Tag: Fintech

Neobanks need to own their niche

On By mehranmuslimiblogIn Banks, Mobile payments, neobanksLeave a comment

Currently there are somewhere around 256 neobanks in existence, according to Exton Consulting. These brands offer a digital-only experience that are perceived as customer-centric and easy to use, as in opening an account only takes a few minutes. They are also lower cost to use than their physical banking counterparts.

However, only a small handful of these banks have achieved substantial profitatbility. Their names will be familiar: Revolut, N26, Monzo, Nubank and Chime amongst them. The others, which are significant in number, are unlikely to be profitable for the foreseeable future, according to Accenture research, which revealed “the average UK neobank loses $11 per user yearly.”

Part of the problem is the rising cost of providing a service, whilst the margins generated per customer remain low. Finextra correctly reminds us that disrupting the traditional banking market was always going to be a long-haul business, and that it really needs large amounts of venture capital investing to keep the LTV/CAC ratio in good shape.

CAC is ‘customer acquisition cost’, and LTV is Life-Time Value in this case. The LTV is a measurement of the average revenue generated by a customer in a 1, 3 or 5 year period. Clearly, neobanks want this to be as high as possible, but it is one area where they are being challenged, as the average is around 15€ per customer per annum. Banks like N26 and Monzo obtain revenue mainly from “the low debit card interchange fees,” but this results in very low LTVs. Less travel and smaller purchases during the 2020 pandemic has had a big effect on this.

The CAC is calculated by taking the total money spent on customer acquisition and dividing it by the number of new customers. Neobanks do much better than traditional banks in this regard, “with an average CAC of neobanks around 30 euros versus 200 euros for incumbent banks,” Joris Lochy reports at Finextra.

Lochy says that what we are going to see this year is a switch from chasing growth to increasing profitability. Neobanks are being strongly encouraged by VC investors to provide more profitable products, such as investments and credit: products such as credit cards, overdrafts, salary advances and purchase financing. They are also likely to chase small business customers, and provide Banking-as-a-service services to other Fintechs or even banks.

It also follows that some neobanks will stop offering free services. They used these effectively to grow their customer base, but now they may need to charge more fees.

Threats are also coming from the incumbent banks, but perhaps the biggest threat is from Big Tech stepping into this space. As Lochy suggests, what the neobanks need to do is “find a niche where they can excel and not fight head to head with the large banks.”

Finding a niche

This is likely to come by restructuring and rethinking the product offering to provide an even more personalised service, probably in the credit sector. Some would also be better off by targeting a specific consumer group and tailoring their product offering to them. For example, the Longevity Bank is for Seniors, and there are ones focusing on women, freelancers and SMEs. Ultimately, what neobanks need to do to survive, is offer something that no other bank, credit union etc offers – that’s what ill really bring home the customers.

PayPal targets fintech

On By mehranmuslimiblogIn FintechLeave a comment

PayPal is getting into point-of-sale financing. This is a tool that allows you to pay for an item in instalments rather than putting it on your credit card. It has been growing in popularity, and the pandemic has driven its use to rise even more steeply.

Two companies, namely Afterpay (Australia) and Affirm (USA) have been thriving in this sector. For example, Afterpay, whose entire business is staked on the scheme, has sailed from a market valuation of $1 billion in 2018 to $18 billion today, and Affirm is planning an IPO that could fetch $10 billion.

Now PayPal is squeezing itself into the space with its new ‘Pay in 4’ product. This will allow you to pay for any items that cost between $30 and $600 in four instalments over six weeks.

It promises to be slightly less expensive to use than the other two companies mentioned. It won’t charge interest to the consumer or an additional fee to the retailer, but if you’re late on a payment, you’ll pay a fee of up to $10. 

It’s OK for PayPal to do this, because it already has a highly profitable payments network it can leverage. As Jeff Kauflin says, “Eighty percent of the top 100 retailers in the U.S. let customers pay with PayPal, and nearly 70% of U.S. online buyers have PayPal accounts.” Not to mention the fact that as Covid-19 made online purchases skyrocket, it saw record revenues of $5.3 billion and profits of $1.5 billion. Its stock has rocketed in value, adding $95 billion of market value over the past six months, and Lisa Ellis, an analyst at MoffettNathanson, told Kauflin, “PayPal can grow 18-19% before it gets out of bed in the morning.” 

Why move into point of sale financing?

Data from both Afterpay and PayPal shows that consumers spend more money—sometimes 20% more—when they’re offered point of sale financing options. Therefore, when PayPal launches Pay in 4 this autumn it can expect to see transactions rise. It earns 2.9% on each transaction, so its fee revenues will receive a boost as well.

