Effects of Demonetisation on Microfinance in India


This is a guest post by Arunkumar Krishnakumar, who is deeply involved in the early stage Fintech scene in London but was raised in India. So he is highly qualified to write about this important and controversial topic.  

Muhammad Yunus, who was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of Micro Finance, said:

“I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolute poor”

The Micro Finance industry, despite being hailed as a saviour of the poor, has had a turbulent ride in many parts of the world. There have been various incidents in the emerging markets where farmers have committed suicide when they haven’t been able to pay off their debts. As a result, the industry was regulated in some parts of the world, and institutions offering Microfinance had to adopt different credit strategies. While the focus of many of these institutions have moved away from achieving volumes to offering affordable micro-credit, the global average rate of borrowing is about 30%.  Micro Finance in India has been no different and has had its ups and down. The recent Demonetisation (DEMON) drive in November 2016 looks like a setback to the primarily cash based Microfinance industry.

Microfinance in India:

In India, pioneer Micro Finance Institutions (MFI) operated as non-profit, non-governmental organisations with a strong social focus. They developed new credit techniques; instead of requiring collateral, they reduced risk through group guarantees, appraisals of household cash flow and small initial loans to test clients. In recent times, MFIs have transitioned from non-government organisations to nonbanking finance companies (NBFCs). As a result, once primarily donor-led, MFIs are now increasingly funded by banks and private and shareholder equity.

The Indian Micro Finance industry hit its peak in 2010, when SKS Microfinance, one of the industry leaders had its IPO. Muhammad Yunus, hailed as the father of the industry, criticised the move as the IPO was fundamentally conflicting with the principles of Micro Finance. The IPO offered at $350 million was 13 times over-subscribed. But due to reckless lending and strong-arm collection tactics that followed, strict controls were imposed on the business and loans written off which resulted in a slump. However, over the past few years, regulation of MFIs has been centralised in India and the industry growth stabilised. By 2016 the size of the industry in India was about $8.2 Billion serving over 40 Million customers. About 40% of this industry thrives in the four southern states of India.

In a country traditionally notorious for lack of women empowerment measures, MFI has been a shining light. About 70-80 per cent of the customers are women with a repayment rate of about 95 per cent against repayment rates of about 70 per cent for middle class men who form the primary borrowers for commercial banks.


In November 2016, the Indian government launched a huge DEMON drive when they banned 500 and 1000 Rupees notes. In a country where 69% of the population lived in rural areas and 90% of the transactions are cash based, the move was paralysing. For the Micro Finance industry this came as a blow too. Most of the borrowers of the MFIs are based in rural areas; they borrow in cash and repay in cash. Typically, MFIs that have had a repayment rate of 99% have had a fall of upto 12% in repayment rates. For many MFIs the non-performing assets (NPA) have risen by 7-10%.

For a discussion of the impact of DEMON in India please go to this thread on the Fintech Genome.

What does this mean for the MFIs? It might just be a short term blip, rather than a long term trend. However, these MFIs could be affected by the DEMON drive, and the resulting non-payments by their borrowers. While the borrowers will have some negative effect on their credit scores, it might be a bigger issue, if that affected the credit worthiness of the MFIs themselves.

What does this mean for the borrowers? Particularly farmers and SMEs that make up most of the customers are affected in a big way. The drying up of liquidity that the DEMON drive has caused has affected cash dependent rural communities in a big way. Especially in the southern states of India, the drought this year has made matters worse. In Karnataka, about 800 farmers committed suicide in the 12 past twelve months due to the drought and mounting debt, although what percentage of that is due to pressures from MFIs is unknown. In TamilNadu, my home state, farmers-suicide due to debt issues is almost a daily occurrence. There have been several cases where farmers have had to borrow from local lenders at higher rates, to pay off the MFIs, as MFIs tend to be stricter on their debt collection dates.

What can be done about all this? While these are certainly tragic incidents, there are various avenues the government and the MFIs have explored and continue to explore. One positive outcome of it all is that, the top 8 MFIs in India that hold about 40% of the market share, have now been provided the small finance bank licenses. Which would mean they can have their own cash out points and the DEMON drive is very likely to increase usage of their accounts. MFIs have also been lobbying with the Reserve Bank of India (RBI) to extend deadlines for the usage of the banned currency notes and farmers have had some special exemptions to this extent. RBI has also provided MFIs with a further 90 days extension before classifying loans as NPAs, if payments were due in November and December 2016. There have been some signs of recovery in certain parts of the country where repayments had fallen immediately after DEMON. However, most industry experts expect that there would be a further increase in NPAs before the industry recovers.

