Even seasoned fintech observers are sometimes surprised to learn that the world's largest independent virtual bank by customers is not in China, India or anywhere in Asia-Pacific for that matter. Rather, it's in Russia, which despite being the world's largest nation by landmass is one of its least populous with just 145 million people. Founded in 2006 as a branchless credit card issuer, Russia's Tinkoff Bank has 8-10 million customers (depending whom you ask), which even at the lower end is more than any other independent digital bank.
Many of the most prominent fintechs are known for sky-high valuations and red ink on their balance sheets. There's a disconnect between what private investors deem the companies are worth and their actual financial performance. The biggest challenger banks in Europe, such as N26, Revolut and Monzo, are unprofitable. The same goes for Paytm, a payments bank that is India's most valuable tech startup. Ditto for Grab and Go-Jek, the Southeast Asian Uber clones which are trying to reinvent themselves as digital banks.
The arrival of open banking in Australia comes at an opportune time. Virtual banks are fast setting up shop amidst widespread demand for more choices in consumer banking. Consumers, while not dissatisfied with existing banks, would like better digital-first options. For their part, regulators are keen to boost compliance across the industry. The findings of the Financial Services Royal Commission did not cast Australia's traditional banks in a flattering light. That's one reason Australia has not hesitated to issue full banking licenses to several fintechs.
UK-based Revolut is the one of the world's most valuable challenger banks with a valuation of US$1.7 billion. With seemingly unlimited coffers of venture capital to draw upon, the company is targeting a $10 billion valuation in the next few years. Its executives say that the company would need to be valued at US$20 billion or more before it would consider going public.
Revolut's backers are pouring money into the company because they believe it is pioneering banking of the future: digitally native, frictionless, having a minimal branch network (and thus a more competitive cost structure than traditional retail banks) and a stronger focus on niche customer segments underserved by incumbents. Currently, Revolut offers foreign exchange, stock and crypto brokerage services, plus peer-to-peer payments.
Estonia is perhaps the most connected nation on earth. Wired magazine describes the small Eastern European country as "the most advanced digital society in the world." Data compiled by the Estonian government show that 99% of Estonia's services are online, 98% of Estonians have a digital ID card and about 47% of Estonians vote online.
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.