Hi Fintech futurists --

This week, we look at:

• Chime, eToro, and Wise targeting the public markets through IPO and SPACs, and their operating performance

• The overall growth in fintech mobile apps, their install rates and market penetration (from 2.5 to 3.5 per person), and whether that growth is sustainable

• The implications for incumbents from this competition, and in particular the impact on money in motion vs. money at rest

• Broader financial product penetration and an anchoring in how the technology industry was able to get more attention that we had to give

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Long Take

Two large, high quality fintech companies are on the way to the public capital markets — eToro and Chime. Add also into this mix Coinbase, SoFi, and (transfer) Wise.

Each touts five to 40 of million users. Where do all these users come from?

ARK Invest recently created a slide that motivates every fintech startup to declare a Fintech bundling strategy and claim it is a financial services super app. It anchors the maximal value of a digital wallet customer at $20,000 — something that an app with a million users would love to use as a multiplication factor for its valuation. This has created a sameness of many recent SPAC and IPO stories. And it simply can’t be the case that every B2C fintech out there will capture the maximal user value.

Let’s anchor to some data. Note — our newsletter is running a marketing sponsorship from eToro, which we deployed prior to and without knowledge of this news breaking. Editorial and commercial coverage is separate, but thought we should flag for you.

eToro is planning to go public through a SPAC combination that will value the company at $10.4 billion. In addition to the capital from Fintech Acquisition Corp V, a Betsy Cohen / The Bancorp family of vehicles, there will be a $650 investment  from Fidelity Management & Research Co LLC and Wellington Management. eToro has about 20 million registered users, of which 5 millions came in last year alone, and prints $600 million of revenue from 1.2 million funded accounts.

There are some compelling mechanics described within the investment deck. The company knows how to deploy marketing spend and its cost per registration has fallen from $50 to $30 in the last year within the macro context of the Reddit stock market (yo GME!) and the crypto renaissance (yo Bitcoin!). The expansion out of crypto revenue into equities is also an interesting angle, and a worthy lesson about economic engines for other exchange-spread companies like Coinbase. Commodities and equities have been an organic story in what otherwise looks like a cyclical crypto revenue base.

Reminder that eToro, as an Israeli company with a global footprint, did at least two things in a unique manner that could not have been done by Robinhood and other American brokers. First, it designed its early user acquisition using contracts for difference (i.e., CFDs), which is a derivative on an asset price movement rather than holding the underlying. Crypto companies like FTX and DeFi protocols like Perpetual are essentially doing this today, and it is earning them fast adoption and volumes.

In the United States, CFDs are regulated out of existence, making them for all intents and purposes, illegal. But we do like out payments for order flow and interchange, which for example, the Europeans regulate out of existence.

And second, eToro has been able to “succeed” with copy trading engine on top of its community. We are generally bearish on social trading due to the lemons problem and a clunky fit on top of American behavioral / psychographic profiles (e.g., see the graveyard of Kaching!, Covestor, Motif). But the global aspect, the fat freemium tail, and the crypto exposure may have allowed eToro to break out of the trap. M1 is another company that seems to be hitting these notes.

Anyway, $10 billion on $600 million of revenue is about 16x — though the company is using 2022E revenues for a 10x multiple instead. Per user valuation is a bit tougher. 20 million users would imply a $500-per-user enterprise value. But if we look only at funded accounts, it is closer to $10,000 per account. This reminds us of the Personal Capital dilemma — do you look at the data aggregation PFM or do you look at the wealth management customers. Regardless, we find the price range to be credible and eToro to be a “real” business. It’s exposure to crypto native technology is roughly on part with Square, is less than Coinbase (50x revenue multiple), and is much less than DeFi protocols like Aave or Uniswap.

Ok. Wise is harder to track down, but we see 2020 revenues of £302.6 million and a most recent valuation of $5 billion. It is ways off from Stripe, the $95 billion engine of the eCommerce economy, but its 7-10 million customers are likely active and funded. The back of the envelope would suggest that $5 billion is cheap, and $10 to 20 billion is more likely in the current market.

Alright, that gets us to Chime. It is reported the company is aiming at a $30 billion listing with over 12 million users, for a $2,000 per user valuation. The neobank managed to crush nearly every other American competitor. Hat tip to Ron Shevlin and Cornerstone Advisor for the below estimates.

The key takeaway for us about Chime is that it is not generically competing to provide a financial service, and it’s not just the Covid digitization that is driving success. Chime is competing to be the primary banking relationship for its retail and lower income users by offering alternatives to payday lending products. But! It’s not the interest on the payday lending that is important. It is the fact that to be eligible for the lending advance, you need to connect in your direct deposit. That makes Chime the de facto primary bank account. And over time, social mobility should drift up the average account sizes if Chime does its job.

Revolut’s travel FX savings and Acorn’s round-up the savings into investments are not features that yield a primary bank account relationships. We will see this operational difference play out in the rate of growth of the deposits and user acquisition.