While the industry shows every sign of recovery, the livelihoods of drought stricken farmers are still up in the air.

PS: I am a big fan of Narendra Modi and his DEMONetisation measures. However, these were some of the unintended effects of such a huge initiative in a land of 1.3 Billion people. The human cost is clearly terrible, yet we have not seen the final chapter in DEMON. If it leads in the end to a more efficient digitized Micro Finance industry, it will have a positive impact on the poor in India and will be studied by other countries facing a similar mission.

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Can you ride the Metro to the Challenger Bank future?


Metro Bank does not fit any obvious category. It is not a stodgy old bank. Nor is it a mobile only disrupter created by and for Millennials. It is based in the UK but founded and led by an American.

We aim for actionable insights on Daily Fintech. If you believe that challenger banks can beat the incumbents and you don’t want to start a challenger bank (it is very hard work) or invest in a startup challenger bank (you may be a bit late to that party), you might take a look at Metro Bank. It is a publicly traded business, so you can get detailed financials and buy and sell without anybody’s permission.

The public stock market is the original permissionless innovation and tool for the democratization of capital markets. The public stock market may have lost its way recently with all the focus on High Frequency Trading (HFT), but the fundamentals are still sound. Choosing a stock to buy or short only needs smarts. You don’t need permission from anybody.

That is why Daily Fintech likes looking at public companies and the Daily Fintech Index.

The question is, if you believe that challenger banks will own the future, can you ride the Metro Bank to that future? In simple terms, should you buy Metro Bank stock? Or do you think that a challenger bank with physical branches does not make sense in the digital age and that means that Metro Bank is over-valued and that you should short it.

That is the question we shine a light on in this post. Our focus is the strategic tailwinds and headwinds more than current financials. I Am Not A Financial Adviser (IANAFA). Do your own research. If it does not work out, don’t blame me. If my research helps your research I am happy. I have not yet bought Metro Bank stock but I might.

Metro Bank Background

Metro Bank was founded in 2010. This was the Cambrian Explosion era of Fintech when other great ventures such as Lending Club were born. Metro Bank was celebrated as Britain’s first new high street bank in over 150 years.

The founder is an American entrepreneur called Vernon Hill, who had earlier created Commerce Bancorp in America (which was acquired by TD Bank in 2007). This gained the nickname of “McBank”, because Hill used his knowledge of the fast-food chain business to the bank.

Metro Bank looks like Vernon Hill’s second act.

Metro Bank is a contrarian play in the digital age. They invest in physical branches – or “stores”. These branches are open seven days a week, and have longer working hours and work hard for better customer service (often through simple human touches such as being dog friendly). Speed is a key selling point. Customers applying for a current account in store can start using it the same day and get their bank card and cheque-book printed while they wait.

They are better branches, but they are still physical branches.

In the digital age is it too late for a strategy that emphasises physical branches?

The tipping point for UK Challenger Banks

A few weeks ago we did a landscape review of UK Challenger Banks, where we posed the question Can Challenger Banks break the massive bank concentration in the UK?

In short, I believe the answer is yes. This is about the tipping point when it becomes normal to switch from the Big 4. After that tipping point, word of mouth marketing will take over and the Customer Acquisition Cost will come tumbling down.

Tipping point is the Malcom Gladwell term and there is empirical observation behind it. Before the tipping point, the idea of change seems ridiculous. After the tipping point, everybody agrees that change was inevitable.

In that landscape report we said that “Metro Bank is the one to watch”. In this post we dig deeper into that thesis.

Before digging deeper into Metro Bank, we need to look at a different tipping point.

When do people stop using branches?

Back in October 2015 we wrote that Branch closures will soon pass the Wile E Coyote moment. This is a different tipping point, when people see so many branches closing (or semi-closing by reducing branch staff to such a minimum that their only job is to teach customers how to use the automated tools) that the customer’s takeaway is “it is pointless to go into a branch”.

