Category Archives: Fintech

FTX Downfall

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“It’s only when the tide goes out that you learn who has been swimming naked.” Warren Buffett

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. Federal Reserve Chairman Jerome Powell aggressive interest rate hikes to counter inflation exposed all sorts of companies that were relying on cheap capital to either grow or survive.

In FTX case, a Bahamian cryptocurrency exchange, things were great for a while. Investors were excited about the way the stock price continued to melt up.

FTX was the third-largest crypto market in the world at the start of last week when it announced liquidity problems and would need a massive infusion of cash to stay afloat. However, the tide went out and the problems at FTX began to surface and then totally self-destruct.

In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions.

“It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.” ~ Brandon Kochkodin, Forbes Staff

According to WSJ, FTX problems are a result of the loans it extended to Alameda using money that customers had deposited on the exchange for trading purposes. It was a decision that Mr. Sam Bankman-Fried (SBF), the crypto wunderkind who founded the exchange and then drove it into bankruptcy, described as a poor judgment call, writes the Wall Street Journal.

In March 2022, the Fed started raising interest rates to battle inflation. Speculative investment assets started tanking and a number of crypto funds and brokerages crashed. FTX came in as a bailout “savior” with the apparent purpose of sweeping in depositor funds into FTX.

Additionally, SBF’s hedge fund Alameda Research was also hit hard by the crypto drop. SBF was able to temporarily hide the problem by “borrowing” customer deposits at FTX to plug the hole at Alameda. This move may be a violation of the terms of service and potentially violate regulations.

All in all, FTX had $16 billion in customer assets. It is believed that the unregulated exchange transferred more than half of its customer funds to its sister company Alameda, according to WSJ.

In traditional markets, brokers must keep client funds segregated from other company assets. Cryptocurrencies and brokerages that trade them remain unregulated, which means it may not be legally possible for any government agencies to step in to reimburse FTX customers, said corporate lawyer Eric Snyder, chairman of bankruptcy at Wilk Auslander.

“Absent any regulation, it’ll be difficult to show fraud if the agreements between FTX and their customers allowed FTX to use investments at their discretion,” Synder said.

The root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money and allegedly operated by Mr. Bankman-Fried’s ex-girlfriend as CEO of Alameda. Mr. Bankman-Fried is the majority owner of both firms, FTX and Alameda. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.

“There’s one fundamental takeaway: Bitcoin itself should never be leveraged. It cannot be leveraged safely. And anybody who thinks that they can lever it safely is going to learn a very hard lesson: that illiquidity is the same thing as insolvency,” commented Caitlin Long, founder and CEO of Custodia Bank, on CNBC’s The Exchange

References:

  1. https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=23f8a20111f6
  2. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732
  3. https://www.oldschoolvalue.com/investing-strategy/warren-buffett-quotes/#8_Swimming_Naked_is_Cute_Only_for_Babies
  4. https://www.cnbc.com/amp/2017/12/11/bitcoin-millionaire-grant-sabatier-dont-buy-bitcoin.html
  5. https://www.marketwatch.com/story/ftx-filed-for-chapter-11-bankruptcy-heres-what-account-holders-should-know-about-this-very-messy-and-complex-bankruptcy-case-11668202547?mod=mw_latestnews

Don’t get financial advice from NFL stars

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When it comes to financial investing, investors should not rely on advice from professional athletes who promote crypto-currencies or currency trading platforms.

In November 2021, cryptocurrency market prices were skyrocketing to new heights and Bitcoin was one of the red-hot. Concurrently, two well-known NFL football players, Green Bay Packers quarterback Aaron Rodgers and Los Angeles Rams wideout Odell Beckham Jr., stated that they would accept a portion of their 2021 salaries in the cryptocurrency during a month when Bitcoin hit an all-time high of $68,906 per coin. 

As often happens with volatile currencies and investments, Bitcoin market price has crashed from that November peak to a nearly 52 percent dive, reaching a January bottom of $33,076.

If ever there were a case of buyer beware with the products athletes endorse, this would be it. Most especially when that “product” is actually a volatile form of currency that can cost investors massive sums of money.

The sad fact is that the vast majority of people don’t truly understand how cryptocurrency works. And that group also includes most professional athletes who have advisers paid to guide their investments, as well as agents who find commercial opportunities to endorse products like Bitcoin.

It’s been assumed that athlete such as Odell Beckham Jr. has take a substantial financial hit in pay with Bitcoin.

