N26's $9B Valuation vs Chime, Varo, Revolut & Monzo
Klarna Revamps UK BNPL, Crypto Roundup, Paypal Buying Pinterest?
Hey all, Jason here.
Hello from Las Vegas! I have to admit, I’ve never really understood the appeal of Vegas, but I guess it doesn’t help that I’ve never been one to gamble. I got into town late Friday and am *definitely* still jet lagged. With any luck, I’ll still be asleep when this hits your inbox.
I’ve already had the chance to meetup with some fintech folks at Saturday’s Finnovation event, put together by the team at Sila. Looking forward to kicking off the full Money20/20 experience today — if you’re able to spot me behind my mask, make sure to say hi!
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How Does N26’s $9 Billion Valuation Stack Up to Chime, Varo, Revolut & Monzo?
Despite fierce competition, neobanks continue to raise monster rounds — and see their valuations rise as well. Recent months have seen Varo raise at $2.5 billion, Chime raise at $25 billion, and Revolut raise at a truly eye-popping $33 billion valuation (and, just yesterday, news broke that Chime is planning a 2022 IPO at a $35-$45 billion valuation target.)
It hasn’t all been good news and big checks, however. Unlike neobank peers that raised big rounds as they racked up new users and ballooning deposits during the pandemic, Monzo saw its valuation slashed to just $1.65 billion as its auditors flagged risks to the company’s ability to remain a going concern.
This all got me thinking, how do these companies stack up, from a valuation perspective? While there are certainly some important differences in their business models and revenue streams, they’re all fundamentally in the same core business of providing spending accounts to their customers and collecting revenue from interchange and fees.
Key differences include geography (interchange is considerably more lucrative in the US than in the UK or Europe) and product suite (Revolut has shipped features much more aggressively, expanding into crypto and investments, among other areas.) Still, interchange and fee income are the primary revenue drivers for most of these companies — few do a material amount of lending, at this point.
Because these companies are all private, there are far fewer data points to work with, especially in the US, where private companies aren’t required to file public annual reports. However, some of the data points that are available provide an interesting basis of comparison.
Looking at the valuation per user, a couple things jump out. First is the wide variation, from a low of $330 (Monzo, 2021) to a high of $2,083 (Chime, 2021).
Interestingly, Varo, which targets a similar user base to Chime but has the added benefit of a bank charter, comes in at a substantially lower $625 per user. Arguably, with its charter, Varo should be better positioned to monetize its customers (and retain that revenue for itself) than Chime, which must leverage bank partners to power its products.
Also of obvious note is Revolut’s huge jump from 2020 to 2021 — it saw its valuation increase from around $5.5b to $33b, driving the large increase in valuation per user. I attribute that largely to the funders leading that round — Softbank and Tiger Global — investors with deep pockets that have been known to drive valuations sky high (remember when WeWork was ‘worth’ $47 billion?).
Looking at valuation per user is an interesting if incomplete picture — especially as it is not uncommon for companies to report anyone who has ever opened an account as a “user,” even if the account is no longer active.
Looking at total deposits and average deposits per user provides additional context on the types of customers these platforms attract and the revenue potential. The amounts range from a high of $854 for Monzo to a low just $38 for Varo, with Revolut and N26 sitting somewhere in between.
There are a couple possible explanations for the variance. Monzo users could be more likely to use the service as their primary account, receiving their paycheck into the account, vs. Revolut or N26.
For Varo, users attracted to the service by its lack of fees, early direct deposit, and small dollar loans are more likely to live paycheck to paycheck, and have little in the way of savings. Chime hasn’t published numbers on total customer deposits.
But the number the really matters, of course, is revenue. Looking at the UK/EU-focused neobanks gives a remarkably consistent story, where a user is generating around $20 in revenue (total revenue/number of users). Varo’s ARPU is considerably higher, coming in around $38, which is likely driven by higher interchange rates vs. Revolut, Monzo, and N26.
According to analysis from Axios, Chime had an ARPU of $208 as of June 2020, but it’s unclear how a “user” was defined in this case (eg, all-time users vs. active users).
Despite roughly similar abilities to monetize their users, there is a wide difference in the resulting valuations. Monzo and Varo are valued at 15x and 16x revenue, respectively, while N26 is valued at 78x and Revolut at an astounding 108x revenue. If the numbers in this Forbes piece are to be believe, Chime is looking to price its IPO at a (somewhat!) more reasonable 35-45x revenue.
What investors are presumably pricing in is a combination of continued rapid growth of users and the assumption that these richly valued companies will be able to boost ARPU and LTV by rolling out more products and cross-selling — something that may be easier said than done.
