Will Neobanks Reward Investors?

Venture capital firms have been flocking to invest in neobanks, and they must be hoping that they will see big rewards. Expectations are high, but it appears that some questions are being asked about whether or not the hype around fintech will yield the financial returns that everyone hopes for.

It is true that the neobanks are attracting plenty of customers; N26 and Revolut being two good examples of customer growth. According to Accenture, UK-based digital banks could add 35 million customers over the next year, and they have around 13 million at present. Its data also shows that in the first six months of 2019, the UK neobanks added five million customers, indicating that the sector is picking up momentum this year.

However, there are some challenges remaining. First, the traditional banks still occupy the biggest slice of the market, and then there are the financial regulators like the FCA, which are extremely averse to any finance related institution cutting corners. Plus, as John Detrixhe points out, we have seen that companies in other ‘disrupting’ sectors, Uber and WeWork, have demonstrated that big valuations and intense customer growth are not sure signs of success. He also says that the fintechs need to ask themselves if they will continue to be seen as a niche product, or will customers eventually see them as a one-stop financial service.

Hence, there seems to be some changes happening in fintech investment, with investors looking at fintech tools beyond neobanks that will prove to provide bigger gains. This move is based on the idea that digital banks will never really disrupt the traditional banks.

So, they are looking at fintech software, such as cloud-hosted software and systems that make it easier to sign up for a new account. In other words, there is a belief circulating that the incumbent banks can fend off the newcomers by adopting new technology that allows them to offer the same benefits as their digital competitors.

These fintech tools are not as sexy an investment as Revolut say, but they could perform better in the long term, because if the incumbent banks can provide the same service as Revolut, then why would customers switch?

The situation in Europe is different to that in other regions where there are millions of people who are unbanked. Europeans have fewer problems with banking access, but perhaps don’t always have a great customer experience. So there is still plenty of investor enthusiasm in the West. Detrixhe says, “Eighteen of Europe’s biggest fintechs are now valued at more than $1 billion, according to Richard Diffenthal, a partner at Hogan Lovells. Investors are lining up to give them even more money.”

The one advantage that neobanks have over the traditional banks is that the incumbents can’t just rip up their legacy and start afresh. They are having to implement change one small step at a time, and that will take time. The neobanks need to use this opportunity, i.e. the incumbent banks slow-moving change, to accelerate their position as a trustworthy alternative to the banks that have been trading for hundreds of years. Then they will provide the returns that make investors happy.

Will ICOs outperform Venture Capital in 2018?

ico

Although there has been some negative press around ICOs since they skyrocketed in 2017, it hasn’t stopped them from raising more funds for blockchain-based startups than traditional venture capital (VC). Indeed, according to Jason Rowley, a contributor at Techcrunch, ICOs are on track to do even better in 2018.

The investment from VC in 2017 was $900 million and in the first two months of 2018 it amounted to $375 million, but this looks like chump change compared with the ICO fundraisers.

Crunchbase recorded a total of 527 funding rounds by both VC and ICOs for 2017 and 2018 to date. In terms of numbers of startups, VC still has 68% of the market, but, whilst ICOs may only have 32%, the dollar volume is considerably higher.

Basically, as Jason Rowley says: “despite the smaller number of ICOs, these funding events — on average — attract much more capital than the average venture funding round.” In fact, if you look at the dollar volume, ICOs take 78% of the market for blockchain-related startups. In figures, this equates to $1.3 billion raised through VC and $4.5 billion raised by ICOs, according to Crunchbase.

Of course, not all ICOs have been a runaway success. Bitcoin news reported that out of 902 businesses raising an ICO, some 142 failed before they could even close the funding round, and another 276 failed after the fundraising was completed. A further 113 projects have been classified as ‘semi-failed’, either because they have stopped posting on social media, or because experts have assessed that the community is too small to give the project a chance of success. Ultimately, “59% of last year’s crowdsales are either confirmed failures or failures-in-the-making.”

This doesn’t mean that the ICO sector is doomed, there are still going to be many successful coin offerings – Telegram’s ICO is just one example of healthy show of support. Undoubtedly some will continue to view this form of fundraising with scepticism, but if investors do their due diligence and more regulation comes into play, there are no good reasons to think that the ICO does not have a secure and sustainable future.