neobank

NEOBANKS & FINTECH: Ride-hailing apps are becoming the Uber of Fintech

Steve Jobs defined a key distinction that stuck with many entrepreneurs -- is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that Fintech product is being transformed into a platform feature by non-Fintech players -- specifically ride-hailing apps like Uber, Lyft, and Grab. 

These ride-hailing giants have built their empires by making the burden of payments a truly seamless experience for their customers. Which is why the potential for them to expand into Fintech and financial services far outweighs the need for new forms of transportation -- autonomous human-carrying Uber drones or Lyft trains. The kicker being that their robust platforms and/or large customer bases create ripe cross-sell opportunities. 

Take Grab -- the $14 billion-valued ride-hailing giant that acquired Uber's Southeast Asia business last year. Since then, Grab has faced growing competition from Go-Jek -- its +$9 billion-valued rival who is backed by Google, JD.com, and others. Forcing Grab to earmark financial services as a core pillar of its strategy for regional dominance over Go-Jek and financial incumbents who are disadvantaged by the lack of financial services infrastructure and unified credit scoring. Since then, Grab has partnered with Mastercard to launch a prepaid card to target the unbanked, spun out its own financial arm -- Grab Financial Group, which brings group payments, rewards & loyalty, and insurance to its drivers and customers, and recently announced a co-branded credit card with Citi. 

Uber's initial foray into financial services was the launch of Uber Cash -- a digital wallet allowing credit to be added in advance via prepaid cards. Since then, the popular ride-hailing app has partnered with Venmo for payments, Finnish-Fintech Holvi for offering financial services access to its drivers, Flexible car-leasing startup Fair for car leasing, a credit card in partnership with Barclays for loyalty and promotions, and a recent hiring spree showing signs of a potential New York-based Fintech arm -- much like that of Grab's. One of the interesting outcomes from such an arm would be the potential for a native Uber bank account, which would help remove the ride-hailer's reliance on the existing banking system -- Card processing fees alone cost Uber $749 million in 2017 -- to get paid and pay its drivers. Such a move would see Uber partner with cheaper and more agile low-profile FDIC-insured banks such as Cross River, Green Dot, or Chime, rather than have its own charter or partner with larger institutional banks. This is likely, as US-based ride-hailing companies such as Uber and rival Lyft have come under scrutiny by lawmakers to consider their drivers as employees rather than "independent contractors". Both Uber and Lyft argue that such a move would be cripplingly expensive -- Quartz estimates the cost to be $508 million and $290 million respectively. Our question is, to what extent would native bank accounts offset these potential employee-related costs?

Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems.

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Source: Grab (via Business Insider), Grab Financial (via TheDrum), Uber (via Business Insider), Uber Credit (via Techcrunch), Uber-Lyft wage concessions (via SFChronicle)

NEOBANKS: JP Morgan Chase's Finn proves that digital banking is tougher than you think to get right

JP Morgan Chase's Finn -- is a bit of a hybrid -- a digital app loaded with features suited for its millenial target market, as well as, a digital branch mechanism to transfer customer's funds to new Chase checking and savings accounts. The reason for this was to attract customer's that sought to bank with Chase, but had little to no access to a branch. The digital banking app launched in 2018, and soon proved that the Chase brand was in fact best positioned to provide that combination of services to Finn's 47,000 customers.

Three important takeaways from this: (1) Consumers who open accounts with digital banks don't do so because they want a bank with no branches. A higher value is attributed to better financial management tools, rewards, and interest rates. (2) A differentiated service offering than what exists in the market is critical to garner significant adoption rates amongst a younger target market. Finn didn't offer its consumers -- nor existing Chase customers -- anything they couldn't get elsewhere. (3) A lack of understanding the market you are attracting, is probably the cause of poor uptake. In a recent poll by Cornerstone Advisors research – Finn had clearly tailored its market to the wrong demographic with just 7% of 20-something Millennials and 6% of 30-something Millennials said a digital bank would be in their consideration set. Contrast that to the 9% of Gen-Xers and 7% of Boomers who said they would consider a digital bank.

This is Fintech at its best -- multifaceted, difficult, iterating on a solution to cater to the largest customer demographic as possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. The kicker is if you get this wrong, then call it a day. 

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Source: Finn Bank (Via Chase), Insight Vault Q4 2017 (via Cornerstone)

