FHi Fintech futurists --

This week, we cover these ideas:

The Acorns SPAC deal, including its valuation and detailed metrics
The growth levers and obstacles for point-solutions as they scale into the millions of users and hundred of millions of revenues
What a $50 billion fund should do to roll this stuff up

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Long Take

Let’s say you are SoftBank, or Tiger, or Coatue, or Point72, or Third Point.

And you’ve got a few billion dollars lying around that are burning a hole in your pocket. On the one hand, you might have a small (i.e., $100-500MM) strategy allocation to mid-stage venture capital. On the other hand, you might run several billion cycling through public financial markets (i.e., short Euro banks, long Visa and Square). Life is a bit bland.

Meanwhile, the SPAC markets are flipping fintech companies from private to public. The list of those companies is growing, and growing, and growing. Anything generating $50 to $500 million in revenue and with 500,000 to 10 million users is finally going public. As it should, if the public markets weren’t a wall of compliance.

Fintech SPACs in Q1 2021 and 2020, Source- FT Partners

Do you see what we see?

Here’s a hint:

Is it clicking together yet?

Here’s another hint.

A Tangled History of Telecoms (infographic) | Infographic, History, Family tree

It is looking like a pretty good time to go consolidating individual financial product footprints. Leaving aside whether consolidated companies are good or bad for some particular reason, the simple observation is that there are just far too many point-solution brands out there. Too many to be left alone to operate. And now a number of them are going to be public, which means that a number of them are going to be up for sale.

Instead of sweating it out on blitz-scaling, some good old-fashioned financial engineering can solve the growth problem. How would we go about consolidating $50 billion of fintechs into one? Let’s punt that to the end of the article, and first talk about the latest Acorns SPAC.

Growing Up

Acorns, the microinvesting roboadvisor, is being taken public by a SPAC at a $2.2 billion valuation. On an annualized revenue of about $100 million and paying user base of over 4 million, this is a 20x multiple and $500 of enterprise value per user. It’s a pretty reasonable deal relative to what we’ve covered before. Let’s trace out some history for the company and its context.

Roboadvice and digital wealth management got their start in the US in the mid 2000s. Much of the original push of getting financial advisors into the phone was about automating existing processes, and those processes largely existed for people who had a large amount of assets to invest. As a investment management business owner, you wouldn’t want to deal with the fixed cost and complexity of having lots of humans doing lots of paperwork, unless you were getting good return on that investment.

So you had processes that were targeted at wealthier people and didn’t “scale down” to small accounts. We don’t want to beat a dead horse about digital investing, so let’s just accept this as true. Personal Capital is probably the best execution of a translation of the traditional wealth management process into software with a modern customer acquisition strategy — i.e., data and content funnel that converts into asset allocation. As a reminder, they sold to Empower Retirement for about a billion.

On the opposite side of the spectrum, Acorns was founded in 2012 to power microinvesting. Microinvesting is essentially a behavioral hack to get people to move a little bit of their cash into savings accounts — speaking functionally rather than from a regulatory perspective. Some microinvesting apps round your spending change into asset allocations, others withdraw some small amount automatically every month. The core building block for microinvesting is data aggregation, allowing a machine learning algorithm to read your spending habits and figure out how much is safe to squirrel away.

The last thing you want to do to a person who has no money to save is to pull their cash when they need it. Acorns, Stash, Aspiration, Plum (on the UK side of the world), have been working on this alchemy using Plaid and PSD2 data. And they sort of solved it. Here is the service offering that Acorns provides, and the associated subscription fee for that service.

The app anchors in a subscription model and a simplified financial superstore concept. There are several well-executed components. First, the subscription model is easy to understand. Paying $1 or $3 or $5 a month is clear and straightforward, and there’s a narrative about how the software industry has turned everything into a subscription. Even Schwab’s digital wealth management comes with a subscription fee, rather than an AUM charge.

This framing allows Acorns to appear to be a very good investment for public equity funds. Just look at this chart of subscribers relative to market capitalization!

With 4 million subscribers and a $2 billion valuation, this thing is a bargain compared to Peloton, which has a $30 billion valuation and 2 million subscribers. Right?

It also seems quite impressive that the company is able to generate $20-30 per user each year, and as a result create over $100 million of run-rate revenue. The actual revenue is going to be 20-30% slower since it accrues over time, but the charts presented certainly look compelling.

The second thing Acorns has done very well is achieving simplicity.

The tiered package bundles together an investment, retirement, and cash account. Everything is automated, and the user doesn’t really have to think about what goes on inside the bundle. If you dig in, you’ll see an individual brokerage and IRA account from an Acorns broker/dealer and RIA, as well as a depository account at Lincoln Savings Bank. Users at this asset size level don’t need to mess around with asset allocations, risk questionnaires, savings rates, active trading, or any other anxiety inducing financial activities. Right?

