european fintech trends
TRANSCRIPT
Discussed Themes
2
Intro
Challenger Banks
Blockchain
Marketplace Lending
Robo-Advisors
How are banks responding?
Takeways
Appendix
18% switched from their bank in the past 12 months2
40% would consider banking with Google
59% of financial products are not targeted at them
79% view there relationship as ‘transactional’
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18-34 year olds think differently about personal finance1
“…digital natives are really pissed off with their digital banking experience” - Valentin Stalf, CEO
The Pulse of FinTech Q1 2016 Review, CBInsights, MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, 2In a survey of 4000 customers in the US & Canada: Banking Shaped by the Customer, Accenture
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Low customer satisfaction creates opportunity for new players
The Pulse of FinTech Q1 2016 Review, CBInsights
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Which gave rise to…the new FinTech ecosystem
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Challenger Banks
What is a non-bank? Someone who engages in banking without a banking license.
• It is cheaper, easier and faster than ever to engage in banking activities
• Existing low customer satisfaction creates an incentive to try new banks
• Bank partnerships extend the same deposit guarantees for customers
• Lower compliance standards for online only banks makes it easier to onboard customers (address and ID verification)
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A perfect storm has catalysed the growth of challenger banks
Atom Bank
Starling
Number26
Tandem
Mondo
Fidor
0 45 90 135 180
Digital challenger banks by total disclosed funding (€m)
MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field”
• Announced €40m Series B financing round at a rumoured €140m (post) valuation
• Acquired 200k customers since launch in January 2015. Suggests a €700 valuation per user
• Does not have a banking license, and is built on top of WiredCard bank1
• Marketplace where they integrate 3rd party products rather than offering services off of their balance sheet
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Case Study: German startup challenger bank Number26
“We are not regulated, but our partner bank is”
- Valentin Stalf, CEO2
1Wiredcard bank is a specialist in online transfers, and is used by CurrencyFair/ LinkedFinance. 2MoneyConf, Madrid, Panel Discussion “What do you want from a bank?”
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Number26 primary differentiator is user experience
ID Verification via video chat No proof of address document required
Entire process takes about 8 minutes
Deposit cash at your local grocery store or through
electronics transfers
Free transfers to friends who also use Number26
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Number26 analyses your spending patterns to loan you money
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Number26 offers Transferwise integration directly in the app
Easiest and fastest account to open
Completely free to open and use
Covers any withdrawal fees, from any ATM
Send money within the Number26 ecosystem for free
Send money internationally with Transferwise
Affordable credit/ overdraft easily accessible
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Number26 is great!
From the users perspective, product is similar to high street bank
Banks offer higher level of customer service at branches
Cost of customer acquisition for non-banks is high
Cost of compliance is high (or not conducted properly)
Many ‘perks’ are not sustainable (ATM fees, limited identity verification)
Banks have huge distribution
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But will it last?
A banking license continues to be an unfair advantage
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“…You get a license to defy the laws of gravity…government guarantees, and ability to increase leverage…it is a license to print money.” CEO, Atom Bank
MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field?
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Blockchain
• VCs like cryptocurrencies because it reminds them over the early days of the internet
• It is taken longer than expected to gain traction, and many players are still looking for a strong use case
• The role banks play in blockchain is not the point. The real question is, will any of these technologies take off at all
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How did we get here?
“Like the Internet itself, the blockchain is architected for resilience and self healing…I have a deep and fundamental belief in open and decentralized systems.” - Fred Wilson, Union Square Ventures1
1If they're not lauging at you, you aren't working on the right thing
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More than just Bitcoin…
There are hundreds of cryptocurrencies built on the blockchain
Fundamental flaws of Bitcoin: mining is to expensive, transaction capacity is slow
Increasing complexity of producing new coins makes it less scalable
Growing pains or fundamental flaws? Patient investors are sitting on the side lines
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Blockchain: Status Quo
“Blockchain technology is immature, unproven and not scalable…disagreement about core protocol…it could take 5-10 years to sort out these issues.” - Toby Coppel, Parter & Co-Founder, Mosaic Ventures (investors in several cryptocurrency businesses)
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Marketplace Lending
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Marketplace lending has arrived in a big wayReal Estate LoansInstitutional
Investors
Hedge Funds BDCs Banks
Insurance Pensions
Family Office Governments
Sovereign Funds Endowments Foundations Private Equity
Small Business Loans
Consumer Loans
Factoring and Receivables
ServicesMedicalStudents & EduImpact Investing
Orhcard Platform, Lendscape
Consumer is by far the largest use case in the USA for MPL
In Europe, Funding Circle leads the way in Small Business loans
Real estate and factoring are showing potential in recent years (MarketInvoice, FastPay)
Creating markets: many factoring deals are loans that would have never taken place before
Cost basis for issuing loans in the long run should be lower than banks
Stricter capital requirements for banks have led to reduced credit availability,
Scrutiny around high risk lending have made banks pull back
In 2015 UK and USA MPL loans were £2.2b1 and $36b2 respectively
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Status Quo: Marketplace Lending
UK P2P Industry Lent £2.2 Billion in 2015 UK P2P Industry Lent £2.2 Billion in 2015 , Breaking New Ground the Americas Alternative Finance Benchmarking Report, KPMG
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Lending Club in the USA is dominating the consumer space
LendingClub Statistics
• The total outstanding consumer debt is $3.4t1 in the USA vs €16b2 in Ireland, and £183b in the UK3
• The average consumer debt per capita is €3,500 in Ireland, $10,700 in the USA and £2,850 in the UK
• In the USA, student debt, auto loans, and credit card debt account for $1.2t, $1.0t, and $714b respectively4
• European marketplace lending will be B2B focused because the EU consumer lending market is too small
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Consumer lending in Europe is small compared to the USA
1Consumer Creidt & Payment Statistics, Philadelphia Federal Reserve, 2Irish Central Bank, Household Credit Report 2H 2015. 3The Money Charity, UK Lending Statistcs 4New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages
Lending Club Reported Loan Purpose
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How will banks respond to new lending businesses?