At the time I was focused on incumbents. It did not occur to me that a new bank would actually aggressively open new branches. I had seen Metro Bank branches, but assumed this experiment would soon end. As we enter 2017, it is clear that the experiment is still going strong. That is why we are re-evaluating and digging deeper into Metro Bank. It is about behavioural economics. If all you see is branches closing, your behaviour changes one way. If you see new branches opening, your behaviour changes the other way.

Does their technology stack make them agile?

Metro Bank’s co-founder Anthony Thomson left in 2012 to set up rival Atom Bank.

There can be two stories behind this:

  • Either – Metro Bank’s technology is a boat anchor constraining innovation
  • Or – Metro Bank is a talent incubator and great companies are defined by their alumni

Challenger Banks either buy/license from established vendors or build their own from scratch. Metro Bank opted for the former strategy and has licensed technology from the following vendors:

  • Temenos’ T24 core banking
  • Backbase Omnichannel Banking Platform for front-end.
  • FIS/SunGard’s Ambit for Asset Liability Management
  • BancTec for mortgage processing
  • Glory Global Solutions’ Vertera 6G teller cash recyclers (TCRs)

The question is, in the mobile age, how good is their mobile app? How do they compare to the big incumbents and the pure digital upstarts? For this we turn to the Great British Mobile Banking Review 2016 which as of April 2016 did not even give Metro Bank a mention.

You can see their app here.

The tech stack matters. User Experience is more than putting fresh paint on an old car. There is no reason why Metro Bank cannot compete with their mobile app, as they have a reasonably modern tech stack. However, they are clearly late to this party. Metro Bank is due to launch a new mobile app soon. It does not have to blow away the competition, because the physical branch is the differentiator, but it does have to be good enough. It also has to show 1+1= more than 2. It has to show how the combo of branches + mobile is a winner. We await that eagerly.

Apple store comparison

Another contrarian play was Steve Jobs opening Apple stores when most consumer electronics stores were hurting. Good visual design and customer service does wonders. But the comparison soon breaks down. Consumer electronics are physical. You want to touch them, look at them before buying. That is not true for financial services. Both are complex but you can learn about financial services online, by phone or by somebody visiting your office (what Civilised Bank do).

We have to look elsewhere for a potentially winning reason for opening physical branches in the digital age.

The first bank built for Market Place Lending?

Banks bundle two functions – they borrow from you (and call it a Deposit Account) and lend to you (and call it a Loan Account). The latter is hard to do well. That is where Market Place Lending is the first fundamental innovation in banking for hundreds of years (by creating the Lending Account). If you get lots of Deposits, you don’t need to lend the hard way, you can outsource that to Market Place Lending platforms. Metro Bank is going down this route as evidenced by their deal with Zopa.

Metro Bank is happy to lend direct if the collateral is a house aka mortgage lending and are aggressive on the rate they offer for residential mortgages.

If Metro Bank can get a low cost of capital via Deposit growth by using physical branches they will be onto a winner. As an investor that is the one metric worth tracking.

UK Economy Post Brexit?

Two features offered by Metro Bank indicate an entrepreneur who understands that the UK works in a global economy:

  • You can withdraw cash or pay by card anywhere in Europe without being charged a fee.
  • Metro Bank is the only bank that uses MasterCard’s market conversion rate. This is the rate that banks themselves trade at, so there is no need to use a broker.

The FTSE 100 goal

Vernon Hill does not lack for ambition. He has declared a target of getting into the FTSE 100 as per this report.  This is not just about bragging rights. FTSE 100 status brings in new investors. He states the bull case clearly:

“We are very close to one million accounts in a country where people say no one switches bank accounts. If we only get 5 per cent of the British deposits market, that is £100 billion. If you value the bank at about 20 per cent of that, you are looking at a £20 billion company.”

You have to take a man seriously who built Commerce Bancorp from scratch and sold it for $8.5 billion – netting him $400 million.

Neither Growth nor Value play

Many investors position as either a Growth investor or a Value investor. Metro Bank is neither fish nor fowl. That may make Metro Bank a good long term bet – they could be growth at a reasonable price. That may make it a good long term bet, but will constrain short term price momentum as it lacks an obvious story.

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How the humble QR code may usher in the cashless society, starting in India



Clay Shirky, in Here Comes Everybody, writes

“Communications tools don’t get socially interesting until they get technologically boring.”

