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Another major fintech exit as SoFi acquires banking and payments platform Galileo for $1.2B

The fintech wars continue to heat up with another major exit in the space.

Consumer financial services platform SoFi announced today that it is acquiring payments and bank account infrastructure company Galileo for $1.2 billion in total cash and stock. The acquisition is dependent on customary closing conditions.

Salt Lake City-based Galileo was founded in 2000 by Clay Wilkes and was bootstrapped to profitability over the intervening two decades. My colleague Jon Shieber wrote a profile of Galileo back in November after the company announced its second round of external funding, a $77 million Series A check from Accel, which was led by growth partner John Locke. The company had previously raised an $8 million Series A round from Mercato Partners in April 2014.

Galileo Financial raises $77 million for its fintech services that were 19 years in the making

Galileo provides APIs that allow fintech companies like Monzo and Chime to easily create bank accounts and issue physical and virtual credit cards, among myriad other services. While simple in theory, banking regulations and financial rules place a huge regulatory burden on fintech companies, burdens that Galileo takes on as part of its platform.

The company has found particular success in the United Kingdom, where all five of the country’s largest fintechs are customers. Globally, it processed an annualized $45 billion in transaction volume last month, up from $26 billion in October 2019 — nearly doubling in just six months.

From a strategic perspective, SoFi’s objective is that Galileo will help power its expanding suite of finance products and offer it another revenue source outside of consumer services. While SoFi was founded a decade ago to offer ways to secure better financial terms for student loans, it now offers a bevy of consumer financial options, including loan, investment and insurance products as well as cash and wealth management tools. With Galileo, it now has a clear B2B revenue component as well.

SoFi, which is now led by ex-Twitter COO Anthony Noto, has also raised hundreds of millions of new capital from the likes of Qatar in recent years. The company was most recently valued at $4.3 billion.

Online lender SoFi has quietly raised $500 million in funding, led by Qatar

Galileo will operate as an independent division of SoFi, and will be continuing its operations with founder Wilkes remaining as chief executive.

As fintech valuations have rapidly expanded in recent years, the companies that empower those fintechs have increasingly become strategic for investors. Earlier this year, Visa bought Plaid for $5.3 billion, in what was considered a key exit for a finance infrastructure company. That exit brought acute investor and strategic interest to the space, interest that almost certainly accrued to Galileo, as well, and helps explain the company’s relatively quick exit from its funding round last year.

Embedded finance, or why fintech mega VC rounds have become so common

As for Accel, the firm has long had a strategy of investing in mostly bootstrapped companies, sometimes a decade or more after their founding, with examples outside of Galileo including 1Password, Qualtrics, Atlassian, GoFundMe and Tenable. Accel also led this type of round into payments platform Braintree, where the firm met the startup’s GM Juan Benitez, who also joined Galileo’s board in November along with Accel’s Locke.

Accel’s valuation of the deal was not publicly disclosed in November, but a source with knowledge of the acquisition today characterizes the firm’s return as more than 4x. Given that Accel held the equity for roughly half a year, that’s quite the IRR multiple in an otherwise challenging global macro context. Given that the acquisition of Galileo was for cash and stock, Accel likely now holds a stake in SoFi, making at least part of the return unrealized.

Galileo was represented by Qatalyst in the transaction.

Updated April 7 to include the $8 million Series A funding round led by Mercato Partners and more context on IRR.

Read more: https://techcrunch.com/2020/04/07/another-major-fintech-exit-as-sofi-acquires-banking-and-payments-platform-galileo-for-1-2b/

Credit Cards

This Clever New Service Auto-Cancels Your Free Trials

Every time you sign up for a free trial of any kind, you’re forced to take stock of your outlook on life. Realists accept that they’ll eventually wind up paying for this thing that is currently free. Pessimists understand this too, but are prematurely embittered even as they plug in their credit card numbers. Optimists assure themselves that they’ll keep track of when the trial ends and they’ll cancel before they are ever charged, if it turns out they don’t want to continue.

