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Startups called fintechs aim to shake up financial services using new technology. Hassle-free digital services like money transfers and loans have proved popular with the public. In the UK, Monzo and Starling Bank, known as “neobanks”, have garnered over 8mn and almost 4mn customers respectively and are still growing fast.
Low fees mean profits have remained elusive. But higher interest rates are now compensating for that, not least with better returns on client money put out on deposit.
That helps Revolut, Europe’s largest neobank with almost 35mn customers. Its hopes of getting a UK banking licence received a boost this week. A complicated shareholder structure is one issue that has given regulators qualms concerning the business.
Revolut is now negotiating a simplification of ownership with backer SoftBank. If the UK gives Revolut a banking licence, it could expand its suite of lending products, already available in continental Europe, on to its home turf.
Revolut was valued at $33bn (£23.9bn) at its last funding round in 2021. Lex remains highly sceptical of such private valuations, which lack the solidity of public market price discovery. Venture capitalists have been keen to back neobanks, however, lured by their potential to disrupt traditional banking.
Retail investors cannot easily buy into neobanks because they are not publicly quoted. But that may change in future.
If they float, they will be risky but intriguing investment prospects. Any investor in new lenders should bear one pitfall in mind. It is easy for them to produce fast and apparently profitable loans growth at first. If some of those loans are too risky, it will catch up with the lender later on.
Neobanks pay savers about twice as much on average on savings accounts as traditional banks. These are also driving profits higher by depositing funds with the Bank of England.
“The focus of neobanks on deposit gathering in the earlier part of their development should mean further gains in margins this year following rapid interest rate rises,” notes Jason Napier of UBS.
Starling Bank, which is fully UK licensed, has gathered large amounts of low-cost current accounts. It attributes this to superior technology. It has been a particular beneficiary of higher rates; net interest income rose to £400mn in the year to March from £126mn a year earlier. Profit before tax increased to £195mn from £32mn accordingly.
Low funding costs have helped Starling expand into mortgages, putting it in direct competition with high street banks. It recently boosted rates on its current accounts to 3.25 per cent for balances up to £5,000. That might be a sign it is willing to reward customers or that competitive pressure for low-cost deposits is rising.
Bigger peer Monzo made pre-tax losses in its latest financial year. It says it is now run-rate profitable and operations are fully funded to 2028. This neobank focuses on unsecured loans, overdrafts and buy-now-pay-later loans. But a 13 per cent loan-to-deposit ratio means it has plenty of spare funds benefiting from high central bank rates.
Growth is all well and good. Interest rates are flattering businesses today. But neobanks may simply become replicas of their bigger peers. Sales of proprietary technology may unlock value, as many now propose, but this proposition remains untested.
As Revolut is finding out, regulation remains a hurdle. The question of longer term sustainability still needs to be answered. The franchises of high-street banks are robust and hard to disrupt. Having started small, neobanks may stay that way.
PayPal: transfer market
PayPal was one of the great disrupters of its day, shaking up digital payments much as newer fintechs hope to do. Today it is in a funk. Tech hype pushed the shares to more than $300 each at their peak in 2021. Today they trade for less than $60. The valuation, at 11 times forward earnings, is at a record low.
Could the advent of fast-growing discount ecommerce platform Temu finally give investors something to cheer about?
Worries focus on PayPal’s higher-margin branded unit. This makes money every time a shopper clicks on the PayPal button at checkout.
Stiff competition from the likes of Apple, Google, Affirm and Afterpay is squeezing the business. PayPal’s volumes grew just 5 per cent last year, compared with a compound annual growth rate of 26 per cent in 2018-21.
Temu sells ultra-low-price clothing and knick-knacks mostly made in China. It has exploded in popularity since its debut last September. The app, owned by PDD (formerly Pinduoduo), is the most popular shopping app in the US, ahead of Amazon and Walmart. Visits to Temu’s website have increased from 7mn in September 2022 to nearly 300mn in August 2023, according to Similar Web.
PayPal is among available checkout options. Mizuho analysts reckon Temu accounted for about 2 per cent of incoming website traffic to PayPal in August. They think that as Temu grows in popularity, it could become a meaningful source of revenue for PayPal.
Stumbling blocks await. Temu’s customers in the US tend to snap up bargain items such as 10 pairs of socks for $2 and $5 shower caddies. PayPal’s take must be slim. Temu is likely burning cash at a high rate.
The upshot is that new chief executive Alex Chriss needs to revive PayPal via self-help. Temu and its bargain basement trinkets will not lift PayPal off the discount shelf.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
