Asia Financial Industry Blog

Fintech Research

London-headquartered TransferWise continues to buck pandemic-induced economic malaise. The money-transfer firm is one of the few fintech unicorns that was profitable before covid-19 hit. With cash saved for a rainy day, it has continued to expand strategically over the past six months. TransferWise has reportedly reached a valuation of US$5 billion, a 30% increase over its previous US$3.5 billion price tag, in a secondary share sale that raised roughly US$300 million. The U.S. hedge fund D1 Capital bought US$200 million in TransferWise shares as part of the deal, according to Sky News. Other key investors in TransferWise include Merian Global Investors, Andreessen Horowitz and Sir Richard Branson. 

It was only a matter of time before an erstwhile high-flying fintech crashed amid the pandemic-induced downturn. After all, what goes up always comes down. What surprises us is that the insolvent party is not a unicorn with an inflated valuation in private markets, but a listed company founded in 1999: Germany's Wirecard. One would think that Wirecard would be able to manage the basics of banking and not cook the books. Unfortunately, creative accounting looks like the only explanation for how Wirecard "misplaced" US$2 billion that probably did not exist in the first place.

The UK's Starling Bank is that rare neobank that espouses an interest in profitability. Who would have guessed in the wake of the 2008-09 global financial crisis, when fintech was in its naissance, that the banks of the future wouldn't worry about making money? Starling though remains of a more traditional mindset than its contemporaries Revolut, Monzo and N26. That can be attributed in part to its founder Anne Boden, a banking veteran who previously worked at Lloyds, Standard Chartered, AON Corporation, UBS, ABN AMRO and RBS. In May, Starling closed a £40 million fundraising round led by current investors JTC and Merian Chrysalis Investment Company Limited.

Brazil's Nubank is growing so fast it's hard to keep up. In June, Nubank hit the 25-million customer milestone, up from 15 million in October 2019. Most neobanks talk up the need to build scale and grow fast, but Nubank is one that walks the walk. The Sao Paolo-based company is the largest independent digital bank in the world. Granted, it did not happen overnight. Nubank has been around since 2013. But the Brazilian neobank, currently valued at US$10 billion, appears to have found the secret sauce.

German neobank unicorn N26 has a well earned reputation for audacity. In July 2019, its co-founder Maximilian Tayenthal famously (or infamously) told The Financial Times that "profitability is not one of our core metrics." If we had to sum up the fintech bubble's ethos in one line, that just might be it. In that same interview, Tayenthal highlighted N26's "deep-pocketed investors," which include Peter Thiel - the smart money, at least based on his bets on Facebook and PayPal. Despite the coronavirus pandemic, investors handed N26 another US$100 million in early May, while its valuation held steady at US$3.5 billion.

Neobank valuations have long seemed inflated given how few of the banks are profitable. Now the £2 billion valuation of loss-making UK challenger bank Monzo could be adjusted downward as its business slows amid the global economic downturn. Monzo is considered one of Europe's top challenger banks along with Revolut and N26. In mid-May, The Financial Times reported that Monzo is close to reaching a deal with investors that would value it at roughly £1.25 billion, a 40% decrease from the £2 billion valuation it achieved in June 2019. 

For Europe's cash-burning neobanks, the current economic downturn is a rude awakening. In March as Europe went into lockdown, the unicorn trio of Revolut, Monzo and N26 saw their growth rate drop by 18% to 36% in their home markets (The UK for the former two and Germany for N26), according to Sifted. These three digital banks - among Europe's most highly valued - have prioritized rapid growth over profitability. They have spent heavily to build scale quickly, assuming they will eventually move into the black on solid revenue-per-user figures. If growth suddenly stalls, their business models start to look less solid.

As it turns out, Facebook's much hyped Libra cryptocurrency project is more evolutionary than revolutionary. Libra 2.0, rolled out in mid-April, is modest in its ambitions. Gone is the concept of a global digital currency to potentially rival the dollar and evade regulatory oversight. Instead, Facebook wants to launch a series of digital coins backed by fiat currencies. The proposal includes the idea to build a "digital composite" of some of the coins for cross-border transactions and use in countries with no virtual currencies. Of equal importance, Libra will not be decentralized and "permissionless." That was never going to fly with central bankers or politicians, who don't want to deal with Bitcoin on a much larger scale.

To be sure, many crypto diehards are crestfallen. Even those who are not fans of Facebook liked the idea of an anonymous, decentralized digital currency that might one day challenge fiat currency hegemony. If Facebook could have pulled off such a project, crypto in an iteration close to how Bitcoin founder Satoshi Nakomoto (a pseudonym) imagined it would have finally broken into the mainstream global financial system. When Nakomoto launched Bitcoin in 2009, he sought to reduce our reliance on centralized financial institutions to transfer funds, and instead foster anonymous peer-to-peer transfers on the blockchain.

The Singaporean government recently released the second edition of its Model Artificial Intelligence Governance Framework, which includes recommendations for governing Artificial Intelligence that could influence international guidelines and regulations. The updated framework introduces some notable changes from the first edition, which was published back in January 2019. Among them are recommendations that AI developers and operators strive to make their systems human-centric, explainable, transparent and fair. This emphasis on responsible governance is in keeping with the Monetary Authority of Singapore's FEAT guidelines from 2019, and presents a stark contrast to the approach taken by the European Union in their recent white paper on Artificial Intelligence

The coronavirus outbreak is weighing heavily on the balance sheets of some neobanks, while others appear to be weathering the crisis well. For digital banks in Europe, which is the second hardest hit region behind the United States, the challenge to their businesses is particularly formidable. Very few of Europe's top neobanks by valuation were profitable before the contagion broke out. In fact, they occasionally played down the need to be profitable. WeWork's abortive IPO helped change their calculations. Yet it is hard to see how they will come closer to profitability amidst a painful economic downturn.

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