Oh, the naivete. It’s not until these sunny, positive thinkers are digging through their transaction history in their banking app months later that they see it: $89 a year for a mobile VPN membership? What on earth? And then they remember: It was April, Game of Thrones was finally returning for the last season, and they were in Canada, a place where HBO inexplicably doesn’t exist, and so they signed up for a free trial of a mobile VPN to try to stream it on their phone. Only it didn’t work because they had terrible Wi-Fi signal service, and they fell asleep whimpering in their hotel bed, watching as the spinning loading wheel of death never advanced and they forgot all about the free trial they’d signed up for.

OK, maybe I’m actually talking about me here. But if you’re anything like me, you can relate. You sign up for these “free” trials with your credit card, forget about them, and then are left paying for a service you aren’t using.

As of today, there is a more convenient way for you to cancel before ever being charged: a service called Free Trial Card. It's available now through the app DoNotPay, created by 22-year-old wunderkind coder and entrepreneur Joshua Browder.

The Free Trial Card is a virtual credit card you can use to sign up for free trials of any service anonymously, instead of using your real credit card. When the free trial period ends, the card automatically declines to be charged, thus ending your free trial. You don’t have to remember to cancel anything. If you want, the app will also send an actual legal notice of cancelation to the service. The DoNotPay app will send you an email when you sign up for a service and another when your trial ends—a way of nudging you with the reminder that if you want to convert your trial into a paid subscription, you’ll need to update your payment info and hand over your actual credit card number.

“The idea for this product came when I realized I was being charged for a $21.99 gym membership from over a year ago that I was never using,” says Browder.

As he sees it, companies that require you to put in a credit card in order to sign up for a free trial are engaging in deceptive practices. They’re counting on you to forget that you signed up in the hopes that you'll continue to pay whether you use their service or not. This, Browder argues, it fundamentally against the principle of “opt-in” services.

“Why should you have to give a credit card in the first place?” he asks. If free trials were truly free, you’d be able to sign up for them for a limited time without giving any financial information to the company. Then, if you wanted to continue using the services after the trial period, you could pony up the dough. That would be an actual opt-in service, argues Browder.

But since most free trials don’t work that way, Browder and his 10-person team at DoNotPay “found a way to trick the websites,” as he put it, into beginning the free trial without consumers having to put in any of their personal information, financial or otherwise.

The DoNotPay app gives you a throwaway email address you can use to sign up for free trials with the card.

DoNotPay

You can use DoNotPay’s Free Trial Card under any name, with any email and any address. When I generated my bogus credentials using the app, it also gave me a fake email: brownwarthogmilk966@privacy.donotpay.com. DoNotPay allows you to use this email to sign up for services, and forwards any emails you get from the service to your real email, after removing location and read-receipt tracking. That requires that you give DoNotPay your info though; to get that pseudonymous email address, I first had to give DoNotPay my real email address.

Money for Nothing

Using the fake email address and the name Brown Warthog, I signed up for Spotify and CBS All Access (I’ve been dying to watch Emmy-nominated The Good Fight for years!). It worked like a charm. The zip code on the card the app generated for me corresponded to a town in Oregon, or so I learned after Googling. For consistency, I entered that town’s name as my address, though Browder says that was unnecessary. It was also unnecessary for the name to match the email address. I verified that when I used the card to reactivate LinkedIn Premium from my actual real account, which I had half expected not to work, since the email address was so clearly false. But it did work.

And the reason it worked is that Browder’s team is the entity doing the approving. When I clicked Purchase after putting in my false credentials, the request did not go to a bank. It went to DoNotPay. When DoNotPay’s system got that ping, an algorithm the team spent six months building looked at the code request to see if the purchase was for a free trial. Determining that it was, the system approved my transaction. When I tried to use it to buy a $48 pair of Thinx period-proof underwear on that company’s website, it was declined. You can't use this card to make real purchases.

And yet it’s a real card. A Visa card, no less, backed by a network of community banks, which have a relationship with Browder’s company. The bank network has given DoNotPay a business credit card, and allows the company to use it to “act as an agent paying for consumers.” Starting today, one of the things it can do as your agent is create this virtual credit card for you that’s technically real … but only works when there’s no money involved in the transaction.

