Fintech Research
What Klarna gets right that most neobanks don't
Neobank unicorns have a fundamental problem: Their business model is shaky. They prioritize customer numbers rather than profitability. It's like an e-commerce vendor focusing more on site traffic than sales. Sweden's Klarna is one of the few exceptions. It has generally been profitable since its 2005 founding, although it lost money in 2019 and again in the first half of 2020 amid the pandemic-induced downturn. Klarna's backers, however, remain sanguine. The company recently closed a new US$650 million funding round, bringing its valuation to US$10.65 billion. Klarna is now Europe's most valuable fintech unicorn.
Nubank lost US$17 million in H1, but it's not worried
Among neobanks, there are those that lose money and then those that lose a lot of money. "A lot" is a relative term, but it is apt to describe some of the European neobank unicorns. The UK's Monzo lost US$151 million in 2019 while Revolut only did a tad better, losing almost US$140 million. In contrast, Brazil's Nubank lost just US$17 million in the first half of 2020. It's not exactly profitable, but profitability looks a lot closer for Nubank - the world's largest independent digital bank - than some of its counterparts in Europe.
N26 remains focused on user numbers, not profitability
For all of their slick technology, neobanks can sometimes seem like a dime a dozen. Take this example: "the mobile banking platform redesigning banking for the 21st century." That could be just about any neobank in existence. In fact, the phrase comes from an Aug. 26 press release published by German neobank unicorn N26, whose backers include Tencent, Peter Thiel, Allianz and reportedly Mike Bloomberg. N26 put out the press release to announce it had reached the milestone of 500,000 customers in the United States after one year in the U.S. market.
Revolut's losses tripled. Does it matter?
It is not often that a company can shrug at its losses growing 300%. But in the world of fintech unicorns, where we don't always know what is real and what is make believe, going deep into the red is par for the course. Just ask Revolut: The UK's most valuable fintech startup lost £107 million in 2019, more than triple the £33 million loss a year earlier. A hiring spree was largely responsible for that, the company says, noting that it its headcount rose to 2261 from 633. Otherwise, Revolut says that it is in shipshape and expects to be profitable by year-end, pandemic or not.
Can Vodacom and Alipay build a super app for South Africa?
The super app is the most elusive of tech platforms. It's not easy to bundle messaging, digital banking, e-commerce and content into one tidy package at enormous scale. So whenever we hear about platform companies ready to bring users a super app, we take it with a grain of salt. It's not easy to duplicate the success of WeChat or Alipay in mainland China. The latest company to throw its hat into the super app ring is South Africa's telecoms giant Vodacom Group, which is teaming up with Alipay.
Why is Monzo struggling more than Revolut?
As the pandemic-induced downturn worsens, two of the UK's most prominent neobanks are taking diverging paths. Revolut continues to defy gravity. It raised yet another US$80 million as part of an extended Series D round in July. In total, Revolut raised US$580 million in that round at a valuation of US$5.5 billion, unchanged from February. Monzo, on the other hand, appears to be on shakier ground. While Monzo recently managed to raise another US$76 million, its valuation plummeted 40% to US$1.6 billion from US$2.6 billion. Worse yet, the company's annual report reveals heavy losses of US$149.5 million in its 2020 fiscal year, up 140% from the previous year's US$62 million.
Will Brazil greenlight WhatsApp Pay?
WhatsApp Pay just can't catch a break in the largest BRICS economies. China banned WhatsApp ages ago, so launching a payment app there is a moot point. India is ambivalent, as seen by a seemingly endless approval process. Brazil is the latest BRICS country to get cold feet about Whats App Pay. Things started out well enough when the company launched its payment app in Brazil on June 15. Yet within a week, Brazil's Central Bank ordered it to shut down. Now Brazilian regulators are suggesting that they may allow WhatsApp Pay after all, as long as Facebook comports itself properly.
TransferWise is on a roll
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.
What went wrong at Wirecard?
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.
When will Starling Bank reach profitability?
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.
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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.
N26 sanguine in face of COVID-19 challenges
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.
Monzo faces potential 40% drop in valuation
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.