Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your vote of confidence. If you’re reading this as a post on our site, sign up here so you can receive it directly in the future. Every week, I’ll take a look at the hottest fintech news of the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there and it’s my job to stay on top of it — and make sense of it — so you can stay in the know. Let’s goooo! — Mary Ann
Last week was a true roller-coaster ride in the world of fintech. It felt like for every funding round that I covered, I also reported on a layoff. Real estate tech companies Redfin and Compass combined let go of over 900 workers while Notarize and Wealthsimple conducted staff cuts of their own. In the contradictory world that is the startup scene, proptech HomeLight raised a $60 million extension and acquired another startup.
Meanwhile, insurtech Sana also raised $60 million and says it doubled its valuation. But the biggest news of the week — which some might say shook the fintech world — was that decacorn Brex revealed that it will no longer serve small- to medium-sized businesses (SMBs). TechCrunch dug into the news in three separate pieces, and I’m going to get into some of the background around it all here. So, don’t go anywhere.
Brex cuts off SMBs
Three months after announcing it would make a big push into software and enterprise, fintech giant Brex confirmed that it is apparently abandoning a segment it started out to serve — small- to medium-sized businesses.
Now initially there was some confusion as to what that meant. SMBs like brick-and-mortar businesses? SMBs as in startups? I talked with Brex CEO and co-founder Henrique Dubugras to get some clarity. What he told me may not have been as comforting to some of our readers as the company might have hoped.
Dubugras emphasized that Brex, which started its life focused on startups, “remains committed to startps.” When asked about the criteria in which it determined which businesses would be impacted by its move, he said that Brex chose to no longer work with any businesses that did not have some sort of “professional” funding — either venture capital, angel money or funding from an accelerator. As a result, “tens of thousands” of businesses were told their accounts would be shut down as of August 15. Dubugras admitted the set of criteria may not have been “perfect” but that it had to “have one.”
While the executive seemed appropriately contrite, the move still angered some who believe the company is leaving the customers who most need its offering in the lurch. Comments ranged from bitterness that Brex was acting without regard “for the people who built them up.” One SMB owner who was affected tweeted about his frustration with the manner in which the company handled the situation, noting that Brex left him “and other SMB owners out to dry.” Still another tweeted the communication it got from Brex: “What an inconvenience, this Brex account closure sucks. Was using it for one of our digital properties with minimal revs, guess they’re clearing out the minnows.”
Many were disappointed that it was only keeping SMBs that had some sort of funding already. One commenter to my LinkedIn post on the topic said, “Small business owners need a lending hand now in these times of uncertainty, not being ditched like this.”
He’s not wrong. “Tens of thousands” is a lot of businesses that have 2 months to figure something else out. As one person said to me, “The scale of that is really remarkable.”
But at the same time, the move maybe shouldn’t be as shocking as it was to nearly everyone I talked to on the matter — from founders of rival companies to industry observers. Here’s why. As mentioned above, in March, the company made a big deal about how it was entering the software business and focusing more on acquiring enterprise customers, like DoorDash. Also, it’s just a fact — and as Henrique himself admitted — that the needs of a small business are very different from the needs of a larger company. The onboarding, the sales, pretty much everything related to servicing that segment is very different. Also, there are rumblings that Brex simply wasn’t making enough money from working with SMBs to justify continuing to do so, with one industry insider sharing, “I think that the operational costs, the fraud costs, and the risk costs combined with heavy rewards they were giving out just made it a poor segment.”
Historically, Brex has made most of its money on interchange fees, which many would argue are low margin, so a move to a SaaS model could make sense. It would especially make more sense when the macroenvironment has shifted so much since Brex last raised and was valued at $12.3 billion. With investors now more than ever demanding revenue (and, gasp, profits) to justify high valuations, Brex may have felt it needed to focus more on growing its SaaS business. But doing so at the expense of its SMB customers just felt…wrong. And let’s also keep in mind, it’s still building out its SaaS offering.
Others have pointed out how difficult it is to be “everything to everyone,” and that this decision by Brex was a reflection of just how true that is. When I talked to Henrique, he shared that its startup clients “needed us to be more proactive with their needs.”
