Issue #60: Zeller Secures The Bag, Visa Buys Tink And We Launch Another Publication!

👋 Hi, FR fam. I hope you’ve all had a great start to the week.

As always, there’s plenty to cover from the world of fintech, but before we jump into this week’s issue of FR, some quick news about a new publication I’m launching/reviving…

🔮 Future Finance — A Newsletter On All Things Open and Decentralised Finance

Before starting FR, I wrote a crypto-focused newsletter for ~2 years (and 111 issues!). It was a great run, but I decided to mothball it when I started this weekly missive.

After recently diving back into the world of decentralised finance, I’ve decided to revive the newsletter formerly known as The Week In Bitcoin under a new banner, Future Finance. It’ll cover all things open and decentralised finance. But unlike FR, it’ll be a short, curated round-up of the week’s most important news from the sector which you’ll be able to get through over a coffee.

Why another newsletter, you ask? The future of fintech is open and decentralised, with protocols, not institutions being what’s relevant. In this regard, I wanted to give the sci-fi future of finance its own dedicated home. So if you want to keep up with what’s happening in the world of open and decentralised finance make sure you subscribe!

Subscribe Me To Future Finance →

📣 The News Grab Bag

Amazon opens a fintech innovation lab in… Dubai ⚬ Godaddy gets into payment processing ⚬ Four charts on finance app growth How did BharatPe manage to win a banking licence? ⚬ Virtual wallets, real complaints ⚬ What’s next for Chinese fintech startups? ⚬ Latam Fintech Nubank Said to be planning an IPO in the US ⚬ Mollie is now Europe’s third-largest fintech by valuation ⚬ Apparently, banks should be concerned about Walmart ⚬ Growing Trust is Key for Fintech to Succeed in Nigeria

📈 Notable Funding Announcements

It was another big week of funding announcements in the world of fintech. In total, 74 funding rounds were announced, totalling $5b.

This week I thought I’d discuss the SME banking market in Australia. Specifically, I thought I’d dive into two funding announcements from this week that highlight the spectrum of challengers banks in the space.

Zeller Raises $50m

Last week Aussie SME focused fintech startup Zeller announced another round of funding. The latest $50m round of funding was led by Spark Capital and valued Zeller at $400m. The round also had participation from returning investors Square Peg, Apex Capital Partners and Addition.

🤓 My Take: Firstly, congrats to the Zeller team on raising another sizable round — and all while just emerging out of beta. That’s really impressive. The latest round of funding brings their total raised over the last 12 months to $81m, which is a fair bit of capital in the Aussie fintech context.

As I’ve written about in previous issues of FR, globally, there is a massive opportunity in the SME banking space. Having said this, I think one of the fallacies in the Aussie context is that there is a need for a better business banking account. The reality is, much like consumer banking, what incumbent Australian banks offer is relatively high quality. For the most part, the chequing accounts offered by the likes of NAB (Australia’s most prominent business bank) do the job just fine. After all, it’s reasonably hard to f**k up a chequing account.

Having said this, beyond the basics, the Australia big 4 banks’ offering is mediocre, to say the least, and this is where I think the opportunities are for the challengers. On the purely transactional business banking side of things, I’d go as far as to say that simply offering a chequing account via an app with a slicker brand is an almost inevitable death march. The question really is what is that “something” that you use as the wedge into the financial workflow of a business. Interestingly, when you survey the Aussie landscape of SME challengers most are taking a storm the hill approach by offering a basic business account and some basic tools for expense management.

In a country where cloud accounting pioneer, Xero, has trained businesses and (arguably more importantly) accountants to use a complex web of add-ons from their marketplace to manage the finances of a business, the head-on attack through expense management feels destined to fail. Also, if you think you're getting distribution through accountants good luck. Xero spent millions and close to decade training accounts on how to use a tool that was head and shoulders better than the competition — so convincing them to distributed your alpha product which uses pre-paid cards that’ll constantly be blocked by merchants is going to be a massive stretch. In my opinion, what’s required is a more nuanced orthogonal attack.

Aussie fintech outlier, Afterpay, has written the playbook on orthogonal attacks. The way they’ve been able to take on the big 4, all without ever looking like a threat until they won the wallets of Millenials and Gen-Z, is a blueprint for taking on incumbents in the Australian market. I think the same will be true for SME banking — it’ll be those who find a different way into the financial workflow of SMEs that’ll be the ones that win the market.

The question for the likes of Zeller is whether taking on the banks, Square and Tyro by offering another PoS terminal is the best entry strategy into the rapidly expanding challenger SME segment. Only time will tell.

