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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With Lufax, Marketplace Lending is becoming a 4 horse global race



On Monday we profiled Ping An Insurance, China’s largest insurer by market value. 

Yesterday we looked at Zhong An, which has Ping An as one its major (12%) shareholders.

Today we look at Lufax, which is 49% owned by Ping An. Lufax is a P2P Lending Marketplace, matching borrowers with investors for a 4% fee, but they have recently branched out into other asset classes such as equities.

Lufax (whose official name is Shanghai Lujiazui International Financial Asset Exchange Co.) was founded in 2011 and raised 3 billion yuan ($483 million) from international investors in 2015.

China Marketplace Lending Consolidation

The Lufax CEO, an American born McKinsey alum called Greg Gibb, was vocal about the coming consolidation in Marketplace Lending in China in a 2015 article in Bloomberg.

“The vast majority of China’s more than 1,500 peer-to-peer lenders are going to fail, with as few as one in 20 surviving.”

In our Oct 2016 report on Marketplace Lending in China, Lufax ranked no 2 on both transaction volume and number of borrowers. They are clearly well positioned for the consolidation.

Greg Gibb of Lufax was eloquent about the small players disappearing;

“Their business models are turning into pyramid schemes. Some promise unrealistic returns to investors and lend without enough data to determine borrowers’ creditworthiness”.

We looked at these issues in more depth in this post.

The Cambrian explosion of Marketplace Lending helped the market expand. As per Bloomberg, from original research by Yingcan Group, Marketplace Lending grew almost 13-fold since 2012 to $41 billion in 2015 and grew more than six times faster than loans extended through banks.

Global 4 Horse Race

P2P Lending originated in the UK but took off in the USA. For a long time we talked about a two horse race in the USA, with Lending Club and Prosper, although there are other big players in the USA with slightly different models such as SOFI and Avant. With their recent $100m raise and already active in both UK and USA, Funding Circle joins this small global group. We profiled them in this Oct 2015 post.

Our thesis is that the globalization of Marketplace Lending will play out inexorably but in fits and starts, deeply impacted by regulation and politics. There are three  drivers:

  • Best practices and technology adoption. As Lufax’s Gibb put it “how do you create transparency and the right asset-scoring process?” The US and UK are mature consumer lending marketplaces, but the growth is in places like China, India, Africa and South America. The company that manages to bring global best practices and technology to these big growth markets will be a very big winner.
  • Marketplaces expanding globally. So far the US firms have stayed in the US market. It is a big enough market and the problems in 2016 constrained any more ambitious plays. Funding Circle is different. They operate in a small domestic market, so like other ambitious UK firms, they went global early. How the Chinese firms play in this game will be key as they have both a big domestic market and big ambitions. We expect 2017 to be big on the M&A front.
  • Lenders looking for global diversification. Most lenders have never had this opportunity before. Only big global banks could compare the risk/reward arbitrage across countries. Now any Hedge Fund can play and so even can Mrs. Watanabe and her global peer Joe Q Public. Entrepreneurs who make this easy by enabling global diversification will win. They may be acquired by the Marketplace Lending platforms or stay independent as a layer in the value ecosystem.

Lufax expanding into Equities

This article in South China Morning Post describes how Lufax is now also creating an international equity trading platform.

This goes against the grain of the Silicon Valley innovation model which is clearly focus, focus, focus. This is an example of how China is different. People used to the Silicon Valley innovation model assume that Lufax is doing rash  diversification by moving from Fixed Income into Equities. The mantra is that Consumer Lending is massive and complex, so “stick to your knitting”. That makes sense if it is a small founding team using step ladder VC funding. It is different when a firm is created by one or more big established firms, so that financial, human and other resources are not a constraint. It is also different in a fast growing market where consumer trust is critical and with many spaces where no incumbent yet has that trust. One of our mantras is that “bits don’t stop at category borders”, that digitization breaks down previously distinct categories if the user need is there. There is a real user need, for multi-asset strategies (such as some Fixed Income and some Equities).

