On day one of this new decade, here are a few Points on fintech startups maturing into banks, and banks mastering fintech.
Who will consumers and investors bet on?
The first fintech cycle that began 10+ years ago will officially mature in 2020.
There were two original crops of fintech startups: lenders and investment/wealth managers (aka robo-advisors).
Let’s see how the fintech pioneers have evolved, and how the banks could win in the end.
FINTECH LENDERS BECOMING BANKS
– Propser, LendingClub, and SoFi started the digital, phone-first personal and student loan wave in 2005, 2006, and 2011, respectively.
– Prosper is private, its last funding in 2017 put valuation at about $550 million, and they have almost 1 million customers. They now fund almost $3 billion in loans per year, and expanded from personal loans to home equity loans. They also now offer investment accounts.
– LendingClub is public, has a $1.1 billion market cap, and 3 million customers. They now fund about $11 billion in loans per year, and expanded from personal loans to business, auto, and patient medical loans. They also now offer investment and retirement accounts.
– SoFi is private, its last funding in March 2019 put valuation at $4.3 billion, and they claim 9 million users*. They expanded from student loans to mortgages, and personal loans. They also now offer savings, investment, retirement, and trading accounts.
– All 3 have pivoted from peer-to-peer to institutional funding sources as they matured.
FINTECH WEALTH MANAGERS ALSO BECOMING BANKS
– Wealthfront, Betterment, Personal Capital, and Robinhood started the digital, phone-first investing and stock trading wave in 2008, 2008, 2009, and 2013 respectively.
– Wealthfront is private, has $22 billion assets under management (AUM), and was valued around $1 billion in early-2018. They began as a robo-advisor but now offer savings, investment, retirement, and are now looking at offering mortgages. They came out of the gate extremely strong last April with savings, adding $1 billion in deposits in 1 month.
– Betterment is private, has $16 billion in AUM and undisclosed valuation and customer count, but perhaps has about 400,000 customers. They’re expanding toward a full-service proposition of checking, savings, investment, retirement—but no lending yet.
– Personal Capital is private, has $10 billion in AUM, is (maybe) valued around $2 billion, and has 2 million users. They’ve added human advice to their digital wealth management and also added savings.
– Robinhood is private, has 10 million stock trading customers, and was valued at $7.6 billion in July 2019. But that valuation is in question after late-2019’s race to $0 commission trading (a race Robinhood ironically started). They’re now expanding into investing and saving.
CAN FINTECHS DO ALL YOUR BANKING?
– The customer/user counts from these pioneers show how fintechs have mastered customer acquisition.
– It’s always been a ‘land and expand’ strategy.
– First, create a brand that doesn’t relegate you to one product.
– Second, pick one product on the Budget, Save, Borrow, Invest banking spectrum and add customers.
– Third, expand into other banking products.
– And it goes way beyond these pioneers. Billions is going into new fintech banking models.
– U.S. fintech VC-backed equity funding topped $12.9 billion through Q3 2019 across 513 companies.
– This surpasses 2018’s full year record of $12.5 billion in funding for 762 companies.
– And so far in this fintech cycle, I estimate (using 3Q 2019 CB Insights data) that U.S. fintechs have taken 60+ million customers from banks across the budget, save, borrow, invest product spectrum.
FINTECH POWERED BANKS MAY WIN IN THE END
– But the fintechs have banking regulatory challenges.
– Meanwhile banks not only have the regs down, they have full product sets to cover the customer’s budget, save, borrow, invest lifetime journey.
– And now banks are catching up on the phone-first approach to banking that fintechs pioneered.
– They do this with another crop of fintechs that don’t provide banking services, but instead provide under-the-hood tech to upgrade customer experience for banks.
– Firms like this get these valuations by upgrading tech and customer experience for America’s 5300 banks.
– 5000 of these banks are community banks, and most have under $1 billion in assets. These banks have great service and full product sets. Now they can give customers the same cool bank-on-your-phone experience as fintechs provide.
– Banks also have the valuation advantage over fintechs.
– JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo are together worth $840 billion and earned $100 billion in 2018 after tax.
– As such, big banks can afford to keep spending on new tech.
– Also, big banks will buy certain fintech startups as this cycle plays out.
– And this is to say nothing of media and big tech buying fintechs too.
– More coming shortly on a newer, higher-valuation crop of fintechs, as well as 2020 dealmaking among banks, fintechs, media, and big tech.
– Hit me with questions, and see a few reference links below.
– *Note difference between “customers” and “users” in this piece—and in fintech vernacular overall. For these companies, “users” implies consumers using free parts of their services (budgeting, planning, etc.) but haven’t necessarily become customers.