NEOBANKS: T-Mobile offers a bank account with all the perks

Following a soft launch in November 2018, T-Mobile has officially taken its Money checking account live for all T-Mobile customers in the US. The telecommunications company has joined forces with digital-only MobileBank who is operated by Customers Bank. Yes, you have to be a T-Mobile customer to take advantage of the account, but it does come with some competitive perks such as: 4% yield per annum on balances under $3,000, full mobile platform payment (e.g., ApplePay or GPay) support, and comes with a Mastercard. There are no minimum balance requirements and no fees to keep it open, however, because T-Mobile Money is not supported by a major bank such as BoFA, it is likely to incur ATM fees. Such perks are indicative of a focus towards a younger market who like the idea of high annual percentage yield, whilst keeping the overall account balance low due to lower incomes -- hello Goldman's Marcus. So why is this notable news? Whilst telecommunications companies offering financial services in the US is not necessarily new, with examples like 2013's "Softcard" (originally called "Isis") - a mobile payments system created from the unique partnership of Telcos -- AT&T, Verizon and T-Mobile with Financial Service companies -- Mastercard, Visa, and AMEX, which subsequently failed due to low customer adoption. We should see more resiliency from the T-Mobile Money account as MobileBank gives T-Mobile an out-of-the-box solution to offer to their 73 million strong US customer base without the need for large capital outlays or significant risk exposures to do so. However, regulatory risk is a major factor at play here, which could be financially crippling if something were to go wrong at a time when T-Mobile Money is regulated as a Financial Services Provider.

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Source: MarketingDigest (SoftCard), CookiesandClogs (Isis), T-Mobile Money

CRYPTO: Coinbase's new Visa debit card wants to assimilate cryptocurrency and fiat accounts

We still believe that the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). And in our write-up of Samsung's crypto phone gamble, we stressed that there should be no difference -- from the customer view -- in using a credit card in a digital wallet, and using a self-custodied digital asset. Well it seems the folks over at Coinbase were paying attention, as last week the crypto trading website unveiled a Visa debit card that lets users buy things with fiat money converted from cryptocurrency stored in their online Coinbase wallets. Users can take advantage of the full neobank treatment with Coinbase's app providing nifty visualisations on your spending behaviour, and security controls such as disabling the card if it gets lost or stolen. The card will only be available in the UK, with a wider European release to come later this year. UK users can expect to be charged a 1 percent transaction fee and a 1.49 percent conversion fee, totalling 2.49 percent for every transaction using the card (2.69 percent in Europe and 5.49 percent elsewhere). These fees seem high when we compare them to the C2B credit card transaction fees for US-based retail and online merchants at 2.2 percent and 2.52 percent respectively, per $100 transaction -- as outlined in our latest Payments keystone report. The big question is -- is this new? and our answer is not really. Revolut, amongst others, has offered the ability to make transactions using cryptocurrency for well over a year, however, the merchant doesn't actually receive bitcoin, rather the app does a conversion back to fiat to make payment. From a transaction standpoint, we see Coinbase as no different, as they are simply taking exchange custodied wallet holdings and converting them at the spot rate to make payments. Cryptocurrency-native transactions are difficult because the distributed ledger (Blockchain) requires each transaction be verified through network consensus before it is finalized, which for Bitcoin is 10 minutes -- imagine waiting 10 minutes for the credit card machine to print the transaction slip?. What is notable about Coinbase's card is that it helps cryptocurrency adoption by assimilating one's crypto holdings at Coinbase with their fiat holdings at a bank, promoting a better user experience than before.

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Source: Coinbase (Coinbase Card via Twitter), ComputerWorld (Coinbase Card)

NEOBANKS: Monzo and Tandem seek massive new raises whilst RBS's Bó seeks to shake things up

Just months after raising £85m in a Series E fundraise, it seems as though neobank Monzo's aspirations for US dominance is being assisted by means of a £100 million in further funding, in a new round led by US-based VC and accelerator Y-Combinator. Such a raise would see the coral-carded digital bank valued at around £2 billion, positioning it on par with rivals N26 and Revolut. Whilst neobanks who focus on current account products like Monzo drive massive consumer adoption yet are inherently loss making, those who build lending and savings products through credit cards such as Tandem Bank, have lower user adoption rates but higher revenues (£5.1 million in 2017 compared with Monzo's £1.8 million). As such, it's not surprising that Tandem Bank are looking to secure an investment in the next three months, which is likely to be larger than the £80m it raised when it took over Harrods Bank last year. And in true neobank fashion, the ex-Harrods bank is looking to expand into continental Europe over the coming year. Finally, RBS has just exposed their neobank play with Bó -- a new online-only bank RBS has created, similar to Goldman's Marcus, to rival the likes of Monzo, N26, and Revolut. The specific target market being the 17 million UK residents with less than £100 of savings in their bank accounts. With the aim of this to “nudge” users towards ways of saving money by providing them access to a “marketplace” of different providers — from rival financial services companies to energy companies. Should Starling be worried?, only if they didn't help RBS build it, which they did. I won't say we called it, but have a revisit to our 2019 Fintech prediction, and see for yourself.

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Source: Techcrunch (Monzo), Fintech.Global (Challenger Bank Analysis), Finextra (Starling help RBS)

PAYMENTS: Is Digital Banking hurting the Underbanked?

Here's a conundrum. You don't have a bank account and therefore cannot set up a digital payment option. Now try ordering and paying for an Uber! This example reveals a simple truth: digital services -- and in particular digital financial services -- can be regressive (benefit the haves, hurt the have-nots). As countries like the United Kingdom, China, India and the Nordics move towards demonetization, driven by technology and policy, the social and structural implications of getting rid of cash could make things a lot worse for the most vulnerable. Based on a recent UK report linked below, lowest grade workers and the unemployed use cash 49% of the time for their purchases, while those in the highest professional occupations use cash only 39% of the time. And conversely, card use is split at 37% (low income) vs. 44% (high income).

