FinTech Zapping - 11th January

FinTech Whispers

??SoFi to Go Public via a SPAC That Values the Company at $8.65 Billion

We continue the trajectory marked in the second half of 2020, with a long list of tentative IPOs for this year. Sofi, one of the largest and most recognized players in the industry is going public but not through a traditional IPO, instead they have used another mechanism called Special Purpose Acquisition Company deal (more info on how SPAC works HERE). Sofi is posed to continue growing, and this move along with their brand-new banking license will help reinforce their objective of becoming the all-in-one banking solution

??Banking software start-up Mambu raises $135 million at a $2.1 billion valuation

BaaS solutions continue their growth trend, in a time where digital banking products/services are more important than ever. The German BaaS (credit oriented) company is taking speed to take off, with a new valuation of $2.1B and serving from traditional clients like Santander or ABN Amro, to FinTechs such as Oak North.

??Equifax Strikes Deal To Buy Kount

The consumer credit reporting agency adding tech muscle by incorporating Kount’s team and platform (a provider of Artificial Intelligence (AI)-driven fraud prevention and digital identity solutions). Kount was founded in 2007 and has raised $80M to date, while it serves more than 9k brand globally. The exit is priced at ~$640M, a figure that marks the importance of intelligent-driven data solutions to ensure security in the digital world

??N26 scoops Brazilian banking licence to take on Nubank

The massive success of NuBank has not only encourage other entrepreneurs or companies to target the retail banking space in latam, but it has also attracted the attention of established players from other regions of the world. In this case we are talking about the German Challenger bank, N26, which since last year’s exist of the UK market had the vision to explore to the Latam market

??LendingClub Bank Acquisition Approved by OCC as Investor Platform Closes Down

LendingClub has closed its p2p lending chapter, the model that has driven the company to go public just a few years after its foundation. This year has been specially challenging for p2p driven companies, and Lendingclub has managed to maneuver to redesign its whole strategy. Great things ahead in a pretty crowded space, looking forward to see their plan to become successful once again

FinTech Reflection – A decade in a year 

One thing that I know for certain is that 2020 was a year that I will never forget, for the good and bad that has happened. Above everything I have a feeling of have lived more than one year in 2020. Bear with me with this last thought, if we look back at 2020 and more specifically to the FinTech space so much has happened so rapidly that it seems we have burned chapters faster than ever. Fast progress or evolution is tough, as it eats you if you are not prepared to move fast, evolve, and adapt to the current circumstances. From my point of view, we have witnessed the end of a rich full period, and we are front-row watchers to the transition to a new redefined playground for FinTechs across all dimensions.

I am going to summarize three key events during the past years that have led the massive transformation or shift in direction of the FinTech space. The list can be longer, I can definitely tell you that, but at the end of the day from my point of view I am reflecting those situations that I have believe have escalated more rapidly, have had a deepest ripple effect across the industry and of course represent a shift on their expected trajectory:

1.FinTech exits

Usually when we look at progress, we tend to focus on the good that has emerged, without looking at what has been left behind. In this case, this year has been marked a good number of recognized players that will no longer operate independently either because they have been acquired, forced to close their operations or shut down. From the Wirecard scandal (squander years of work and resources, without forgetting the job destruction) which shaked the industry for a few weeks (I still have some emails from a few apps that I use letting me know that I couldn’t use my balance) to the variety of acquisitions with different flavors, from Ondeck Capital (IPOed at a $1.3B valuation in 2014 and now acquired by $90M), Kabbage (as a move by Amex to strength its SMB business – acquired by ~$890M) to Creditkarma acquired by Intuit for ~$7B or Personal Capital absorbed by Empower Retirement for $1B

The other side of the coin is the FinTechs that have acquired others to grow their business, and we have variety of examples from different dimensions. On the higher end of the pyramid with Sofi acquisition of Galileo Tech (according to Sofi’s latest reports Galileo already represents 53% of their revenues) or LendingClub acquiring RadiusBank (a move that has represented a closure from their lending p2p model, transitioning into a full bank). Smaller players have moved as well, with Tink acquiring Instantor and Eurobits to expand their platform and reach through EU, or  Brex the corporate card specialist adding tech muscle by acquiring small Fintechs specialized in SaaS and DLT (Neji, Landria and Compose Labs) – you can check more in detail some of the variables fueling M&A transactions HERE