Paypal Considering Acquiring Pinterest
News also broke last week that Paypal, now pursuing a so-called financial ‘super app’ strategy, is in late-stage discussions to acquire social media site Pinterest. According to CNBC, the purchase price would be around $70 a share, valuing Pinterest at about $39 billion. The company’s IPO in 2019 valued it at approximately $10 billion.
The move is not dissimilar to other lending and payment companies initiatives to get into content and the growing “social shopping” trend as a way to differentiate and to move upstream in the customer journey. BNPL-focused companies like Klarna and Affirm have been pushing their apps not just as financing tools but also as shopping portals. JPMorgan Chase even acquired restaurant review website The Infatuation, which included the storied Zagat brand.
Still, the deal may make more sense as an idea than in practice. How, exactly, such an integration would work and how it would boost Paypal’s payment volume and revenue isn’t immediately clear — a sentiment that seems to be borne out by Paypal’s swooning share price on the news.
Klarna Revamps UK Product Ahead of Tighter Regulation
European BNPL startup Klarna is making changes to its product in the UK in advance of anticipated beefed up regulations for the product category in the country. The sector has come in for criticism in the UK for encouraging users to take on debt they may not fully understand or be able to repay. According to the FT (emphasis added):
“The fintech, which was valued at $46bn in a recent investment round, will introduce new wording to make it “absolutely clear” to customers that they are being offered credit, with penalties for missed payments.
It has also added a “pay now” option alongside its offers to spread payments over several weeks or months. These changes in the UK will bring it in line with other countries where it operates.
Other promises include “stronger credit checks” and allowing customers to share income and spending data from their accounts via the UK’s open banking infrastructure, to prove they can afford repayments. It has removed late fees from its longer-term repayment plans of six months and over.”
It’s unclear how material an impact the changes will have on Klarna’s UK business. In the past, UK regulators have demonstrated a willingness to upend established business models by imposing new regulations that substantially impacted profitability, for instance, in the market for High-Cost Short-Term Credit (small dollar lending).
Crypto Roundup: Bitcoin ETF Starts Trading, Facebook Begins Testing Novi Wallet, NY AG Crackdown
Bitcoin ETF Begins Trading
The much anticipated launch of a bitcoin ETF went forth as planned last week. ProShare’s Bitcoin Strategy ETF, which is composed of bitcoin futures, saw about $981 million of trading volume in its first day, making it the second most highly traded ETF debut ever. Additional crypto ETFs are expected from industry players like VanEck, Valkyrie Investments, and others.
Still, not everyone is convinced the structure makes sense. Writing in the FT’s newsletter Unhedged, industry commentator Robert Armstrong said (emphasis added):
“Bitcoin Strategy provides an expensive way to capture some of the beta in a market, which it would be easy to capture, more efficiently, another way. The annual fee is 1 per cent. It draws its exposure to changes in bitcoin’s price from short-term bitcoin futures contracts, meaning that it has to regularly sell expiring contracts and buy new ones. Because the longer-term contracts are usually more expensive than the shorter ones, rolling the contracts over creates a drag on performance that, it has been estimated, could run to 5-10 per cent annually. The chances that the ETF will perform nearly as well as bitcoin are very low.”
Facebook Begins Testing Novi Wallet
You’re not alone if you’re confused by what, exactly, Facebook’s crypto and payment ambitions are these days. But after numerous setbacks, a reduction in scope, and multiple rebrands, its digital wallet, now called Novi, started rolling out last week. The company is piloting the wallet in the US and Guatemala, though it will use Paxos’ stablecoin rather than Diem, a USD-linked stablecoin proposed by a Facebook-founded coalition. In pursuing a dual pilot in Guatemala and the US, Facebook appears to be pursuing low- or no-fee remittances as a wedge feature to encourage user adoption.
New York Attorney General Cracks Down on Crypto
Last week, the New York AG’s office sent cease and desist letters regarding two firm’s “interest” products and requested additional information from an additional three companies. According to Bloomberg:
“Nexo Financial LLC in a statement confirmed it had received a cease-and-desist letter, while a person familiar with the matter said Celsius Network LLC was among the firms that received a request for more information.
The release states that virtual currency lending products “fall squarely within any of several categories of “security” under the Martin Act,” meaning they must be registered with the attorney general’s office.”
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Other Good Reads This Week
A Tale of Two SPACs (Fintech Takes)
Coinbase Teardown (CB Insights)
The CFPB could be kryptonite to fintech’s super apps (Protocol)
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