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Pandemic creates big audience for wage access fintechs



The pandemic has unleashed a boom in US fintech start-ups offering workers early access to their wages, even as questions mount about the impact their business models have on consumers.

So-called earned wage access programs vary in nature, but usually offer workers the option to receive some of their wages outside of the two-week pay cycle that is common in many industries.

Some companies, such as DailyPay and PayActiv, offer the service through employers, which can choose to pay some or all of the fees charged to employees.

Others, such as Dave and Earnin, make interest-free advances directly through a mobile app but ask for optional “tips” on each transaction. These tips can translate to high annual percentage rates, raising concerns that the apps could be worse for consumers than the payday lenders they aim to replace.

Even so, earned wage services have taken off as hourly workers seek quick cash during the pandemic, fuelling an explosion of apps that have either opened for business or raised new cash in the past few months.

On a recent earnings call, Visa chief executive Alfred Kelly said demand for earned wage access from supermarket, quick-serve restaurant, healthcare and hospitality workers had more than doubled in the first quarter compared to the same period last year. The company’s Visa Direct system handles transfers for DailyPay and other earned wage access providers.

For the companies, the business opportunity is a captive base of customers depositing paychecks directly into their apps, allowing them to sell additional products such as financial advice and other banking services.

But they could soon face stumbling blocks. In August of last year, the New York state financial regulator said it would lead a multistage investigation into payroll advance apps, singling out those that “appear to collect usurious or otherwise unlawful interest rates in the guise of ‘tips,’ monthly membership and/or exorbitant additional fees”.

A Biden presidency could also breathe new life into the Consumer Financial Protection Bureau, the government agency that oversees payday lending rules. Dave and Earnin, which have faced the brunt of the pressure, both maintain they are not equivalent to payday lenders.

One start-up, New York-based Clair, is aiming to avoid any regulatory grey areas. The company says it charges no fees to employees for either wage advances or routine debit account functions, breaking from competing employer-sponsored offerings.

This month, Clair announced a $4.5m round of seed funding led by Upfront Ventures, and chief executive Nico Simko said it had signed up a “very large workforce management company”.

Mr Simko said the company makes money from interchange fees from Clair-branded debit cards, along with other financial services it plans to sell. It finances the payday advances through external lines of credit.

Aditi Maliwal, a partner at Upfront who led the investment in Clair, said she was attracted to its focus on large human resource software companies that manage employee attendance records.

“The goal is that there will be plenty of users who will view Clair as their main bank account, primarily by the virtue of their pay cheque . . . coming into that account,” Ms Maliwal said.

Some fintech investors still have questions about whether any of the apps can make money as standalone businesses or are destined to be acquired — or copied — by larger companies. Other companies are moving into their territory, such as the human resources start-up Gusto, which debuted a “cashout” service in September.

Additionally, many of the apps give up a slice of revenues to so-called partner banks that manage customer deposits, an arrangement that critics argue is unsustainable.

“The gatekeepers to the financial system charge you a toll that’s just too high for it to really work,” said one fintech investor.

Quick Fire Q&A

Company name: Finix

When founded: 2015

Where based: San Francisco

CEO: Richie Serna

What do you sell, and who do you sell it to: Finix is a payments infrastructure provider for software-as-a-service companies and fintechs that facilitate payments and disbursements.

How did you get started: We combined a fintech’s engineering power with an established financial institution’s payments expertise to provide seamless payments infrastructure.

Amount of money raised so far: $96m

Valuation at latest fundraising: N/A

Major shareholders: Employees, Bain Capital Ventures, Homebrew, Inspired Capital, and Lightspeed Venture Partners.

There are lots of fintechs out there — what makes you special: We help companies monetise payments by cutting out the middleman.

Further fintech fascination

Follow the money: Ant Group is set to raise $34bn in its initial public offering, which is on track to be the biggest ever market listing, reports the Financial Times. The IPO, expected to take place on November 5, could value the company at about $313bn which is roughly equal to US bank JPMorgan Chase.

Follow the money (2): US motor insurer Root is targeting a valuation of up to $6.34bn in its forthcoming IPO, reports TechCrunch. The flotation follows the successful IPO of fellow insurtech Lemonade earlier this year. Root could raise up to $1bn from the IPO and concurrent share placings.

Crypto chronicles: PayPal is set to allow US customers to buy, sell and hold cryptocurrencies, says the Financial Times. The payments company has been granted a conditional “Bitlicense” by the New York State Department of Financial Services. FT Alphaville takes a sceptical look at the news, asking whether the fees PayPal is planning to charge will put people off.