That said, $2,000 per user — or even $1,000 per user — is pretty wild for this customer segment, and comes with a interstellar embedded growth assumption from 15 million users to 50 million users in the next 5 years. Can Chime be Wells Fargo size without building out a large institutional business? Reminder that for industry analytics, banks that have less that $150 billion in deposits are collapsing to around 10% of the industry by deposit share. And banks with less than $1 billion don’t even count.

Look, let’s say that Chime banks the average and mass affluent American, which has an account size of $500 to $5,000. At $5,000 in deposits per person, we are looking at a $50 to $200 billion in total assets. This implies around 40 million accounts on the high end — something that is a very, very high share of the US population. Also note that the megabanks have over $1 trillion in assets. All this to say, there’s some natural ceiling that we should be thoughtful about. If Bank of America trades at $300 billion in market capitalization and Chime is at $30 billion, there are some *real expectations* baked in about asset expansion and user acquisition.

Market Share Structure

There are definitely more people around year over year.

But not so many more in the wealthiest countries in the world. Not so many that we can live in a reality where traditional banks keep their market share, and new banks double up that market share? Or is that somehow possible?

Here’s where we stand on brokerage. Ownership in stocks is pretty much flat or down since the late 1990s. There you have it for democratizing access to trading! For a deeper dive comparing the similarities between the period, and the symmetrical journeys of Etrade relative to eToro, check out the excellent Net Interest.

So it’s not like there’s a much higher percentage of the population that is now into daytrading YOLO stocks. Human nature has not changed.

Something else must be going on.

Back in 2016, people had 2.5 financial apps installed on their phone, according to Google. They largely used those apps to make a payment, check a bank balance, check stock price, and make a trade.

But that 2.5 app install number is growing. Financial services app downloads have doubled from 600 million per quarter to 1.2 billion per quarter at a 30% CAGR in the last three years. Meanwhile, the total number of downloaded apps went from 140 billion in 2016 to 200 billion most recently, a total growth of 40%. We estimate that the current number of app installs is 3.5 per person as a result.

All of these feel like money-in-motion, transactional services. And in fact, if you look at the growth of the transactional mobile wallets, like Square’s Cash App and PayPal’s Venmo, user acquisition bears out the hypothesis. Money at rest accrues in the megabanks and asset managers. It takes a long time to switch. Money in motion twiddles around. And increasingly that app growth is coming from new digital-native players than traditional incumbents according to SensorTower.

Key Takeaways

How do we make sense of the data above? Fintechs going public are claiming more and more users. We see more and more users install new fintech apps. And yet, the trading and banking populations are staying relatively flat. The asset levels of the megabanks are staying relatively flat. In traditional wealth management, assets are even growing.

The wealth management point we can largely explain away with capital appreciation. More people are getting wealthy as capital markets are subsidized by central banks and technology innovation persists. The assets themselves become more valuable as equity prices inflate. New wealth seeks services to which they can delegate new problems. Or alternately, they buy crypto art for $70 million.

The asset levels are simply the most sticky. Just because the ice cube is melting slowly, or growing slowly but melting relative to inflation or industry growth, doesn’t mean it’s not melting. Younger generations care about crypto assets and fintech mobile apps. The high finance ice cube is melting. Just look at what has become of Goldman Sachs and its transformation into Marcus. But that shift may take decades.

Money in motion lives on the frontier and prefers quick and easy experiences. Over time, it accrues into large deposit- and asset-bases, as Chime and eToro have demonstrated.

Finally, people simply have more financial relationships and more financial apps as the barrier to garner one is erased. This hypothesis is not easy to parse out, but we believe it to be true. The World Wealth Report may still say that HNW investors have 3 or 4 primary financial advisors. Payments Journal says there are 5.3 banking relationships per person on average. The data on the ground — trolling Twitter for crypto investors — will show you that retail individuals can easily have 10+ financial accounts across the world.

Such a phenomenon already happened in traditional media and in its war for attention. As the Internet was added to media consumption, TV and outdoor metrics stayed relatively flat over the last decade, with people simply eating more information. The mobile phone added a second screen, which was kept open while you watched Netflix. As a result, we added an extra 2 hours of media gluttony.

But there is always more room! The Philipines see 3 more hours of daily Internet consumption than the United States. More time for apps, games, movies, and of course, financial apps.

We leave you with one more chart — the distribution of bank accounts per 1,000 people from 2017. Singapore is at the top of the list with 2,300 bank accounts for every thousand consumers. Estonia, home of Transferwise, is number two with 2,200.

Israel is at the bottom of the top 20 here with 1,100. But it is also far and above more banked than, let’s say China, with 25 bank accounts per 1,000 people — 50 times more banked. Ant Financial and the Chinese CBDC are largely remedying this gap.

The main point from this data set is to show you that we can indeed have more people with more accounts, because we will all have many more financial accounts, the same way we have accounts scattered across hundreds of websites on the Internet. All these fintech companies going public are impressive, but you should pay attention to more than user count. You should pay attention the financial health of the consumer, and the core design mechanisms of the financial applications. Do they grow the relationship over time? Do they make the user better off? Do they create positive-sume outcomes?

As for the company, the deposits, assets, and revenues matter. If you take a fixed pie of the total value stock and divide it by more accounts, the natural outcome is that the average account is worth less — not more.

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