Weird. Fintech is supposed to be a democratizing force that allows anyone, regardless of account size, to access quality financial product. Let's stick with the UK for a clean analysis. If you look at penetration of mobile devices, 85% of the populace owned a smartphone in 2017, massively up from 52% in 2012. So that means, generally speaking, most people have some payment-enabled digital hardware that they can lug around in their pocket. And yet that device is not the financial key (yet) for the unbanked and underbanked. Why? One hypothesis is to look closer at the rails on which money travels, and their interoperability.

The first is paper cash. It requires no intermediaries, at least in concept, and therefore 100% of the population is able to "self custody" a little bit of it under their bed, and use it for commerce. The second is banking. Banking intermediates the financial system, and allows for modern services to function and thrive. But it also has an onboarding cost, set by the banking industry's risk tolerance, set by the legislator and the regulator, which may be prohibitive to some share of the population. It excludes "bad risks" by design. Banking also introduces costs into moving money around, which must be covered through business activity, and often warps into unethical economic rents (i.e., overdraft fees). When we talk about mobile payments, what we are really talking about is extending the banking system into the population that has adopted mobile phones -- and this excludes unbanked mobile users. As homework, we suggest the reader think about WeChat (mobile UX, media industry intermediation, government rails) and Bitcoin (mobile UX, hardware industry intermediation, blockchain rails) as being a solution to avoiding the regressive outcome. 

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Source: Access to Cash (Report), Consultancy UK (2017 mobile penetration), Latin America's Banking Revolution (Euromoney)

ONLINE BANKING: Metro Bank and Revolut in the Doghouse

Facebook used to say "Move Fast and Break Things". It sure did. There are many ways to win, and some are sharper elbowed than others. Is growth inevitably tied to bad behavior, or is there a version of sustainable entrepreneurship that doesn't require us to sacrifice Ethics at the altar of Monopoly? Prior marquee Fintech bad-actors include Zenefits (fastest growing insurer whose brokers were unlicensed) and Lending Club (what's a little self-dealing?), not to mention all of Wall Street and at one point or another. Now we are seeing the same sharp elbows from Revolut and Metro Bank.

Metro Bank may be a fast growing operation, but it doesn't seem to be very good at being a bank. Of its £14.5 billion loan book, the company mis-categorized 10% of its assets last month, grading that capital at 100% when it should have been at best a 50% (e.g., commercial property loans are more risky than cash). That means the balance sheet needs way more cash, and Metro Bank is out raising a cushion of £350 million -- a number that will mean chunky dilution given that the public market cap has been under pressure. There is a certain irony here as well. Consider the sins of a bigger offender -- RBS getting a £45 billion bail-out a decade ago and being forced to set aside £775 million to as penance. Of those funds, £120 million are now flowing to Metro Bank to promote banking competition. 

One of our favorites, Revolut, has also been in the news with a spat of ugly news. There are reports of over-clocked, destructive culture. Some Fintech aspirants are asked to sign up 200 funded accounts for Revolut as part of the interview process, without a job guarantee. Once they do land a job, workers are expected to drive 100 mph through weekends and holidays, leading to burnout and churn. Sounds like SoFi two years ago. Money Laundering concerns abound, with information coming out that KYC/AML control lapsed in the middle of last year. For a company that launched Bitcoin trading, this type of news is both embarassing and systematically destructive. And lastly, the main adult in the room (CFO Peter O'Higgins, former JP Morgan) has just quit as well. 

It's easy to say to look at people doing hard things and judge them on style. But sometimes the ambition isn't worth the damage. 

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Source: Guardian (Metro Bank), SharesMagazine (Metro Bank), AltFi (RBS Settlement), Wired (Revolut Culture), Finextra (Revolut CFO), Banking Tech (Revolut AML)

ONLINE BANKING: European Fintechs backed by Goldman, Paypal and Nordea get $200 Million

Open banking is happening, but it feels different than expected. The story is not the gradual digitization of incumbents through Application Programming Interfaces that liberate data and modernize incumbents. Incumbents -- other than a select few giants (e.g., JPM, Goldman, BAML, BBVA, Santander, DBS) -- are primarily performing Fintech Kabuki to look good for public equity investors. And even more, their financial performance is driven too much by exposure to capital, interest rates, regulation and compliance, physical retail costs and other risk-averse incentives, that tech-first approaches do not matter. The ice cube is melting slowly, like the media industry in early 2000s. This is how you get to absurdist PR poetry: in advertising their merger of equals, creating a $300 billion deposit bank, BB&T and SunTrust proclaim: "Two Legacies, One Future". Yes, the future of Planned Obsolescence.

