https://lex.substack.com/p/long-take-can-bunq-the-19b-profitable

Gm Fintech Architects —

Today we are diving into the following topics:

• Summary: Following its fresh $111M fundraise, Dutch neobank bunq recently announced plans to expand into the US and UK markets. We benchmark the bank’s strategy against key EU competitors and challenge bunq’s stable valuation of $1.9B during the driest quarter of fintech funding since 2017. In addition, we discuss how bunq plans to extract value from a market where Goldman Sachs has recently begun to retreat consumer banking.

• Topics: Neobanks, Funding, Valuations Bunq, Revolut, Goldman Sachs, Monzo, Wise, Starling

• Special thanks to Michiel for this fantastic analysis

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Long Take

The bank of “The Free”

Like many other neobanks, bunq launched in the wake of the financial crisis when consumers felt increasingly dissatisfied with the lack of transparency and online experiences offered by traditional banks. The Amsterdam-based company was granted a European banking license in 2014 and found its niche in the frequent traveller and digital nomad demographic, marketing itself as the bank of “The Free”.

Up until 2022, bunq made the majority of its income from subscription fees on its tiered banking products. These range from (1) a free savings account, to (2) a current account, (3) FX transfers and budgeting, and (4) insurance and CO2 offsets. Its mission of radical transparency on fees and charges reminds us of Wise, which indeed powers bunq’s FX transfers. 

The bank reported $78MM in revenue on the back of heightened interest income in 2022 and turned its first profit in the fourth quarter. Last month, bunq reported a user base of 9 million customers across its EU markets with a combined $4.7B in deposits. This places it as the second largest pure-play neobank by users in Europe — excluding Klarna and Wise which are pure-play lending and payments companies, respectively.

Bunq’s founder, who still retains 90% of the business, personally bankrolled the initial 9 years of the firm’s operation. In July 2021, the firm raised its first external round of $228MM at a $1.9B valuation; or a whopping 128x FY20 revenue. This was significantly above both the 13x average neobank multiple at the time and the broader 25x average multiple for high-growth fintechs. But then again, Revolut raised funding that same year at 180x FY20 revenue.

Bunq’s most recent $111M raise is from existing investors, including its founder, which has likely helped it retain a flat valuation; based on current sales figures, the multiple is a more conservative 24x FY22 revenues. After all, it has had two full financial years to grow since its last round. That’s still high considering the average neobank multiple dropped to 4.6x as fintech funding hit a 6-year low in the second quarter of the year.

So what are investors betting on with bunq? We believe it is a mix of aggressive geographic expansion and revenue growth through M&A.

An M&A growth strategy

In contrast to competitors, bunq’s growth strategy largely consists of M&A for the acquisition of both users and assets. A majority 5.4 million customers joined the bank in 2022 via the acquisition of Tricount, a Belgian group expense management platform (think Splitwise). Similarly, bunq entered the Irish market following the acquisition of business lender Capitalflow, which now makes up the vast majority of its loan book. This strategy has helped keep the bank’s customer acquisition cost below those of competitors.

Analyzing marketing spend per new user across European neobanks shows that bunq spent roughly $8 for each new user sign-up in 2022. Wise and Monzo spent between $12-$15 per user in the same period, and Starling spent a larger $30, though for a larger average customer.

Bunq was also early in raising interest rates on its savings account, which resulted in strong deposit growth in 2023. Customers in its domestic Dutch market are offered a 1.6% APY, significantly above the 0.5% offered by the incumbent banks. Last month, the bank reported an increase in customer deposits to $4.7B, up 2.5x since the start of the year. This places bunq’s average deposits per customer comfortably above those of Revolut at $527, but still behind those of other European neobanks.

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https://lex.substack.com/p/long-take-starbucks-and-nike-nft

Hi Fintech Architects —

Today we are diving into the following topics:

• Summary: Traditional brands are entering the Web 3 ecosystem through an NFT gateway. Among the leading innovators are Starbucks, teasing the public rollout of its Odyssey program, and Nike with its .swoosh community. This week we dissect the NFT strategies in the context of an increasingly digital customer base and the growing virtual environments built by the likes of Fortnite and Roblox. We also briefly touch on the underlying enablers and advancements in user experience and transaction speed.

• Topics: payments, media, NFT, metaverse, Nike, Starbucks

• Special thanks to Michiel for this fantastic analysis

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Long Take

Brand NFT Market Context

The regulatory crackdown on crypto is fully underway, in the United States at least. But things are not as dire as they are made out to be. Investor interest in Bitcoin and Ethereum, for example, appears to be fairly resilient. Global crypto markets are up +50% since the start of the year and are comfortably outperforming the broader market (S&P500 +15%) as retail and institutions continue to deploy capital to the sector.

The parallel ecosystem of NFTs, meanwhile, seems to be adrift. Mainstream interest in the sector was at its peak at the end of 2021, before diving headlong into its first prolonged bear market. 2023 has not been forgiving, with trading volumes down approximately 50% from the start of the year, despite a slight rebound as an apparent result of the launch of Bitcoin ordinals.

