Breakingviews: Fintech superstars face brutal financial comedown

The 2008 crisis helped birth a new breed of financial company. Digital banks like Chime and Revolut, and online lenders from Kabbage to Klarna, spent the past decade stealing established institutions’ customers with technologically slick, low-cost products. The current crisis will prompt a brutal comedown for some of this richly valued crop.

Fintech is an increasingly diverse sector, but two broad types of business have gained particular traction among investors and consumers. First are the so-called neobanks. America’s Chime, Germany’s N26, Brazil’s Nubank and London-based Revolut, Monzo Bank and Starling Bank have collectively raised $4.6 billion and turned it into a 50 million-strong customer base and almost $30 billion of equity value. But they have struggled to turn this vast user base into much money.

UK neobanks’ 2019 revenue was about $11 per customer, Accenture reckons, compared with $330 for established banks. Most rely on the fees merchants pay when customers use their cards, but this fails to cover costs. Nubank and Revolut have pushed into credit cards and business accounts respectively, but that’s unlikely to make up for the lockdown hit: Revolut’s Nik Storonsky said on April 30 that payments transaction volumes were down roughly 50%. That will make rich valuations, premised on endless growth, hard to defend. Monzo faces a 40% haircut to its previous $2.5 billion valuation in its new funding round, the Financial Times reported.

Online lenders, meanwhile, may fare even worse. Shares in small business-focused On Deck Capital and LendingClub, which funnels credit to consumers, are already down 82% and 55% respectively this year. They and privately held rivals like Kabbage and SoFi survived the U.S. industry’s mini-crisis in 2016, when rising defaults and some less-than-pristine lending standards prompted their own lenders – be that banks, capital markets or wholesale funders – to pull back, forcing many to close.

The pandemic has brought those same issues back with a vengeance, with Kabbage focusing mostly on disbursing government loans for now. That might tide them over for a time. But as their predecessors learned in earlier crises, one-trick ponies often fare poorly in a financial crunch. SoFi and others have tried to become a bank, and LendingClub, run by Scott Sanborn, in February agreed to buy one. For now, though, most will be focused on survival.

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