Instead -- open banking looks like this. London-based Bud has raised a $20 million round from Goldman, HSBC, Investec and Sabadell to sit on top of legacy, obsolescent systems and pull data out of them into modern architecture. The firm has 80 fintech partners, and can connect third party developers into products like credit cards and insurance, as well as categorize the data exhaust coming from these sources using machine learning (but who couldn't at this point). Or take Tink, raising EUR 56 million in new funding from Insight Ventures and the Nordic banks, similarly going after the PSD2 as a service opportunity. Yet another example is Raisin, which just got $114 million for interest-rate shopping across the continent. The company has placed $11 billion across 62 partner banks; 62 banks that offered the most interest to customers, and therefore made the least money. This technology intermediator is accumulating the long tail of capital as product, while owning the customer directly.

So yes, these are all little bits. But such is the nature of erosion, until the rock-face breaks off into the ocean with a final splash. We note the investors in these entities are from the financial industry, so that creates a hedge. But we can also imagine Amazon, with a net promoter score 3x better than the national banks, snapping one of these apps as the industry yawns. Bud and Tink are cloud services, which could sit in AWS for finance. Raisin is a comparison shopping engine, at home in Prime. Neither make financial products, instead relying on the industry to get hollow in the middle and provide capital through the long tail. And capital is fungible -- for example, if a legitimate crypto-first bank comes along, offering 1% returns backed by insurance on a stablecoin, why shouldn't these open banking players connect to the decentralized ones? 

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Source: Forbes (Bud), Finn.ai (Amazon), TechCrunch (RaisinTink), Company Websites

CRYPTO: Re-making Traditional Banks with Custodian/Exchange Staking-as-a-Service

2019 has started off with a bang in capital markets blockchain -- (1) a $20 million investment by Nasdaq in enterprise blockchain FX player Symbiont, on the heels of Baakt and ErisX, (2) a Security Token Realized conference well attended by financial services execs from companies like State Street, of which 70%+ owned BTC, (3) and meaningful technical developments and financial products from folks like Tokeny, Securitize, Templum, Atomic Capital and others. But let us shift to another leg of the crypto stool this year, which is staking-as-a-service. We recommend reading the Coindesk op-ed from Michael Casey linked below, which outlines how a transition from proof-of-work to proof-of-stake in Ethereum (if it ever happens) could lead to the intermediation of crypto deposit holding on behalf of consumers. If investors get paid for outsourcing private key management to custodians, argues Casey, we re-create the fractional banking system with its pitfalls, like counterparty risk and incentive trends towards leverage. 

We agree, but aren't immediately put off by the comparison because credit is the lifeblood of inter-temporal economic decision making. Staking reminds us of two things from traditional finance -- capital requirements for banks, and interest-bearing deposits within those banks. As soon as users realize that they should be getting some interest return from their outsourced cryptocurrency accounts at exchanges or custodians, there should be broad competition around this product. If Coinbase offers 3% while Binance offers 4% of staking rewards (or vice versa), the consumer choice becomes more clear. This is exactly what banks compete on in terms of attracting deposits.

Users can already get an interest rate on their crypto for margin lending, up to 7% or so depending on the token. As an aside -- that margin lending may be a bad deal for the lender, since you are powering the short-selling of the capital asset you hold. You could also compare staking returns to dividends that corporations pay to their shareholders, as shareholders buy the equity and commit capital to an asset.  Given that these staking rewards are raw inflation (rather than cashflow earned by a corporation), the dividends become a value transfer between holders that stake and those that do not -- a tax on the unsophisticated user. Also, a dividend by law has to be passed on to the beneficial owner, which is a good thing. But that's not very anarchist of us.

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Source: Forbes (Symbiont), Security Tokens Realised (agendavideo), Coindesk (Staking op-ed), Medium (On fractional banking), Token Daily (on staking as a service), Celcius Network (interest on ETH)

ARTIFICIAL INTELLIGENCE: "Financial Deadbeats" map is the worst things about Chinese Fintech

In our continued amazed gawking at the Chinese fintech landscape, we bring you the following. There is now a feature within WeChat, one of two channels for all mobile chat communication, to show a map of "financial deadbeats" around you. That's right -- a shaming visualization of people who are in financial trouble, like some sort of public sex offender list. We link to the article below, and assume that it is true despite how preposterous the whole thing seems. 

Offenses that could land you on the blacklist include serious ones like being the founder of a digital lender that collapsed with 12 million unpaid accounts, and trivial ones like being a single mother embroiled in a divorce proceeding. Once you are on the list, not only will your full name and financial information be public entertainment on this app, but access to credit, commerce and university admission could be revoked. To add insult to injury, a special ringback tone is added to the "discredited" person's mobile phone, alerting any potential caller about your poor financial management skills.

We add to this soup the idea of algorithmic bias exhibited by AI based on training data. We've covered this issue in the past, but point to Rep. Alexandria Ocasio-Cortez (D-NY) recently bringing it up into mainstream conversation. From propaganda bots to algo-racism, these arcane issues are starting to concern the broader Western polity. So when you combine historical training data reflecting past social and economic biases with social media enforcement systems, dystopia calls. One of the most important financial innovations in the West was bankruptcy, allowing entrepreneurs to fail and start over. This normalization of financial wipe-out led to an equilibrium with higher risk-taking and innovation. It is chilling to see technology being used, with potential for error and misuse, to stifle that spirit. Based on the US personal bankruptcy data below, you can see that 6 out of 1000 people would be guilty according to WeChat, skewed in large part to minority populations. No thanks. 

