What comes after MarketPlace Lending?

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Now that Lending Club is past its crisis mode and is just another mature company that has to impress investors with predictable growth in financials on a quarterly basis, we look at where the puck is headed in Lending.

What innovation will change the Lending game and create companies as big as Lending Club ten years from now?

Disclosure: I sold shares in Lending Club just before their recent quarterly earnings (Q4), having been fortunate enough to buy in at 3.51 after writing this post. Although I expect Lending Club to do well, the shares no longer have the great margin of safety that they did right after the crisis in May.

This post looks at four innovations that focus on two big imperatives facing any Lending entrepreneur – reducing Customer Acquisition Cost (where Customer = Borrower) and reducing Cost Of Capital (reducing the intermediary cost):

  • The next generation Deposit Account
  • Just in time Borrowing by consumers
  • Big Data for the lending to Micro Entrepreneurs
  • Automated working capital financing for SME

The next generation Deposit Account.

One big reason Banks have a low cost of capital is that consumers are willing to put up with lousy interest rates in order to get safety i.e. to know that their money is not at risk. The next generation Deposit Account could change that and our thesis is that the next generation Deposit Account will be based on the Lending Account.

Market Place Lending has created the first real banking innovation in hundreds of years which is the Lending Account. Until the likes of Prosper, Lending Club, Funding Circle and Lufax came along, consumers could have a Deposit Account (lend money to a bank) and a Loan Account (borrow money from a Bank) but could not directly lend in any simple scalable way.

This post shows how one Consumer has used Lending Accounts to make good money, much better than Lending to a Bank via a Deposit Account.

Most people don’t want to a) work that hard b) take that much risk. This is where the next generation Deposit Account is awaiting a great entrepreneur. The next generation Deposit Account will be a Lending Account that is ultra low risk and short tenor. Let’s start with tenor. If you are willing to lock up your capital for a few years, you can use existing Market Place Lending accounts. Compare the risk-adjusted return over 3 years compared to locking up your money in a 3 year Deposit account or a AAA Sovereign Bond and the Market Place Lending account looks pretty good.

However, most people want to have cash available at short notice for emergencies. They might want the notice/tenor to be weeks or at most months. That is hard to do using Market Place Lending accounts because the Borrower needs longer to repay. Unless you work hard to resell on a Secondary Market such as Foliofn, this is not an option.

This requires some financial engineering – the sort of thing that Wall Street has always done well. Through a mix of securitization, secondary markets and a cap & floor based guaranty, this is feasible. The arbitrage between lending to bank (Deposit account) and lending directly is big enough to give any entrepreneur enough to play with.

A note on securitization. Although securitization is seen as the villain of the Great Financial Crisis of 2008, there is nothing wrong with securitization per se. The issue is transparency. If you can hide a bunch of dodgy BBB loans in a shiny AAA package that is bad. If BBB loans are sold to those who know how to manage the risk/reward trade off, then markets are working as they should.

In addition to financial engineering, some UX magic is needed to make this as  simple for consumers as opening a Deposit Account.

If anybody is working on this, please let us know in comments.

Just in time Borrowing by consumers

The way a Market Place Lender like Lending Club or Prosper finds borrowers is remarkably old-fashioned. There is a lot of direct mail and search engine marketing to find consumers who want to refinance expensive credit card debt.

What if you eliminated the credit card phase and the Market Place Lender could acquire customers at the point of sale? That is what Klarna is doing for example; the proposition is bill me and I promise to pay. That can work in small, homogenous and relatively wealthy countries (eg Nordics, Switzerland) where the default rates will be relatively low.

This can also work at the opposite end of the spectrum in huge and relatively poor countries (such as China, India, Africa) where Credit Card penetration is low ie new models can appear at the point of sale to deliver lower cost borrowing to consumers at the point of purchase.

What is unclear is whether these new borrower acquisition models at the point of purchase will be part of a Lending Marketplace or part of an ecosystem that delivers customers to the Lending Marketplaces.