“They were asking us for a lot of resources that we wanted to give to them, that had to be diverted from somewhere else,” he said.
Previous employees have shared their belief that the company has lacked focus and has been going in too many different directions. In January, Brex confirmed that it had raised $300 million in a Series D-2 round that upped its valuation to $12.3 billion. Over its 5-year lifetime, it has raised $1.2 billion.
All I know is that as a journalist covering the fintech space, this type of shift in strategy from a decacorn in Brex’s position struck a lot of negative chords with a lot of people. What we all are wondering now is…will the strategy backfire or will Brex’s decision prove to be the best it could have made for the future of its business? Only time will tell.
Image Credits: Brex
Weekly News
After Apple shook up the buy now, pay later market with news that it would now be a competitor to established firms, PayPal introduced another buy now, pay later product to follow the 2020 launch of its “Pay in 4” installment program. The new offering, “PayPal Pay Monthly,” is designed to give customers a more flexible way to pay, the U.S. payments giant said. Instead of having to pay off purchases over a 6-week period as before, “Pay Monthly” users can break down the total cost into monthly payments over a 6- to 24-month period.
The housing market has taken a huge hit this year as mortgage interest rates have surged and homeowners scale back on purchases. The latest casualties in the proptech world are Redfin and Compass, which both announced layoffs last week that combined amounted to about 920 people. “I said we wouldn’t lay people off unless we had to,” said Redfin CEO Glenn Kelman. “We have to.”
Canadian fintech giant Wealthsimple, which was valued at $4 billion as of last year, said it was laying off 159 people — or about 13% of its staff. CEO and co-founder Michael Katchen addressed the move in a letter to employees, which was published as a blog post, noting that Wealthsimple’s clients “are living through a period of market uncertainty they’ve never experienced before.
Notarize, a startup that offers remote online notarization services, has let go of 110 people — or 25% of its workforce. In a statement issued last week, CEO and founder Pat Kinsel implied that being able to secure additional funding would be challenging. Read more here.
Klarna is considering raising more capital at an even lower valuation than what was reported a few weeks back, according to the Wall Street Journal, which cited people familiar with the situation. The Swedish payments giant is reportedly in discussions with investors regarding a deal that could value the company at around $15 billion. Last month, it was projected to be raising additional capital at a $30 billion valuation, down significantly from the $45 billion it was valued at last year.
Plaid announced this past week that it is opening an office in Toronto — a market it entered as its first international market in 2018 — and that it has entered into a data access agreement with the Royal Bank of Canada, which is the fifth largest bank in North America. I talked with a few executives about the news, and while I unfortunately didn’t have time to cover it in the form of a story, they shared that the agreement will bring about secure, API-based financial access for more than 14 million RBC digital clients, who will have the ability to “securely” connect to the 6,000+ apps and services on Plaid’s data network.
India has lifted business restrictions on Mastercard, nearly a year after imposing the ban, once again allowing the cards giant to add new customers in the South Asian market after it demonstrated “satisfactory compliance” with the local data storage rules, the central bank said last week. Manish Singh gives us the scoop here.
Funding and M&A
Seen on TechCrunch
PayCargo, a fintech for the freight industry, raises $130M
Able.ai exits stealth with $20M to help big lenders speed up making high-value loans
Auxilius lands $10M to help biopharmas manage financial aspects of the clinical trial process
Sana, which offers health insurance plans to SMBs, raises $60M and doubles valuation since October
Amid real estate tech industry layoffs, HomeLight raises $60M and acquires lending startup Accept.inc — “[…]Flat valuations are the new up,” the CEO says as the company increased its valuation from $1.6 billion to $1.7 billion.
Mono aims to be ‘first bankingless bank’ for Latin America’s small businesses
Seen elsewhere
Islamic investing platform Wahed secures US$50mn in funding
BNPL fintech KEO World with an SMB focus closes on $20M in funding
Well, that’s it for this week. Once again, thank you for reading — and Happy Juneteenth!! See you next time. xoxo, Mary Ann