And yet, we do have some nagging questions.

First, even though the subscription revenues are packaged as a good, modern way to charge people, they inevitably remind us of when banks have fees to maintain checking accounts. Here’s an old chart, but it proves the point around banks charging $5 to $15 per account.

Free Checking Is Disappearing Perk - WSJ

Charging a flat dollar fee, as well as promoting features like “round the change” are some of the oldest moves in the bank playbook. The may not know how to distribute them on Snapchat, the way Acorns does. But like, for real though! The whole point of fintechs was about getting rid of these nickel-and-dime fees from banks. And here we are, Acorns. Yes, the fee is smaller, but it *really* looks like the traditional model.

And the investor deck is pretty clear about trying to get these fees to be higher. See the ARPU build below for how Acorns wants to take the number from $30 to $140. The story is familiar in the sense that is adds on other financial instruments to the current user footprint. The consumer lens on this would just be to say that fees are going to go up per person — perhaps not on existing services, but somewhere. See the below chart compared to the Ark Invest chart on the same topic.

Digital wallets named among 15 world changers in 2021 – TechGH24

This goes to the heart of the story. Is Acorns the primary bank or investment account, or is it the secondary or tertiary one? The entire game for the company has to be about moving up in the scheme of importance for its users.

On the one hand, it is what will naturally happens as users become wealthier through investment activity and earnings power. On the other hand, it is what every other fintech is also racing to do. For example, Chime has been able to absolutely dominate the neobank market with a similar audience, because it figured out how to be the primary wallet.

Challenger Bank Chime Reaches The 12 Million Customer Mark

Hint — it starts with “direct” and ends with “deposit,” subsidized with payday lending.

How to set up direct deposit with Chime account number and routing number

Anyway.

This all comes down to how the fees benefit or hurt users, and whether that is sustainable over the long term. There is a reason that investment accounts charge a percentage of assets, and that is in part because the product is return denominated in percentages. If I give you 500 basis points and take 50 basis points as a price, that feels pretty fair.

Here is an annual user fee plotted against the size of a hypothetical account. Anything in the red zone is above 1% or 100 basis point, which is roughly as much as anyone should pay for money management, especially if mediated by a simple software robot.

It is hard to find chart data about the average or median account balance, but some articles suggest a range of $250 to $1,000. If we go to the SEC ADV filing here, it looks like there’s about $5 billion in assets under management.

That means an average account of a bit over $1,000, and the way that distribution curves work, we would think the median floats around $500. No matter which way you cut it, fees are 2% or higher across most of the Acorns client population.

Now that hasn’t stopped the fantastic client growth that you see in the app. Simplicity of design very often removes awareness of the financial cost. As another example, Coinbase was able to charge people 2-3% of funds just to get funds into Coinbase accounts, and thereafter to withdraw them. For Acorns, if you are delivering investment return of 15% per year (see SP500 chart below), nobody is complaining.

As an investor, you have to believe that fee expansion to this user base is possible, and ethical. You also have to believe that penetration will continue to grow relative to what other fintechs are doing. Acorns makes a reasonable point with the below chart about growth potential. In the grander scheme of things, this isn’t about Acorns against Chime, but against the incumbent banks.

And this data point leads us back to the start of this write up.

Key Takeaway

We started with the point that $1-5 billion SPAC target fintechs are perfect acquisition targets now that they are in the public markets. If you have a big financials hedge fund, it is hard to execute the innovation thesis just putting money into Santander and Goldman Sachs. You need a roll-up.

We are not sure how such a roll-up would actually be done, since the floated equity percentage for eToro, MoneyLion, Bakkt, Acorns and the rest is not a controlling part of the company. But certainly there is an activist investor out there that can figure it out. If Chime and Acorns do not overlap in customers, the way that Acorns claims, this is what a banker might call a “revenue synergy”.

A Western mega-fintech-app would probably cost around $50 billion to put together, and you might lose money for a few years. But within a decade, your footprint would be the size of Citi or JP Morgan or Well Fargo, and your valuation would look more like a technology company than a bank. Perhaps a Square or a Stripe could execute on this playbook as well. The main difficulty to overcome, in our view, would be the egos of the managing teams across all of these point solutions. But other financial monoliths, like Goldman Sachs, seem to manage.

If you’re a fund with $50 billion to spend, we’d be happy to advise you on how to get this done. Don’t come knocking with less.

Payload Changeout Room Supports Last Shuttle Cargo | NASA

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Long Take: The $2.2 billion Acorns SPAC and …

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