It was reported by Darren Rovell that Beckham’s entire salary is now worth only $413,000 USD equivalent in Bitcoin as opposed to the $750,000 USD guaranteed by the LA Rams football team, excluding taxes. Once federal and state taxes are factored in, Beckham is projected to make around $35,000.

References:

  1. https://www.yahoo.com/lifestyle/odell-beckham-jr-suffers-major-085440249.html
  2. https://www.msn.com/en-us/sports/nfl/bitcoin-s-recent-crash-is-a-reminder-don-t-get-your-financial-advice-from-nfl-stars/ar-AAT8kiG

Fintech (Financial Technology) Investing

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  • “Ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese.”  Chris Skinner
  • The integration of technology with financial services is today’s new and present reality. These technologies not only improve the efficiency and productivity of financial services but also enhance the customer experience.
    • Fintech is a hybrid industry of two nearly opposing parts—finance and technology
    • Fintech’s disruptions may transform not only the way we transact money but the definition of money itself
    • Financial technology is a rapidly growing industry.

    We’re on the precipice of a major evolution in the domestic and global financial services industry. How we send, receive, store, spend, and invest money may undergo a few radical changes.

    Fintech—“financial technology”—is an emerging hybrid industry that brings together legacy financial services and technological innovation. With this combination, the Fintech industry is likely to compete with and disrupt traditional financial services, especially banking.

    Financial technology is the driving force behind the rapid digitization of the world. Fusing the concept of financial services with new technology, fintech companies aim to improve traditional methods of moving money around by offering lower costs, time efficiency and improved access for businesses and consumers to manage their finances.

    The term fintech can describe many processes, such as online money transfers, mobile payments, loan management, or investments, all done digitally without the need for intermediary.

    There are countless examples of how Fintech is reshaping the world of money, commerce and financial services, but they all fall into three primary categories:

    • New tech (such as apps) that allow for monetary transactions online,
    • Digital money which is a blockchain technology-based alternative to cash and
    • The Internet of things (IoT)-enabled credit and loan services (which are replacing and digitizing traditional banking services).

    Naturally, fintech is often described as a disruptor of the finance world. The financial services once recognized as the domains of banks, brokerage houses and desktop computers are now available on mobile phones.

    It’s one thing to invest in a financial asset for the long term. It’s another thing to invest in the very source and infrastructure that may give all financial assets their substance, mobility, and meaning.

    Fintech’s growth is driven by three primary factors:

    1. Cryptocurrencies: Fintech’s fortunes are closely connected to the skyrocketing popularity of cryptocurrencies, such as bitcoin, and blockchain technologies that provide a safe, decentralized platform for them.
    2. Mobile devices: Smartphones, tablets and laptops are used for nearly everything these days, and it’s almost hard to imagine how we lived without them. None of these devices would have been able to thrive without the rise of mobile apps and related technology.
    3. Millennials: This generation is the most tech-savvy in U.S. history. Millennials are the first people to grow up with the internet and smartphones, and they’re on track to become the biggest wage earners, buyers and money managers since baby boomers.

    To invest in this rapidly evolving industry, you might consider paying attention to all the moving parts that feed into the engines of financial progress and disruption. In a way, the current areas of only scratch the proverbial surface of Fintech’s potential.

    1. https://tickertape.tdameritrade.com/investing/what-is-fintech-financial-technology-industry-15946
    2. https://paulmampillyguru.com/america-2-0/fintech-companies/
    3. https://finance.yahoo.com/news/top-10-best-fintech-companies-144738653.html

    FinTech: OppFi

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    Building consumers’ financial health over time.

    There exist a large and widening gap in financial inclusion and economic equality in America, according to OppFi. On average, the median U.S. consumer is employed, has a bank account, earns median wages, but has little to no savings or investments. Some have experienced a hardship or emergency; others are struggling to make ends meet; others have unplanned expenses.

    Overall, the state of the American middle class is precarious. Among other things,

    • 150 million Americans have less than $1,000 in savings,
    • 115 million live from paycheck to paycheck, and
    • 60 million Americans lack access to traditional credit.

    The median FICO score in the U.S. is 711. Borrowers with a score of below 620 are considered to be subprime, a group that represents a third of people with credit histories.

    Americans with subprime credit struggle to cover a $400 emergency. Although many consumers in this category are unemployed or under-employed, Experian found that the average income for a subprime borrower (pre-pandemic) was $65,000 annually. These consumers may have income fluctuations, but they are generally members of the middle class.