And finally, the IPO activity that has happened and what is cooking for this 2021 (which is seems to me that is going to be a remarkable year for FinTechs going public). Everything together encapsulates a huge year for FinTech exit activity, lead by investors need to cash out investments, players looking to upgrade their digital capabilities and strategic moves to grow by acquiring other

2. Embedded finance as a driving force

We are connected through all platforms that we regularly consume, as we have accustom to a certain degree of expectations towards the ubiquity of the financial products that we need in our daily lives, and the role of the companies powering this connectivity is increasing more than ever. Open Banking as driving force, either if it has been pushed by regulation (e.g. PSD2) or if it has emerged plunged by market needs and progress. The year started strong with Visa and Mastercard making sure they had the platform and tech capabilities to lead this wave (acquired Plaid and Finicity, leading API providers in the FI space – leaving aside some of the issued raised with Visa’s acquisition). But this is just the tip of the iceberg, the wave of embedded finance is much more than API connectors, it encapsulates all API driving products and services that are redefining the way we interact with our financials in a direct or indirect way. The massive surge in demand for only channels has pushed all kind of business to move to digital, where API driving services are the fastest, safest and easiest way to run a business online. Payment Service Providers are on the front run of this rush, with giant players leading the way (like Stripe or Adyen) but also mid-range companies establishing as well (e.g. Checkout.com, Rapyd). Also, the current situation has revitalized segments that might be lagging a little bit, which is the case of Buy Now Pay Later players (e.g. Affirm, Afterpay, Klarna). In the last half of the year there has been a roller coaster with BNPL players, from huge growth in demand going through massive investments to start questioning the morality of their services. And this year the trend continues, Affirm is going to IPO (probably this week or the next one) with an estimated valuation of ~$8-9B.

Also, following the connectivity across platforms and increasing need for digital solutions, multiple industries are shifting their attention to the banking industry where they see a possibility to take piece of the pie. Most of the players looking to expand to financial services have in common a establish customer base to push financial products, already a brand recognition, tech-infrastructure, stable core business and cash to fuel new business lines. Following these principles players are starting with an advantage if compare with FinTechs, since they don’t really start from zero.

The reach of embedded finance will spread across the whole Banking value chain, the emergence of new players and the establishment of mid/late mature companies will help further push this transformation and for sure will be a driving force for the next FinTech era.

3. Neobanks from gold rush to quest for profitability

About this time last year, and through Q1 (before the pandemic started), neo/challenger banks were experiencing a gold rush pushed by massive investment received by top players fueled by the rapid adoption of their services, which also advocated for smaller players to begin operations across the globe (during the last period of 2019 and 2020 it’s been a record year for the number of neo/challenger banks founded), and also a new redefined experience for daily banking that was much needed. We all knew the progression and results of the largest players (growing fast in revenues and losses) but nobody was imposing a short-term timeline for profitability, until the pandemic outbreak. The canvas presented by the Covid-19 was a two-sided sword, on the one hand digital bank services were going to experience surge in demand with a ripple effect on much needed digital adoption across the globe (e.g. contactless payments, instant transfers…). On the other hand, the dramatic decrease in consumer consumption and consumers rushing to save guard their savings in traditional institutions directly set a target on neo/challenger banks. Investors rapidly move to inject funding into these players, to help them stay afloat but this time the need to seek for profitability was urgent (I did a small piece on the differences between non-profitable and profitable neo/challenger banks you can check it HERE).

The pressure was especially heavy on the most mature players from the EU space, while in other regions large players have further increase their reach and growth (e.g. Chime, Nubank, Kakao Bank). In the last Q of the year we learned how Starling and then Revoult have reached break even numbers for the first time, and we look forward to seeing this trajectory continue over the coming months.

On top of profitability pressures, FinTechs from other segments are targeting the daily banking space. More FinTech players are diversifying their core offering, to stay competitive and of course to open new revenue streams. There are similarities and commonalities across segments that enable companies to leverage their economies of scale to launch new products and services. This situation has not arisen during 2020, it has been cooking for a while, but it is true that last year I have paid more attention to this trend, specially on the intersection with daily banking. Across all segments we see players increasing touch points with customers, and there is no better way to do so than developing a daily banking service. This situation is imposing an extra weight on neo/challenger banks, since they still need to evolve their offering to be able to build profit structure and to compete with other players in other segments (e.g. financing, wealth management …)

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Multiple events have occurred this year, for me these 3 mark a differentiation across the whole ecosystem but of course there plenty of additional ones such as decreased in early stage deals, p2p lending models challenged, FinTechs distributing government funds etc. that are also driving forces in this new FinTech era