Fintech In 2020: Challenger Banks Are Moving In On The Incumbents For Real
Crazy valuations. Rails takeovers. Mobile money.
Looking at where money was invested in 2019 and early 2020, it’s clear to see that investment in financial technology is showing no signs of slowing down.
Three clear trends have emerged in this investment space, lately:
- Challenger banks are becoming too big to fail
- The battle for tomorrow’s payment infrastructure is heating up
- Mobile payment apps are no longer considered “alternative payments”
I’ll talk in more detail about trends two and three in subsequent articles, but first, how are challenger banks are becoming mainstream? What does this mean for the incumbents?
Challenger banks are becoming too big to fail
According to The Telegraph, Revolut is gearing up for a funding round that will value the company at up toward $10bn. Financial services thought leader Chris Skinner wrote a critical piece on the possibly poisonous trend of Fintech unicorn valuations. On Medium, this criticism, especially towards Revolut, was further elaborated by analysing the (lack of) logic and math justifying the valuation.
Based on known metrics and valuation models, there is no way to justify the proposed valuation. “In 2018, Revolut made a net loss of £32.8 million ($40 million) on revenues of £58.2 million ($70 million), doubling the level of losses it made in 2017. Furthermore, the cost of sales jumped 247% on card scheme charges and user acquisition.”
Revolut is not alone in being valued at way beyond rational amounts. In fact, most of the neo and challenger banks seem to be too big (or valued too high) to fail. N26 raised in 2019 to become valued at $3.5bn. Nubank (Brazil) is valued at $10bn. Monzo is valued at £2bn… and the list goes on.
Being on the inside of the payment and banking industry, I know where the majority of revenue comes from. It’s from card issuing. More specifically, the incentives received (cash) from card networks for flooding the market with cards, as well as from the interchange made when customers spend with card. Clearly, this is not enough to sustain a profitable business. While there are other streams of revenue, such as cryptocurrency trading and clever foreign exchange services, those who wish to survive, for real, will likely have to turn to traditional financial services to make profits. Such as credit. Basically the newcomers will have to become more like a digital brother of the banks your parents bank with. So one has to ask: can a fancy app design alone make a simple bank provider worth billions?
Interchange is constantly under pressure and will likely continue to drop as account-to-account payments put price pressure on the card networks. Incentives for flooding the world with little used cards will likely decline. As a result, the revenue for these newcomers will continue to be marginalised and their losses will continue to grow.
I wonder what would happen if your traditional bank made an app just as smooth as that of say, Revolut, which gave you the ability to manage your cards in the app and lowered their FX prices? With unparalleled financial muscle, deposits, long running private and business financing and a healthy balance sheet, how would the newcomers stack up, if the old banks of the world decided to go digital, for real? Most of these new digital banks are in fact nothing new. It’s just the same old banking services re-wrapped and priced slightly differently. The majority of their revenue comes from the cards, something that is not owned, run or perfected by them, it’s Visa and MasterCard.
Maybe this lack of actual innovation, sane valuation and future prosperity for shareholders and customers alike is why the co-founder of Monzo has quit to farm alpacas?