    Surveys have found that when these consumers face an unexpected bill, such as a medical bill, car or house repair that someone with a high credit score would simply put on a credit card, they have very few options: their family and friends are often in the same situation, and any credit cards are maxed out. They generally have nowhere to turn.

    Borrowers with low credit scores are not naïve. Research on the sector has found that while these consumers may face desperate financial situations, they also understand the consequences of borrowing at high interest rates. They make the determination that taking out a high-cost loan is better than losing access to their doctor, being unable to get to work, or living without a working oven.

    Source: OppFi

    OppFi has designed a FinTech platform around the subprime customer with the ability to facilitate credit access that is simple and accessible. OppFi focuses on providing access to credit as well as building financial health through financial education and resources.

    FICO score alone is not the only measure of a potential customer’s ability and willingness to repay a loan. According to OppFi, there is a way to operate profitably providing loans to this underserved population without gouging them with high interest rates. This addressable market has expanded because of artificial intelligence and alternative data that make has made it easier to model risk without relying solely on FICO scores

    Empower everyday consumers to rebuild financial health.

    OppFi is an online installment lender that has facilitated over 1.5 million loans with a total origination volume of over $2.3 billion, which works out as an average loan size of around $1,500.

    OppFi began life as a direct lender with multiple state lending licenses. They moved to a bank partnership model a couple of years ago and are now fully committed to that model. They have multiple bank partners today and will continue with this model as they release new products.

    OppFi is focused on building a financial ecosystem to help the tens of millions of Americans whose only alternatives are predatory lending options, like payday or title loans. OppFi meets its mission—Empower Everyday Consumers to Rebuild Financial Health— by helping consumers gain access to transitional financial products with transparent pricing and affordable payment schedules, help rebuild their credit and financial health, and graduate them back into mainstream credit.

    OppFi meets the demand for non-bank lending products in a way that empowers customers to not only meet their short-term financial needs, but also build credit for their long-term financial future. The loans we service are designed for:

    • Access: Loans we facilitate are for people who do not qualify for prime loans. Non-traditional credit quality standards are used to help more people have access to loans to meet short-term, small-dollar emergency needs.
    • Affordability: Loans through our platform are underwritten to ensure that a consumer has the ability to pay off their loans, with amortizing payments, longer pay-off periods, and lower monthly payments. While rates through our platform
    • Transparency: We provide terms that are simple and transparent to customers. There are no fees: no origination fees, late or NSF fees, or prepayment penalties. We don’t want borrowers to have surprises. That makes things easier for us and for them.
    • Graduation: We report positive payments and payment history to the three major credit bureaus, and when a customer pays off their loan, we work to facilitate access to lower cost credit. This helps our borrowers’ credit scores improve so that they will not need us if they have another financial shortfall.
  • OppFi proves that facilitating access to credit to consumers with poor credit does not need to involve high rates, fees, or tricks to meet their needs at a profit. There intent is to help consumers who have no other place to turn, but they also offer a path to a better financial future through financial literacy and referrals to nonprofits.

    • References:

    1. https://www.oppfi.com/wp-content/uploads/OppFi-2020-Social-Impact-Report.pdf
    2. https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/, accessed 7/2/2021
    3. Elkins, Kathleen. “Here’s how much money Americans have in their savings accounts.” CNBC.com, Sept 13, 2017
    4. Bureau of Labor Statistics U.S. Full and Part Time Workers; Friedman, Zack. “78 percent Of Workers Live Paycheck to Paycheck.” Forbes.com, January 11, 2019
    5. https://www.oppfi.com/media/credit-access-whitepaper.pdf

    Financial Technology (Fintech)

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    “There are more financial products for more consumers than you could ever imagine.” Fintech Startup Founder

    Fintech, or financial technology, refers to the technological innovation in the design and delivery of financial services and products. The term can apply to any innovation in how companies and people transact business, from the invention of digital money to double-entry bookkeeping. The technology in finance continues to evolve; advancements include the use of Big Data, artificial intelligence (AI), and machine learning to evaluate investment opportunities, optimize portfolios, and mitigate risks.

    Fintech refers to any business that uses technology to enhance or automate financial services and processes. The term encompasses a rapidly growing industry that serves the interests of both consumers and businesses in multiple ways. From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.

    There are 326 Fintechs, according to one database, from one-stop shops such as PayPal Holdings Inc. and Revolut Ltd. to behind-the-scenes payment processors.

    Fintech companies integrate technologies (like AI, blockchain and data science) into traditional financial sectors to make them safer, faster and more efficient. Fintech is one of the fastest-growing tech sectors, with companies innovating in almost every area of finance; from payments and loans to credit scoring and stock trading.