DoNotPay has already been acting as a financial agent on customer’s behalf in other ways. For one, if you use the app to contest a parking ticket but then you lose your appeal and still need to pay, you let the app pay your parking ticket for you. To do this, you give DoNotPay your bank account info, which it verifies with the same back-end system that Venmo uses, and then DoNotPay generates a virtual credit card for you, based on the credit of its business credit card, and pays your ticket. You don’t see that back-end transaction. (The bank network that gives Browder’s company the credit card makes money on these kinds of transactions, he says.)

Bank Shot

But by now you’ve noticed I haven’t named the bank network. That’s because Browder refuses to name it. “They might shut us down if we mention their name,” he says. Why? Well, for one, the people running the bank network don’t know their service is being used to generate virtual credit cards for the Free Trial Cards service. “Our agreement is to act as an agent for consumers on various payments. And so they do not know specifically about the free trial,” says Browder.

None of this sounds exactly on the up and up to financial experts I spoke to, though they don't think it's illegal. When told I didn’t know who the issuing bank was for these cards because Browder would not say, Sarah Grotta, director of the Debit Card and Alternative Products Advisory team at the payments analysis group Mercator, said this: “No, no, no, no, we gotta be open about that. That can't be a secret.”

For regular credit cards that are used to buy actual goods with real money, Grotta explains, consumers have the right to know who the issuing bank is in case something goes wrong. “They are sort of the holder of the card. If you had an issue, then it's the banks that you’d go to for recourse.”

But in this case, the issuing bank doesn’t know who you are. They only know who Browder and his company are, since these virtual cards are extensions of a card issued in DoNotPay’s name. And if for some reason the card failed to decline, and began actually being charged, it would be Browder paying, not you.

Financially, DoNotPay’s liability is probably nil, since if everything works right all these transactions involve zero dollars. But if the banks bristle at being used this way, it could present problems. Browder says that if the community bank network balks at being used to issue Free Trial Cards, he has three competing banks lined up instead. But then he adds, “I'm confident that this is at least going to go on for a few months.”

“I hope we don't get shut down. We'll see,” he says a few minutes later.

He’s not worried about the DoNotPay app itself, which is doing well. Earlier this month it closed a new $4.6 million seed round led by Andreessen Horowitz. It’s also working with a local San Francisco law firm to make sure all its offerings are legally compliant and robust, and has plans to become a subscription-based app that offers all its legal and convenience services for a monthly cost of around $3.

Browder is hopeful Free Trial Card will be a part of that. The system seems to work for consumers. I’m writing this while listening to music on my free Spotify trial. And DoNotPay has a good track record with its other services, and boasts good basic privacy policies. It has stopgaps in place in case bad actors try to weaponize the Free Trial Card and sign up for a ton of free trials and resell them for profit. But banks, Visa, and the companies offering the free trials may not be so happy.

A fintech lawyer for a major payments company, who spoke on the condition of anonymity because he wasn't authorized by his company to talk to the media, praised the Free Trial Card as clever, but questioned whether it was in good faith. “It could be construed as deceptive. It's a credit card that has no ability to pay. It's basically a product that's designed to defraud the free trial providers,” he says. “It’s really a device to get around the processing system. It's a game on the processing system.”

Browder’s position is that it’s the free trial companies who are being deceptive, not DoNotPay. Grotta points out that Mastercard announced earlier this year that it would require companies offering free trials for certain physical products to reach out to customers at the end of the trial period to get their explicit permission to begin charging them, so maybe a trick like this won't be necessary for long.

That sounds nice, Browder says. But until all free trials change their ways and stop asking people to opt out, he thinks consumers should have a way to make them truly opt-in. Even if that means gaming the system a bit.

Read more: https://www.wired.com/story/free-trial-card/

Credit Cards

New York Transit Edges Into a Future Without MetroCards

As any New Yorker knows, the proper way to swipe a MetroCard to get into the subway system—the timing, the speed, the downward pressure—is tricky, but possible to master. The successful MetroCard swipe separates the tourist from the hardened commuter, the New Yorkers of taxicabs and Ubers from the New Yorkers who descend underground daily.

But in the next half-decade or so, those distinctions will vanish, along with the now 26-year-old MetroCard pass. On Friday, New Yorkers get a peek at the future: paying for a transit ride not with a swipe, but just by holding a smartphone or smartwatch near a turnstile.

