millions of dollars invested into alternative lenders. Just this week, alt lender Earnest announced a round of $275 million (equity and debt).

 

Regulation and branding will assure that banks aren’t going away but it’s getting more complicated to compete in core banking services. Direct competitors are emerging to challenge banks head on while others, like ecommerce players, are indirectly competing indirectly with them. Through general growth, partnerships, and some disruption, the banking industry is quickly evolving.

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