    “Fintech’s disruptive potential was unleashed in mature markets such as the U.S. only recently, thanks to a confluence of factors: low interest rates, better technology, rising consumer demand, and a more permissive attitude toward nonbank finance”, according to Lionel Laurent, a Bloomberg Opinion Columnist. “Efficiency gains in software have kept products coming.”

    Fintech technology examples include:

    • Crowdfunding Platforms – Crowdfunding platforms allow internet and app users to send or receive money from others on the platform and have allowed individuals or businesses to pool funding from a variety of sources all in the same place. Instead of having to go to a traditional bank for a loan, it is now possible to go straight to investors for support of a project or company. 
    • Blockchain and Cryptocurrency – Cryptocurrency and blockchain are hallmark examples of fintech in action. Cryptocurrency exchanges connect users to buying or selling cryptocurrencies like bitcoin or litecoin. But in addition to crypto, blockchain help reduce fraud by keeping provenance data on the blockchain. And while cryptocurrency and even blockchain have certainly taken parts of the investment world by storm in recent years. 
    • Mobile Payments – It seems as though everyone with a smartphone uses some form of mobile payments. In fact, according to Statista data, the global mobile payment market is on track to surpass $1 trillion in 2019. Using increasingly sophisticated technology, services have emerged that allow consumers to exchange money and payments online or on mobile devices – including popular payment app Venmo. 
    • Insurance – Fintech has even disrupted the insurance industry. In fact, insurtech (as it’s been so-called) has come to include everything from car insurance to home insurance and data protection. Additionally, insurtech startups are increasingly attracting funding. 
    • Robo-Advising and Stock-Trading Apps – Robo-advising has disrupted the asset management sector by providing algorithm-based asset recommendations and portfolio management that have increased efficiency and lowered costs. Since the rise of more advanced technology that can analyze various portfolio options 24/7, financial institutions have adapted to offer online robo-advising services. Perhaps one of the more popular and big innovations in the fintech space has been the development of stock-trading apps. When once investors had to go directly to a stock exchange like the NYSE or Nasdaq, now, investors can buy and sell stocks at the tap of a finger on their mobile device. And with inexpensive and low-minimum apps, investing from anywhere with any budget has never been easier. 
    • Budgeting Apps – One of the most common uses of fintech is budgeting apps for consumers, which have grown exponentially in popularity over the years. Before, consumers had to create their own budgets, gather checks, or navigate excel spreadsheets to keep track of their finances. But after the fintech revolution prompted the development of financial services apps, consumers can easily and efficiently keep track of their income, expenses and other budgeting tools that have revolutionized the way consumers think about their money. Budgeting apps help consumers track their income, monthly payments, expenditures and more – all on their mobile device. 

    With fintech innovations, firms can better meet customer needs and expectations. With clear benefits, fintech is quickly changing the landscape of investment management. Advancements include the use of robo-advisers, Big Data, AI, and machine learning to evaluate investment opportunities, optimize portfolios, and mitigate risks. In the area of financial recordkeeping, blockchain and distributed ledger technology are creating new ways to record, track, and store transactions for financial assets.

    Additionally, artificial intelligence (AI) is having a major impact on the finance industry as part of fintech. AI is being used to analyze investment opportunities, optimize portfolios, and mitigate risks, among many other functions, but the applications go well beyond the investment decision-making process. For example, automated wealth advisers (or “robo-advisers”) may assist investors without the need for a human adviser, or they may be used in combination with a human adviser. The desired outcome is the ability to provide tailored, actionable advice to investors with greater ease of access and at lower cost.

    The annual Forbes Fintech 50 compiles some of the hottest fintech platforms on the market worth noting.

    Fintech is changing the landscape of financial and investment management. At its core, Fintech exist to help companies, business owners and consumers better manage their finances, processes, and lives by utilizing specialized technology, software and algorithms.

    References:

    1. https://www.investopedia.com/terms/f/fintech.asp
    2. https://www.cfainstitute.org/en/research/fintech
    3. https://www.bloomberg.com/news/articles/2021-10-07/fintech-s-explosive-growth-has-regulators-scrambling-lionel-laurent
    4. https://www.thestreet.com/technology/what-is-fintech-14885154
    5. https://www.forbes.com/fintech/2021/#1e6de3bc31a6
    6. https://www.forbes.com/sites/elizahaverstock/2021/06/08/the-future-of-personal-finance-fintech-50-2021/?sh=2ce3aba8710a