On July 29, Robinhood Markets, which democratised investing by pioneering commission-free trading for stocks, ETFs, options and cryptocurrencies as well as trading of fractional shares, will list on Nasdaq at a valuation of over US$35 billion ($47.61 billion). It will be the second biggest listing of a FinTech firm following cryptocurrency exchange Coinbase’s US$51 billion IPO earlier this year. Last November, China’s Ant Group, the giant FinTech affiliate of Alibaba Group Holding, which was seeking to list at a valuation of US$313 billion, had its IPO pulled just 36 hours before trading of its shares could begin in Hong Kong and Shanghai.
In some ways, Robinhood, which has over 18 million active customers on its platform and US$81 billion assets in custody, is a tad late to the party. By its own admission, growth is already slowing from the massive boom in retail trading early this year at the height of the mania in millennial stock darlings like GameStop. Robinhood raked in US$522 million in revenues in the January-March quarter, up 303% over the previous year. Had it gone public at the time, some market gurus believe the retail brokerage behemoth would have commanded a valuation of over US$75 billion.
Even now, on its IPO day, Robinhood would be valued almost as much as Credit Suisse and Standard Chartered Bank combined.
The FinTech disruption
Five years ago, I wrote a column in The Edge Singapore about “banking’s Uber moment”, which described how a growing number of firms at the intersection of technology and finance — from those leveraging on distributed ledger blockchain to payment start-ups to those tackling algorithmic trading and wealth management — were upending commercial banking and consumer finance across the world. I attempted to answer some basic questions around the burgeoning FinTech spectrum: How will business models in the financial services sector change? What will happen to credit or deposits? Will banking follow the footsteps of travel, music and video? Can banks stop disruptors from eating their lunch?
My column quoted a dire warning from Jamie Dimon, CEO of JPMorgan Chase, that “Silicon Valley is coming” no matter what the banks did. Hundreds of start-ups with lots of brains and money were working on various alternatives to traditional banking, he wrote in his annual shareholder letter in 2016. “They are very good at reducing the ‘pain points’,” he noted.
Five years on, the FinTechs, powered by boatloads of money from venture capital funds, sovereign wealth funds and private equity firms, are thriving and pose a bigger threat to incumbent banks than CEOs or regulators could have imagined. They are also more powerful and have moved far beyond reducing the traditional ‘pain points’ of banking to take on its bread-and-butter services including mortgages, consumer finance, wealth management and foreign exchange. Last year, FinTechs attracted US$42.3 billion in VC investment despite the pandemic.
FinTechs are no longer underdog upstarts. PayPal, now the world’s 23rd largest firm, has a market capitalisation of US$355 billion — bigger than Bank of America at US$326 billion and indeed bigger than Wells Fargo and Goldman Sachs combined. Only JP Morgan Chase, with a market value of US$456 billion, is more valuable than PayPal. The No. 2 FinTech player, Square, may have a smaller market capitalisation of US$120 billion but is growing far faster than PayPal or indeed the incumbent banks.
Why FinTechs? And, why now? New York University marketing professor and popular podcaster Scott Galloway believes that like theatres, grocery stores, petrol stations, dry cleaners, university classes, doctor’s offices, the world of finance is still stuck in the 1980s. “It’s hard to imagine an industry more ripe for disruption than the business of money,” he noted in a recent blog.
Galloway points out that FinTechs are winning by doing things that incumbents are not. Firstly, they are focusing more on innovation. PayPal, over the past five years, has issued 26 times more patents than Goldman Sachs which has Marcus, a disrupter retail bank, under its umbrella.
Secondly, FinTechs or neobanks are cutting costs aggressively and do not have legacy costs of bank branches. In America, a traditional bank branch needs US$50 million in deposits to break even; 48% of physical bank branches in the US lose money. HSBC recently announced it would shutter most of its branches in the US because retail banking in America was bleeding money.
Lastly, FinTechs are focusing on the underserved or the unbanked. A third of the world’s adult population does not have a bank account. Financial inclusion, says Galloway, is more than an economic issue. “It’s a societal issue as it bolsters the middle class and forms a solid base for democracy,” he notes.
Almost everyone these days has access to a smartphone. Take Indonesia, where even though only half the adults have a bank account, more than 72% of adults have a smartphone. You may be far from a bank branch but a FinTech player with an easy-to-use app lets you do an array of financial transactions right from your phone. Millennials, even in urban centres like Singapore, Kuala Lumpur or Hong Kong, do not want to venture into a branch or dial a stock broking firm to open an account. But they are game to try out options trading on an app on their smartphones.