Wirecard fallout: The Financial Times has taken a look at what Wirecard said to investors, and when, as they were awaiting the outcome of a special audit by KPMG in April. The FT also reports that Wirecard’s North American business has been bought by Syncapay, a US holding company that specialises in payments. Wirecard North America will change its name to North Lane Technologies.

AOB: Newfront, a technology driven insurance broker, has raised $100m in total and is now worth $500m, reports The Insurer; Mastercard is to launch a trial in Asia of a biometric card that uses a fingerprint to authorise transactions, according to Finextra; UK fintech PrimaryBid has raised $50m from investors including London Stock Exchange Group and Omers Ventures, says Sky News.

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Why it might be good for China if foreign investors are wary




Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.

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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms




Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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Biden puts workers ahead of consumers




US economy updates

For the past 40 years in America, competition policy has revolved around the consumer. This is in part the legacy of legal scholar Robert Bork, whose 1978 book The Antitrust Paradox held that the major goal of antitrust policy should be to promote “business efficiency”, which from the 1980s onwards came to be measured in consumer prices. These were considered the fundamental measure of consumer wellbeing, which was in turn the centre of economic wellbeing.

But things are changing. A White House executive order on competition policy, signed last month, contains some 72 discreet measures designed to stamp out anti-competitive practices across nearly every part of the US economy. But it isn’t about low prices as much as it is about higher wages.

Like the Reagan-Thatcher revolution, which took power from unions and unleashed markets and corporations, Biden’s executive order may well be remembered as a major economic turning point — this time, away from neoliberalism with its focus on consumers, and towards workers as the primary interest group in the US economy.

In some ways, this matters more than the details of particular parts of the order. Many commentators have suggested that these measures, on their own, won’t achieve much. But executive orders aren’t necessarily about the details — they are about the direction of a government. And this one takes us completely away from the Bork era by focusing on the connection between market power and wages, which no president over the past century has acknowledged so explicitly.

“When there are only a few employers in town, workers have less opportunity to bargain for a higher wage,” Biden said in his announcement of the order. It noted that, in more than 75 per cent of US industries, a smaller number of large companies now control more business than they did 20 years ago.

His solutions include everything from cutting burdensome licensing requirements across half the private sector to banning and/or limiting non-compete agreements. Firms in many industries have used such agreements to hinder top employees from working for competitors, as well as to make it tougher for employees to share wage and benefit information with each other — something that Silicon Valley has done in nefarious ways.  

This gets to the heart of the American myth that employees and employers stand on an equal footing, a falsehood that is reflected in such Orwellian labour market terms as the “right to work”. In the US this refers not to any sort of workplace equality, but rather to the ability of certain states to prevent unions from representing all workers in a given company.

But beyond the explicitly labour-related measures, the president’s order also gets to the bigger connection between not just monopoly power and prices, but corporate concentration and the labour share.

As economist Jan Eeckhout lays out in his new book The Profit Paradox, rapid technological change since the 1980s has improved business efficiency and dramatically increased corporate profitability. But it has also led to an increase in market power that is detrimental for people in work.

As his research shows, firms in the 1980s made average profits that were a tenth of payroll costs. By the mid 2000s that ratio had jumped to 30 per cent and it went as high as 43 per cent in 2012. Meanwhile, “mark-ups” in profit margins due to market power have also risen dramatically (though it can be difficult to see this in parts of the digital economy that run not on dollars but on barter transactions of personal data).

While technology can ultimately lower prices and thus benefit everyone, this “only works well if markets are competitive. That is the profit paradox,” says Eeckhout. He argues that when firms have market power, they can keep out competitors that might offer better products and services. They can also pay workers less than they can afford to, since there are fewer and fewer employers doing the hiring.

The latter issue is called monopsony power, and it is something that the White House is paying particularly close attention to.

“What’s happening to workers with the rise in [corporate] concentration, and what that means in an era without as much union power, is something that I think we need to hear more about,” says Heather Boushey, a member of the president’s Council of Economic Advisors, who spoke to the Financial Times recently about how the White House sees the country’s economic challenges. 

The key challenge, according to the Biden administration, is that of shifting the balance of power between capital and labour. This accounts for the emerging ideas on how to tackle competition policy. There are many who regard the move away from consumer interests as the focus of antitrust policy as dangerously socialist — a reflection of the Marxian contention that demand shortages are inevitable when the power of labour falls.

But one might equally look at the approach as a return to the origins of modern capitalism. As Adam Smith observed two centuries ago, “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Reprioritising it is a good thing.

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