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Source: Abacus News (deadbeat map), Independent (deadbeats), Vox (algo-racism), On bankruptcy normalization and bankruptcy zip codes

ONLINE BANKS: $22 Billion from Fiserv for First Data, creating a Public Banktech utility

In one of the most massive Fintech headlines in recent history, core processing company Fiserv is buying merchant acquirer First Data in a $22 billion stock deal. Much of the thinking about the combination is about scale (12,000 financial services clients plus 6 million merchant locations) and synergies ($900 million in cost, $500 million in revenue). The combination is well engineered in a spreadsheet, and has the strategic rationale of defending a competitive position by vertical consolidation -- "if we own all the Payments and Banking products, we'll touch all the clients". Some folks also mention the pressure on revenues across the industry, as Fintech start-ups create transparency and competition in the space. Consolidating business lines in such an environment makes sense, though perhaps this is an afterthought at the scale we are talking about.

There are two angles we want to consider. The first is that enabling financial technology -- i.e., the infrastructure needed to manufacture something financial -- trends towards both utility and monopoly over time. It is a utility in the sense that it should be dirt cheap, easily available, and nobody in their right mind would want to rebuild one (also note utilities are public, as in owned by the government). It is a monopoly in the sense that a single player should win the whole market, consolidate all the costs, and charge only at the margin. As technology evolves, the threat of entry by new players like Alipay and Whatsapp is almost as scary as the actual entry of such players. The infrastructure provider would be wise to compress their own margins to make entry by smarter, faster, better players unattractive. A corollary to this line of thinking is that the long tail of small banks and credit unions rent software from utilities, while firms like JP Morgan and Goldman Sachs get to hire AI PhDs from Google. 

The other lens to think about is where the innovation and associated growth happen. We recently re-discovered 2015 slides from venture firm Andreessen Horowitz, which showed how the flow of investment value in technology -- i.e., the investment returns for taking on some risk -- are happening in large part in the private, and not in the public markets. Said another way, private market valuations no longer have a meaningful ceiling (thanks to SoftBank and Tencent), and therefore private investors get to capture all the capital gains from fintech disruption. To go public merely is to monetize those private gains, whereas in the past going public meant getting capital for growth. That means we expect Payments and Banking industry innovation to stay private, and for large players like Fiserv and First Data to rent or acquire them, rather than lead and source them. 

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Source: Business Wire (Press Release), Andreessen Horowitz (Presentation on Venture), Company Websites for screens

OPEN BANKING: Newly-horned unicorn Plaid acquires data aggregator Quovo for up to $200 million

In another unicorn story, let's take a look at Plaid, which we discussed just a few weeks back when they raised $250 million at a $2.7 billion valuation. Plaid solved the problem of financial authentication. Some of you may remember that when you connected a third party service to your bank account in the Dinosaur Age, that service would send you a few pennies into the account as a secret pass-phrase. It would be a random number, which you would then tell to the provider as proof you control the account. A few billion dollars later, Plaid has replaced this for tech companies with a simple API call. They do other stuff too -- which, broadly speaking, can be said to encompass all of the "Open Banking" PSD2 regulation in Europe. They just do it in the US, regardless of the wishes of the banks.

So we were delighted to see that Plaid used some of its new money to buy Quovo, a strong player in the digital wealth data space for up to $200 million. Unlike Plaid's banking focus, Quovo is strong at understanding investment management data. Take for example the following -- credit card transaction data categorization (Starbucks is a coffee shop), and tax basis reporting for stock purchases (bought at $100). These are different problems and require different teams. Quovo had built a strong stack on the investments side, powered a meaningful amount of the account aggregation for folks like Betterment and AdvisorEngine. Still, the acquisition likely has (1) much of the consideration in the form of Plaid stock, since venture investors don't love funding acquisitions, and (2) revenue-based valuation earn-outs. The cash outlay in that $200 million, we suspect, is more modest.

But also, let's look back and compare. Quovo's closest analog would be ByAllAccounts, which Morningstar bought for $28 million. Someone wasn't good at selling! Plaid's closest analog would be Yodlee, which used to power Mint and was purchased by wealth platform Envestnet for $590 million. In turn, BlackRock has bought into over $100 million of Envestnet stock. These more traditional versions of the same business were way, way cheaper than the Silicon Valley equivalents, and were prescient moves by the incumbents. Yet these are early days for financial data -- we are rooting for the whole industry to open up and digitize. 

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Source: Envestnet (Yodlee), Investment News (Morningstar), RIA Biz (Plaid/Quovo)

ONLINE BANK: Here's why N26 can be valued at $2.7 Billion

One key prediction for 2019 -- digital, mobile-first Fintech bundles -- is already coming true. N26, a German neo-bank, has raised a new $300 million to fund international expansion at a ridiculous, eye-popping, anxiety-inducing $2.7 billion valuation. After just a few years of operation and some European Millennials downloading the app. Can this thing really be worth it? Our initial bearish take was that this is not about how much the company is worth, but how much it needs. Venture investors are happy to burn money in order to grow B2C consumer brands, which have now gotten large enough to need (rather than earn through revenue or income) their unicorn valuations. Anecdotally, there's a 5x difference between the public and private markets -- so if you divide the billions by 5 and are no longer outraged, then this price is fair.

