The battle between new entrants and incumbents banks: who will be the winner over Fintech?
Why is Digital Literacy necessary in the financial industry?
Is Digital Literacy only necessary for those who work in the technology industry? We know that the answer is clearly “No” and that all industries today must leverage technology to stay ahead of the competition. Above all, as represented by the buzzword Fintech, the finance industry is even more essential to leverage technology than other industries. Going to a bank branch, withdrawing, and transferring money is no longer an endurable experience for the millennials and the next Gen Z, who will be the core of the customer base and who have grown up with social media and smartphones.
Then, will the winners in Fintech be the asset-light newcomers who can easily focus on the customer experience? Or will it be incumbent banks with robust security backed by a proven track record and past investments? The answer to this question is still not yet clear, but I would like to introduce some of the characteristic moves in each camp in this post.
Nu Bank: The World’s Largest Digital Bank
Do you know the bank that offers this credit card? This is a credit card from Nu Bank, the Digital Bank with the largest customer base in the world; Nu Bank represents a new Digital Bank to enter the market with an IPO on the New York Stock Exchange in December 2021.
Founded in 2012, Nu Bank is a digital bank that offers credit cards, personal loans, and payment services in Brazil and other South American countries. It is the largest bank globally, with 53.9 million customers at the end of 2021, a 62% increase over the previous value period, including 41.1 million active customers. And the number of users has more than doubled over the past three years.
So how is it that the bank has acquired so many new customers in just the first 10 years? According to S-1 of the company’s listing prospectus, as of 2017, 30% of the population over 15 years old in Brazil did not have a bank account. This percentage is 55% in Colombia and 65% in Mexico. On the other hand, the five largest banks in these countries control 70–85% of the banking market, and Nu Bank estimates that the cost of services borne by customers of the large banks exceeds 600 per month. At the same time, the service quality of the existing banks is not satisfactory, with the number of complaints exceeding 5,000 in six months, compared to Nu Bank’s 269, making it difficult to say that financial services have been democratized.
“Nu Bank” means “the bank of Nude” without excessive branches, staff, complexity, and high fees. Instead, it offers credit card loans and microfinance for small businesses, with accounts and credit cards easily opened with a smartphone. As a result, the company has secured impressive profitability of 4.7$ in profit on monthly sales of 5.6$ per active user, and LTV is more than 30 times higher than CAC. However, there are concerns that credit risk may materialize due to concerns of a slowdown in the global economy, and the stock price has been on a downtrend since its listing. This suggests that the ability of new entrants to show resilience in the event of an economic slowdown will be an important point in determining whether they can be winners in the fintech market.
MUFG Bank’s Venture Debt to Startups
Are existing banks reluctant to leverage technology? That is not true. MUFG Bank, one of the largest Japanese banks in Asia, invested $9 billion in Morgan Stanley when the Lehman Brothers bankruptcy and still holds more than a 20% stake in Morgan Stanley as the largest shareholder. The bank holds more than With total assets of $3.1 trillion; it will be the world’s fifth-largest bank by assets in 2021.
One of MUFG Bank’s current businesses focuses on providing Venture Debt to startups in Asia. The main funding source for startups is equity investment by VC and PE funds, but there is also a need on the corporate side for debt financing, which has a less direct impact on management rights, etc. Therefore, MUFG Bank is expanding its business in Southeast Asia and India, where startups are beginning to grow. As a result, there is a sufficient need and market size for venture debt.
So how does MUFG access this market? The answer lies in a joint venture with Israeli Fintech firm Liquidity Capital, a startup finance company founded in 2018 that uses proprietary AI technology to forecast future cash flows and scoring models. By combining Licuqidity Capital’s novel technology with MUFG’s 100 years of corporate credit models and experience, they can provide debt financing to early- to mid-stage startups. The first fund, which initially started with USD80M, has completed its financing, and the second fund of USD300M was formed in January 2022 to provide Venture Debt to the late stage, as well as to acquire a client base for a new IPO and to work with Morgan Stanley.
As this example shows, existing banks are by no means immune to the use of technology. At the same time, it has become common for banks to move away from a self-focused approach and create new business opportunities by partnering with external parties that possess cutting-edge technology. Incumbent banks know that they need to open themselves first to provide an open experience to their customers.
Therefore, I believe that the winners in Fintech are not correctly categorized as New Entrants and Incumbents. Still, the real winners will be those who can continue to transform their own companies into what they need to be at the time to provide what their customers need, regardless of which camp they are in.
(Source)
https://fintechmagazine.com/banking/battle-between-challenger-and-incumbent-banks-continues