Lufax is positioning to serve Chinese investors’ asset allocation around the globe. In 2007, China ruled that each mainlander is allowed to buy up to US$50,000 worth of foreign currencies a year. This gives Chinese people a legal channel through which to diversify their assets.

Lufax plans to offer an online wealth platform in 2017 to serve those needs. According to Lufax CEO, Greg Gibb:

“Demand for overseas investment among Chinese people and businesses is constantly increasing. Lufax hopes to leverage new technologies and models to provide clients internationalised services.”

Lufax has announced partnerships with two firms – eToro for  social trading and Denmark-based Saxo Bank.

Big bet on the Chinese consumer

The Chinese consumer demand for loans is high as the country transitions from being export led to becoming a consumer economy. This is leading to high growth with few big incumbents as competitors. Lending Club and Prosper have to compete with big, smart, agile banks in America. Imagine being able to bet on the American consumer 100 years ago, but with the Internet as a delivery tool.

Of course such opportunity does not come without risks such as lack of consumer finance models and a possibly overheated economy. Entrepreneurs look at these risks to guide their action plan.

Lufax has a clear bet on the Chinese consumer, both enabling them to borrow and to invest their excess capital.

However, the Chinese consumer is only one possibility in a global economy.

Along with Lending Club, Prosper and Funding Circle, Lufax is in a 4 horse race for the global consumer lending opportunity.

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When will Fintech disruption show up in Wells Fargo and Lloyds Bank stock price?



#6 of our top 10 Fintech predictions for 2017 was: 

“Analysts covering Banks will start referencing Fintech disruption when referring to a drop in profits at a major bank. Carried over from 2016. I believe Fintech disruption was the root cause of the Wells Fargo scandal, but this was not a generally held opinion.”

This post will look at why a major decline of profitability at big banks is inevitable and will look for signs that this may be imminent. The post will conclude with some investing/trading options based on this analysis.

 Why we only look at Wells Fargo and Lloyds Bank

To start tracking measurable impact of Fintech disruption, we look at two big banks that have been rewarded by investors with a premium valuation – Wells Fargo in America and Lloyds Bank in UK. The 10-year chart of these two stocks compared to an ETF of bank stocks shows the scale of the premium valuation.


Investors like both these stocks because:

  1. They stick to one country that they know very well – America for Wells Fargo and UK for Lloyds Bank.
  1. They mainly focus on Consumer Banking – avoiding big exposure to Investment Banking.
  1. They have strong balance sheets.

Sticking with these two banks avoids getting results skewed by:

– fear of another Lehman event (impacting banks with a weak balance sheet)

– Political risk e.g a return to something like Glass Steagall (impacting banks using retail deposits for a big play in investment banking).

It also makes sense because consumer Fintech innovation has been happening for a long time, but is more nascent in Investment Banking. In short, the consumer Fintech tsunami is a lot closer to the shore.

Why loss of profit is inevitable

This is very simple – the cost to process a transaction via mobile phone, or maybe call center for complex issues, vs via a branch. As more transactions go digital and remote, those huge branch networks turn from an asset to a liability. How close we are to that tipping point is the big question, but nobody seriously disputes the inevitability of most consumer banking being branchless in future. If you dispute that, try raising money for a new venture that sells financial services via your own branch network; selling via grocery stores or Post Offices does not count as those channels are also competition to a bank’s retail branch networks.

Cross Selling & KYC

Cross selling has been the mantra of banks with big retail branch networks. They talk of omnichannel – branch staff + ATM + website + mobile + call center – and the Customer Acquisition Cost of cross selling vs acquiring a new customer. This makes a lot of sense because KYC rules mean that acquiring a new customer is very expensive; that will change as KYC artifacts become digital (see this post for details). There is no question that consumers like the convenience of omnichannel; who does not like having options? The question is the profitability of those customers. That is where cross selling comes in.

The problem is that banks find it is harder to cross-sell because their leverage over customers has decreased.

