Are big bank fintechs unfairly valued?

I’ve watched Marcus for a while and was not surprised to see its founder is leaving. There are those who are great at building companies and those who are great at running companies. They are rarely the same person.

In fact, some of the greatest companies were created by builders and runners. Walt Disney is always my favourite example. Walt was the visionary and builder of the empire; his brother Roy was the operations guy, who managed the business and finances.

Funnily enough, I can see this in my own children. One is a dreamer and the other is practical. One is Walt and the other is Roy.

Anyway, back to Marcus. It’s the FinTech bank created within Goldman Sachs. Launched five years ago, I was impressed to see that they now have more than 2,000 staff, 8 million customers, $100 billion in deposits and almost $10 billion in loans and card balances. Or was I? A bank that has deposits tends to get them by offering better interest rates; a bank that has 10% of deposits-to-loans is not so impressive.

Nevertheless, the bank is growing rapidly. In 2020, Marcus generated $1.2 billion in revenue, which was a 40% increase versus 2019. What’s the secret of its success? Strong backing, excellent capital access and funding, big marketing budgets, simple to offer bribery interest rates on deposits and loans to gain customers …

I remember a figure someone shared that Marcus was spending $20-$30 million a year in marketing Marcus.

Now, think of the figures I’m sharing. It takes a minimum $20 million to get a new bank license, based on UK regulatory figures. You then need another $20 million to market the bank, maybe. Sure, you can say it’s all going to be viral but really? Is that going to work?

Then you need a strong capital based to take deposits and cover exposures under the financial insurance schemes, like the FDIC. In other words, to launch a bank like Marcus, you needed a minimum $50 million from the get-go.

Sure, I’m impressed by Revolut, Monzo, Chime and others for this reason, but the big banks are stepping up to the mark too.

Just look at JPMorgan who are launching a UK digital bank. Like Marcus they are offering bribery to get customers onboard with 5% interest rates on deposits.

The operation is already bigger than many start-ups: 400 employees in London, 200 in Edinburgh and 250 more in customer centres in India and the Philippines … the digital bank will expand [from the UK] into the Continent and then worldwide if successful.

JP Morgan has also bought almost three quarters of VW’s payments platforms, and in the UK, Viswanathan led a deal to buy Nutmeg, a digital wealth manager, for £700 million in June. He previously considered buying Starling, The Times revealed in November.

It has also committed £500 million to LendInvest to fund mortgages for landlords, triggering speculation that the digital lender has the capability to join the rush into buy now, pay later — but will consider if “it is the right product with the right conduct expectations”.

Big banks with big pockets are always going to have a head start on boot-strapped start-ups looking for their next funding round.

Meantime, I noted a couple of years ago that  Goldman Sachs CEO David Solomon was complaining that the bank is “getting absolutely no credit from anybody else in the investing community” on the firm’s digital banking efforts.

Autonomous Research estimate the value of Goldman’s Marcus business at between $7 and $11 billion. Goldman’s total market capitalisation is about $130 billion.

Yet we see all these unicorns that are worth more than Goldman Sachs, like Square and PayPal. Equally, we see neobanks and challengers that are worth more than Marcus. In America alone, there are six FinTech start-ups that would beat Marcus:

• Stripe: $95 billion
• Klarna: $31 billion
• Kraken: $20 billion
• Chime: $14.5 billion
• Plaid: $13.4 billion
• Robinhood: $11.7 billion

What do you think? Are the big banks pegged down in valuation because they’re big banks? After all, five years and $100 billion in deposits, with 8 million customers seems pretty impressive to me.