Big Data for the lending to Micro Entrepreneurs

You can lend to business or consumer or to the grey area in between of the self-employed “micro entrepreneur” where companies like Iwoca operate. The key here is that the revenue sources for these self-employed micro entrepreneurs are data rich services such as Uber, AirBnB, Amazon, Alibaba, eBay etc and data is the key to assessing lending risk.

Automated working capital financing for SME

Approved Payables Finance when the SME sells to Global 2000 type Corporates is working well. The APR is far lower than the SME would get from traditional finance or AltFi and Lenders get short tenor, self-liquidating high grade debt at far better interest rates than Sovereign Bond lending.

To date this has remained a niche play, despite working so well. This will scale when two things happen:

– An open standard drives e-invoicing to 90% plus adoption (the remaining 10% can be forced, enabing huge cuts in AR and AP processes). Once AR and AP is entirely digital, inserting just in time working capital financing options is easy.

– A credit rating for SME; today this only works when buyer is “investment grade”i.e. a corporate with a credit rating from an agency such as Moody’s, S&P or Fitch . If a butcher selling to a baker or candlestick maker could evaluate the credit rating of the  baker or candlestick maker, pricing credit would be simple and thus the APR would come down a lot. This is not rocket science and as always it is a data problem. All you need to know is does the baker or candlestick maker pay their bills on time.

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If anybody is working on solutions for the kind of innovation profiled here that we have not already mentioned, please tell us in comments.

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This week in InsurTech shows how fast the market is globalizing

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It is hard to sip from a firehose and the InsurTech innovation pipeline in 2017 is a major gusher. As we parse this week’s news stories, one theme jumps out and this theme goes a long way to explain why the InsurTech innovation pipeline is such a gusher.

The theme is globalization.

5 InsurTech stories this week illustrate the globalization theme:  

  • Digital Fine Print goes from Seed to Asia via America and London
  • Australian insurer IAG establishes an Insurtech hub in Singapore
  • Youse is the very first Brazilian InsurTech brand
  • The first InsurTech conference in Quebec City
  • The first InsurTech VC fund in flyover country

Digital Fine Print goes from Seed to Asia via America and London

The news: the story broke on CrowdFund Insider. This one is as global as it gets. An American Insurance Company (MetLife) partners with an early stage London based InsurTech startup (Digital Fine Print) to move into Asia.

This story also shows the capital efficiency value of Incumbent partnerships and social media. Digital Fine Print is going into Asia having raised only $400k. Conventional wisdom was that you should wait until your $400m round before going global. However if you can use the back end platform of an incumbent and use social media at the front end, it is time to challenge that conventional wisdom. (Daily Fintech is totally global, with subscribers in 130 countries and we have not yet raised any outside capital).

Australian insurer IAG establishes an Insurtech incubator in Singapore

The news: It will be called Firemark Labs and was reported in multiple venues, here is one. IAG = Insurance Australia Group. It underwrites over $11.4 billion of premium per annum and is active in many Asian countries. The incubator (do we call them “hubs” or accelerators today?) has the usual job of scouting for innovation.

Score another one for Singapore – see here for our story about CXA. This story also illustrates the value brought by the very proactive Monetary Authority of Singapore (MAS) and its Chief FinTech Officer, Sopnendu Mohanty.

This is an inter Asia story – no American or European ventures. The Australia Singapore nexus makes sense as the Australian economy is tied to Asia.

The Incubator has access to cash through IAG’s $ 75 million venture fund.

The trend looks clear. MetLife already has an active Singapore-based innovation center called LumenLab. One can envisage each global insurance company having an InsurTech incubator in the 20 or more global cities with an active Fintech scene.

Youse is the first Brazilian InsurTech brand

The news: It is really only a “we are here” announcement with a lot of big picture data about how big InsurTech is.

Youse was created by Grupo Caixa Seguradora as a digital venture within a big company. We have seen some of these become successful in banking (see our Pirates With Ties interview series for some good success stories), even though cultural mismatch kills most intrapreneurial ventures.

Nubank in banking is a Brazilian specific example of a digital Neobank (but VC funded unlike Youse).