Historically, banks were one-stop shops for most consumer financial needs. If you had a current account, you also probably had a deposit account and a loan account and a credit card. The unbundling of these services makes it easier for consumers and businesses to shop around, and not surprisingly, the best providers aren’t always the banks they have done business with for years. The rebundling by new services that give consumers a holistic view across multiple accounts further commomditizes the bank/consumer relationship.

No, problem – just put more pressure on the sales guys! That is what happened at Wells Fargo.

Good cross selling will never go out of fashion, but banks need  products and services that are competitive on price and feature and user experience. That is a lot harder than increasing the targets of the sales people.

Of course, that’s easier said than done, particularly given some of the challenges in recruiting digital talent, but it’s the only real solution.

The good news is that banks that can improve their products and services, and develop innovative new ones, will not only be in a better position to cross-sell to their existing customers, but to use those products and services as a wedge to lure new customers who do business with other banks. The bad news is that other banks a well as Fintech startups will be wooing your customers with the same strategy.

A level playing field is a big problem for banks that grew up with one tilted in their favor.

Why you cannot forecast when a drop in profits at a major bank will be revealed to the public.

The Wells Fargo scandal is a story about digital headwinds meeting a “make target at all costs” culture. In this post we outlined the Creative Destruction 7 Act Play. Two acts are most relevant to Wells Fargo:

Act 3. Denial

The changes are now real and management can see it. But they don’t know how to react, so they reach for high pressure management to make the numbers work. In some cases, management also reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed.

Many banks have been in this mode about Fintech since its inception after the Global Financial Crisis. 

Act 5. Blow up

This is when reality can no longer be glossed over. This is when we see scandals such as Wells Fargo (and the News Corp phone hacking scandal). This can lead to investors taking a cold hard look at the numbers and when the new numbers do finally appear, it can trigger a stock crisis, often with a restatement of earnings and a change of CEO.

At this stage the reality can no longer be denied and we see real crises in big companies. These crises may lead to radical transformation, or they may lead to Chapter 11 restructuring and fire sales. Before that happens we see the kind of behavior we just saw with Wells Fargo.

This is new for banking, which has not had a major headwind like this in hundreds of years. However, bankers can study other markets that have faced digitization headwinds – for example News Media.

The News Corp phone hacking scandal

News media faced digital headwinds a long time before banking did. To put it another way, software feasted on news media before it looked for the next tasty morsel in banking.

The day the News Corp phone hacking scandal hit, I happened to be meeting with an esteemed Wealth Management firm that had put up a list of their highest conviction stocks. Right at the top of the charts was News Corp. Oops. When questioned, they responded:

“Stuff like that happens. It’s impossible to predict that kind of thing where rogue employees run amok”.

The rationale for putting that stock top of the charts based on financial metrics was impeccable. It is also true that the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No.

Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way.

It was an inevitable event, even if it was not an imminent event where you could predict the timing. The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. Valiant efforts by sales people (Wells Fargo) or Journalists (News Corp) cannot save companies from digital disruption. Top management attempts to make that happen usually end in scandal.

Like Climate Change

Causation does not equal correlation, but when you see correlation you can adopt one of two strategies:

  • Either: say causation is not yet proven, so do nothing
  • Or: say causation is not yet proven, but there is some evidence and investing is all about assessing probability and so some action is needed.

In the case of Climate Change, the investment concerned is property/real estate in low lying coastal areas that is in danger of rising sea levels. The action you take will depend on your situation and assessment of probability, such as:

– buy more flood insurance

– Sell the property

– Short resort business with exposure.

The parallel is apt because the big force of change related to Fintech is the behavioral change of millions of consumers. You can see the individual change (e.g a Millennial who has never used a Bank branch) but tracking the rate of change in large populations is much harder. Nor can you say with certainty what causes the change.

We call this slow, steady & powerful but hard to measure change Fintech Change.

Investing options

In the case of Fintech Change, the Investing options will also depend on your situation and assessment of probability, such as:

– Reduce exposure to Wells Fargo and Lloyds Bank stock i.e. sell them.