QR Codes are a good example. This post describes:

  • QR Codes 101 including who controls QR Codes and why QR Codes matter
  • Why India QR is a game-changer
  • QR Codes for Bitcoin payment
  • Fintech and the new government infrastructure investment

QR Codes 101

A Quick Response (QR) code is a machine-readable code made up of black and white squares read by the camera of a smartphone or other device reader.

QR Codes originated in Japan in 1994 to track vehicles during the manufacturing process. Now you see them everywhere – such as URLs in print ads, boarding passes, Bitcoin public keys. The key is the ubiquity of the smartphone camera that can read them. There are specialized QR Code readers (think of boarding pass readers at airports), but the key is the ubiquity of the smartphone camera that can read them.  The reader can be held by a consumer or an employee working retail. For example, that is how Swiss Railways check a ticket that you bought with your mobile phone.

Who controls QR Codes?

A Japanese company called Denso Wave invented the QR Code technology and owns some patents and trademarks, but has chosen to waive its rights to a key patent and offers a free license as long as users follow the standards.

Details are at QRCode.com

The mass adoption is creating an ecosystem of companies offering services such generating QR Codes, such as this company with pricing starting at EUR 5 pm.

Why QR Codes matter

They are simple and free and can go on any form factor, from mobile phone to paper or plastic. So while they are technically boring, their mass adoption makes them interesting.

QR Codes for Bitcoin Public Keys

If you want somebody to send Bitcoin to your account, just go to BitcoinQRCode.org and key in your Bitcoin public key address and then put that QRCode wherever you want like your website or business card.   Yes it really is that simple and simple can change the world.

Why India QR

News: On Feb 20 2016, the Reserve Bank of India (RBI) launched the IndiaQR (or in Hindi BharatQR), a common QR code jointly developed by all the four major card payment companies – National Payments Corporation of India that runs RuPay cards along with MasterCard, Visa and American Express. It will also have the capability of accepting payments on the Unified Payments Interface (UPI) platform.

MasterCard  is promoting the standard through ‘Masterpass QR’.

Customers make payments by scanning the QR code and entering the transaction amount. The amount gets transferred directly from the bank account without the need of a swiping machine.

This replaces credit card Point of Sale devices with anything that can generate QR Codes (which is a dirt cheap capability). That is an important benefot but the reason this is so disruptive is in one word – interoperability.

Before rail gauges were standardized, trains could only run on tracks from that train company.

Currently, QR Codes can be processed on closed systems, such as mVisa, for Visa cardholders, or via mobile wallets such as Paytm, as long as both parties have a Paytm account.

The key to interoperability is the standardisation promoted by the Indian government and codified in the  Unified Payments Interface. This enables Mobile wallet interoperability (read this post for why this is so critical).

Banks and Card networks are on board

On launch day they had 15 banks signed up for IndiaQR (household names if you live in India such as Axis Bank, Bank of Baroda, Bank of India, Citi Union Bank, DCB Bank Ltd, Karur Vysya Bank, HDFC Bank Ltd, ICICI Bank Ltd, IDBI Bank Ltd, Punjab National Bank, RBL Bank Ltd, State Bank of India, Union Bank of India, Vijaya Bank and Yes Bank). Visa, MasterCard and Repay (India specific credit card network) have been integrated and American Express is in the final stage

Paytm has said it plans to invest Rs 600 crore (about $90m) in the next 10 months to further enhance its QR code-based payments solution.

Another mobile wallet contender, MobiKwik, is also backing the standard

The new digital national infrastructure investment

This is an example of how governments can create digital national infrastructure. In ye olden days, infrastructure meant roads and railways and airports – think post war America. In that arena, India can at best play catch up. However in the digital arena, India can lead. The press release mentioned an “insignificant cost” for this QR initiative. It was really the role of government to create interoperable standards that matters. This another example of why we believe India is the country to watch in Fintech. 

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Program your own bank – the power of APIs


This week I joined a panel of four experts to discuss Open Banking at Australia’s APIdays conference. Expert API commentator and author Mark Boyd, who recently wrote an extensive market report on emerging API strategies being used by banks around the world, led the panel. You can read his report here.