The first InsurTech conference in Quebec City

The news: InsurtechQC is the first conference dedicated to Insurtech in Quebec City. It takes place on April 3rd and has both local and international speakers.

The first InsurTech VC fund in flyover country

I know, I know, I should not refer to flyover country. It’s an old habit from living in New York and flying a lot to California. It sounds elitist and I apologize for that. The significant trend is that the Silicon Valley model of innovation has gone global and global does not just mean places like London, Zurich and Singapore. It also means places like Des Moines, Iowa.

The news: A Des Moines, Iowa-based VC fund called ManchesterStory Group backed by a consortium of insurance companies is looking for Insurtech deals.

“The new firm said it cannot disclose the insurance carriers behind it until the fund closes.”

They have company in Des Moines.  The Global Insurance Accelerator was launched in 2013 with backing from seven insurance companies and has since added 3 more.

Closer to mainstream customers and lower cost base sound like good ingredients for venture success.

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Can proptech mixed with fintech save Generation Rent?

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Thanks in part to low interest rates and globalisation, property markets in many urban centres across the world seem to be spiraling out of control. Sydney’s median house price has shot past the AU$1.12M mark, surpassing even that of New York, while across the Tasman New Zealand’s largest city, Auckland, has seen median dwelling prices drift close to NZ$1M.

The market dynamics are similar in the UK, with research from the Resolution Foundation indicating there is a significant ground shift occurring, from owning a home to renting one instead, amongst working-age households. In the year 2000 around 55 per cent of households lived in an owned, mortgaged property, a figure that has since dropped to 41 per cent in 2015. Over the same period, those in private rentals climbed from 11 per cent to 25 per cent. The social ramifications of this shift are profound.

Generation Rent, as they have come to be known, now find themselves stuck between a rock and a hard place, facing a potent mix of stagnant wage growth and skyrocketing house prices. Perversely those that have scraped together a deposit face the risk of long-term low inflation, potentially locking them into a possible debt trap for years to come.

Once, owning a home was considered a safe and sure bet for building long-term wealth for the middle class. However with this asset now out of reach for most, some fintech start-ups have spotted an opportunity to service the appetite for property via a range of more accessible and affordable vehicles.

BRICKX in Sydney is one such fintech (or proptech) startup. Via fractional property investment, the company allows investors to purchase units, or ‘Bricks’ of a home. The investment also entitles investors to a fixed share of any rental income generated.  The upside of fractional investing is that investors can spread their risk across a basket of rental properties, plus cash in on capital gains at any time by selling their Bricks to another buyer.

For those lucky enough to have significant equity stashed away in a home today, fintech startups like Point in the US are providing an alternative to the traditional banks when it comes to accessing stored wealth, specifically for reinvestment back into the property market. Point, an Andreessen Horowitz backed startup, purchase’s a fraction of a homeowner’s dwelling, only collecting this back (plus capital gains) when the original property is sold. Homeowners also have the option to buy out Point at any time.

While Generation Rent might not be able to access services like Point directly, parents, who are increasingly financing children into their first home, could. Data from the Reserve Bank of Australia shows the proportion of first-home buyers borrowing from their parents to finance their first property purchase has more than doubled since the 1970s. With many in the Baby Boomer generation under financial pressure themselves through tech driven workplace disruption, any financial solution that doesn’t impact monthly cash flow is a bonus.

Building societies and small banks have a great opportunity to partner with fintech startups in the proptech sector to propel innovations like these forward, scale and bring them to the mass market. These types of partnerships can have real social impact if executed correctly – there is even scope for government involvement. One thing is for sure, we need to creatively rethink how home ownership works and take this opportunity to address the real long term problems uncertainty and insecurity around housing can cause.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

The vertical integration of SoFi has the core entry point right!

sofi

There is a question that beckons for an answer.

In this fluid world, owning the customer is the challenge.

Each individual is managing a balance sheet, e.g. assets and liabilities.

Serving which side of the balance sheet, will prove to be the best entry point to develop a long lasting relationship with the end-customer?