– Short Wells Fargo and Lloyds Bank stock i.e. a more aggressive approach.

– Buy individual Fintech stocks (private or public) such as Lending Club and Square

– Buy a basket of public Fintech stocks.

– Invest in a VC Fund with good expertise in Fintech to capture the early stage action.

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Can Challenger Banks break the massive bank concentration in the UK?


The UK has one of the most concentrated/ consolidated banking markets in the world with the top 5 banks accounting for 85%market share.

By contrast, the big banks only account for about 44% in America and 25% in Germany.

The question is, does this level of concentration & consolidation make it harder or easier for challenger banks? This post seeks to find out which of these two theories is correct:

  • Theory 1: Big banks will remain dominant. Their size enables them to crush any attacker
  • Theory 2: The digital only challenger banks will win because the game has changed.

We segment the market into:

The Big 5 universal banks

The big traditional challengers

The new digital only challengers

The challenge from retail players

Current account innovators

Altfi Lenders moving into Deposits

SME Banks

Niche challengers

The Big 5 universal banks in their castles

Everybody knows them – a walk down any UK high street shows their dominance. These are the barons in their big castles, with huge moats populated with crocodiles and plenty of boiling oil to pour on attackers. They seem impregnable. Consumers may grumble, but maybe they will always need a big solid bank to fall back upon.

Approximately 27% market share goes to Lloyds and a further 18% each to Barclays and RBS with HSBC and Santander taking 12% and 10% respectively.

The other narrative goes like this –  the barons in their castles have lost the plot and suffer from bunker mentality and are “too big to manage”.  Their innovation teams report back from sponsored hackathons and innovation challenges to business units that then get back to business as usual. Their business reality is about managing dividend cover ratios, buybacks and stress tests, not delighting customers.

Investors also know these Big 5 very well. Apart from crashes around various crises, such as the Global Financial Crisis in 2008, the Eurozone Debt Crisis in 2011 and Brexit in 2016, their stock holds up as long as they keep paying high dividends and passing stress tests. There is no sign as yet of investors viewing the challengers as a serious threat.

The big traditional challengers

These are the landed gentry in their manor houses. They are minor compared to the Big 5 but 3 of them have meaningful market share, more than 1%:

  • Nationwide
  • TSB
  • Coop Bank

Virgin Money has the new brand, but is really Northern Rock under the skin. Clydesdale and Yorkshire are innovating with the B account, but this article in the Telegraph shows how hard it is to win over new customers.

They all seem like smaller versions of the big guys, which is not a game-changer.

In this category, Metro Bank is the one to watch. When Metro Bank opened for business in spring 2010, created by a US entrepreneur called Vernon Hill, it became Britain’s first new high street bank in over 150 years. It has retail branches – called stores – open 7 days a week and outside normal banking hours. The model was largely based on a similar venture created by Hill in the US, Commerce Bancorp (acquired by TD Bank in 2007), which gained the nickname of “McBank” as Hill applied his knowledge of the fast-food chain business to the bank. Metro Bank has also been a talent incubator; Metro Bank’s co-founder Anthony Thomson left in 2012 to set up rival Atom Bank.

During 2015 it looked like the game was turning to the challengers as per this report from KPMG:

“Britain’s challenger banks outperformed the Big Five lenders by notching up an 18% hike in profits in 2015, but new research warned the “tide is turning” in a tougher year for smaller players.

Total pre-tax profits for so-called challenger banks – such as – rose by £194 million to £1.28 billion in 2015, while the Big Five were left nursing a combined profits drop of £5.6 billion.”

The new digital only challengers

These are the insurgent “neobanks” using ladders & tunnel & battering rams to break into the mighty castles.

In 2013, the Bank of England created a simplified two-step process with lower capital requirements, in order to introduce more competition.

The digital challenger strategy is mostly to appeal to mainstream but younger consumers – the Millennial strategy.

We sorted these challengers by amount raised:

Bank Total ($m)
Atom 166
Starling 70
Tandem 35
Monzo 18

Atom’s last round was from BBVA which pioneered buying Fintech Neobanks with Simple. So we can expect a big challenge into the top 5 from “the other big Spanish bank in the UK”.