Not burdened by legacy infrastructure like branches or a huge labour force, FinTechs can keep costs low and harvest a lot of your personal data. Using analytics and artificial intelligence, they can push all sorts of services tailored for your needs. Using cloud computing platforms and renting software, they can deliver services at a fraction of the cost of banking incumbents.
Essentially, FinTech firms are unbundling the traditional banking cross-subsidisation model. That unbundling makes the pricing and cost of banking products and services more transparent. That suits younger tech-savvy customers, as well as the older unbanked who dread the opaque bank pricing, just fine.
IPO bonanza
Globally, there are now 123 FinTech unicorns, or private companies with valuations of over US$1 billion. FinTech unicorns form 17% of the total 728 unicorns worldwide. Of the top four unicorns in the world, two are FinTechs, according to CB Insights, a start-up advisory firm in New York.
Over the next 12 months a number of top FinTech unicorns, most of them far bigger than Robinhood, are likely to seek stock market listings around the world as they accelerate their battle against entrenched traditional providers of financial services. Among them are Irish-American financial services and soft- ware-as-a-service firm Stripe which has a valuation of US$95 billion; San Francisco-based neobank Chime; Swedish “buy now pay later” firm Klarna; San Francisco-based cryptocurrency exchange and bank Kraken; US consumer finance data firm Plaid, whose US$5.3 billion merger with Visa International was called off late last year; and Brazil’s digital finance powerhouse Nubank.
Analysts expect Beijing regulators to allow Ant Group to finally proceed with a listing over the next six to eight months, albeit with a far lower valuation than the US$313 billion it was hoping to command nine months ago. A listing of Shenzen-based WeBank, in which Tencent Holding has a 30% stake, is also on the cards for the first half of next year.
The coming FinTech IPO bonanza follows the listing of Coinbase in April and direct listing of cross-border payment firm Wise on London Stock Exchange earlier this month which valued the firm over at US$10 billion. Digital-only Wise does not actually wire money like Western Union or MoneyGram International. Instead, it holds balances in countries on popular currency routes like US – India, Singapore–Bangladesh or Germany – Turkey, to sidestep the high fees in money transfer business.
The FinTech market mania has been fuelled by a wave of “blank cheque” special purpose acquisition companies (SPACs) targeting FinTech firms. Just this past week, Portage Fintech Acquisition, a SPAC targeting the FinTech sector, raised US$240 million. It is looking for a FinTech target deal that could value the combined firm between US$2 billion and US$3 billion.
The biggest consummated SPAC–FinTech merger this year was Sri Lankan-born billionaire Chamath Palihapitiya’s Social Capital Hedosophia Holdings V pairing with SoFi Technologies which valued the combined firm at US$8.65 billion.
SoFi is led by CEO Anthony Noto, a former Goldman Sachs analyst who briefly served as Twitter’s CFO. The firm provides mortgages, personal loans, credit cards, student loan refinancing, commission-free stock and ETF trades, fractional shares and cryptocurrency trading. It has no account minimum and offers free financial counselling through its mobile app and desktop interface. SoFi stock has since surged 55% and it now has a market value of over US$13.6 billion.
Including SoFi, there have been 12 SPAC mergers in the US FinTech sector this year, generating US$52.63 billion in deal volume, compared with just nine transactions totalling US$16.9 billion last year, according to Dealogic data.
Investors need to focus on the ground-floor investment opportunity that today’s FinTechs present, says Dan Dolev, FinTech and payments analyst at Mizuho Securities in New York. “Square’s Cash App may be on its way to becoming the ultimate neo-bank and the money centre bank of the future,” he says. “This could make buying Square analogous to buying a piece of JP Morgan in 1871.” Dolev believes Cash App is the “ultimate challenger bank”.
Right now, Square’s app has average revenue per user of US$40 to US$50. The Mizuho analyst believes Cash App can grow average revenue per user to between US$150 and US$200 over the next few years as Square rolls out mortgages, auto loans, online insurance as well as a “buy now pay later” service on top of its online trading services. Currently, banks like JP Morgan Chase, Wells Fargo and Charles Schwab have average revenues per user of between US$400 and US$700 but with a cost base that is substantially higher than a FinTech like Square.
Yet just as FinTechs are poised to grab market share and wallet share from incumbents, regulators are ready to pounce on the use of data by both financial institutions and FinTech players. Regulators have their sights on antitrust enforcement of large tech players as well as the use of AI and data harvesting by FinTech upstarts. Governments around the world want to encourage innovative FinTechs but are mindful of growing privacy concerns.
After years on the fringe, FinTech players now have the ability to grab a much bigger share of the financial services market as long as they address the concerns of regulators as well as their customers. Robinhood’s big IPO next week is likely to be an accelerant for these challenger neobanks.
Assif Shameen is a technology and business writer based in North America
Photo credit: Bloomberg