Kauflin makes a good observation: “With Pay in 4, PayPal’s renewed push into lending is an indication the company is getting more aggressive in a volatile economy where many consumers have fared better than expected so far.” Furthermore, PayPal will house these new loans on its own balance sheet. As its senior vice president Doug Bland says, “We’re incredibly comfortable in managing the credit risk of this.” That is indubitably true.

Fintech and the startup movement

On By mehranmuslimiblogIn Digital Innovation, Fintech, InnovationLeave a comment

According to Alex Lazarow the startup movement is growing like daisies. Indeed, there has never been a better time to launch an entrepreneurial, technology-led project anywhere. Why is that?

To start with, the cost of cloud computing has dropped significantly and this enables startup growth with fewer barriers to entry. As Lazarow comments, anyone can now rent Google’s enormous computing power by the hour, eliminating the need to purchase and maintain your own server. Telecoms costs are also heading downward and when combined with collaboration software, it is easier now for teams to enjoy frictionless remote work.

Global markets are also looking more attractive for startups thanks to the five billion mobile phone users worldwide and the two billion people with online identities on social media all ready to be the consumers that “ over 480 innovation hubs globally and over 1.3 million venture backed companies” are looking for.

Furthermore, according to the 2020 edition of Startup Genome’s Global Startup Ecosystem Report there is exciting news about the future potential for innovation ecosystems globally.

Highlights of the Startup report

  1. The incidence of ‘unicorns’ (companies valued at over a billion) has increased. They used to only be found in Silicon Valley, but there are now 400 of them spread around the world and fintech is the core component of their success.
  2. The report ranks the tech hubs around the world, and shows that the challengers to Silicon Valley are muscling up at pace, with New York, London and Tel Aviv amongst the big contenders, including the Asia Pacific region. Indeed, Asia Pacific accounts for 30% of the leading ecosystems.
  3. Covid-19 has presented a challenge, especially in the tougher, less resource-rich ecosystems around the world. Venture Capital investment has dropped by 20% globally, plus over 72% of startups saw their revenues drop. The knock-on effect of this is the loss of employees in 60% of startups.

The way forward for fintech startups

Future success will require resilience, and Lazarow suggests it also requires a new playbook, something he explores in his recently published book : Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley (HBR Press).

As he points out, it is vital that startups get it right this time round, especially as entrepreneurship is “the largest force of job growth globally.” In a positive way, this is a good time to rethink how to be an entrepreneur, rather than follow the old routes, because it’s a good time to act for success and join the startup movement.

Coronavirus threatens fintech lenders

On By mehranmuslimiblogIn Covid - 19, FintechLeave a comment

We are only just coming out of the last recession, and now we are hurtling into another one at breakneck speed. Countries are going into lockdown one after another, with those that can continue to function with employees working from home, having a distinct advantage over those sectors, such as tourism and hospitality that have been brought to their knees in some places already.

We all know that finance is going to be hugely affected yet again, and with so many people losing employment and therefore their salary, loans are going to be in the spotlight once again. Jeff Kauflin suggests that fintech lenders in the USA may be facing the biggest risks right now, starting with the basic reason — people won’t be able to repay their loans.

Upstart is a fintech-based lender that lends consumers up to $50,000 for purposes ranging from credit card debt consolidation to putting in a new kitchen. However, as the bond-rating agency Kroll reports, “It makes most of its loans to people with below-average credit scores.” Upstart argues that by using alternative data and machine learning to assess risk, it can identify creditworthy borrowers with lower traditional credit scores. It is true that the company has not reported significant defaults over the last year and is in profit, but what will happen to it during a sharp and sudden economic decline?

William Ryan, a managing director at investment bank Compass Point points to the fact that in a crisis, people place repaying personal loans very low on their list of priorities. He says, “People pay their cell phone bills, mortgages, auto loans and credit card bills before personal loans.”

And if the fintechs are not facing defaults, they face is a rapid rise in the cost to fund their loans. Most of them don’t hold banking charters and this means they can’t do what banks do — use customers’ checking accounts to fund loans cheaply. Typically, fintechs borrow from banks to fund their loans and this approach prevents them from holding loans on their own balance sheet, thus reducing their risk.

Another issue the fintechs face is the fact that interest rates for low-grade corporate debt have surged in recent weeks. Together, these factors are already making fintechs lower their growth expectations. Dan Rosen, a founder of fintech-focused venture capital firm Commerce Ventures said: “I was with a bunch of entrepreneurs last week. Most of them had already been having board calls and dramatically changing their plans for originating [new loans].”

The outcome for fintechs depends on the length of a lockdown. Chris Brendler, a senior director of research at CB Insights says that most will be able to survive a one to two-month lockdown, but that if it goes on for three to four months there will be a significant rise in unemployment, as well as