NEXT BIG THING
As neobank
valuations bubble
up, some investors
think there’s an
even better bet in
fintech
REUTERS/RUSSELL BOYCE
Banking on the go.
FROM OUR OBSESSION
Future of finance
New technology is upending everything in finance, from saving to trading to making payments.
By John Detrixhe
Future of finance reporter
October 18, 2019
Venture capitalists have poured billions of dollars into digital bank
startups, and at least one more megadeal is expected before this year is
over. Questions are being raised, however, about whether this fintech
craze is another quixotic quest for market share that burns cash but
doesn’t generate much profit in return.
Some of the most ambitious banking startups, like N26 and Revolut,
aim to be a kind of Amazon for finance, an umbrella brand offering
everything from bank accounts to insurance and trading. These banks
are quickly amassing customers: Digital-only banks added around 5
million users during the first half of the year, bringing their total to 13
million in Europe alone, according to Accenture.
As they expand, these upstarts are running up against entrenched
incumbents, and financial regulators that don’t have a lot of
patience for cutting corners. Recent episodes, from MoviePass to Uber
and WeWork, have shown that rapid growth and high valuations are
far from a sure sign of success. The question for fintech unicorns is
whether customers will continue to use them as niche providers of
peer-to-peer payments or travel spending or fully embrace them as a
one-stop-shop for financial services.
Some investors think they’ve found an even better bet in the fintech
sector. Point 72 Ventures, the venture arm of the hedge fund founded
by Steven Cohen, thinks traditional banks won’t be disrupted by the
unicorns. However, they are going to have to learn new fintech-
inspired tricks to fend off the challenge: Older lenders need things like
cloud-hosted software and systems that make it easier to sign up for a
new account.
Top-tier banks already have scale, well-known brands, and (crucially)
profits, said Tripp Shriner, a partner at Point 72 Ventures. “What they
tend to lack is the modern technology,” he said. “For a majority of the
new features or capabilities that neobanks are talking about, you can
almost inevitably point to another technology provider that is enabling
incumbents to do something similar.”
Shriner previously worked in JPMorgan’s strategic investment group.
The venture fund is buying stakes in companies like Mantl, a startup
that develops software for digital account openings at regional and
community banks. Another of its investment is in Flybits, which uses
machine learning to make recommendations to customers.
These startups aren’t as sexy as the notion of an Amazon for finance.
But taken together, if they help old-school banks leap into the 21st
century, they could serve as neobank killers. If traditional banks can
offer fintech features, why switch?
Playing catch-up
Mark Tluszcz, chief of self-described contrarian investor Mangrove
Capital Partners, said the software companies getting banks up to
speed are a “terrific play.” The longtime fintech skeptic doesn’t see
why a startup would be any better at assessing creditworthiness or risk
management than a traditional bank. If a startup’s main offering is
just a better interface, he thinks banks will catch up in a matter of
time.
“Valuations don’t mean a whole lot right now, as we’ve learned,”
Tluszcz said.
Company Valuation Users Ratio
Revolut $10 billion* 8 million $1,250 per user
Chime 5* 5 1,000
N26 3.5 3.5 1,000
Nubank 10 12 833
Facebook 540 2,400 225
Sources: PitchBook, *news reports
There’s a neobank segment, however, that even the skeptics think has
potential, and that’s in developing markets. Point 72 Ventures has
multiple investments in Latin America, while Mangrove has a stake in
Oriente, which offers credit in the Philippines and Indonesia. In these
regions, there’s far less incumbent competition and millions of
customers without bank accounts. As commerce increasingly goes
online, these consumers will need financial services more than ever.
“Our belief in the US and Europe is generally that people are well
banked—they’re just not well served from a consumer experience
perspective,” said Shriner of Point 72 Ventures.
Megadeal
Based on current valuations and recent funding rounds, it is clear that
there are still plenty of smart people who see immense promise for
neobanks in the West. Eighteen of Europe’s biggest fintechs are now
valued at more than $1 billion, according to Richard Diffenthal, a
partner at Hogan Lovells. Investors are lining up to give them even
more money.
This year’s biggest deal could come from payments and banking app
Revolut, which is looking to raise as much as $1.5 billion through a
combination of convertible loans and equity, according to Sky News.
The deal, which will help the London-based fintech expand around the
globe, could value Revolut at as much as $10 billion. Another high-
flyer is San Francisco-based Chime, which Bloomberg recently
reported could be valued at more than $5 billion, more than three
times its price tag in March. Brazilian digital bank Nubank
raised $400 million this summer and was valued at $10 billion.
Among the investors who believe in the neobank dream is Peter Thiel’s
Valar Ventures, which has a stake in Berlin-based N26. Thiel made his
billions by founding PayPal, a payment company created at the turn of
the century that racked up users quickly and figured out how to make
money later. The San Francisco-based firm is now worth about $122
billion; it generated more than $800 million in net income in the
second quarter.
For now, not unlike PayPal’s early days, N26 says it’s focusing on
customer growth and things like daily active users, which is the kind of
metric you would expect to be cited by a social network, not a bank.
“It’s very clear that there is a proposition from neobanks that
resonates very strongly with customers,” said Will Sorby, general
manager for the UK at N26. “The next step for us is demonstrating
that we can take that and build upon it a set of financial services
beyond what we have today.”
N26 says its cost base is around one-sixth that of a big bank with
branches and outdated systems. It has 3.5 million customers and is
expanding around the world, from the US to Brazil. It doesn’t disclose
how many of those customers receive paychecks into those accounts,
but says users hold more than €1.5 billion ($1.7 billion) with at the
company. According to Accenture, customers at banking startups
maintain average deposits of only around 4% of their counterparts at
incumbent banks.
Some digital upstarts, meanwhile, sell software while also running
their own financial institution. Starling is a neobank that also
provides payment and banking software (Quartz member exclusive) to
other companies. OakNorth, which lends to smaller business, sells its
analytics to other institutions. OakNorth’s banking unit is profitable
and Starling said it aims to make money next year. The biggest fintech
of them all, China’s Ant Financial (Quartz member exclusive), also
sells its cutting-edge tech services to traditional banks—it was valued
at an eye-popping $150 billion last year.
System update
Can centuries-old banks ever really adapt to the era of cloud
computing and mobile apps? If you ask a neobank executive, they’ll
probably say it’ll never happen. The old banks’ tech is archaic, based in
coding languages that today’s university grads have never studied.
Their culture is too slow and bureaucratic to innovate. And even if they
adopt fintech-inspired features, scrappy newer banks will always be a
few steps ahead.
Eugene Danilkis, founder of Mambu, takes a more nuanced view. The
company makes “core engine” software for banking, and it’s used by
digital upstarts like OakNorth and N26 as well as traditional
institutions. The company’s software sits in the background and
provides servicing for accounts—things like calculating interest—while
clients still build their own apps and develop their own credit models
and analytics.
Danilkis admits that traditional banks can’t just ditch their old
systems and start over from scratch. These efforts have failed in the
past, running far over budget and taking longer than projected. Older
institutions may also struggle to adopt the iterative, “agile” software
development used by tech-savvy startups.
Instead of a massive overhaul, he says banks are upgrading one system
or business line at a time. This shows that they’re modernizing,
gradually. “The reason banks are working with us is because they
know they need to adapt,” Danilkis said. “They can’t stay on their old
systems forever.”
