Asia Financial Industry Blog

Fintech Research

Americans are fond of their smartphones. They use them for voice communication, texting, internet browsing, photo sharing and of course streaming videos. Yet, unlike citizens across Asia, Americans rarely use their phones for banking purposes.

Data compiled by consultancy Bain & Co. show that mobile payment adoption rates in the U.S. last year were below 10%, compared to above 80% in China. The U.S.'s mobile payments usage seems especially low given the country's high level of smartphone penetration. About 81% of the U.S.'s 327 million people own a smartphone, according to Pew Research.

Fintech investors think big. Armed with heavy warchests, they seek out the noblest of disruptors - startups with a shot at redefining the rules of banking. Profitability is not the first order of business - or even the second one. As long as the idea is attractive and scaleable, losing money for a while is fine, perhaps even a given. It's a small price to pay if one of those neobanks ends up "democratizing banking."

To be sure, investors expect fintechs they back to eventually reach the black, but when is anyone's guess. It's a bit like trying to predict when the United States and China will reach a trade deal. With that in mind, we shouldn't be surprised that the founder of N26, Europe's most valuable challenger bank, recently said that profitability is not a core metric for his company. Yes, this is a privately-held (not state-owned) bank that seemingly shrugs at turning a profit. And it just so happens to have a valuation of $3.5 billion.

Despite the United Kingdom's Brexit travails, its digital banking sector remains red hot. Indeed, the UK is home to the most challenger bank unicorns of any country: OakNorth (valued at US$2.8 billion), Monzo (US$2.5 billion) and Revolut (US$1.7 billion). Further, if analysts' estimates are correct, Atom Bank (US$644 million) is closing in on the magic number of US$1 billion. Starling Bank, valued at $161 million, may be a ways off from unicorn status, but isn't doing too bad for itself all the same.

To be sure, these challenger banks all have strong potential, but they are not - at least for now - all equally profitable. And if profitability is a key metric by which to measure what these startups are actually worth, then we can argue that their valuation is inflated. In recent years, as fintech has steadily disrupted and even occasionally menaced traditional financial services, venture capital has been pouring into the segment. So goes the fintech bubble.

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