Wall Street embraces Los Angeles companies disrupting the financial system

Local fintech companies are transferring payments and conducting financial transactions at lightning speed. They are shaking up credit score models and lending money to small business owners from underrepresented backgrounds.

But Wall Street, brick-and-mortar, and traditional big houses are unsuspecting. Instead, they’re pumping billions into fintech. In a September report, S&P Global Market Intelligence estimated that fintech companies in the United States attracted nearly $7.5 billion in venture capital funding in the second quarter of 2021 through 194 deals, representing an increase nearly 70% year-on-year.

A large portion of these transactions were captured by Los Angeles-based companies.

In LA, some fintechs have decided to go public, such as West Hollywood-based Dave Inc. and Marina del Rey-based Aspiration Partners Inc. They have made deals to go public with blank check companies on Wall Street and expect to start trading before the end of the year.

Others are in a building phase with hundreds of millions of dollars supporting them and preparing for their next growth spurts.

These heavily funded companies include Altruist Corp., a Venice-based fintech startup that is building a digital investment platform for registered investment advisers, and BSD Capital Inc., which does business as Lendistry, a downtown-based fintech company providing billions in Covid-19 aid. financing of minority-owned small businesses.

There’s also Welcome Tech Inc., a Brentwood-based digital platform designed to give Latino immigrants access to banking, healthcare and other everyday services without paying predatory fees. Burbank-based Zest-Finance Inc., meanwhile, focuses on credit underwriting standards and software to improve credit scoring methods for financial institutions that want to eliminate lending bias.

These four companies alone – Altruist, Lendistry, Welcome Tech and ZestFinance – have received $238 million in venture capital over the past two to three years.

And investors are ready to pour more money into LA fintechs.

Just last week, Santa Monica-based Grow Credit Inc., a black-owned fintech lender that helps consumers leverage their subscription payments to build credit for free with Equifax Inc., TransUnion and Experian, has lined up $106.3 million in an equity and debt financing agreement. Investors include Jason Robins, chief executive of sports betting operator DraftKings Inc.; National Basketball Association All-Star Baron Davis; and New York-based investment firm Arena Investors.

In the coming weeks, Camino Financial Inc., a downtown-based fintech lender, plans to double the size of its $100 million lending platform to underbanked small businesses in the Latino community, according to Sean Salas, co-founder and head of Camino Financial. executive.

In July, the company reached a milestone by lending $100 million to more than 5,500 underserved small businesses. The fintech now plans to enter into a debt agreement to increase its credit line to a level well above its current lending platform before the end of the year. It also closes a significantly larger capital raise than its $8 million Series A, according to Salas.

old money
In February, private auto lender Westlake Financial Corp., founded in 1978 by billionaire Don Hankey, decided to get into the fintech action.

In April, the Mid-Wilshire-based lender – with a profit of $755m last year on revenue of $2.3bn – reorganized into fintech. Its new name is NowLake Technology, which is the entity that oversees Westlake, its auto lending business and all other lines of business.

NowLake owns companies that develop software for the auto finance, technology, real estate, and insurance industries. He also plans to leverage the software to facilitate loans for jewelry purchases, consumer loans, credit cards, cell phones, solar equipment and elective medical procedures.

Major commercial banks and credit unions are also paying attention to the world of fintech, in large part because the pandemic has put a new emphasis on digital banking due to office closures and limitations on in-person shopping.

Last month, Santa Ana-based Banc of California Inc., which established its dual headquarters in Los Angeles’ Westside this summer, participated in an $8 million funding round in fintech OneNetworks Inc., which does business as Finexio, a company based in Orlando, Florida. payment service provider for businesses. Banc of California wants to use Finexio’s payment service to expand its product offerings for its business customers and use the fintech software to develop payment and related lending and deposit services, said Ernest Rolfson, founder and CEO of Finexio.

“They really are a major player in Southern California’s business economy and growing across the state,” Rolfson said. “I think they are trying to expand.”

The downtown-based City National Bank is investing in the fintech space, as are some local credit unions through a start-up venture capital group aimed at investing in fintechs.

Nearly two dozen credit unions across the country have banded together to form their own venture capital fund, called Curql Collective, to invest heavily in fintechs like Zest.

Based in Des Moines, Iowa, Curql Collective unveiled its $150 million war chest in April. Local members include Torrance-based Unify Financial Credit Union and Santa Ana-based SchoolsFirst Federal Credit Union.

As for City National, it bought two Silicon Beach-based companies, Filmtrack and Exactuals, in the past two years, said Verna Grayce Chao, City National Bank’s executive vice president in charge of its fintech subsidiaries.

Filmtrack modernized City National’s entertainment payments space, and Exactuals is a cloud-based platform that enables the bank’s entertainment clients to calculate, track and analyze billions of dollars in distribution revenue and participation payments.

The most recent deals build on City National’s 2010 acquisition of El Segundo-based Datafaction, a software developer of accounting solutions.
“It deepens our relationship with our customers and prolongs that commitment, which is what all businesses seek,” Chao said.

New rules
As the fintech sector has grown in popularity in California, it is also worth regulating it.

Of particular interest are peer-to-peers, which manage money over the Internet between parties without the help of a bank. They operate in a gray area of ​​the banking world without having to provide much in the way of registration or licensing with state and federal regulators, as they technically charge no interest or fees for their services.

In May, the new Office of Fintech Innovation, which is the main government agency focused on all things fintech in California, appointed Christina Tetreault, a consumer technology lawyer, to head the office. ‘agency.

His office grew out of an overhaul of California’s new consumer financial protection law. The bureau is not a regulator but will play a vital role in setting new rules for fintech. This will raise red flags about how new technologies could harm consumers.

“We are here to help entrepreneurs understand our expectations and support responsible innovation and job creation in California,” Tetreault said.

“The office itself allows us to better coordinate efforts so that we can pay greater attention to how the department tracks the arrival of new financial products and services,” she added. “Technology is at the heart of all these developments. This office’s engagement with these entrepreneurs is key to helping us understand how these new products may or may not pose unique legal issues.

Jason Wilk, managing director of digital banking app Dave, welcomes the dialogue with Tetreault.

“It’s still relatively early days, and we’re seeing more conversations happening; people are usually interested in learning more about (fintech) companies because of the number of customers we all acquire. It’s only natural that there’s some interest in watching the industry to make sure the good actors are actually good and weed out the bad ones,” he said.

“If anything, we’re proponents of surveillance to make sure people don’t try to spoil the party for everyone.”

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Don F. Davis