Tech-enabled financial services are not a dream anymore. From telcos, to internet providers, to social networks, they can all aspire to offer financial type of services. Starting with basic personal financial management tools (PFM), to transactions services, all the way to investments. Most PFM and transaction related services are already very low margin services and heading to zero. The remaining higher margin services are further down the value chain and mainly related to investments. Despite the fact that margins in some segment of investment services, are being squeezed from low cost online offerings (robo-advisors), there are still substantial margins that remain. Even though they are decreasing also, they don’t seem to be heading to zero.

Markets are efficient but the time needed to reach this equilibrium type of state, is uncertain. Technology is altering the investment segment of financial markets and creating havoc for financial advisors and asset managers alike.

Seems like there is a new segmentation being formed in the investment segment of the market, with one part of it being cannibalized and another part not. But the latter one, has no other option but to redefine its value proposition and is being pushed towards some kind of Vertical Integration.

At the same time, we have to admit that technology has not been able to sweep the unadvised assets, still sitting around despite the negative deposit rates in most of the world and despite the old-fashioned vault keeping services that deposit taking institutions offer. We have been pointing to this fact,

The Unadvised Assets, and the quarterly data that we collect show no significant change in the “Lazy Cash” figures.

(Read Oh, the things you could do with the enormous Cash pile!). That covers the asset side of most balance sheets of individuals.

On the other side of the balance sheet, there are our liabilities or our debt. This is the part that actually weighs more than saving and investing. From a more holistic perspective, the debt side of our balance sheet is heavily defining our decision making, our life-style and is more sticky. Debt decisions and debt management, affect much more our life. They not only are typically, larger in size, both absolute and percentage wise, but our life is much more sensitive to these factors.

In other words,

allocating capital and managing the risk on the debt side of our balance sheet is larger, more complex, and determines whether we reach our goals or how far away do we end up. This is primarily where we all need advice (human, bionic, hybrid) in the first place, and subsequently in the investment segment of our finances.

Incumbents and Fintechs, for the most part, have got this order of priorities wrong!

Incumbents have a long history of silos between business units, segmentation by product areas, and very low cross-selling rates. The large ones are struggling with the daunting task of integration, platformification, or a holistic approach to the existing large customer base.

Lets watch and see, whether Marcus for example, the consumer lending innovation from Goldman Sachs truly succeeds in destigmatizing personal debt (check out Will Goldman become a verb? Watch the Marcus ads!)? And then, in an invisible way, manages to simplify your first mortgage. And create a full stack for the customer, by integrating their deposit taking offering, their debt offering and management, and their investment capabilities.

On the Fintech side, will it be Betterment which is investing its recent large (for the robo space) funding round into the investment segment of our financial needs, that will invisibly move from its current Home improvement loan offering in certain states, to a full fledged mortgage offering?

Or will it be SoFi, who is investing its ten fold recent funding, into the mortgage segment already, that will easily move into the investment robo-offering later?

SoFi has been growing through the refinancing part of the value chain starting from student loans. From that same niche, they have been growing for more than 3yrs, their mortgage business. In other words, they have been advising their customers on how to manage their debt, from student loans to mortgages! In November, SoFi announced a partnership with Fannie Mae and a new offering, the Student Loan Payoff ReFi.

With SoFi’s new offering, the Student Loan Payoff ReFi, homeowners will have the ability to refinance mortgages at a lower rate and pay down the balance of an existing student loan. With its cash-out refinance student loan payoff plan, SoFi will pay down the student loan by disbursing payment directly to the servicer of the student debt. SoFi is a Fannie Mae approved seller servicer. Source

 This is not just another offering that is cheaper and faster. This is about parents who have co-signed student loans, that will be able to free up their digital assets. It is also about homeowners that manage student debt, being able to optimize the way they manage their capital and risk.

While the headlines are focused on the Zenbanx acquisition (covered in SoFi buying Zenbanx either signals the first Mega NeoBank or a unicorn losing the plot), what is really happening is

the creation of a platform business that is about managing both sides of the balance sheet for retail customers, that has been built around the core business of advising retail on the debt side.

