The Economist - USA (2021-07-17)

62 Finance&economics TheEconomistJuly17th 2021

and Asia, and led by Stanford­educated or

Silicon­Valley­trained founders in particu­

lar,  have  become  magnets  for  investors.

Nubank, Brazil’s biggest digital­only bank,

for instance, is worth $30bn. 

The  craze  also  extends  beyond  pay­

ments. A surge in savings in rich countries

in the past year has boosted “wealth­tech”

startups,  such  as  online  brokers  and  in­

vestment  advisers.  Insurance­tech  firms

received  $1.8bn  through  82  deals  globally

in the first quarter of this year. Lending has

proved trickier to disrupt—perhaps owing

to regulators’ firmer grip on this area of fi­

nance—except  when  it  crosses  over  into

payments, as illustrated by the rise of Klar­

na and its rivals.

This  broadening  out  points  to  one  ex­

planation for the explosion in funding: the

huge  growth  in  the  market  for  fintech  of­

ferings  during  the  pandemic.  Consumers

and companies adjusted with rapidity and

ease  to  the  closure  of  bank  branches  and

shops  and  the  resulting  digitisation  of

commerce and finance. Many of their new

habits are likely to stick. 

Factors  specific  to  fintech  are  also  be­

hind  the  big  bang.  Most  of  today’s  fintech

stars are not overnight successes, but were

set  up  in  the  early  2010s.  Since  then  their

user  numbers  have  swollen  to  the  many

millions  and  they  are  approaching  profit­

ability.  They  have  become  big  enough  to

appear  on  the  radar  screens  of  late­stage

venture­capital  and  private­equity  firms,

such  as  America­based  tcv (which  has

backed  Trade  Republic,  a  German  variant

of  Robinhood),  Japan’s  SoftBank  (a  recent

investor  in  Klarna)  and  Sweden’s  eqt

(which  backed  Mollie,  a  Dutch  payments

firm, last month). 

Moreover,  some  institutional  inves­

tors—such as asset managers (BlackRock),

sovereign­wealth  funds  (Singapore’s  gic)

and pension funds (Canada’s Pension Plan

Investment  Board)—have  made  a  lot  of

money  by  snapping  up  shares  in  big  tech

firms in recent years. These are now trying

to gain an edge by investing in promising

startups before they go public. 

Thehugechequesfromtheseinvestors

comejustasfintechfirmsarehopingto

writethenextchapter.Moststartupswere

createdto“unbundle”finance:tocarveout

nicheswheretheycouldoffera betterser­

vicethanthebanks.Now,however,most

successful firms are rebundling, adding

newproductsina bidtobecomeplatforms.

Acquisitions provide a handy shortcut;

theirhighvaluationsmeanthebigfirms

can often snapup smalleroneson the

cheapbyswappingequity.

Stripe,themostvaluableprivatefintech

firmintheWest,isa goodexampleofthe

sector’scomingofage.Itwassetupa de­

cadeagotohelpfirmsacceptpaymentson­

line.Nowworth$95bn,italsooffersser­

vicesrangingfromtaxcompliancetofraud

prevention.  That  breadth  was  partly

achieved through acquisitions; since Octo­

ber it has bought three other firms. 

A  similar  logic  animates  credit­card

giants,  which  are  trying  to  hedge  against

innovations  in  online  payments;  and  the

banks,  which  see  fintech  as  a  way  to  plug

gaps  in  their  digital  offerings,  cut  costs,

and diversify away from lending. Goldman

Sachs  and  JPMorgan  are  bringing  lots  of

smaller acquisitions under the umbrella of

new, versatile consumer apps. As a conse­

quence,  the  distinction  between  fintech

and  traditional  banking  could  eventually

blur, predicts Nik Milanovic of Google Pay,

the tech firm’s payments arm. 

Swipe right

All this splurging and merging also carries

risks.  One  is  that  the  hefty  prices  paid  for

fintechs  prove  unjustified.  Visa  is  buying

Tink at a price that is 60 times the startup’s

annual  revenue;  Wise  is  valued  at  around

20 times its revenues and 285 times its pro­

fits. Banks in particular may find out about

promising fintech firms only once they are

too expensive. 

Another risk is that competition and in­

novation  are  stifled.  Founders  of  startups

that have been acquired often leave at the

end  of  their  “vesting”  period—the  mini­

mum  amount  of  time  they  must  stick

around  before  they  can  sell  their  shares,

usually one to three years. The culture that

allowed a firm to thrive could then wither.

Fintechs  bought  by  banks  in  particular

could  struggle:  after  a  deal,  cultures  can

clash;  customers often  leave.  Most  neo­

banks acquired by old ones, such as Simple

(bought  by  bbva,  a  Spanish  bank),  have

been either shut down or sold.

Nevertheless,  one  thing  seems  clear.

Fintechs  are  inexorably  gaining  critical

mass: their value has risen to $1.1trn, equiv­

alent to 10% of the value of the global bank­

ing  and  payments  industry,  and  up  from

4% in 2018. Prices may be stretched today

and  somefirmsmay  flop,  but  in  the  long

run it seemslikely that this share will only

rise further.n

Golden goodbye

Venture-capital exits from fintech companies

By type, $bn

Source:PitchBook *To July th

2

80

60

40

20

0

21*201918172016

Buy-out

Acquisition

Public listing

WallStreet

Fatandhappy

B

ankbosseswerefullofgoodcheeras

they reported their second­quarter

earningsonJuly13thand14th.“Theconsu­

mer...theirhousevalueisup,theirstocks

areup,theirincomesareup,theirsavings

areup...they’reraringtogo,”saidJamieDi­

mon,thebossofJPMorganChase,when

analystsaskedabouttheriskthateconom­

ic growth might slow in the coming

months.DavidSolomon,thechiefexecu­

tive ofGoldmanSachs, sounded upbeat

whenaskedifanexecutiveorderfromthe

WhiteHouseseekingtoincreasecompeti­

tionamongbusinessesmightcoolfeverish

dealmakingactivity:“I’mencouraged by

thefactthatourbackloglevelsremainex­

tremelyhigh...Alotofthatfeelslikeitwill

besustained.”JaneFraser,thebossofCiti­

group,expresseda similarsentiment,tell­

inganalysts“wehavea fabulouspipeline.”

ForanentireyearnowAmerica’sbanks

have enjoyed aprofits bonanza. Invest­

mentbanks,whichissueequityanddebt

forcompaniesandmakemarketsinstocks

andbonds,havereapedbumperprofitsas

tradingactivityhasboomed.Retailbanks

tookanearlyhitastheywrotedownloan

valuesforexpectedlossesinearly2020.

Buttheyhavesincebeenabletogradually

reviseloanvaluesbackup,firstasstimulus

helpedcustomersstayafloatandthenas

theeconomybegantoreopen.

Banks’earningsinthesecondquarter

ofthisyearfittherecenttrendwell.Total

profitsatfivebigfirms—BankofAmerica,

Citigroup,Goldman,JPMorganandWells

Fargo—cametoa meaty$39bn,fivetimes

theirlevel inthesecond quarteroflast

year,andaround40%higherthanaverage

N EWYORK

Bankersareconfidenttheirbumper

profitswilllast.Investorsarelesssure

All the way to the bank

US banks, quarterly net profit/loss, $bn

Source:Bloomberg

50

40

30

20

10

0

-10

2018 19 20 21

To t a l

GoldmanSachs

Citigroup WellsFargo

JPMorgan Chase Bank of America