Tinder Banking and Toilet Banking
Abstract:
- Valuations of neobanks are reliant solely on growth metrics which may or may not translate into corresponding earnings due to structural factors in European markets that affect both legacy and neo banks.
- The disruption story has legs as neobanks start to make a dent in legacy banking topline and bottomline. However, to make money, neobanks must get basics of banking right and not rely excessively on ‘UX’ and gizmos.
Tinder Banking
Let’s start with a middle aged man’s lament on a self-servingly stereotyped view of millennial living:
I have a lot of respect for tinder for delivering a brilliant gamified UX and one UK high street bank actually hired someone from tinder to improve the UX of their mobile banking. However, is ‘UX’ enough for neobank valuations to continue to skyrocket or do tinder-banks actually have to deal with the fundamentals of how banks make money and manage risk? Essentially, my lament was provoked by UK #fintech media darling @Monzo sending hot coral cards to customers…
Toilet Banking
Before the financial crisis, bankers were royalty. Now we are a utility. This tweet from Avtar Sehra, the CEO of Nivaura makes a stark comparison to another much needed public utility:
That tweet predictably started a firestorm from the champions of #challenger banking.
I think driven by cheap capital and near zero rates, valuations of #tinderbanking are reliant on account growth metrics that may take a decade to translate into income. In other words, it’s a fallacy to compare a Monzo to an RBS given the near lack of lending operations.
Avtar went on to make some really good points
Gizmo banking?
Avtar said…
“My observation was a general one. No amount of bells and whistles will make people care about a bank… only care when it doesn’t work. A good bank is one you never see/think about. Similarly with all the nonsense around fractional ownership. Customising investment portfolios… all this #fintech nonsense will eventually disappear into the background, and things will just get done without people ever thinking about it… hence my public toilet analogy.”
Goldman’s Marcus vs Libra’s Marcus
Avtar said…
“It’s not like you’ll only use a public toilet once. You will keep going back when you need it. I’m talking about stickiness of the platforms for anything but basic functionality. And most of that functionality people want but are not willing to pay for. There is a reason they only provided a bare bones interface, but focused on the fundamental. People want to deposit, generate a return and not think about things until they need their money, and so should be able to access it easily. Basics… @GoldmanSachs gets it”
@pascalbouvier agreed in a lovely takedown of hot coral banking:
“Very true. further, accessorizing with bells and whistles, thinking the end result is differentiation, only ends up creating fads. and fads do not last.”
The Not-Com Bubble?
Twitter has been in a firestorm about the valuation of Revolut and it’s apparent disconnect with earnings. Some thing we may be in a “not-com” bubble. On the other hand, as @a16z noted fintech has got to a point where it’s not making money yet but its genuinely hurting the topline and bottomline of high street institutions. In other words, the disruption story is showing some legs.
That said, it’s not clear if any of the tinder banks have a clear plan for making money. As A16z noted:
“There are three big ways banks make money: net interest margin, interchange, and fees. Net interest margin is the difference between the interest income generated by lending and the interest paid out to their depositor”.
This is how #tinderbanking doesn’t make money -yet.
Amazon Envy
We can’t justify #tinderbanking valuation on trailing P/E so there’s an assumption they the leading incomes will rise significantly. The question is how? The answer is probably not in dating services or grocery shopping inside an app. The answer has to be in relevant banking services aka lending. So what tells us the apps will be able to manage credit risk and what their cost to income ratio will be when they finally can?
The #tinderbanking sector hopes to grow now and monetize later like Amazon did. That may or may not happen if the probable recession hits and the current tide of “shut up and take my money” venture capital runs out. This warning is particularly relevant in Europe because structural factors in Europe such as limited scale, market fragmentation, excessive regulation (e.g. GDPR), clogged debt markets, excessive reliance on loans for income and low growth apply to neobanks as well as to legacy banks.
That could well be the reason why Revolut, Monzo and N26 are now heading to ‘the states’ where Banks’ ROC is significantly higher.
Next… does fintech mean financial inclusion? Let’s see.
McKinsey Says It Best
For a More MECE Quantitative Analysis, I defer to our friends at McKinsey on Finance
