There’s a regular itch that I feel in the back of my neck. I scratch it, but it won’t go away. The itch is an alarm call really, and it’s asking whether all this FinTech investment is worth it. Last year, $111.8 billion was invested in over 12,000 start-up FinTech firms worldwide, according to KPMG. Of these, a number have broken out to be unicorns. A unicorn is a technology start-up that has reached a valuation of more than $1 billion, and includes such names as Uber, Airbnb and Ant Financial. In Europe we have several – Klarna, Revolut, Monzo, TransferWise – and, in July, the second largest European unicorn broke free of the pack with a $3.5 billion valuation: N26.
Now, you may not know N26. Founded as a digital first retail bank in Germany in 2013 by Maximilian Tayenthal and Valentin Stalf, the firm has just whizzed through its seventh funding round and now leads the pack. It is a full-service digital retail bank, operating across 24 European markets – in addition to the Eurozone, N26 is currently available in the U.K., Denmark, Norway, Poland, Sweden, Liechtenstein and Iceland. In these markets it has reached 3.5 million customers, up from just 2 million back in November 2018, and is now launching in overseas markets, specifically the USA and Brazil.
Monzo, with 2 million customers, is now valued at the $2.5 billion as of a June funding round which is double its value of October 2018; and Revolut, with 5 million customers, was valued at $1.7 billion back in April. The reason for Revolut’s lower valuation is that it has yet to roll out a full-service retail bank.
Even so, these are impressive numbers when you think that Commerzbank is valued at just $6.8 billion. How can new firms that have yet to gain customers main bank accounts – most of these new players are being used as secondary or even tertiary accounts by many people – be worth half of a Deutsche Bank, when you combine their current valuations?
It’s a good question, and one that many are asking. In fact, going back to my itchy neck, I have a feeling that some of these firms are more like Leprechauns than Unicorns. A Leprechaun is also mythical and magical but, rather than delivering riches, it just promises riches at the end of a rainbow you never reach. In other words, most Unicorns are offering riches that are as mythical and magical as the beast it shares its name with.
This was an underlying message in the N26 announcement of its latest funding round, in fact. Speaking with Laura Noonan of The Financial Times, Maximilian Tayenthal made this statement:
“In all honesty, profitability is not one of our core metrics. We want to build a global financial services company ... in the years to come we won’t see profitability, we’re not aiming to reach profitability. The good news is we have a lot of investors that have very deep pockets and that share our deep vision and that are willing to support the company over many years to come.”
Profitability is not a core metric? So what is? Oh, investability. The more people invest the better. Forget the return on assets, return on equity and returns on anything. It’s just getting ot the next funding round with a bigger pay cheque.
This struck me as close to the heart of so many technology dreamers, such as the Ubers and WeWorks of this world. Uber just had an IPO in May valuing the firm at $70 billion. This is a firm that is not profitable and, in fact, subsidises every ride you take with investors money. When will it be profitable? Who knows. WeWorks is even worse. WeWorks achieved a $47 billion valuation this year, but it is just a real estate firm that is cool and trendy for office space because it has free beer and neon signs. When you think it only has 425 locations, revenues of around $2 billion and losses of more than $2 billion – as of 2018 data – how can this be worth 12 times more than IWG, formerly known as Regus, which has 3,306 locations, $3.5 billion revenues and $200 million profit, again according to 2018 data.
I’ve heard of smoke and mirrors, but this is glaring pixie dust and sleight of hand. Whether the same be true of our FinTech brethren remains to be seen, but when valuations are based upon app downloads and future models of income, I remain to be convinced. Am I the only one or do I need to change my shower soap to stop that itch once and for all?
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...