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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Insurtech Exits enabling Claims Management As A Service

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One of our top 10 Insurtech predictions-for 2017 was: 

“We will start to see exits as Insurance carriers buy startups. These will be either a) reducing operational cost eg in claims processing or risk management b) Robo Agents that enable carriers to sell direct, reducing their CAC and enabling them to compete with startup carriers. These will be small, quick wins for investors and entrepreneurs that will make it harder for the big full stack startups to get traction (as the incumbents will catch up to their innovation).” 

Actually some early deals already happened late last year.

The action so far has been in the claims processing space. This will bring a new layer of efficiency to this critical layer of the insurance stack. In this post we look at two deals:

– WeGoLook acquired by Crawford

– ISCS acquired by Guidewire

 The direction of travel is a Claims Management As A Service layer that will be used by customer-facing ventures. 

Neither deal got much attention in InsurTech media circles because the story lacked any hot VC fund, or mega number or hot space. However, we believe that Claims Management As A Service will be a huge enabler for innovation and in retrospect these will look like very smart deals.

WeGoLook acquired by Crawford

WeGoLook built a network of 30,000+ field agents who perform inspections and custom tasks. The field agents are called “Lookers”. A classic job is to do automotive and property inspections post claim.

While pundits like to talk about drones and AI, we believe that Augmented Intelligence is a more plausible future. A task might be 80-90% automated, but humans are still better at exception handling, particularly when fraudsters have a lot of motivation to cheat the machines is so high. Humans are very good at saying something like “that looks odd and needs a closer look”, but only if the machines are automating the easy stuff. Humans just need the machines to help aka to augment their intelligence.

WeGoLook is small exit at $36m. This makes a lousy story – no hot VCs, no big number in the headline – but it is still life changing for the entrepreneur if they have not raised a lot of money and a quick look at Crunchbase shows that WeGoLook was very capital efficient. It also bodes well for the acquirer. Capital efficiency is a good thing unless you are in the business of deploying other people’s money.

The acquirer, Crawford, is a publicly listed company

The “gig economy” (a much more real term than sharing economy) is the new normal and WeGoLook adds another type of gig to give people additional income.

ISCS acquired by Guidewire Software

This is a bigger deal at $160m. Again the acquirer, Guidewire, is publicly listed. At a revenue multiple just shy of 4 on 2016 ISCS revenues of $41m, the multiple looks about right for a niche cloud based SAAS business.

The big theme here is that what Salesforce started is now going mainstream. Cloud will be the norm for all business apps. Guidewire currently targets large Property & Casualty insurers. Acquiring ISCS gives Guidewire entry into the small carrier market.  ISCS targets smaller Property & Casualty insurers, two-thirds of which have less than $100 million in revenues.

Business As A Service

ISCS is traditional Software As A Service. It is a great business – strong growth margins and good revenue visibility. There are lots of niches such as small P&C carriers. But this opportunity has been visible for a while so each niche has multiple players. WeGoLook could be described as Humans As A Service. Where we see the puck headed is something that combines elements of both services into one higher level. Generically we can call this Business As A Service, but within a niche we are more likely to see names such as Claims Management As A Service.  This is a natural evolution of the software business through Past and Present to the Future:

  • Past = Perpetual Licensing. Close a sale and send a disk with the software. All the hard work (and all the reward) of delivering the business result now passes to the customer. The software was the secret sauce by itself. This is like selling yeast to people who want bread; yeast is the active ingredient, but it is useless on its own.
  • Present = Software As A Service. You add hardware to deliver the software over the Internet. In cooking terms, you add water, salt, flour (commodity ingredients) to offer a loaf of bread.
  • Future = software enabled Business As A Service. This includes hardware – that is now the baseline. Software Enabled Business Services also include 24/7 guidance by human experts and business process innovation and digital media that attracts customers to your customers and co-branding partnerships and proprietary data. To stretch the analogy, this is now a restaurant where bread is one item (given free while waiting for your appetizers).

As an example, think of a payment network such as Visa, Mastercard and Amex. These are Software Enabled Business Services. Yes, these payment networks have software at the core. Yes, they own the hardware servers that the software runs on. Yet they don’t license that as a SAAS product to banks. They wrap it into other services to deliver transactions to consumers via Banks. That is how Visa, Mastercard and Amex turn their secret sauce into Unfair Advantage.

Claims Management As A Service will be a great platform business and will enable lots of innovation by customer-facing ventures (which could be full stack Insurtech or traditional Insurance after a digital transformation). The WeGoLook and ISCS acquisitions point us towards this future.

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