The core Web3 NFT markets seem to have experienced the type of pop-culture surge similar to that of 2017 ICOs, structured to attract FOMO interest with promises of future riches. Despite innovating on a real trend — fungible token capital raising for ICOs, luxury digital objects signalling status and commerce for NFTs — the particular shape of the market has become damaging to regular holders. Acute interest has been followed by a negative reputation. Some committed traders continue to move the assets around on marketplaces like Blur, but largely to generate yield farming rewards and manufacture trading volume.

However, an important underlying trend is the growing number of traditional brands launching NFT campaigns. This trend represents more organic economic activity that looks like digital commerce and loyalty rewards. The lack of meaningful speculation around corporate NFTs is a bug for crypto traders, but a feature for enterprises working to use Web3 as part of digital transformation.

New Brand Revenue and Nike Leadership

In 2022, 150+ companies launched ~250 NFT collections, with nearly half of these being first-time entrants. The top 10 brands generated a cumulative ~$265MM in revenue from primary sales and royalties from subsequent secondary market trades.

Nike accounts for ~70% of sales from RTFKT’s collections — a metaverse fashion studio it acquired for a speculated $1B+ in December 2021, a 30x increase in RTFKT’s valuation from 6 months prior to the sale. But in contrast to many crypto-native NFT projects, Nike already has a long-standing brand and an established community of loyal customers. And indeed, by the end of 2022,

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https://lex.substack.com/p/long-take-revoluts-100mm-opportunity

Gm Fintech Architects —

Today we are diving into the following topics:

• Summary: The banking system has been under our spotlight a fair amount recently, from the deposit runs on Silvergate and SVB to the collapse of Credit Suisse. This week we leave the incumbents to focus on challenger bank Revolut, which — despite growing compliance concerns and a looming rejection for a UK banking license — crossed the 30 million user mark last week. In particular, we discuss Revolut’s position among European competitors, the value of banking licenses in the neobank strategy, and the cost of being rejected from its primary UK banking market. 

• Topics: Revolut, N26, Monzo, Starling, neobanks, interest rates

• Special thanks to Michiel for this fantastic analysis

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Long Take

The Neobank Wave

Consumer-led financial technology emerged in full in the wake of the 2008 financial crisis. In the United States, personal financial management like Mint and investment platforms like Betterment came first. In Europe, customers were particularly dissatisfied with their banking experience, leading to the rise of neobanks.

A 2010 investigation by the UK Treasury found that 47% of customers across the 5 largest banks were dissatisfied with their current/checking accounts. Among key issues were a lack of transparency on rates and charges, a frustrating mobile and online experience, and poor customer service.

Rapid advancements in mobile and digital platforms created an opportunity for challengers to address the shortcomings of the traditional financial sector. Globally, the number of live neobanks increased from 10 to nearly 400 in the period between 2014 and 2022. These firms leveraged changing customer expectations and a new regulatory environment (Open Banking in the UK and PSD2 in the EU) to build out their business models.

Among them is UK-based Revolut, which positions itself as a financial super-app — a term borrowed from the wildly successful Ant Financial — offering a suite of products spanning FX payments, trading, banking, and more recently insurance and travel booking. Revolut is not a super-app in the sense of being a platform aggregating third party functionality, but something more akin to a fully integrated financial services digital bundle. In 2021, the firm raised $800M from Softbank at a peak valuation of $33B valuation, most recently reporting 30 million customers in over 35 countries.

Standing out from the Pack, on users

Having just recently released their (much-delayed) financials for FY21, we lack a complete picture of how the company has fared since its fundraise — but 2023 appears rough so far: (1) auditor BDO recently expressed concerns about material misstatements in the company’s latest financials, (2) several board members left the firm including the CFO, and (3) the UK may reject its application for a banking license. Those are all not-so-great things for a company, but the last one might be particularly problematic. 

Upon launch, challenger banks typically faced a decision on whether (1) to become a fully licensed bank or (2) operate as an e-Money Institution (EMI). The difference is important. Obtaining a banking license is a costly and time-consuming process, but ultimately enables companies to offer a wider scope of services and increased customer protection. In particular, it enables them to re-invest deposits and earn revenue on interest-bearing assets like loans and securities.

With interest rates currently at their highest level in 15 years, licensed banks — at least those that are not experiencing a deposit run — have been generating record profits from doing exactly that. Bank profitability reached a 14-year high in 2022 with revenue globally growing by $345B.

Most challenger banks launched in the past decade of historically low interest rates. For them, the decision to get a banking license often represented a trade-off between their ability to participate in interest income, which was negligible at the time, and the speed with which they could go to market and acquire customers. A license is also no sure thing, with the potential to be held up by regulators, and your venture-backed business killed by a semi-political process.   

