Long Take: The Fintech tipping point is here -- Visa's $2B Tink acquisition, Dave neobank $4B SPAC, and Revolut's 15MM users in context
Hi Fintech futurists --
This week, we cover the following:
Thesis: The fintech industry is coming up on the tipping point of funding, revenue generation, and user acquisition to rival traditional finance with $20 billion in YTD fintech financing, the several SPACs, and Visa’s $2B Tink purchased. Defensive barriers have eroded.
Companies: Dave, Revolut, Starling, Tink, Visa, Mastercard, Envestnet, Acorns, Stash, Cash App
Topics: venture capital funding, digital transformation, embedded finance, open banking, PSD2, venture capital, incumbent bank tech budgets
Fun ideas: Who will be the Baby Shark of Finance? Why doesn’t Craiglist have a bank yet? Who should Visa buy next?
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Check out Machine Learning and Data Science Blueprints for Finance: From Building Trading Strategies to Robo-Advisors Using Python from Hariom Tatsat. Great book about how to build machine learning algorithms in finance. Over 20 case studies in supervised, unsupervised, and reinforcement learning, along with natural language processing.
Fintech Meetup completes largest ever Fintech meetings event and announces in-person 2022 Las Vegas event (link here).
There was something about last two weeks that felt like a watershed moment.
Fintech started with Mint.com and you won’t convince us otherwise. Its $170 million sale to Intuit with 1.5 million users for personal financial management (in 2009!) proved you could make a *cool* finance tech company.
In 2021, $170 million is what you raise for your fintech / DeFi pre-seed.
Not really, but may be a little bit? Chainalysis raised $100 million at a $4B+ valuation. Clearscore got $200 million. Circle took down a $400MM+ round and is now pushing institutional DeFi. Visa is paying nearly $2 billion for Tink, the European open-banking aggregators. Wise, formerly TransferWise, is doing a direct listing for over $6 billion to its millions of customers. Mollie, the paytech company, is raising $800 million at a $6.5 billion valuation. These are large numbers, and there are many of them.
And that doesn’t include the long list of other names that sprung up in the last few years that are growing strong customer footprints like Oxygen, Dave, Step, M1, Aspiration, Blend, Pipe, and others.
Let’s take a moment to compare capital. While it is not the money that wins markets, it is the transformation function of that money into novel business assets that does. And while the large banks have a massive incumbent advantage with (1) installed customers and assets, and (2) financial regulatory integration (or capture, depending on your vantage point), there is a real question on whether a $1 generates more value inside of an existing bank, or outside of an existing bank — even when it is aimed at the same financial problem.
On the margin, would you rather invest into new financial companies, or old ones? Alternately, would you rather invest into human process or software process?
According to Empire Startups, there has $21 billion of fintech capital raised to date. And if the numbers are right and comparable, the $10 billion or so of Q2 2020 fundraising is on pace to be above the 5-year median of about $6 billion.
Throw into that Andreessen Horowitz raising over $2 billion for its crypto fund, the $70 billion in SPAC proceeds which provide liquidity outside of mergers and acquisitions, and you start to get a pretty clear view into the $50 billion or so of annual financial services innovation capital that is trying to crowbar finance into the modern century. And that’s not even counting the $1+ trillion crypto markets.
Here’s what the other side has.
Look at the tech expenditure by banks, such as the $10 billion spent by JP Morgan or $4 billion by Goldman Sachs. The global market cap for financial services is $8 trillion, with JPM at about $500 billion. So with some very naive math, let’s eyeball an industry tech spend of maybe $10 billion times 40, or $400 billion. That seems too generous number, so we haircut it 50% to get rid of public financial services market caps that already relate to fintech, payments, and other non-traditional finance providers (e.g., Alibaba).
About 20-30% of that is likely spent on some version of sustaining innovation, according to Cornerstone Advisors. That translates into $50 billion of annual incumbent spending to fend off the barbarians. We would guess maybe $30 billion of that belongs to the Western economies.
Ladies and gentlemen, the fight is now evenly matched. So the deciding factor now is — whose innovation algorithm generates better growth at the margin.
There also remains integration into government power — apparently $500 million or so of annual lobbying expense.
Until such spending on sovereign power is part of fintech activity, we are going to continue seeing the banning of Binance, and the shutting down of crypto mining, and the OCC battling the States for bank charters, and all sorts of other derivative power struggles.
This, we think, is a matter of time — as El Salvador has showed the world by adopting Bitcoin as a legal tender. It requires nothing but a generational revolution. That sounds fancy but isn’t, because it merely means “the passage of time”. If we are certain of anything, it is that time will pass.
A Closer Look at Tink
Let’s get the Tink news out of the way first. Visa really wants some open banking, embedded finance rails of its own. Its $5 billion bid to get Plaid didn’t work out; perhaps because it didn’t sufficiently disarm the government. Our deep dive on why a payment rail would want a financial data rail is here.