We see two distinct strategies. One is to build a new tech stack from scratch. The idea is to be able to offer a genuinely new service rather than a new UX on top of an old core banking system.

The other is to outsource the back end to proven banking software vendors. The idea is to focus on the UX layer, so that they can innovate faster. Most digital only banks adopt this approach; you see surprisingly Traditional Fintech below the hood.

Monzo is the biggest proponent of the DIY from scratch strategy.  The technology used is classic for a digital startup. It is mainly open source: Linux, Apache Cassandra, Golang and PostgreSQL relational database. There is a team of 16 people working on this.

The challenge from retailers

Asda, Tesco, Marks & Spencer and Sainsbury’s have all launched banks. The logic makes sense as they have brand recognition and physical high street coverage, yet without a major presence they don’t suffer from innovators dilemma.

Like all banks, they suffer from cyber attacks.

The Post Office also has the brand recognition and physical high street coverage.

These retail store challengers use traditional old school technology. Their advantage is simply being able to monetize their real estate in multiple ways – and that is a big deal.

Current account innovators

While most challenger banks focus on deposits and loans, which is highly regulated, many other ventures focus on the current account (checking account for American readers). This is a big area for innovation and there is no reason why in the digital realm a current account must be bundled with deposits and loans. The innovators we see in this category are:

  • Tide. Tide focusses on SMEs. They offer a fully featured current account and business MasterCard, plus SME-oriented finance apps, accounting capabilities and and online community.
  • Think money. They also offer MasterCard as part of their current account. They differentiate via tools to help  customers manage cash flow (ego tracking incoming like salary, benefits, pension so that there is enough pay all the regular bills. Once the bills are taken care of, the rest of the money is moved over to the customer’s “card account” for discretionary spending.
  • Soldo. They also offer prepaid debit card (MasterCard) and a mobile app. They focus on family spending, budgets and cash flow. The company says it does not intend to compete with banks, but will rather complement their services. It plans to seek formal partnerships with banks and co-branded arrangements. Soldo holds an electronic money licence and is regulated by the FCA.
  • Loot. Loot is a  mobile banking service aimed at students or what it calls “generation Snapchat”. They also offer a prepaid Mastercard account. The card is linked to a money management app that lets people track their spending and gives them insight into where their money is going.
  • Pockit. They also offer a prepaid MasterCard and focus on the underbanked, who rely on cash in the absence of bank accounts.  Pocket says it takes two minutes to open an account – without any credit checks.
  • Ffrees. It offers a no-frills account (and a debit card) and does not carry out credit checks. Ffrees describes itself as an “Unbank”, with their November 2016 launch of their new U Account. They claim to have opened 10,000 accounts in 3 months from a young demographic. We covered them in their earlier incarnation here.
  • Lintel Bank. They do position as a full service bank and are still waiting for a licence. They focus on migrant workers and students via prepaid current accounts, money transfers, personal and SME loans, and mortgages.

AltFi Lenders moving into Deposits

Our thesis at Daily Fintech is that the P2P Lending is the new Deposit Account. As an investor, you put in more work, take a bit more risk (less if you put in the work) and get a much higher return than you would from a deposit account. This is still only for early adopters – such as Hector Nunez who we profiled here – so there is still a lot of room for intermediaries to package it up for consumers in a way that is easily accessible.

Funding Circle raising $100m signals that P2P Lending is alive and well.

Zopa, which claims to be the world’s first P2P Lender is taking this thesis to a logical conclusion by applying to become a bank. This gives them a big interest rate arbitrage opportunity. They can borrow via deposit accounts from investors and lend via overdraft alternatives, while laying off most of the balance sheet risk to the market. This will be worth watching.