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https://lex.substack.com/p/deep-dive-can-klarna-the-bnpl-category

Gm Fintech Architects —

Today we introduce a new format — a deep dive on a target company.

• Summary: The Buy Now, Pay Later (BNPL) business model has fundamentally changed the e-commerce shopping experience across the world. Led by the Swedish company Klarna, the BNPL model has been rapidly growing in popularity, particularly among millennials and Gen Z, who are looking for more flexible payment options. Klarna has expanded its services globally and now operates in over 20 countries, with partnerships with major retailers such as H&M, ASOS, and Adidas. Does that mean that Klarna and its BNPL business model is here to stay? We explore its most recent financials, competition, and emerging threats and opportunities.

• Topics: Buy Now Pay Later, digital lending, payments, valuation

• Tags: Klarna, Affirm, Apple, Afterpay, PayPal

• Author: Enormous thank you to Michiel Milanovic for putting together this report in both analytics and narrative. Lex has edited the work within the broader context of the Fintech Blueprint view on market strategy and innovation.

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Klarna Company Deep Dive

Introduction

In 2005 at the Stockholm School of Economics, three entrepreneurs pitched a payments platform that promised to increase an online retailer’s conversions at checkout by up to 30%.

The concept was straightforward: (1) offer customers the ability to make payments in installments at checkout, but (2) pay retailers the order value immediately. The platform would take a fee from both sides — a merchant fee from the retailer for conversion of the customer, and interest fees from customers who make late payments on their instalments.

Today, this business model is known as “buy now, pay later” (BNPL). At the time of company founding, it was both new and brilliant to combine two previously separate fintech pillars — payments and lending.

BNPL companies target inefficiencies in the traditional financial value chain. Applications for credit generally lived outside of the commerce experience, within a banking environment. Further only 40% of applicants get approved for credit cards, and 6% of loans ultimately don’t get paid back.

By embedding underwriting in the digital payments journey, BNPL companies can merge traditional and non-traditional data to build new data-driven underwriting models. Combining the traditional “soft” credit check with data on customer purchasing behavior has enabled BNPL providers to accept an average of 70% applicants while keeping their losses at a lower 4%.

Over the years, this became a popular value proposition for online shoppers — especially young people with lower credit scores, who face high costs to access traditional credit products. Given the rapid growth of e-commerce over the past decade, BNPL captured 8% of online payments in Europe and 4% in the US in 2021 — about $100B in volume.

By 2025, these numbers are projected to triple. Assuming a 3% customer conversion fee, the industry has a $10B revenue opportunity across Europe and the US. If you add customer late payment fees, fixed transaction fees, and any interest on top, the math works out to an attractive target market size.

Klarna was the first mover in this space. Riding the wave of e-commerce growth, low competition, and ultra-low interest rates enabled it to gain an edge over emerging competitors. Ample funding from investors including Sequoia, General Atlantic, and Softbank also meant there was no need to go public. The company raised a whopping $4B in total.

Klarna leads Paypal, Affirm, and Afterpay in market penetration with 500,000+ merchant partners, higher volumes, and more customers. Klarna processed $83B in GMV in 2022 (vs. ~$20B each for Paypal, Afterpay, and Affirm) and reached over 150M users (vs. 25M for Paypal, 19M for Afterpay, and 16M for Affirm). You can see this visualized below.

With the acquisition of a banking license in 2017, Klarna was able to expand its ecosystem to include more traditional products — a Klarna debit card, short-term loans, and savings accounts. These deeper financial bets should have been a meaningful revenue generator, deepening monetization. But a changing macro environment and increasing competition from incumbents are now starting to expose holes in the Swedish fintech’s business model. Let’s dive in.

Company Financials and Funding

Klarna’s high valuation came crashing down. Between 2019 and 2021, Klarna saw its valuation grow from $2.3B to a sky-high $46B, or 38x FY20 revenues of $1.2B. This was high compared to publicly listed comparables, but so were the times. 

According to F-Prime Capital (here), companies with year-over-year (YoY) revenue growth in line with Klarna were trading at an average of 28x revenues at the time. When central banks began signalling higher rates in 2022, tech valuations plummeted. Among other factors, valuations are based on the current value of future earnings, and many high-growth tech companies take a longer time to make profits. Investors have to wait for network effects, data advantages, and economies of scale to kick in. Higher interest rates typically make investors less willing to sit tight as the opportunity cost of allocating capital elsewhere increases. Needless to say, when Klarna raised additional funds from investors in June-22, it saw its valuation slashed by ~85% to $6.7B. This followed a wider BNPL correction with publicly listed competitors down 80% on average.

But more importantly, it shifted the narrative for both public and private investors — once focused on top-line growth, but now increasingly looking for profitability. Lending risk has also materialized in the shape of losses, something that isn’t fully appreciated when valuing underwriting revenues 40x. Generalist venture investors have received an education in the different quality of financial services revenues.

Klarna Financials

In 2022, Klarna reported decent revenue growth, but a widening loss.

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