SoFi is a business innovator because it has the priorities right in building a successful business to serve retail customers.

SoFi has realized early on, that the value lies in managing the debt side of the balance sheet for retail customers.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Applying Loose Coupling software principles to enterprise digital transformation

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Loosely coupled vs tightly coupled is no longer much of a debate in software. There are debates about how to do it well, but it is generally recognized that loose coupling is more robust to failure (even anti-fragile) and more scalable. The best example is the Internet itself. Imagine a version of the Internet controlled by a single big company or government. You would get something like Prestel or Minitel. If you have not heard of either, I rest my case.

This debate becomes relevant to business strategy and digital transformation, as many of the most valuable companies are simply software systems with an economic model attached – think of Google, Facebook, Alibaba, Amazon etc. When we talk about digital transformation of incumbents, we are really talking about turning industrial era companies into software systems with an economic model attached.

The question then is how should the components in that software system interact with each other? Or to put it in more MBA terms, how do business units work together to create synergistic value (aka one plus one is more than two).

This is not an academic debate for bankers. The question today is less about “too big to fail”. Governments do not have the cash for a bailout (with the possible exception of China). The debate is now more about “too big to manage”, or to put it more accurately “too complex to manage” (because big is good as long as it is robust). Tightly coupled is complex and fragile.

To understand how bad tight coupling is, try fixing one line of code in a legacy system. For the non-technical subscribers let me walk you through that one.

Try fixing one line of code in a legacy system

Many enterprise systems have thousands of components. If you ever wondered why big banks with lots of legacy systems are not agile, try fixing one line of code in one of those legacy systems. You will see what it looks like when a butterfly flapping its wings in China creates a hurricane in Florida. Developers have a term for how to deal with this – dependency management. If you fix one component you must know how it will impact related components and any change needs lots and lots of testing (failure to do so is career threatening).

Stack, platform, ecosystem and other faulty analogies

This is from one of my favorite thinkers about the future of software called Jon Udell:

“Here are some analogies we use when talking about software:

Construction: Programs are houses built on foundations called platforms.

Ecology: Programs are organisms that depend on ecosystem services provided by platforms.

Community: Programs work together in accordance with rules defined by platforms.

Architecture: Programs are planned, designed, and built according to architectural plans.

Economics: Programs are producers and consumers of services.

Computer hardware: Programs are components that attach to a shared bus.”

Analogies are useful to introduce a subject to a lay audience, but they can get in the way when trying to get to the next level. I tend to prefer “Ecosystem” as the analogy because the APIs do not only work up or down the stack. For example, one consumer-facing application could interact with another consumer-facing application without necessarily going through a layer below them in the “Stack”. I also try to avoid the Architecture analogy because that implies a level of rigidity which is dangerous. In an ecosystem we have emergent behavior. When one releases an Open API to the outside world, a good result is the unexpected, serendipitous application that nobody had planned for but which totally changes the game.

Applied to digital transformation, all of these are a form of systemic innovation.

Systemic innovation

Back in the summer of 2015, we interviewed Haydn Shaughnessy, co-founder of the consultancy The Disruption House, whose book Shift, A User’s Guide to the New Economy is a look at systemic innovation.

He told us:

“The system threatening innovation is coming from outside the industry, from China tech companies, which have quite different balance sheet constraints, and as ever the open source community. Banks don’t understand system innovation. They think in terms of product. Compare this to what the Chinese technology platforms are doing.  I think western banks will be swamped by system level innovation soon and FinTech investments won’t provide an answer to that. The change is not just about digital and the start ups we see right now are just not scaling fast enough. The change is about new skills, new processes, new services and new business models. Digital is the wrong war cry and the start-up is not a big enough axe.”