• Push for increased regulation to level the playing field
• Banks will still win some asset classes such as mortgages
• Reduce pricing to compete
• Acquire, build or use white label services to participate in growth
Banks are partnering with marketplace lending platforms
Marketplace lending cost structure
25The future of finance, rise of the new shadow bank. Goldman Sachs Research
Marketplace lending is expected to be a trillion dollar business
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Projected Marketplace Lending Deals 2020
0
35
70
105
140
2012 2013 2014 2015 2016
China Origination VolumeUnited Kingdom Origination VolumeUnited States Origination Volume
300
250
200
150
100
50
Billi
ons o
f USD
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
YoY Growth in 2014: 167% YoY Growth in 2015: 200%+
Global Marketplace Lending: Disruptive Innovation in Financials, Morgan Stanley.Global Crowdfunding Market to Reach $34b in 2015, Mass Solution
• Morgan Stanely forecasts global originations will reach $300b
• This would suggest $1trln in loans outstanding in 2020
• Half of this growth has come from china, where there has been massive fraud
• Banks will acquire or build similar platforms
Alternative lending by the numbers in the USA
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. While it took Prosper 8 years to reach the first $1bn loans issued via its P2P lending platform, it took just six months to reach the second billion.
The future of finance, rise of the new shadow bank. Goldman Sachs Research
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Robo-Advsiors (i.e. Automated Wealth Managers)
Assets under management are still relatively small
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And growth is slowing. Trouble ahead?
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“Stand-alone firms will need $16b to $40b of net assets to break even. Moreover, [Morningstar] estimates…$1000 cost to add a new account, after factoring in attrition, and up to a decade to recoup marketing costs. It will be hard for robe-firms to self finance their growth.” - Joe Manseuto, CEO, Morningstar
The Pulse of FinTech Q1 2016 Review, CBInsights, Quote MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, Does not compute, The Economist
“People are overestimating how juicy the business is. Products are extremely low margin. It will be harder than the airline industry. Competition is still increasing. People coming in with competitive pricing.” Tamaz Giorgadse, CEO, Raisin (cross boarder deposits)
When scale is hard to achieve, companies are acquired for Tech
31The Pulse of FinTech Q1 2016 Review, CBInsights
• Goldman Sachs Asset Management (GSAM) has 1trln in AUM. Betterment and WealthFront have a combined $6b. Early innings?
• Financial advisors have historically struggled to build tech, which would justify high take out premiums
• Outside the USA, adoption of robo-advisors has been slow. Customer acquisition cost in this segment is very high
• Barclays, RBS, Lloyds and Santander plan to launch their own services1
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Wealth management innovation still generates a lot of interest
1UK banks set to launch robo-advisors, FT
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How are banks handling the situation?
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Case Study: Santander Bank
Agility Risk Taking
Mindset
Customer Scale Products
Infrastructure Brand
Startups + Banks = Best of both worlds
Kabbage - Serving SMEs in the UK via 3m Santander SMB clients
ripple - Santander uses ripple for small sum currency transfer
Startups Banks
Startups build on top of bank systems and are looking for partners
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Incubuments co-operate with new players
Banks are partnering with marketplace lending platforms1
1Proprietary Research, The Pulse of FinTech Q1 2016 Review, CBInsights
WiredCard supports Number26, CurrencyFair and LinkedFinance
Bank Investments to VC-backed FinTech Companies Q1’2015- Q2’2016
Goldman Sachs
Citi
Santander
Mitsubishi
JPMorgan
ING Group
Bank of China
China Development
Mizuho
Sumitomo Mitsui
0 2 5 7 9
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Conclusion
Takeaways from MoneyConf discussions
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Challenger Banks
• Mostly opportunity, not enemy
• Is better UX a large enough advantage?
• Is the business model/ service sustainable?
Blockchain
• Bitcoin may not be the big winner
• Expect some adoption in 5-10 years
• No need to jump on the next hot thing
Robo-Advisors
• Signs of trouble
• Valuable tech
• Large market potential
Marketplace Lending
• Capturing €35b+ loans annually
• Instances of fraud & non-compliance
• Small consumer opportunity in EU
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Appendix
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Brexit
• If the Brexit would occur, Ireland and Germany are seen as favourites for new business locations, due to their favourable regulatory framework, EU membership and existing tech communities.
• 34% of software developers working in the UK are from outside of the UK and 24% are from the European Union. Skilled labor have a lot of options and they will go where its easiest for them to work.
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Germany & Ireland potential winners in Brexit vote
Transferwise stated they would relocate HQ in case of Brexit
Massive devaluation similar to the Swiss Franc in 2005
Why is Transferwise halting transactions on day of Brexit?
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Brexit causing spikes in volume transfered at remittance co’s