tencent

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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The Zhong An IPO in China could be the Netscape moment for InsurTech

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InsurTech sprang from obscurity. We first started covering InsurTech in March 2015. Here, for the record, is our first post (basically saying that not much was visible yet, but “watch this space”).

Since then we have covered InsurTech every Thursday for what will soon be two years and witnessed a Cambrian explosion of innovation and funding. Just click on the InsurTech Category to see them all or subscribe to get our posts every day by email. 

By contrast, the disruptive Fintech ventures that challenge the incumbent banks originated in the wake of the Global Financial Crisis around 2008. So by December 2014, around 6 years later, we had our first major Fintech IPO for Lending Club which we called the Netscape moment for Fintech. Yes, Lending Club stumbled badly in 2016 and gave the whole Fintech sector a black eye, but it seems to be in recovery now.

The question is, what will be the Netscape moment for InsurTech?

This post argues that it will be the Zhong An IPO in China. We don’t have a date for this yet, only teasing PR, but read this to get a briefing before the circus starts.

Zhong An 101

Zhong An is a pure play full stack regulated InsurTech venture. Think of it like a challenger Insurance – digital first.

Zhong An was created by three established Chinese companies:

  • Alibaba (the A in BAT)
  • TenCent (the T in BAT)
  • Ping An (Insurance company)

They raised over $900m in a single round, so won’t lack for cash to execute their plans.

Zhong An first got traction from return-delivery insurance for buyers on Taobao.com (Alibaba online marketplace) but has now moved into most Insurance categories such as Auto and Health.

Zhong An sells direct, not via traditional insurance agents.

Flirting with IPO locations

A year ago, Zhong An was doing PR about a US IPO.

Then we read reports about an IPO in Hong Kong.

Now the PR indicates a listing in mainland China. This makes sense for three reasons:

  • IPO is a branding event and Zhong An wants to reach mainland Chinese consumers.
  • Smart money in US can invest in China and does not need a US listing.
  • They won’t want to compete with a US IPO for Ant Financial (owned by Alibaba, which is Zhong An’s largest shareholder with a 16% stake.)

There is no date set and the revenue numbers being shown are as follows (using 6.88 as the exchange rate of USD/CNY):

2015: $331m

2016: $596m to $827m

Some commentators see the move to a mainland China listing as backing away from selling to US consumers. I doubt that was a big factor in their plans as the market opportunity in China is so massive – with few legacy incumbents and big growth in middle class needing insurance. One assumes that the war of words with the new Trump administration and how that would affect US consumers and investors was a consideration, but focus on a huge home market was probably a bigger consideration. A move into Africa is probably next on their rollout as it has similar characteristics to China – few legacy incumbents, big growth in middle class – and Chinese firms are very active in Africa.

Return Shipping Insurance

Return shipping insurance for e-commerce is the top product for Zhong An – not surprising given their Alibaba and Tencent backers. Amazon covers shipping insurance directly in USA, but this is unbundled in China, leaving room for Zhong An to enter as an independent insurer. That is a big deal because clothing (which has a lot of returns) is the largest part of the $900 billion Chinese e-commerce market. Given the low product cost, the cost of shipping in China is about 20% of average transaction value.

Zhong An is now expanding into more highly regulated markets for higher priced items such as auto insurance.

Blockchain incubator & consortium

Zhong An is moving forward with both Blockchain and AI via an incubator and a Technology subsidiary as per this report.

Zhong An is also a member of the The Lujiazui Blockchain Finance Development Alliance that was founded in Lujiazui, Shanghai’s financial hub, in October 2016. It sounds like a mix between R3CEV and B3i. Reports indicate that they are using Ethereum. Without legacy processes, Zhong An may leapfrog the West in Blockchain adoption to reduce Settlement Latency.

Western Insurance going digital in Hong Kong

We have seen companies like Yahoo and Uber leave China and keep a minority position. That was a very profitable deal for Yahoo.

Western Insurance maybe doing the same deal. Reports are that UK based insurance group Aviva has signed a deal to sell stakes in its 160-year-old Hong Kong operation to Tencent, the Chinese internet company, and Hillhouse, a private equity firm.

The Hong Kong market is mature in comparison to mainland China, with big incumbents such as Prudential and AIA and an established network of agents. The idea is to attack this mature market as a digital disrupter, bypassing the agent network.

This indicates a market share war that is hotting up and an InsurTech space that is growing up fast.

No doubt Aviva will translate lessons learned in Hong Kongto  its core UK market.

The Zhong An progress to IPO will be worth watching for anybody in the InsurTech business.

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