In 2017, everything in FinTech becomes a bank

By Thomas Olszewski, Investor, Frontline Ventures

2017 is off to a big start. Revolut’s £50m funding round has spectators and VCs alike scratching their heads as to how the free FX app (subject to their £5k per month fair usage policy), just three years old, could warrant the £300m post money valuation. After all, the non-bank loses money on each FX transaction and the success of Revolut will be based entirely on its ability to cross sell products. See for yourself in Revolut’s 2015 pitch deck.

Two theories have emerged that may explain the trend. First, high customer acquisition costs is the largest obstacle for consumer FinTechs today and as a result, it makes sense to invest in startups with strong organic growth and limited revenue visibility. Second, Revolut’s customer base of 700 thousand is truly staggering.  In contrast, publicly traded Metro Bank has one million customers and a valuation of £3.2b – although this is hardly an apples to apples comparison. Revolut could be in a strong position to become a bank, and this may be one of few routes to grow into its valuation.

Meanwhile, in Germany, N26 has had to limit its complimentary perks, such as free ATM withdrawals, and increase compliance reporting, while incumbent competitors are starting to use the same technology (IDnow et al.) to offer similar onboarding services. In March the company announced it had reached 300 thousand users, the largest public user base figures reported among the venture backed challengers. In our own research we found that German incumbent banks had far lower NPS than their UK counterparts, which would suggest German challengers may be well positioned for continued growth.

As a matter of fact, everything seems to be turning into a bank or neo-bank. Money transfer provider Transferwise announced borderless accounts, online lender Zopa announced late last year that it had applied for a banking license, and Dutch payments company Ayden received a banking license this summer to manage its own clearing process. Maybe in the future your accounting system, asset manager, or crowdfunding platform could also be your bank.

Perhaps the real winners will be the bank of banks and providers of infrastructure such as Solaris, GPS, IDnow or Wirecard, as they benefit from the acquisition spend of their customers. If you are one of the B2B or enterprise software companies benefiting from these trends, we would love to hear from you.

Thomas Olszewski is an investor with Frontline Ventures, a B2B & enterprise software venture capital fund based in the UK & Ireland. thomas@frontline.vc