Launched a newsletter, bought a house

and challengers, challengers, challengers

Welcome to the first issue of Fintech Business Weekly!

Those of us who work in the industry may forget it, but “fintech”, consumer banking, even finance more broadly aren’t ends in themselves, but rather are means to an end.

Financing an education, buying a house, saving/investing for retirement, starting or expanding a business - these are the “ends”. The finance industry offers means to enable people, companies, even governments to achieve these ends.

The “tech” part of “fintech” is also a means to an end. Fintech companies generate value (and justify their valuations) to the extent they enable their users to achieve their ends more efficiently than incumbent financial services products and companies.

What Fintech Business Weekly Isn’t

This newsletter isn’t meant to be an exhaustive roundup of fintech news, product announcements, funding announcements, and the like. There are enough folks who already do an incredibly good job of that.

Instead, it’s a space for thoughtful analysis and discussion of topics in the banking and fintech space: business models, the regulatory environment, consumer financial health, products, venture capital and investing, and so on.

The lens through which I think about these topics is informed by my experience: studying political science and sociology, serving in the U.S. Peace Corps, working at fintech startups like LendUp, working at a bank like Goldman Sachs, and living in the US, UK, and the Netherlands.

Without further ado…

We Bought A House!

My partner and I bought a home in Utrecht, the Netherlands. And I learned that though many in fintech treat digital processes as "done", my experience with leading Dutch bank ABN AMRO shows that is *FAR* from true.

The friction was most noticeable in a few areas:

Account opening
My partner already held an account at ABN, but I did not. This required an in-person visit to a branch with Dutch+US identity documents, physical signature capture, etc.

Solution: digital onboarding like Jumio Corporation, Onfido etc.

Document submission
Sensitive documents (employer info, bank statements, SSN & ID docs) were required to be submitted via insecure, unencrypted email. When an alternative was requested, none was available.

Quick Solution: secure portal for customer application, including comms, document sharing.

Better Solution: identity, employment, and bank account Verification-as-a-Service APIs to reduce/eliminate manual doc processing.

Document signing
Executing documents required a copy to be printed, physically signed, captured by picture, and returned via email. Seriously.

Solution: DocuSign (embedded in customer portal or even standalone).

Takeaway
If this experience demonstrates anything, it’s that “digital transformation” in incumbent financial institutions is far from complete - presenting opportunities both for fintechs building products for consumers and those developing technology solutions for banks.

Challengers, Challengers, Challengers

Chime Tops MAUs

Data on MAU of challenger bank apps in the United States puts Chime far ahead and shows a particularly rough start for UK/EU entrants to the US, Monzo Bank, Revolut & N26. What's happening here?

With Chime founded & operating in the US since 2014, it has a substantial time lead on competitors that recently entered the US. Current and Varo Bank also show decent MAU share.

But challenger banking doesn't have the strong network & winner-take-all effects of other fintech niches, like p2p payments (Venmo, Cash App). A well-capitalized and differentiated offering could still compete & win meaningful market share.

So what happened to the UK/EU entrants? Even N26, which spent heavily on advertising its US launch, has failed to capture meaningful user numbers.

Key reasons
-Little to no product differentiation. The UK/EU entrants all work through licensed partner banks and offer virtually identical features to existing US challengers.
-Sticky customers. There's a misperception that a majority of consumers 'hate' their big bank.
-Customer switching costs. Changing your primary banking relationship (direct deposit, bill pay etc.) in the US is a pain.
-Equals high competition for a limited customer pool (and thus high CAC & churn).

Graphic via C-Innovation newsletter

Unit Economics Reality Check

With Monzo Bank and Starling Bank announcing a number of new fees in an effort to fix their unit economics, they may be starting to resemble the 'legacy' banks they sought to disrupt.

But, the reality is, the overall UK banking landscape (incumbent & challenger) is shifting. Monzo Bank and Starling Bank had early product & marketing advantages, but that's changing.

-"Legacy" banks have closed the gap on digital product (app) features & onboarding
-While challengers still struggle to get to 'top of wallet' (primary bank account)
-Despite full UK banking licenses, Monzo & Starling do minimal lending
-Making them dependent on interchange fees for most of their revenue (which has dropped with COVID-19)
-and, as the shine wears off & customer acquisition competition from new & legacy players increases, CAC is likely to rise as well

Not that everything is easy for the high street banks either - compressing net interest margins (NIM) and increasing uncertainty around COVID and UK government response make lending a more challenging and less profitable business.

Unit economics analysis from McKinsey & Company

Valuation Puzzler

Chime has managed to 2.5x its valuation, while Revolut stayed flat at $5.5b, and Monzo Bank saw its valuation cut nearly in half. What gives?

You have to assume whatever data Chime's investors have makes them see a bullish case. We don't have access to the metrics they do (CAC, MAU, ARPU etc.), but the picture we DO have is that, on a per user basis, Chime is valued 4x more highly than Monzo and Revolut.

Is that justifiable?

With the limited publicly available data, I have to say probably not, for these reasons:

-Number of ACTIVE users is certainly lower than the headline user number
-Of those active users, only a % use it as their primary account (receive payroll)
-And THOSE customers tend to be lower income -- meaning lower revenue customers
-Especially without the fees traditional banks charge (minimum account fees & overdraft fees)
-and when Chime's revenue is derived almost solely from interchange fees

So, Chime's valuation/ACTIVE user is probably HIGHER than $1,812, while the revenue & profit generated from those users is LOWER than retail comps.

And remember, Chime doesn't actually hold a bank license (nor has it applied for one).

Retail bank comps from Ark Investment Management report.