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European FinTech Trends


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Challenger banks, blockchain, marketplace lending, and robo-advisors are changing the way we think about finance. Recent events such as the the hack on the DAO and trouble at America’s largest marketplace lender remind us how quickly things can change.

A number of recent reports, conferences and events discuss developments in the space and how participants are responding. New incumbents have capitalized on low customer satisfaction at traditional financial institutions. Blockchain makes inroads, but not at the pace expected. Growth at robo advisors stumble, and marketplace lending wins in some sectors and geographies.

How are banks responding? How can entrepreneurs capitalize on the opportunity? What is the pulse of the venture community? Read on to find out:

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European FinTech Trends

  1. 1. European FinTech Trends June 2016
  2. 2. Discussed Themes 2 Intro Challenger Banks Blockchain Marketplace Lending Robo-Advisors How are banks responding? Takeways Appendix
  3. 3. 18% switched from their bank in the past 12 months2 40% would consider banking with Google 59% of financial products are not targeted at them 79% view there relationship as ‘transactional’ 3 18-34 year olds think differently about personal finance1 “…digital natives are really pissed off with their digital banking experience” - Valentin Stalf, CEO The Pulse of FinTech Q1 2016 Review, CBInsights, MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, 2 In a survey of 4000 customers in the US & Canada: Banking Shaped by the Customer, Accenture
  4. 4. 4 Low customer satisfaction creates opportunity for new players The Pulse of FinTech Q1 2016 Review, CBInsights
  5. 5. 5 Which gave rise to…the new FinTech ecosystem
  6. 6. 6 Challenger Banks What is a non-bank? Someone who engages in banking without a banking license.
  7. 7. • It is cheaper, easier and faster than ever to engage in banking activities • Existing low customer satisfaction creates an incentive to try new banks • Bank partnerships extend the same deposit guarantees for customers • Lower compliance standards for online only banks makes it easier to onboard customers (address and ID verification) 7 A perfect storm has catalysed the growth of challenger banks Atom Bank Starling Number26 Tandem Mondo Fidor 0 45 90 135 180 Digital challenger banks by total disclosed funding (€m) MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field”
  8. 8. • Announced €40m Series B financing round at a rumoured €140m (post) valuation • Acquired 200k customers since launch in January 2015. Suggests a €700 valuation per user • Does not have a banking license, and is built on top of WiredCard bank 1 • Marketplace where they integrate 3rd party products rather than offering services off of their balance sheet 8 Case Study: German startup challenger bank Number26 “We are not regulated, but our partner bank is” - Valentin Stalf, CEO2 1 Wiredcard bank is a specialist in online transfers, and is used by CurrencyFair/ LinkedFinance. 2 MoneyConf, Madrid, Panel Discussion “What do you want from a bank?”
  9. 9. 9 Number26 primary differentiator is user experience ID Verification via video chat No proof of address document required Entire process takes about 8 minutes Deposit cash at your local grocery store or through electronics transfers Free transfers to friends who also use Number26
  10. 10. 10 Number26 analyses your spending patterns to loan you money
  11. 11. 11 Number26 offers Transferwise integration directly in the app
  12. 12. Easiest and fastest account to open Completely free to open and use Covers any withdrawal fees, from any ATM Send money within the Number26 ecosystem for free Send money internationally with Transferwise Affordable credit/ overdraft easily accessible 12 Number26 is great!
  13. 13. From the users perspective, product is similar to high street bank Banks offer higher level of customer service at branches Cost of customer acquisition for non-banks is high Cost of compliance is high (or not conducted properly) Many ‘perks’ are not sustainable (ATM fees, limited identity verification) Banks have huge distribution 13 But will it last?