The way Steve Jobs created a product like the iPod is by assembling it from lots of loosely coupled components. Of course they were tightly integrated within the product, but via well-defined interfaces so that one vendor can easily be replaced by another vendor. Apple is the opposite of open. They like secrecy and control. Today’s consumer electronics business in China works more like an open ecosystem. Branded, consumer facing companies such as Xiaomi emerge from this ecosystem, but it is the ecosystem that is more interesting than any single company. Like Silicon Valley, this is an ecosystem that rapidly creates big companies, but it is a fundamentally different ecosystem.

Chinese business ecosystems

John Hagel, one of the leading business strategists, is author of The Only Sustainable Edge where he describes how Chinese tech companies are partnering to build products way more efficiently than they could by creating everything in-house.

This is an example of necessity being the mother of invention. Chinese companies have grown despite lacking two critical things that we take totally for granted in the West:

  • Intellectual Property (IP) protection
  • Well-developed capital markets.

The Chinese firms turned these weaknesses into advantages through their approach to partnering – classic Jiu Jitsu.

Enterprise vs Silicon Valley vs Shanzhai

Traditional 20th century enterprises are tightly coupled. That is the essence of vertical integration and it worked well when the challenge was the manufacturing and distribution of physical products. This changes in the digital era, when the winners are companies that create digital ecosystems such as Google, Amazon, Alibaba and AirBnB.

Digital transformation does not just mean adding a digital front end – however mobile savvy it is. It means re-engineering the company from the ground up to create a digital ecosystem. That re-engineering has to be based on loose-coupling.

The Silicon Valley ecosystem has been much studied. The Chinese electronics ecosystem dubbed Shanzhai is less well known. For a good description of Shanzhai, go to this article in The Atlantic.

Both Silicon Valley and Shanzhai ecosystems work on loosely coupled principles and that means that the companies that emerge from those ecosystems are loosely coupled in their DNA. Partnering is not an add-on, it is a core competency.

A bank is a tightly coupled enterprise ecosystem

A traditional Bank is a tightly coupled enterprise ecosystem comprising these 4 different accounts each serving a different need:

  • Current/Checking account (payments in and out).
  • Deposit/Savings account (having some spare cash for emergencies without any risk to capital).
  • Wealth Management Account (earning money on longer term savings using fixed income, equities and other assets, earning more return by taking some risk).
  • Loan account (borrowing money).

The only new account innovation in hundreds years is the Lending Account from Marketplace Lending. This the Loan account in reverse.

Startups are unbundling this tightly coupled enterprise ecosystem of accounts. They do one thing and one thing only. Regulatory innovation is keeping up, so that you can now for example just get a Payment License to use as Current/Checking account and a different license for a Deposit Account.

This is great for innovation. It does however leave the consumer to become their own systems integrator, using a lot of sneaker net and spreadsheets. As most consumers don’t want to do this, traditional banks are OK for now with their tightly integrated offerings.

The next wave of innovation is about “rebundling” and this is done using loose coupling.  The Fintech Rebundling can be done by startups or by Banks. It is a genuinely level playing field enabled by Open APIs. It is perfectly suited to Red Ocean markets. In Blue Ocean markets, the “do one thing and one thing only” startup mantra is more appropriate.  Startups tend to go for Blue Ocean markets and banks tend to fail at Blue Ocean markets due to organizational forces that attack such a radical idea. So Banks tend to operate in Red Ocean markets where they need to innovate in order to counter moves by traditional competitors and Fintech ventures to capture Millenials and other parts of the market that are up for grabs.  Rebundling is a strategic response by Banks in these Red Ocean markets and a way to create new competitive moat.

The Unbundled Bank looks like this (replace those HiFi components with standalone accounts):

hifi-separates

Digital transformation is about building something more like this:

ipod

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Wrap of Week #7: CXA, Calpers, Sofi & Zenbanx, P2P lending, Innovation

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This week we wrote about the discomfort of uncertainty, as an essential part of innovation. Read Embrace uncertainty to give your fintech start-up the edge.

In Insurtech dont miss our insights in CXA Group $25 million Series B shows the maturing of InsurTech and future of Innovation Capital.

