European Fintechs – Few Signs of Renewed Public Financial Market Appetite

Introduction

Two years after we last reviewed the fintech sector¹, three significant trends are emerging which we explore in the body of this Newsletter:

1. Investors remain wary of the sector and are themselves struggling to raise funds in the aftermath of the bursting of the 2021 tech bubble. Multiple fintechs continue to seek exits via public flotations, but the lack of IPO activity reflects a sharper focus on meaningful performance metrics such as actual profits as opposed to forecast profits.
2. A split is emerging, in terms of both commercial success and investor appeal, between fintechs which service the banking sector (B2B) and those such as neobanks which seek to disrupt it (B2C).
3. Regulators in Europe and the UK seem to continue to disregard financial viability warning signs. This is not new. Bafin of Germany was for years duped by Wirecard² whom they tried desperately to protect despite copious evidence of owner/ senior management fraud.

Public and Private Market Activity

One titan of fintech private equity is New York based Tiger Global Management LLC, founded in 2001. However, the 2021 collapse in tech valuations, particularly Fintech, was disastrous for Tiger and by June 2022 its funds had haemorrhaged USD 25bn³. By comparison, Long Term Capital Management’s 1998 collapse was of the order of less than USD 5 bn.

In April Tiger closed its latest fund, its 16^th, having raised USD 2.2bn for new fintech investments. This was bad news because the goal had been to raise USD 6bn, and the fundraising exercise dragged on for eighteen months. Commentators and industry insiders alluded to the importance of accounting profits over optimistic hockey stick graphs predicated on customer sign ups.

Consumer Facing Fintechs; Struggling for Profits and Remaining Private

Two years ago, we commented on Germany’s most prominent neobank, N26. It had then recently withdrawn from both the US and the UK for regulatory reasons, but was valued at USD 9bn based on its latest capital raise, despite reporting 2020 losses of EUR 151mm. Its losses have since nudged upwards, EUR 172 mm and 213 mm in 2021 and 2022 respectively. Last year, it laid off 4% of its staff and announced a pivot into stock trading and selling ETFs. One wonders today if any path to profitability is possible.

Two years ago, we also reviewed two loss making British neobanks⁴, Monzo and Revolut⁵, both of whom continue to struggle, if we treat BDO’s (the auditor’s) qualification of Revolut’s 2021 accounts: “unable to satisfy [BDO] as to the completeness or occurrence of revenue totalling £478 million” as eliminating the claimed trivial surplus.

We recognise that well managed neobanks can be successful. We have previously praised Wise and now consider Starling Bank, founded in 2014, which has made profits for two years. Monzo has a higher profile but is still lossmaking. Let’s compare some financial data:

	Customers (GBP mm)	Gross Revenue (mm)	Profits (losses) (mm)	Staff number and y.o.y growth
Starling March 2023	3.6	453	195	2700 (+39%)
Monzo Feb 2023	7.5	355	(116)	2547 (+13%)
Revolut December 2022	26	923	(25)	6000 (+100%)

It is entirely reasonable for start ups to focus on gross revenue rather than profits when in their infancies. But Monzo and Revolut are almost ten years old, with fairly large customer bases (Monzo is the 7^th largest UK bank by customers) and questions must arise as to the viability of their business models. Monzo aims to achieve profitability by expanding both into the US and Europe at the same time. In the US it remains unable to obtain a banking licence and will partner with a US bank which will be a drag on earnings. Europe opens up exposure to new cultures, languages and rules, and has proved tough for US and UK banks before. Monzo may of course succeed, but the path to profitability does not look easy.

If Monzo’s path to profits seems uphill, Revolut’s seems steeper. Revolut’s numbers and press announcements appear to typify why Tiger’s investors remain cool on Fintech. Revolut’s staff numbers grew from 6,000 Q4 2022 to 10,000 presently and are set to grow to 11,500 by year end⁶. It appears to be spending all its free cashflow on new employees and advertising in a dash for growth, and has been unable to raise capital since 2021⁷. In fact, as the following table shows, its revenue per customer is low and its private valuation looks dizzy:

	Revenue per customer (GBP)	Balance Sheet Shareholder Equity (GBP bn)	Latest private valuation (GBP bn)
Starling	203	0.7	2.7 (July 2023)
Monzo	112	0.5	4.1 (May 20248)
Revolut	35	1	24* (October 2021)

*Perhaps unsurprisingly, investors such as Molten and Schroders have marked their Revolut holdings down by about 50% to GBP 12 bn in the past year.

Business Facing Fintechs

In April, the respected Swiss Fintechnews.ch published its list of the world’s 25 leading banking technology companies of 2024, chosen on the basis of technical excellence, sector leadership, and overall impact on the banking sector. 15 of these companies were based in Europe and the UK, including the three British neobanks discussed above.

The scope, scale, maturity and solidity of the B2B companies selected is markedly different from most of the consumer facing businesses among the 25. For example, Finastra is a truly global software company supplying applications to 40 of the largest 50 banks in the world.

Another lauded company is Mambu, founded in 2011 in Berlin, but headquartered now in Amsterdam. Mambu appears to have successfully monetized its Software-as-a-Service model, licensing its platforms to banks, lenders and fintechs, with collectively 50 million end users. It has undertaken seven rounds of fundraising, most recently at a EUR 5bn valuation in 2021. Even though that valuation might no longer apply today, the company appears reasonably sound, reporting a 56% gross margin on its DKK 4.4bn (EUR 570mm) revenues for 2023. In the past year, it was also singled out by both Forbes and Google for prestigious awards.

A third highlighted B2B is Sopra Steria, a French company, which specialises in cloud-based platforms and boasts 1,500 banks and other large-scale lenders including the finance arms of car companies Mercedes Benz and Toyota. Sopra may be cutting edge, but is also mature, founded in 1968 and staffed with 50,000 consultants. Its shares trade on the Euronext in Paris, and it derives reasonably solid profits from its almost EUR 5bn annual revenue.

Naturally one expects Fintechnews.ch to be bullish on all of its chosen star companies. However, upon reading the 25 company profiles, the business facing companies appear to be generally stronger than the consumer facing ones. This is mainly due to the genesis being different. The trendy word “disruption” clearly applies to neobanks, and we applaud their efforts to win market share from sleepy and expensive traditional banks where possible. However, B2B companies such as Finastra and Sopra Steria are not really disruptors; rather part of the story of the constant evolution of tech in banking, away from in-house employees to outsourced specialist firms. It makes perfect sense for expert fintech leading players to have emerged offering IT platforms, software applications and external ‘cloud’ servers for data management and storage, upon which bank managements can with greater comfort and at lower cost rely.

This is not to predict that everything will be plain sailing for this sector as consumer finance outages are becoming worryingly common⁹. Indeed, in the past month there was a major cyber attack on the UK’s armed forces payroll and wages system, which is reportedly operated by Sopra Steria under a EUR 300 mm annual contract.

Conclusion – Are Regulators Missing Neobank Financial Viability Warning Signs?

These warning signs should also be considered in the macro banking context, which has in the past year or so been very kind to fintech and banks. Banks have been benefitting from widening net interest margins as rates have risen. This benign environment has also favoured neobanks, few of whom can break even, though. And yet the UK’s Finance Minister Jeremy Hunt champions Revolut as “a shining example from our world-beating Fintech sector”¹⁰.

 

Photo by Abel Pérez