But on further thought, there is some defensible industrial logic here. Let's assume -- for the sake of argument -- that all the tech and financial product is trivial, and that all of the venture funding is being used to acquire customers. Further, let's assume that each round is responsible for client acquisition in the prior period. This translates into a simple fact: venture money is a marketing budget, so traction acquiring customers isn't an accomplishment. It's just paying for Facebook ads. On N26's 2.3 million users, customer acquisition costs are between $20-100 per user.

Let's assume that deposits are at $1.5 billion, which is about $650 per customer. That looks a lot like Acorns and Robinhood to us. Depending on assumptions, N26 could make somewhere between $3 and $10 per user per year, which is roughly a 5-10 year payback period. Looking at Revolut, who raised $344 million and probably spent about $150 million of that, venture capital per user looks like $40-110, slightly more expensive. Revolut's revenue is somewhere in the $20 to $30 million range, with a per user revenue of $5-10 as well. There are 600+ banks in the US with assets over $1 billion, so this looks ridiculous (i.e., not special) on its face. Until you realize that customer acquisition cost for financial products is $300, regardless of business line, that customer turn-churn is low, and that acquisitions in the market recently happened at $60 per lead. So we think that the customer acquisition machine is fairly reasonable. Deriving enterprise value on that by multiplying money raised by 10x does seem a meaningful stretch.

Another interesting angle is the fact that the last two rounds involved Asian money -- Tencent and GIC respectively. Those are not particularly price sensitive investors, and N26 is -- from that frame -- a cheap experiment to run in order to see what a foreign banking entrant can do in the United States. If I were Tencent, I would be taking detailed, copious notes.

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Source: Autonomous NEXT analysis, Bloomberg (N26), Company website

2019 FINTECH PREDICTION: Collision of Fintech Bundles and Pivots to New Channels

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Unicorn fintech startups like Robinhood, Acorns, Revolut, Monzo, N26, Betterment, SoFi, Lending Club and others will all converge on the same multiple financial product offering across lending, banking, payments and investments. This is driven by the need to cross-sell new revenue in order to justify high spending on customer acquisition. Large financial incumbents will be following the same bundling playbook through their mobile apps, intensifying the progress of Goldman Sachs, JP Morgan, UBS, DBS, BBVA and Santander along this axis. Tech and finance (as well as incumbents and startups) will all be pursuing the same customer-centric solution for the digital consumer. Great for the customer.

As a result, customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date. As a result, at least one unicorn will implode when the cross-sell does not materialize. Most likely this will look like a devaluation of the equity component in the capital stack, such that new money is raised to maintain profitable marginal operation, but the hundreds of millions already invested in the business are mere sunk cost.

New revolutionary entrants will use channels that are foreign to existing Fintechs and financial incumbents, like video, Twitch, Discord or AR/VR. One example would be credit-as-a-service, similar to Stripe payment-as-a-service, built into a B2B customer journey. Another would be native payment systems for digital experiences and environment. Yet another idea could be social currency within chat streams for video gamers. It will be foreign territory for many, and the key to success is correct market timing balanced with adoption.

Source: Images from Pexels, 2019 Keystone Predictions Deck

ONLINE BANK: Killing the Banks softly with Robinhood and Good Money

But wait, there's more! Certainly all top-3 neobank champions by geography are hungrily eyeing international expansion . The US is looking delicious for Revolut and N26, Europe is interesting for Ping An as it invests over EUR 40MM into fintech venture studio Finleap, Fidelity wants to open a roboadvisor in the UK, and so on. Technology does not have borders. This is why we are particularly interested in Good Money, funded to the tune of $30 million by Galaxy EOS VC fund (remember EOS raised $4 billion). Good Money is a "banking platform" whose equity will be owned by users when they take certain actions, like opening an account, installing the app, or referring friends.

If that sounds like tokenized equity intermingled with Binance referral codes, you're right! One thing we've learned from the ICO mania, other than that some people are sharp-elbowed opportunists who will go to jail, is that human beings like being in communities, and that communities grow way faster and cheaper than "customers". By combining crowdfunding with account actions, this play has a chance to build viral loops, and pioneer a model where a corporate structure (equity) and utopian philosophy (communal ownership of money) have mutually-reinforcing benefits. The blockchain software progress of the last two years makes this possible. Whether it will work or not is another fun story. 

Last, but not least, is Robinhood and their announcment of banking service to their 6 million mobile-first customers. The products is called "Checking & Savings", will deliver a 3% interest rate (vs. Goldman Marcus at 1.85%) and rebated ATM access with a debit card. It is not a bank account and therefore not subject to FDIC insurance. In fact, the whole thing is old hat -- Schwab does this well now (albeit with lower rates on its money market funds), and every HNW wealth management shop ran such an offering for the last 20 years. But you know, Robinhood actually knows how to sell and position a product for its audience, and are willing to burn venture money to deliver a 3% return. Steve Jobs made a killing announcing previously existing products as inventions of Apple -- and he won, because Apple's re-inventions were better suited for the times. Who will you bet on? 