Other AltFi Lenders moving into Deposits include:

  • Together Money. This was created by Jerrold Holdings Group, which unites Auction Finance, Blemain Finance, Cheshire Mortgage Corporation and Lancashire Mortgage Corporation.Their focus is on residential and commercial mortgage loans to niche market segments underserved by mainstream lenders. They have applied for a banking license.
  • Paragon Bank. This banking subsidiary of a well-established specialist finance provider, Paragon Group, was launched in early 2014.
  • OneSavings Bank. This is a rollup and rebranding of a number of financial services businesses owned by US-based private equity firm JC Flowers. Constituent companies include Kent Reliance (residential mortgages and savings products), Interbay Commercial (commercial mortgages), Prestige Finance (secured loans), Reliance Property Loans (property financing) and Heritable Partners (development finance).
  • Masthaven. This mortgage specialist recently received a banking licence.
  • Coombs Bank. They are still waiting for a licence (site is “coming soon”. It is backed by S&U plc, a provider of consumer credit and motor finance created by Derek Coombs.

SME Banks

Our thesis at Daily Fintech is that SMEs have been like the middle child – neither Consumer nor Enterprise, so Banks did not serve them well. This leaves a big window for new ventures such as:

  • Shawbrook Bank. Formed in 2011 via the merger of Whiteaway Laidlaw Bank, Link Loans and Commercial First, Shawbrook is a publicly traded specialist lending and savings bank that focuses primarily on SMEs. You could also put them in the Altfi moving into Deposits category.
  • OakNorth. They focus on the needs of high growth ventures.
  • Hampshire Trust Bank. They were founded in 1977, but moved into the banking space in 2014, following the arrival of new owners.
  • British Business Bank. This government entity is active in encouraging lending to UK SME and has done a lot for P2P Lending.
  • CivilisedBank. They go to the SME rather than asking the SME to go to them (as they don’t have any branches). A network of local bankers working in their local communities come iPad equipped to your office. CivilisedBank hopes that this differentiated strategy will lead to a lower Customer Acquisition Costs than either retail branches or hoping for automated inbound conversion.
  • Aldermore. The company was founded in 2009 with backing from private equity company, Anacap, and did an IPO in March 2015.
  • Wyelands Bank. They were previously known as Tungsten Bank and before that as FIBI Bank. This is an example of buy & repurpose rather than build. Instead of building a bank and applying for a new license, you buy an existing bank and change it to suit your needs. The site is in coming soon status. The investor behind Wyelands Bank is Sanjeev Gupta and at the time of the acquisition from Tungsten, the planned focus was to provide funding to supply chain and trade financing firms (i.e. similar to Tungsten focus).

Niche challengers

  • Hampden & Co claims to be the first private bank to launch in the UK in the last 30 years.
  • Templewood Bank wants to be a new independent merchant bank (awaiting a banking licence).
  • Lintel Bank targets migrant workers and students (awaiting a banking licence).
  • Monese targets expatriates and immigrants. It is also in the current account innovators category, claiming a 3 minute mobile account opening and a simple a monthly charge of £4.95.
  • Monizo targets freelancers. They clain to offer real-time insight into how much tax freelancers need to pay (which is critical to financial planning for freelancers).

Daily Fintech analysis.

The two theories are:

Theory 1: Big banks will remain dominant. Their size enables them to crush any attacker

Theory 2: The digital only challenger banks will win because the game has changed.

We incline to Theory 2, but with a twist.  Consumers know they lack for choice and they lack engagement with the big banks. The traditional analog scale of the Big 5 does not help them win the digital scale game – which is about UX and network effects. Their scale makes them slow and hard to manage.

So the Big 5 are ripe for disruption by smaller and more agile competitors, but not by the current challengers. 

Our analysis is that the challenger banks will be acquired by non-bank players and new foreign entrants. They will have the deep pockets and balance sheet to enable them to win. The challenger banks will find it hard to compete as standalone entities, but via the M&A route they will be a success for investors and founders.

What could trigger a tipping point?

For all this Cambrian explosion of activity described above, all these ventures together are still a rounding error compared to the Big 5.