So the company is back with a $2 billion acquisition in Europe. There is first a core distinction between Plaid and Tink that needs to be addressed. The former is primarily a data company, because American banks do not like to expose their APIs or share client data, and therefore prying information out of them through screen-scraping, bilateral deals, and other voodoo is valuable. The network had 11,000 data integrations on one end, and about 3,000 B2B2C integrations on the other end, with a TAM of 200 million B2C accounts.
Tink, on the other hand, is riding the government-mandated PSD2 open-banking rails. Legislation forced European banks to provide both information and money movement APIs to third parties in order to create competition, and Tink connects to 3,400 financial institutions, used by 8,000 developers, to reach 250 million users. Super duper ironically, Visa is going to own the money movement network that is supposed to disintermediate Visa. In a sense, Tink is the more sensible acquisition, because it is already closer to payments *by law*.
All this gets Visa into embedded finance, which besides creating business opportunity, should create some hyped up multiple expansion.
So what should Visa buy next? Easy — they should acquire Envestnet yesterday. Besides being a pretty good wealthtech asset with lots of financial intermediaries, Envestnet has a chunky annual revenue of $1B+, owns Yodlee (the pre-Plaid data aggregator), and pulls together 500 million user accounts.
All that for a mere $4.2 billion of market capitalization. Alternately, MasterCard could snap up Envestnet or Bud — though it already owns Finicity.
A closer look at Dave and Revolut neobanks
We’ve previously suggested that there should be a $50 billion public fintech roll-up strategy that aggregates mid-size consumer footprints here, with a closer look at Acorns. Assuming you can pick up a $100 million revenue business at a 10x in the public markets, $50 billion would get you $5 billion of revenue and maybe 50 to 100 million total users. That looks a lot like Coinbase today. Potentially Chime could pursue such an inorganic strategy as well when hitting the public markets.
Anyway, we can see under the hood in a couple of other companies this year, and so let’s just lay those numbers down. Here’s Revolut, burning £170 million on revenues of £220 million.
Also, here’s Revolut using an accounting that (1) includes gains on crypto assets, and (2) only keeps in marginal costs.
Revenues are adjusted up by about £40 million, and there materalizes a gross profit. The most impressive thing to us is still just the raw user growth — now up to 15 million sign-ups. That number seems to be cumulative, as well as non-paying (i.e., accepting of terms and conditions), so we would love to see monthly average user disclosure. In a prior analysis of the European neobanks, and in this financial model, we derived a few common metrics. Without re-doing all the work for the comp group, here’s where Revolut now stands relative to peers — it’s more of a Cash App story, rather than a Starling story.
Let’s switch to Dave, the surprise-to-us American neobank focused on providing its users lending and a side hustle (e.g., a local temp gig). The SPAC presentation suggests a $4 billion valuation on $122 million of revenue and 10 million registered users — a chunky 30x on revenue with $400 per registered user.
Of those 10 million registrations, 1.3 million have converted into some sort of cash account, with a $40 average revenue per user growing to a $95 ARPU. Don’t make us do the math on how that squares with the revenue numbers. Also, that’s a valuation of $3,000 per “bank user”, suggesting a 30 year payback period to reach enterprise value (i.e., 30x).
The hat trick here is really all about “service” revenue vs. transaction revenue. Transaction revenue is interchange, which is what all payments wallets like Cash App and BNPL companies like Klarna feast on. Service revenue is defined as revenue to accelerate cash advances and provide “tips” to the app. It seems like lending revenue by another name.
Also, user membership costs $1 per month, which is the same model as the one deployed by Acorns and Stash. That said, we are fans of Dave’s execution over, let’s say, something like MoneyLion which can charge nearly $20 per month to the same demographic to build credit through starter loans. We also think the combination of income generation with spending support via consumption smoothing is a differentiated position. It’s like if Craigslist had a *Craig* bank.
You heard it here first!
Banks used to have some pretty tangible advantage.
You would look at a bank, and be like, “that’s a fancy building that I trust”.
Now, the competition is all in the digital world (see SensorTower):
Crypto.com is beating out Wells Fargo. Chime is beating out Bank of America. Robinhood is ahead of Chase. Cash App and Venmo reign supreme.
Whatever advantage there was in finance for incumbents pre-Covid seems to have melted down, since our digital lives have accelerated. And now that blood is in the water. As multi-million consumer footprints have sprouted left and right, this encourages the venture capital industry to keep throwing resources into the destruction of incumbent finance. The more it bleeds, the harder innovation will hit.
We said the $50 billion per year fintech spend is evenly matched. But there will come a flippening, as banks continue to lose profitability and free cash flow, while inflation drives continued investment into risk-on assets. Venture investment into crypto and fintech will swallow whole whatever incumbents can throw up as defense. The likely exceptions standing will be the very largest mega-banks, and whomever the government protects. It will become trivial to grow into the millions of users, just as YouTube has made it much more likely for songs to go mega-viral and hit billions of views.
Who will be the Baby Shark of finance?
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