If you can’t beat them, buy them. European banks are acquiring mobile-savvy financial technology (fintech) start-ups rather than building their own.
Given the long history of start-ups that have sold themselves for eye-watering valuations before crashing down to earth (case in point: Yahoo’s US$1bn purchase of Tumblr), you might be forgiven for getting twitchy about where this all might be headed. Especially given the banks’ record of value-destroying takeovers. Remember RBS’s record takeover of ABN Amro months before the financial crisis of 2008?
Almost 10 years and billions in losses later, shareholders are pushing for any surplus cash to be returned to them — not reinvested.
But fintech is a long way from having its own exuberant and ultimately painful Tumblr moment. The balance of power is still in the buyer’s favour — even if valuations turn out to be optimistic.
Here’s why.
None of the mobile banks being acquired have really gained traction with consumers in the way that start-ups have in other industries.
When Yahoo bought Tumblr, the blogging site had 300m views per month, while online retailer Jet.com — recently bought by Walmart for $3bn — has 3,6m customers. Contrast that with mobile bank Fidor, acquired by French bank BPCE. It has 120 000 account holders. When BBVA bought Simple for $117m in 2014, the US app had about 100 000 customers.
The technology might be there, but the pressure to pay a premium for a competitor that could just eliminate your customer base isn’t.
That could change if newly minted banks like Mondo, Atom or Number26 were to hit upon the right strategy or product. In Europe, Fidor is probably the closest to reaching that point after it reached a deal to provide payment services for mobile network Telefonica, which has 43m customers in Germany.
But vacuuming up deposits remains expensive and lending requires capital.
With established rivals benefiting from expansive branch networks, vast customer data and a regulatory head-start, it’s harder for a new entrant to gain traction in micro-banking than micro-blogging. Frequently, they’ve had to partner up with incumbent lenders rather than compete directly against them.
That doesn’t mean that recent purchases of mobile banks are wrong-headed — quite the opposite.
The Fidor deal will allow French lender BPCE to expand its digital operation and bring in experts that it could assign to other ideas and products. Fidor’s technology itself can help internally but also be licensed to others. There’s growth there.
And, for the banks, the outlay so far looks modest.
At best, European bank shares trade on about five times revenue. Applying that multiple to Fidor produces a valuation of about €130m, based on its net interest income of €26m in 2015. Set against BPCE’s net income of €1,7bn in the first half of 2016, it’s a small bet.
There’s also the likelihood that start-ups are going to get even cheaper.
The IPO market is still lackluster and some of the inflated hopes for publicly traded fintech companies have been punctured. Shares of peer-to-peer darling LendingClub have tumbled since their IPO after the company revealed flaws in its internal controls. Venture capital funding for fintech fell by 50% in the second quarter to $2,5bn, according to CBInsights.
If this is the peak of the fintech bubble, that has to be good news for banks looking for new ideas on the cheap. — (c) 2016 Bloomberg LP
