FinTech Zapping - 3rd November

FinTech Whispers 

??Zopa launches new credit card to help customers control their money

In addition to SoFi’s credit card announcement, in EU we have another player that is starting to make a good use of its Banking license. One of the p2p lending pioneers in the region has launched a credit card to help individuals make a better use of their financials. The new product comes along with great service features like real time updates or a safety net balance, but it also comes with APRs ranging from 9.9 to 34.9 … yes this is correct, for those users with worse creditscore this option could become expensive

??Venmo, Square Cash and Paypal give the QR code a second life

I must be honest, it was not until a couple years ago when I didn’t really see the point of QR codes, as I was used to use my mobile wallet or my contactless card. This is probably because I haven’t spent much time in APAC where QR codes have been widely adopted thanks to its ease of implementation by merchants and simple use for consumers. However, QR codes are raising again enabling contactless payments and it seems we will see them more than often embedded into digital wallets … in my case I use a QR code to pay every time I go to a gas station

??SoFi gets green light to become a national bank

In the last few months we have seen how Varo obtained its banking license, Square is in the process and well it looks that after a couple of tries Sofi is finally getting its national bank charter. In April Sofi was in the news for the acquisition of Galileo Tech, a company powering neobanks globally that has opened a completely new revenue stream for the US challenger. Now, this marks a huge step for the $5B valued FinTech, as they will be able to operate on its own while extending its product portfolio

??Despite the pandemic global FinTech financing runs high

We saw a great revamp during Q2 helping overall funding for H1’20 to surpassed H1’19, and we are seeing this growth trajectory continuing in Q3 as well. I believe here we shouldn’t just focus on the ballpark funding numbers to really understand what is happening. If we look at number of deals there’s been a reduction of ~8-12% compared to last year, which reaches ~18% if we only look at early stage deals. Yes, overall funding levels is going up thanks to large rounds (e.g. Klarna $650M or Robinhood record rally with ~$1.2B in funding just in 2020) but investors are less willing to take the risk to invest in smaller players with no proven market fit. I include this one in the backlog of FinTech reflection topics, stay tuned!

??BlueVine rolls out small business banking product & Plaid partnership

The SMB alternative lender has been able to grow despite the pandemic, consolidating as a solid alternative for SMBs in the US. Last week it unveiled a series of products upgrades that will help the company enrich their product offering including business deposits, business checking accounts and new payment features to pay out bills directly from the app. Major milestone for Bluevine, diversifying their product offering by partnering with Plaid in a clear attempt to continuing building touch points with its customers to become primary bank option for them

FinTech Reflection – Profitable vs Non profitable Neobanks

Back in August there were tons of news around neobanks’ financials how these players were going through a rough period, the non profit trajectories and the impact of Covid were going to have direct consequences on these players growth. Most of the players raised funds from existing investors, fueling some run away to anticipate what was coming securing its initial investment position.

To be honest I have to say it’s amazing to see how these players have been able to build a 5 or 10M customer base business with no branch or brand awareness, just by offering services cheaper and with more transparency than traditional banks. We must not forget most neobanks have been founded no more than 5 years ago, and yes in about 2-3 years we should start seeing them at profitable levels but let’s not anticipate the future, and we need to consider the current circumstances which in my opinion will benefit the must needed change in strategy.

However not all neobanks or challengers are non-profitable, there is a pool of players (some of them were not launched as neobanks but have transitioned into one) capable of serving the digital banking space and reach profit levels. Let’s put below what are the main core differences from these two segments, to better understand their trajectories

What do Non-profitable neobanks have in common?

• Customer acquisition strategy – the problem with valuation led business models, in the case of the neobanks space, is that there was a race to accumulate the largest possible customer base. The issue is that this race implies a high CACs, at a lower LTV for each user. The customers acquired are not profitable for the company and the bigger the customer base gets the higher fix costs that it has to assume.
• Subscription model – lately there have been some players adjusting and restructuring their offering, but it does not look like it will be enough. Lots users rely on neobanks as a secondary option which means that there is a limit (usually close to zero) to what they will be willing to pay for, and for those premium members current travel restrictions have affected deeply their engagement as most of the value added services are targeted at currency exchange, airports lounge, foreign ATM withdrawals, travel insurance etc.
• Lack of credit offering – as a result of initially launching with no banking licenses and low capital these players were not capable to offer financing products. Some of them were innovative and partnered with other players to fulfill this offering gap, although it is obvious the returns are far from enough to substitute direct financing. In the short term we will see more neobanks pivoting on financing products to drive up their financials
• Low deposits volume – since these players are not their users’ primary bank option capturing deposits is hard. Also, savings products were not introduced until recently, and I mean real savings not “vaults” or “automated savings tools”.

What do Profitable neobanks have in common?

• Target at underbanked segment – the theory tells us that all neobanks were launched to target a segment that was traditionally underserved by traditional institutions, but the practice is a bit different. Non profitable neobanks have developed an offering to capture clients that were not happy with their bank experience, but these users were and are still holding a primary relationship with traditional banks. On the other hand, we have profitable neobanks that have developed a service targeted at those individuals that didn’t have access to banking services (at least in an affordable way). This fundamental difference is key, as it directly affects CAC/LTV and consequently fix costs
• Pricing strategy – most of the players have opted for not introducing a subscription model and offer free account services while introducing other products that would help them build revenue structures. Players have understood that at the retail level most of the users have the same needs, it is just a matter building the right product around core offering instead of segmenting it from the beginning
• Revenue led product offering – it depends on the company, but the truth is that if we look at players claiming to be profitable, they all offer a product range relative rich compare to non-profitable players. Of course, for those players that were not launched initially as neobanks it’s easier to propose a more complete range of products but still for those pure neobanks players, we have seen how they have pivoted on building revenue led products around their core offering instead of launching value added services to complement it
• Capturing user’s deposits – profitable neobanks hold a larger deposit volume, either because they are offering savings products attracting users with their higher interest rates (compared to traditional banks) or because users are relying on these players as their primary bank. Also, like financing products these players introduce direct debits and savings products early on their journey to capture the consumer’s relationship

The above points are just part of a simple comparison, as we will need to go deep into each company’s strategy to better understand the reasons behind their current profit status. Like I have said, for me all neobanks have done a formidable job forcing traditional banks to upgrade their banking experiences and I truely think that the current situation will help them become more successful, as it has challenged their current business strategy accelerating the need to evolve towards profit stages.