Most of the ventures profiled are quite happy with a small piece of the pie, as it is such a large pie. However, a tipping point matters because it is about Customer Acquisition Cost (CAC). Despite the oft repeated data about how much Millennials distrust traditional banks, it still costs a lot of money to persuade them to part with hard-earned money.

There is no magic silver bullet functionally. Everybody offers a frictionless mobile UX with personalization based on big data. That is the price of entry.

The trigger will be another catastrophic event like the Global Financial Crisis of 2008. As catastrophic event usually don’t follow the last one, the next one will be something new; the best guess currently is some form of mass cyber attack.

N26 and the German small banks

The digital challenger bank to watch in Europe is N26, from Berlin.

The German banking market is much less consolidated or concentrated than the UK.

The Grossbanken – Deutsche Bank, Commerzbank & HypoVereinsbank – mostly focus on Corporate banking and are publicly traded. Then there are about 500 independent, local “Sparkassen” or “savings banks”, with a market share around 50%. There are also about 1,450 independent, local  “Volksbanken” or “Raiffeisenbanken” (translation = Cooperative Bank) with a market share of 25%.

Yes, in Germany about 75% is from small banks, which is almost a mirror image of the UK.

The question is, does this make it harder or easier for N26?

These tiny banks must rely on outside firms for technology. The Daily Fintech prediction is that at least one digital challenger bank will switch from B2C to B2B or B2B2C and offer their capability via these locally dominant small banks. That company can come from anywhere. So our take is the N26 will have a hard time competing against lots of small local banks partnering with new neobanks that pivot to B2B or B2B2C.

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The dabbawalas in India point to future e-commerce and payments


If you spend any time in India, you will often be told that home-cooked food is far better than restaurant food. As the restaurant food is so delicious, this is hard to believe, but it is true.

In Mumbai, India, 200,000 workers get fresh home cooked food every day. In this relatively impoverished city, workers get better food that is totally customized to their individual needs than the most pampered workers in Silicon Valley and other wealth hubs.

Investors and entrepreneurs who have spent $billions on food and grocery ecommerce should take serious note of how this is done.

Policy makers might also pay attention as this is good for the environment and for jobs.

The future of e-commerce is mobile. The future of payments is also mobile. So these two worlds of e-commerce and payments are converging around mobile phones and Internet Of Things devices. We see this convergence in companies such as Uber, Amazon, Alibaba and Paytm.

 In short, it is time to take note of what Mumbai’s dabbawalas are doing.

Once again this illustrates our theme of First The Rest then the West – that countries formerly known as emerging aka the rest of the world are leapfrogging the West thanks to not being invested in legacy technologies, processes and models.

Dabbawala 101

A dabbawala (aka tiffin wallah) is a person in Mumbai, India, who collects hot food from the homes of workers in the late morning, delivers the lunches to the workplace and returns the empty boxes to the worker’s residence that afternoon. They are also used by meal suppliers in Mumbai, where they deliver cooked meals from central kitchens to the customers and back.

Dabbawala translates to lunch box delivery person. “Dabba” means a box (usually a cylindrical tin or aluminium container aka tiffin) while “wala” is a suffix, denoting a doer.

These tiffins have become fun gifts in the West. Some parents use them for their kids lunch box.

Hot VC sector

The food and grocery delivery space has been hot. For a good analysis in 2015, read this post on Techcrunch by a VC. VCs put in more than $1 billion in 2014 with a big acceleration in 2015. A few successful IPOs such as Just Eat and Grubhub/Seamless led to a rash of similar ventures.

There has been a cooling in 2016 as some ventures inevitably failed and VCs focused on a few late stage deals. However, the window is still wide open with the online penetration % in low single digits.

The first generation was simply an online ordering layer (replacing phone orders with online orders). The second generation of restaurant marketplaces includes behemoths such as Uber and Amazon that compete on logistics through a network of independent couriers. The logistics network creates a powerful moat and a correspondingly higher commission around 25%.

It is this second generation, competing on logistics, that should be studying the dabbawala network. Actually they probably already know about it and understand its disruptive power (and would prefer if it stays in Mumbai). It is the third generation that will use the ideas behind the dabbawala network to create a new wave of digital cooperative network.