Starting at noon, contactless fare readers from Metropolitan Transportation Authority’s new OMNY system will go into operation at 16 subway stations and on Staten Island buses. To use one, riders with contactless credit or debit cards, or smartphones or smartwatches equipped with mobile wallets, can tap or wave them in the direction of a reader, which will glow blue when they’re ready to use. (You can tell if your credit card is contactless if it has a sort of sideways Wi-Fi symbol on it).

Riders will also be able to use Apple Pay, Google Pay, Samsung Pay, and Fitbit Pay to purchase single tickets. And they’ll be able to create and log on to their own MTA payment accounts, so they can keep track of their rides and add money to their passes from afar. The system—and the ability to use it for monthly or weekly transit passes—should roll out MTA-wide by late 2020. By 2021, riders should also be able to purchase OMNY cards, which they can load with cash and use like today’s MetroCards. OMNY apps for iOS and Android are in production.

Despite New Yorkers’ insistence that they have the best of everything first, the idea of using contactless and mobile payments in a public transit system isn’t new. London, Tokyo, Sydney, Beijing, and Shanghai have had the tech for years. The US has lagged, in part, because contactless credit cards have not taken off here as they did in Europe and Asia. But even Portland, Oregon, beat New York to the transit punch, launching a full-scale Apple Pay integration this month.

And during the initial rollout, OMNY isn’t particularly practical for most commuters, who don’t use those particular transit lines and don’t pay for individual tickets each time they pass through a fare gate. Even OMNY’s short-term goals aren’t exactly world-shaking. It promises to cut down the time it takes for each rider to get through a turnstile, with the ability to accept 30 fares per minute—a nice feature during rush hour. It should reduce the amount of time people spend in line waiting to reload fare cards and allow the MTA to retire some of those bulky MetroCard vending machines that now crowd stations.

But one day, the OMNY system could allow New York to do much more. “Right now, OMNY is an efficiency and modernization improvement,” says Sarah Kaufman, associate director of the NYU Rudin Center for Transportation. “But really, it’s feeding into this great potential for data and creative payment.”

For one, creating a less frustrating transit riding experience might bring more riders onto the sometimes-struggling New York transit system. It should make it easier for even those new to the city to hop on the subway.

If New York manages to convince other local systems to use OMNY, it might make getting around the crowded, trafficky region that much less painful. One day, other local transit systems, such as the suburban Metro North commuter lines or New York’s CitiBike bike-share, could use OMNY. If New York manages to recruit a neighbor like New Jersey Transit or Philadelphia’s SEPTA, one smartphone wave might take a traveler hundreds of miles. In fact, one big agency upgrading its payment system tends to get others interested, says Jon Hill, who heads product development at Visa’s global transit arm. “Local transit agencies that don’t have that same level of resources to invest in research and development look at what the big cities are doing and invest in that as a next step.”

Then there’s the question of what MTA will do with the data it wrings from the OMNY system. In London—the global leader on fancy-shmancy payment—Underground officials have used its contactless framework to restructure how passengers pay for their rides and even reward return customers. When a passenger presents their card or phone to the fare reader, the system doesn’t immediately charge them. Instead, it logs the ride and waits until the end of the day or week to take payment. That’s handy because London offers daily and weekly passes; if a passenger’s rides exceed the cost of the pass, the system stops charging them, and additional rides are “free.”

This “fare-capping” structure is especially useful for low-income riders, who balk at paying up front for monthly fare passes but can take advantage of the “pay-as-you-go, and save money when you do” structure. OMNY lets New York at least consider implementing this option.

London does another fun thing enabled by its contactless, mobile payment system: It automatically gives riders refunds when their subways, trains, and buses are late. Because the system has access to each rider’s account—in a way the MTA doesn’t with MetroCard—London officials can identify and compensate riders for their time. Passengers can also use their accounts to request a refund for their late ride.

An MTA spokesperson did not respond to questions about how the agency would handle and use data collected by the OMNY system.

For now, though, New Yorkers using the limited new system will have to settle for faster taps. (Hopefully: A similar contactless system in Chicago, operated by the same vendor, Cubic, had to hand out $1.2 million in free fares in 2013 because of software and hardware issues. Cubic says the Chicago experience is one reason it’s going slow in New York.) “I spent a lot of time this last weekend doing some final testing, and when you sit in the stations all day long and watch people swipe, and watch all the different errors people have, it’s getting so old,” says Steve Brunner, the general manager of the New York Tri-State Region for Cubic. “This is going to be so much better.”

