Fintechs are supposed to be dying out, desperately needing large financial incumbents for their money and customers. Right? Or so goes the story of fintech partnerships over the last 3 years. So goes the story of every seed-stage Fintech incubator, corporate venture arm, and encouraging regulatory initiative (UK, US). Maybe the story is about to change.
Example one. In the week that neobank Revolut raised $250 million to grow its vision of a multi-currency pan-European mobile bank, Sabadell's TSB kept nearly 2 million customers locked out of their banking account as a result of a core banking system migration failure. TSB's prior system was from Lloyds, the bank's original owner, and accounts were being moved to Sabadell's modern Proteo system. This raises an existential question -- can an incumbent bank develop good software and swap it in for legacy infrastructure? Maybe that begs the question. Our view is that endless capital is not nearly enough to build fintech solutions. You need the right vision and talent, which are scarce and not fungible. You need customers that have an affinity for your brand. For contrast, let's look at Revolut. In 3 years, it managed to get 2 million users, a $1.7 billion valuation, and is positioned to offer consumers more products than regular banks through partnerships. Like adding Ripple and Bitcoin Cash to their already existing crypto functionality.
Example two. This one is contrived, but cute. Binance, the world's largest crypto currency exchange (by some measures) is less than a year old. In the first quarter of 2018, it has turned a $200 million USD-equivalent profit. This places it as a more profitable endeavor than Deutsche Bank's $146 million quarter. You don't need to be a century old to sell financial products to millions of people -- you just need to sell what people want, and fast. Maybe you also need to understand growth hacking, social influence and emerging technology. There is even talk of Nasdaq evaluating the option of running a crypto exchange. But we think this ship has already sailed -- unless you are willing to pay $1B+ valuations, or are buying distressed assets.
So is Crypto making Fintech come back? At least for retail products, yes. Incumbents have massive moats around institutional business, reinforced through regulation and lobbying. But isn't that just capital?