We devoted two days in the growing private markets, starting the week with Calpers and the quiet data driven disruption of Private Equity and ending the week with our insights in SoFi buying Zenbanx either signals the first Mega NeoBank or a unicorn losing the plot.

Last but not least, don’t miss reading A little bit of P2P is all I need – Mambo in Lending while listening to the Lou Bega’s classic.

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SoFi buying Zenbanx either signals the first Mega NeoBank or a unicorn losing the plot

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SoFi became famous for raising $1 billion in Q3 of 2015. Unicorn valuation is big club (with more hype than reality as we said during the mega hype phase at the end of 2014), but a unicorn round (raising $1 billion in a single round)  is a very elite club. We normally only see unicorn rounds in China, where the investors are big companies rather than funds. This story also has a China twist, read on for that.

SoFi timed their $1 billion raise perfectly in late 2015 when Fintech was still in Wave 1 (the “this is revolutionary” wave as defined in this post). Since then Market Place Lending (MPL) hit some problems that dragged down the whole Fintech market and we went through Wave 2, when the conventional wisdom was that entrepreneurs should knock politely on the doors of the incumbent banks because they control the pace of change.

The news that SoFi was buying Zenbanx signals that SoFi has no plans to knock politely on the doors of the incumbents – they want to compete head on with the banks.

This could mean we are witnessing the birth of a Mega NeoBank. Or it could mean we are witnessing a company that raised too much during the hype cycle and is now losing the plot. This is post shines a light on that question. The answer will reveal a lot about the state of the Fintech market as well as the specific fate of SoFi.

This post will cover

  • What do Zenbanx do?
  • Who funded Zenbanx?
  • What comparable events help with analysis?
  • The TenCent China part of the story
  • Our take

What do Zenbanx do?

In the words of Mike Cagney, CEO of SoFi, when announcing the deal, Zenbax offers a “mobile banking account that lets people save, send and spend in multiple currencies.”

Save, send and spend has a nice ring to it. It describes quite simply why we use a bank. Oh and borrow and that is what SoFi already enables.

Two key things about this:

  • This is not just a Current/Checking account, covered by some payment license and using a pre-paid mobile wallet. It is also a Deposit account which as per the Zenbanx FAQ is FDIC insured. That is a big deal for a Market Place Lender like SoFi. It means they can get a low cost of capital. This looks like a head to head competitor for the Goldman Sachs Marcus service.
  • It is a multi-currency account. It will be interesting to see what SoFi does with this. It may simply remain a cross border money transfer service to American customers; SoFi is totally focused on the American today. Or they may use it at some stage to go global.

Who Funded Zenbanx

Crunchbase does not show the Zenbanx investor. Possibly it was changed post acquisition. So we went to CB Insights and found three Seed Investors:

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  • DCM is a classic Silicon Valley VC.
  • TenCent is the T in BAT (more on them later).
  • Recruit Strategic Partners is less well known. They come from Japan but invest globally. They are a 100% subsidiary of Recruit Holdings, a diversified company that began in the 1960s as an advertising agency that specialized in university newspapers.

What comparable events help with analysis?

  • BBVA acquisition of Simple in 2014. BBVA paid $117mn in 2014 and has since taken impairment charges but claims to be happy with the deal and to continue investing. The great results of a digital bank incubated by an incumbent such as ING (see interview here) indicates that they could be successful.

The TenCent China part of the story

TenCent was a Seed Investor in Zenbanx. In December, Zenbanx announced how they are using WeChat to offer what they call “conversational banking”.  Expect Facebook to be paying close attention as they figure how to monetize that $19bn WhatsApp deal. Alibaba is already the dragon in the room with their acquisition of MoneyGram.

The long-awaited move of GAFA and BAT into payments is happening now.

Our take

Banking is a service business not a winner takes all network effects business (see this post for more on that theme).

So we expect a number of full stack global Neobanks to be successful. So both N26 and SoFi can be success stories, albeit with different strategies. As can Neobanks incubated within an incumbent such as BBVA and ING. Whether the starting point is a VC backed startup or a legacy bank, the end game is the same. This is the convergence thesis we first outlined here.

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