  14. 14. A banking license continues to be an unfair advantage 14 “…You get a license to defy the laws of gravity…government guarantees, and ability to increase leverage…it is a license to print money.” CEO, Atom Bank MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field?
  15. 15. 15 Blockchain
  16. 16. • VCs like cryptocurrencies because it reminds them over the early days of the internet • It is taken longer than expected to gain traction, and many players are still looking for a strong use case • The role banks play in blockchain is not the point. The real question is, will any of these technologies take off at all 16 How did we get here? “Like the Internet itself, the blockchain is architected for resilience and self healing…I have a deep and fundamental belief in open and decentralized systems.” - Fred Wilson, Union Square Ventures1 1 If they're not lauging at you, you aren't working on the right thing
  17. 17. 17 More than just Bitcoin… There are hundreds of cryptocurrencies built on the blockchain
  18. 18. Fundamental flaws of Bitcoin: mining is to expensive, transaction capacity is slow Increasing complexity of producing new coins makes it less scalable Growing pains or fundamental flaws? Patient investors are sitting on the side lines 18 Blockchain: Status Quo “Blockchain technology is immature, unproven and not scalable… disagreement about core protocol…it could take 5-10 years to sort out these issues.” - Toby Coppel, Parter & Co-Founder, Mosaic Ventures (investors in several cryptocurrency businesses)
  19. 19. 19 Marketplace Lending
  20. 20. 20 Marketplace lending has arrived in a big way Real Estate LoansInstitutional Investors Hedge Funds BDCs Banks Insurance Pensions Family Office Governments Sovereign Funds Endowments Foundations Private Equity Small Business Loans Consumer Loans Factoring and Receivables ServicesMedicalStudents & EduImpact Investing Orhcard Platform, Lendscape
  21. 21. Consumer is by far the largest use case in the USA for MPL In Europe, Funding Circle leads the way in Small Business loans Real estate and factoring are showing potential in recent years (MarketInvoice, FastPay) Creating markets: many factoring deals are loans that would have never taken place before Cost basis for issuing loans in the long run should be lower than banks Stricter capital requirements for banks have led to reduced credit availability, Scrutiny around high risk lending have made banks pull back In 2015 UK and USA MPL loans were £2.2b 1 and $36b 2 respectively 21 Status Quo: Marketplace Lending UK P2P Industry Lent £2.2 Billion in 2015 UK P2P Industry Lent £2.2 Billion in 2015 , Breaking New Ground the Americas Alternative Finance Benchmarking Report, KPMG
  22. 22. 22 Lending Club in the USA is dominating the consumer space LendingClub Statistics
  23. 23. • The total outstanding consumer debt is $3.4t1 in the USA vs €16b2 in Ireland, and £183b in the UK3 • The average consumer debt per capita is €3,500 in Ireland, $10,700 in the USA and £2,850 in the UK • In the USA, student debt, auto loans, and credit card debt account for $1.2t, $1.0t, and $714b respectively4 • European marketplace lending will be B2B focused because the EU consumer lending market is too small 23 Consumer lending in Europe is small compared to the USA 1 Consumer Creidt & Payment Statistics, Philadelphia Federal Reserve, 2 Irish Central Bank, Household Credit Report 2H 2015. 3 The Money Charity, UK Lending Statistcs 4 New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages Lending Club Reported Loan Purpose
  24. 24. 24 How will banks respond to new lending businesses? • Push for increased regulation to level the playing field • Banks will still win some asset classes such as mortgages • Reduce pricing to compete • Acquire, build or use white label services to participate in growth Banks are partnering with marketplace lending platforms
  25. 25. Marketplace lending cost structure 25The future of finance, rise of the new shadow bank. Goldman Sachs Research
  26. 26. Marketplace lending is expected to be a trillion dollar business 26 Projected Marketplace Lending Deals 2020 0 35 70 105 140 2012 2013 2014 2015 2016 China Origination Volume United Kingdom Origination Volume United States Origination Volume 300 250 200 150 100 50 BillionsofUSD 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YoY Growth in 2014: 167% YoY Growth in 2015: 200%+ Global Marketplace Lending: Disruptive Innovation in Financials, Morgan Stanley.Global Crowdfunding Market to Reach $34b in 2015, Mass Solution • Morgan Stanely forecasts global originations will reach $300b • This would suggest $1trln in loans outstanding in 2020 • Half of this growth has come from china, where there has been massive fraud • Banks will acquire or build similar platforms