Joining me on the panel was James Bligh from NAB, who announced a select number of NAB APIs were now available, for the first time, to fintech startups. While the meaty APIs are still pending (transaction history, customer identification details etc), it marks progress in what has been a slow burn in Australia to get APIs from a major institution made publicly accessible to the fintech community. You can check out NAB’s developer portal here.

While the concept (or misnomer) of Open Banking is gaining traction in the UK and Europe thanks to directives from governments, no such mandate exists in Australia. Momentum however is building for a more hard line stance.

In November of last year a parliamentary committee report recommended that deposit product providers ‘be forced to open access to customer and small business data by July 2018’ via APIs.

And in its draft report, issued earlier that same month, the Productivity Commission also indicated that while it is likely to continue to grant ownership of data to private companies (like banks), it will look to increase customer access to data. This suggests reforms may be in the works that would allow consumers to authorise third party access without facing recriminations from their bank.

Of course if Australia doesn’t act, it will be left behind. Last week UK challenger bank Starling announced it was “opening the doors on #openbanking” making it, according to a blog post on its website, “the first UK licensed bank to have a public, open API.”

This is extremely exciting stuff and great for consumers. You could argue secure, consumer facing banking innovation lags even further behind small business banking innovation. Thanks to proxy banking aggregators like Xero, fintech startups in markets like Australia and the UK have been able to securely access account data without requiring a direct connection to the bank.

Finally, if you’re after something a little more on the fringe of banking API land, I’d highly recommend you check out teller.io. It promises to allow an application to connect to a user’s multiple bank accounts via one API. Aggregation providers and APIs like this are interesting as they could help a fintech service connect a consumer’s fragmented banking world. In the UK one report suggests as many as 1 in 4 consumers hold current accounts with more than one bank, making them prime targets for aggregated account management tools.

When I sit back and think about the power of APIs, then what strikes me is the ability for a business owner or a consumer to program their own bank. That is, instead of choosing an institution first, in the future we’ll choose a number of banking ‘components’, for a truly tailored banking experience – not just a marketing pitch. If like me you’re already part of the 1 in 4 stat above, then you’re already trying to achieve exactly that, just in a clunky, and hard to manage way.

The programmable bank era is here to stay. And personally I can’t wait till I get to build mine!

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.

What comes after MarketPlace Lending?


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.


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


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:


  • 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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N26 is using an app store to become a digital universal bank


N26 is the challenger bank to watch. With a $40m Series B in June 2016 in the bag, Berlin-based startup N26 has a banking license and is now active in 17 countries across Europe. This shows the power of a European banking license that works across the Eurozone.

Although they don’t have any branches, N26 are investing in multi-lingual customer support by phone, because Europe might have one currency but it has lots of languages. Their Series B lead investor, Horizons Ventures is an Asian fund, so they should get access there as needed. Via another investor, Peter Thiel,  they can get connections as needed in America.

N26 could be the first digital universal bank. That is a seriously big deal.

That requires a lot of functionality.  The only way to get there is  to partner through an appstore.

The Back End needs attention

Being mobile is great, but not if it creates a security problem. I would prefer a klunky UI that keeps my money safe. At the end of 2016, stories of a security flaw surfaced.

According to the Fortune post, “Vincent Haupert, a research fellow and PhD student in the computer science department of the University of Erlangen-Nuernberg, told the Chaos Communications Congress in Hamburg how he and two colleagues found N26 security defenses riddled with holes that could have been used to defraud thousands of users”.

In a statement, N26 thanked Haupert for alerting the company to “a theoretical security vulnerability” and advising it on fixes, which N26 said it completed this month.

In addition, N26 has replaced Wirecard with their own back end.

Global expansion plus lots of back end work must stretch the team. This is why they have gone the partnering route for critical customer facing functionality.


The deal that has been announced is with Transferwise, enabling N26 customers to “transfer Euros into 19 exchange rates at the real exchange rate”.

You can see the logic for both parties. N26 gets new features quickly, Transferwise gets distribution. One can imagine other deals with Robo Advisers and Market Place Lenders.

This is a high stakes game where scaling speed is everything. If N26 can offer real distribution they will get lots of app partners and that will accelerate the virtuous circle network effects. N26 have to go global fast in order to keep their partners motivated.

From App Store to Rebundling

If each service is standalone but linked to your main account that is good. If each unbundled service can be rebundled to create new functionality, that is great.

We may see N26 taking on the global universal banks.

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