Read more: https://www.wired.com/story/new-york-transit-edges-future-without-metrocards/

Credit Cards

JCPenney explains why it dropped Apple Pay

JCPenney quietly ditched Apple Pay this month. The decision was announced in response to a customer complaint on Twitter, but without any context or further explanation at the time. JCPenney had first rolled out Apple Pay into testing in 2015, then expanded to all its U.S. stores the following year, and later to its mobile app.

The retailer now claims the move was necessitated by the April 13, 2019 deadline in the U.S. for supporting EMV contactless chip functionality.

As of this date, all terminals at U.S. merchants locations that accept contactless payments must actively support EMV contactless chip functionality, and the legacy MSD (magnetic stripe data) contactless technology must be retired.

JCPenney was not ready to comply, it seems, so it switched off all contactless payment options as a result. However, it hasn’t ruled out re-enabling them later on, it seems.

In a statement provided to TechCrunch, JCPenney explained its decision:

A third-party credit card brand made the requirement for all merchants to actively support EMV contactless functionality effective April 13, retiring the legacy MSD contactless technology in place. Given the resources and lead time associated with meeting the new mandate, JCPenney chose to suspend all contactless payment options until a later date. Customers still have the ability to complete their transactions manually by inserting or swiping their physical credit cards at our point-of-sale terminals in stores, an option employed by the vast majority of JCPenney shoppers.

It’s worth noting, too, that JCPenney is hinting here at low Apple Pay adoption among its customer base — as the “vast majority” of shoppers pay using a physical card.

That means the retailer’s decision to re-enable Apple Pay at a later date may still be in question — especially as this change allows JCPenney to fully take back ownership of customer purchase data.

Customer data is an important part of JCPenney’s plan to get the business back on its feet. Under new CEO Jill Soltau, who took the job last October, the retailer has been closing underperforming stores, hiring new execs to focus on merchandise selection and eliminating its low-margin items, noted Bloomberg following the company’s most recent earnings. It’s also reducing inventory and adjusting its buying process to ensure it doesn’t end up with excess inventory going forward.

And, as Soltau explained to investors in February, the retailer is rethinking its pricing and promotions strategies, too.

“I think that’s one of the key initiatives that we’ll be working on here in the coming months because we’re not being as strategic in how we speak to the customer and engage with the customer through our pricing and promotion,” she said. “And I would frankly say it might be a little bit confusing, and you might not know exactly when you can get the best value at JCPenney,” the CEO added.

Customer purchase data allows a retailer to better target its customers with relevant promotions, as stores are able to collect the customer’s name and card number at point of sale, which they can then combine with other demographic data like the customer’s address, phone and email.

Apple Pay, meanwhile, prevents this level of access — something that customers like, but retailers traditionally have not. In fact, the lack of access to customer data was one reason retailers were hesitant to warm up to Apple Pay in the first place, and spent years developing their rival solution, CurrentC, which ultimately failed.

Today, many major retailers incentivize customers to use their own payments solution instead of Apple Pay — as with Walmart Pay, Sam’s Club’s Scan-and-Go, or like Target does with its store card, which can be combined with Cartwheel discounts in a single barcode scanned at point-of-sale.

Apple Pay is also a more secure method of payment, which today’s consumers prefer — particularly in the case of retailers who have suffered major data breaches, like JCPenney has in the past. Plus, Apple Pay allows shoppers to carry only their phone — not a wallet stuffed with physical cards.

The removal of Apple Pay from JCPenney stores was reported earlier by MacRumors which credited Appleosophy. 9to5Mac also noted Apple Pay was pulled from the JCPenney app.

JCPenney has more than 800 stores in 49 states.

Despite being dropped by JCPenney, Apple Pay remains a top mobile payment solution. In January, it was accepted by 74 of the top 100 U.S. merchants, and 65 percent of all retail locations across the country.

JCPenney tells us it will “seek to implement EMV contactless at a later date.”

Read more: https://techcrunch.com/2019/04/22/jcpenney-explains-why-it-dropped-apple-pay/