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Source: Cointelegraph (Good Money), TechEU (Finleap), Newswire (Good Money), Bloomberg (Robinhood)

DIGITAL LENDERS: Our new keystone deck finds $100B in global originations, merely 10% of market opportunity

We are excited to share with you our latest keystone analysis titled “Digital Lender Evolution”, which expands on our 2015 white paper on digital lending. In the updated deck, we highlight the major drivers of the space across the US, Europe and Asia -- from venture funding, to addressable market sizes, to current origination volumes, as well as operating performance. Additionally, we highlight systemic risks and technological opportunities facing the sector today. 

A few key takeaways: despite the difficulty in the public markets, the digital lender model continues to raise $5 billion in annual venture capital investment, dominated by the US, with Asia becoming a close contender year-on-year. We find that the opportunity remains large and under-penetrated: (1) in the US, the addressable market is $250 billion in originations or $1 trillion in outstanding debt; (2) for Europe, including the UK and the continent, it is $150 billion in originations or $450 billion in outstanding debt; (3) for China it is $600 billion in originations or $2.7 trillion in outstanding debt (though the Chinese market is undergoing major crackdowns on fraud and the collapse of SME lending).

Digitization of the lending process shows clear cost advantages across onboarding and ongoing servicing (up to 70% reductions). However, platform economics are challenged -- marketing costs have been unable to scale lower than $250 per loan, the high cost of capital hurts pricing from being competitive with banks, and surprise expenses, like legal fees or new product development, have eaten into margins. Initiatives like digital identity verification or AI-based underwriting can add meaningfully to cost-saving, and perhaps improve the marketing conversion funnel as well. We were also surprised to see that large global banks have begun to track digitally active or mobile-first customers as a KPI, going from <20% to 40%+ digital penetration at some of the key institutions.

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ONLINE BANK: Lloyds to cut 6,000 jobs to create 8,200 digital ones, Natwest launches SME neobank

Digital hurts! In a sort-of-confusing announcement, Lloyds is getting rid of 6,000 jobs; but it's also adding another 8,000 jobs, for a net gain of 2,000, as part of a £3 billion plan to invest in digital banking. Why have a call center in Kent, if you can have a chatbot in Facebook Messenger? Reportedly, many of the existing staff will be re-skilled for new roles. But the reality is economic dislocation as a paper industry moves online -- data scientists and engineers are not the same as branch operators and lending officers.

As another example, take RBS/Natwest and their latest launch of Mettle, an SME neobank. The tech was built mobile-first by fintech consulting outfit 11:FS and Capco, with the capabilities of opening a business current account in minutes, build invoices, and automate payment reminders. Business financial management and forecasting would sit on top -- trying to apply the personal financial management concepts of the retail market in an SME market that would get immediate, tangible value of a Quickbooks with a bolted-on bank account. Think about who built this thing -- a third party composed of entrepreneurs who launched a set of neobanks and roboadvisors in the UK (Monzo, Starling, Nutmeg). You can't get something new without trying something new.

And the last data point is Zopa, which is the UK-based digital lender that hasn't gotten public (that would be Funding Circle). They've just raised £60 million to build out another next gen digital bank. The company already has the revenue side built out in place from p2p loans, having lent about £4 billion of personal credit since 2005. But without a banking license to take deposits, it doesn't have reliable capital for the bumpy economic cycle. Like every other personal finance Fintech out there, the company plans to offer savings accounts, credit cards, investments, and various other financing options. Everyone pivot together now!

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Source: Finextra (Mettle), ComputerWorld (Mettle), Independent (Lloyds), Techcrunch (Zopa)

ONLINE BANK: Santander, DBS Getting Mobile First Right

You can split the last decade of Fintech into (1) unbundling of banking and investments into niche financial apps, and (2) the re-bundling of these apps into cross-selling machines once some amount of scale has been reached. See N26 (a bank with investments), SoFi (a digital lender with wealth and insurance), Acorns (a micro-investing app with a debt card). But direct to consumer startups are not the only ones getting it right. Today, Goldman with Marcus, JPMorgan with Finn and YouInvest, DBS, BBVA, Santander and the Nordic banks all have smart digital strategies that copy (or buy) the Fintech playbook.

The issue is that digitization is, to some extent, discrete. If you bring financial products into the 21st century, the remaining field for competition is audience gathering. So we note that Santander's Openbank has launched the following in addition to its neobank -- (1) micro-investing that saves a small amount per time period, (2) goal based planning and investing, and (3) a roboadvisor powered by a BlackRock investment team priced at 55 bps (unclear if this is FutureAdvisor, or just a BlackRock asset allocation model). On top of this, the app will have a password manager (surely people trust banks with their passwords, said no one ever), and a data aggregation service like Mint.com. For what it's worth, the app has a 3 star rating on the App Store, so perhaps people don't love it like they love Revolut or Monzo. But the Spanish bank claims to already have 1.35 million accounts, and is coming to the UK next.