  27. 27. Alternative lending by the numbers in the USA 27 . While it took Prosper 8 years to reach the first $1bn loans issued via its P2P lending platform, it took just six months to reach the second billion. The future of finance, rise of the new shadow bank. Goldman Sachs Research
  28. 28. 28 Robo-Advsiors (i.e.Automated Wealth Managers)
  29. 29. Assets under management are still relatively small 29
  30. 30. And growth is slowing.Trouble ahead? 30 “Stand-alone firms will need $16b to $40b of net assets to break even. Moreover, [Morningstar] estimates…$1000 cost to add a new account, after factoring in attrition, and up to a decade to recoup marketing costs. It will be hard for robe-firms to self finance their growth.” - Joe Manseuto, CEO, Morningstar The Pulse of FinTech Q1 2016 Review, CBInsights, Quote MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, Does not compute, The Economist “People are overestimating how juicy the business is. Products are extremely low margin. It will be harder than the airline industry. Competition is still increasing. People coming in with competitive pricing.” Tamaz Giorgadse, CEO, Raisin (cross boarder deposits)
  31. 31. When scale is hard to achieve, companies are acquired for Tech 31The Pulse of FinTech Q1 2016 Review, CBInsights
  32. 32. • Goldman Sachs Asset Management (GSAM) has 1trln in AUM. Betterment and WealthFront have a combined $6b. Early innings? • Financial advisors have historically struggled to build tech, which would justify high take out premiums • Outside the USA, adoption of robo-advisors has been slow. Customer acquisition cost in this segment is very high • Barclays, RBS, Lloyds and Santander plan to launch their own services1 32 Wealth management innovation still generates a lot of interest 1UK banks set to launch robo-advisors, FT
  33. 33. 33 How are banks handling the situation?
  34. 34. 34 Case Study: Santander Bank Agility Risk Taking Mindset Customer Scale Products Infrastructure Brand Startups + Banks = Best of both worlds Kabbage - Serving SMEs in the UK via 3m Santander SMB clients ripple - Santander uses ripple for small sum currency transfer Startups Banks
  35. 35. Startups build on top of bank systems and are looking for partners 35 Incubuments co-operate with new players Banks are partnering with marketplace lending platforms1 1Proprietary Research, The Pulse of FinTech Q1 2016 Review, CBInsights WiredCard supports Number26, CurrencyFair and LinkedFinance Bank Investments to VC-backed FinTech Companies Q1’2015- Q2’2016 Goldman Sachs Citi Santander Mitsubishi JPMorgan ING Group Bank of China China Development Mizuho Sumitomo Mitsui 0 2 5 7 9
  36. 36. 36 Conclusion
  37. 37. Takeaways from MoneyConf discussions 37 Challenger Banks • Mostly opportunity, not enemy • Is better UX a large enough advantage? • Is the business model/ service sustainable? Blockchain • Bitcoin may not be the big winner • Expect some adoption in 5-10 years • No need to jump on the next hot thing Robo-Advisors • Signs of trouble • Valuable tech • Large market potential Marketplace Lending • Capturing €35b+ loans annually • Instances of fraud & non-compliance • Small consumer opportunity in EU
  38. 38. 38 Thomas Olszewski @TROlszewski
  39. 39. 39 Appendix
  40. 40. 40 Brexit
  41. 41. • If the Brexit would occur, Ireland and Germany are seen as favourites for new business locations, due to their favourable regulatory framework, EU membership and existing tech communities. • 34% of software developers working in the UK are from outside of the UK and 24% are from the European Union. Skilled labor have a lot of options and they will go where its easiest for them to work. 41 Germany & Ireland potential winners in Brexit vote
  42. 42. Transferwise stated they would relocate HQ in case of Brexit Massive devaluation similar to the Swiss Franc in 2005 Why is Transferwise halting transactions on day of Brexit? 42 Brexit causing spikes in volume transfered at remittance co’s