Indian frugal innovation

The dabbawala network is a good example of what has been termed “jugaad” in India which translates to “frugal innovation”. This became fashionable to study in the West around 2011 when big companies and universities (such as Santa Clara and Stanford) strove to understand how to reduce the complexity of a process by removing nonessential features. This becomes critical in serving mass market consumers at razor-thin margins without reducing quality.

Also in rich countries

Switzerland could not be more different from India – a tiny country with a high GDP per person.  Yet we see a dabbawala network operating here.

The appeal of fresh, delicious, nutritious food cooked with love and care is universal.

Better for the environment

The packaging wastage around today’s e-commerce (big disposable cartons) upsets a lot of people. If this upsets wealthy people who are influential this can damage the bottom line of the e-commerce marketplace. The dabbawala tiffins are reused every day.

Pave the cow paths with proven digital innovation

The dabbawala network started in 1890 with 100 delivery people (it now has about 5,000). So this was hardly a tech startup. Yet one Silicon Valley mantra is to “pave the cow paths”. This means adding innovation to whatever is already working.

There are 5 tech innovations that are already proven which would add a digital layer to a dabbawala network to make it massively scalable:

– QR code to replace the unique ID stamped into the tiffin.The current system is well thought-through and would translate easily to a QR code.


– ChatBot UI for service inquiries and exception handling. Lets say you want to change the the location to your friend’s office or cancel for a few days next week when you are travelling.

– Mobile payment at delivery time (with auto routing of payments to the cook and the delivery person).

– RFID sensors in the tiffin so that the whereabouts can be tracked automatically (your phone pings you to say that lunch is in the lobby and getting into the elevator).

– fully electric cheap cars and scooters for delivery (cannot rely on trains in many countries and many delivery people will object to pedal powered bycicles).

Delegate don’t micro manage

Ordering takeaway food online rather than by phone increases efficiency, but adds to the tyranny of choice. What shall I eat for lunch today that is a) delicious b) nutritious c) avoids any dietary or religious prohibitions? How much nicer to have somebody who really understands all those needs decide for you and occasionally surprise you within those constraints.

For a lovely movie about the romance of this, watch The Lunchbox.

Put in more MBA terms, it is surely better to delegate this task rather than to micro manage it.

Digital Cooperative Future

The dabbawala network grew in an era and culture where/when men worked for pay and women cooked at home. Today, those roles could be reversed or both could be working and the cooking is done by somebody else.

The Gig Economy is the new normal for a large % of the population. The only question is, do we have a power law society (with the lion’s share of the economic value of these networks going to the network operator) or a bell curve society where the broad mass of people get most of the benefits of these digital networks? The latter is the vision of a digital cooperative future. Many of the blockchain startups envisage a future like this, but the beauty of the dabbawala network is that it does not require any technological breakthrough.

Look at the dabbawala network in the context of recent digital innovation compared to Uber:

  • Each dabbawala is required to contribute a minimum capital in kind, in the form of two bicycles and a wooden crate for the tiffins. This is like an Uber driver owning their own car.
  • Each dabbawala is required to wear white cotton kurta-pyjamas, and the white Gandhi cap. Rich people will pay more if their Uber driver looks like a chauffeur and that branding also helps the network operator.

Here is the fundamental difference with sharing economy network. Each month there is a division of the earnings of each unit. This is a cooperative, not simply individuals using a common system and brand.

At a human level, this enables the connection that people make with their postman or Fedex or UPS driver (or going really far back, the guy delivering milk). The same person comes every day. For humans who like humans, this is more appealing than drone delivery.

Doorstep services is not just for food

This is why Uber got into food delivery. If you have a logistics network, you can use it for anything. This is simply a networked, free agent model of Fedex and UPS. Entrepreneurs in India have figured this out. For example, Anulom uses the Aaadhar unique ID and the dabbawala network for the paperwork around rental service agreements. This earned them a tweet from the Prime Minster, Narendra Modi.

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