Another forward thinking offering is Singapore's DBS. Like Openbank it has all the latest Fintech features, as well as a Facebook Messenger integrated chatbot. As a comparison, independent chatbot Cleo now supports 500,000 users. But of course, it is going to be much harder for Cleo to monetize, well anything, without manufacturing some sort of financial product as people don't pay for information alone. In the case of DBS, the tech-first approach has allowed them to double the revenue generation off a digital vs. a traditional customer (S$1,300 vs. 600), and decrease meaningfully the servicing cost (S$468 vs. 348), leading to a far better lifetime value. Can an independent fintech build that scale and product set as well?

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Source: FSTech (Santander), Coverager (CLEO), Bloomberg (DBS)

ONLINE BANK: Square's Unique Advantage in Rebundling the Bank

Square has $200 million of balances in its Cash app. At a Recode conferences focused on commerce, Square's CFO suggested that the payments company is thinking about expanding beyond its core competency (enabling long tail merchant commerce) to wrapping the full suite of financial products around those $200 million in balances. That includes savings accounts, investment offerings within the app, in addition to the current capability of buying Bticoin. This is why Square has looked into an ILC license and is expected to take advantage of the OCC Fintech license, once the legal dust has settled. For context, about 66% of banks and 80% of credit unions in the US are below $250 million in deposits, which is roughly 10,000 institutions in total of approximately the same size.

But on the other hand, this long tail has no tech DNA. Square, on the other hand, started out as a hardware solution to empower payment-taking by micro enterprises (e.g., comic book vendors). It now runs at approximately $80 billion in annual volume. It also quickly spun itself into a platform, by building out lending capability for the merchants using its payment systems. Now it originates about $400 million of SME lending per quarter, or $1.3 billion over 12 months, leveraging access to both (1) payment data at the point of purchase and (2) its network of merchants at the moment of financing need.

On the other side of the network, it has built out an active consumer user base of 3 million for its Venmo competitor, Square Cash, which has been downloaded over 30 million times. Adding crypto capability to the app has reportedly added another 6 million to the user-base. This has been a successful financial marketing and customer acquisition strategy for others as well, with Revolut doubling its user-base, Robinhood adding another million, and eToro growing 6 million as well for crypto trading. Unlike the long tail of small banks, these players grok young customers and build the features they want. And unlike the rest of the Fintech apps, Square has a physical hardware footprint and a merchant network that gives its "Bank of the Future" an asset in corporate banking, B2B payments, and various other higher margin activities. So when they talk, we would listen.

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Source: Recode (Square Investments), TechCrunch (Square Cash screen), St Louis Fed (Number of banks by size), Statista (Lending)

ONLINE BANK: How Revolut, Goldman and Google are doing the same thing

While we are fretting about whether tech companies will enter finance, whether Fintech startups can compete with incumbents, or if their business models make sense, these things are just happening. Ideas get recycled, regurgitated and presented as new again. This is the good messy stuff of creative destruction. The first data point is Revolut’s recently launched premium Metal card (an actual 18g metal card!), which provides 1% cash back on purchases outside of Europe, flight and bag delay insurance, and a dedicated concierge. Cash back is a novelty for a UK provider, and the offer has already made quite the splash with the global Instagram Millennial crowd. The rewards card gives Revolut a subscription revenue stream while being cheaper than comparable products, and creates the impression of exclusivity. The best part --  the first heavy metal card was released by Western Union in 1914, and later by JP Morgan and American Express. Long live innovation!
 
Speaking of premium banking services offered to the masses, Goldman Sachs is neck deep in the consumer banking opportunity. In the US, the investment firm has a $20 billion deposit online bank and digital lender Marcus (i.e., a Lending Club). It was just reported that Goldman is opening the same platform to its UK employees, in advance of opening a neobank across the pond. One way to analyze this is to see the millions of users for Revolut, Monzo, Tandem and Starling as a sign of market demand. Barclays, Lloyds, HSBC and the like have left their flank wide open for new names, given a stodgy brand and ongoing customer frustration. Another is to think about the cyclicality of Goldman’s business. Interest rates have nowhere to go but up, while equity markets are at historic highs. Goldman’s investment businesses are equities correlated, so perhaps they see the cycle turning.
 
The third leg of this stool is Google. The advertising firm (we jest) is rebranding its Indian app from Tez into GooglePay, which is to become the umbrella app for Google’s financial services in the country. More than 50 million Indian citizens of over 300,000 villages use the app for payments already, amounting to $30 billion in annual transactions for Venmo-like use cases. Google is now partnering with HDFC, ICICI, Kotak Mahindra. and Federal Bank to offer consumer digital loans within the app interface, underwritten in a few seconds. Sounds like Goldman, like Lending Club, like Revolut, like AmEx, like Western Union to us. The sincerest form of flattery.

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Source: UK Card Association (Western Union), Forbes (Revolut), India Times (Google), Reuters (Goldman Neobank)