🥋 Judo Bank Secures $174m In Fresh Funding

Aussie unicorn Judo Bank last week announced they’d closed a $174m round of funding. The round was part equity and also included Judo’s first issuance of Tier 2 debt, which was done at a post-money valuation of $1.9b.

🤓 My Take: Judo bank doesn’t get a lot of love in the world of Aussie fintech news. Outside of fundraising announcements, there’s usually not a lot written about them. Yet, they are one of the most highly valued fintech startups in Australia. In part, this is because they’re not really a fintech.

Unlike other SME focused banking propositions (and they are a bank, in fact, they’re the only one to hold an Aussie banking license), they relish being known as a bank, not a fintech.

Most new banking propositions in Australia focus on being tech-centric and usually like to talk about how they’re more akin to Amazon or Apple than the incumbents. On the other hand, Judo is an old school SME banking proposition built by some old school bankers. As opposed to trimming costs by being fully digital and allowing SMEs to open bank accounts through an app (they literally don’t have one) or online (I can’t figure out if you can), they instead have a phone number that you call and (gasp) speak to a business banker.

Yes, they use a more modern core banking system than the big 4 (they use Temenos T24), and their cost structure is vastly different given they are geared around lending to the larger end of the SME scale. Having said this, in a world where everyone is fixated on digital experiences, to see a new bank be this old school is… well, it’s contrarian, and what’s more, according to reports, business is going great.

In a recent AFR piece, it was noted that Judo had grown its loan book by 66%, which was higher than any of the major banks or regional bank. Obviously, it’s still early days for Judo, and their overall book of $3.3b is a drop in the ocean compared to the big 4 banks1, but it’s clear they’re on to something.

In many ways, it’s fintech startups… sorry bank… like Judo that really test our thinking on what the shape of a challenger bank should be. I’m fascinated to see what they do next and, more importantly, if they ever launch an iPhone app.

☝️ Things You Should Know About

🤝 Stash Acquires Paygrade

Last week Stash announced the acquisition of Paygrade, a financial literacy platform that provides online virtual bank and investment simulations for classrooms.

This acquisition caught my attention as we don’t tend to see wealthtech startups acquiring financial literacy companies. Yet, the ability to leverage these types of platforms to assist their customers in becoming more financially literate is a clear value proposition and, more importantly, could provide a reasonably cost-effective way to acquire customers.

For now, Stash will focus on growing and expanding the product to include digital tools for parents to teach and reinforce money skills at home. As Brandon Kreig, CEO and co-founder of Stash notes in the press release announcing the deal:

Stash's first acquisition is directly aligned with our mission of empowering everyday Americans to invest for the future, forty-three states do not require standalone personal finance courses in high school, and 80% of people live paycheck-to-paycheck. With PayGrade, Stash will provide teachers, parents, and children with interactive tools to learn effective money management skills that will last a lifetime.

💳 Visa Buys Tink For €1.8b

This was the biggest news in the world of fintech this week.

In a €1.8b deal, Visa has agreed to purchase the Swedish open banking provider, Tink. According to the press release, the deal is an all-cash one.

As many of you will recall, Visa tried to acquire Plaid last year, but after DOJ intervention, the deal fell apart, and Visa was left without an open banking play. This undoubtedly caused some concern internally as at the same time, Mastercard was able to acquire Finicity — another US-based open banking data aggregator.

After what I’m sure was a serious period of window shopping, they landed on Tink. For some context, Tink started life as financial management app in 2012 (further confirming my view that every fintech infrastructure company is a pivot from a PFM app). The company currently serves more than 3,400 banks — including ABN AMRO, BNP Paribas Fortis, Nordea, Klarna, and SEB. In their last round of funding, the Swedish open banking aggregator was valued at ~$800m.

Although some on Twitter panned this deal as a poor consolation prize to acquiring Plaid, I actually think this deal makes much more sense for Visa. For one, I don’t think Visa will face the same regulatory scrutiny in the EU as they did with Plaid in the US. I think it’ll be much harder for regulators to make a respectable argument about a reduction in competition in a market where there is an open standard for accessing bank data (i.e. PSD2 in the EU and Open Banking legislation in the UK).

I also think purchasing a company that has been built and focuses on regulation-driven open banking markets makes more sense. The reality is that most markets globally will likely follow a regulation-driven approach to open banking — with the US likely being one of the significant outliers. In broad terms, I think this means that most European open banking players will be better suited to a world where we have government-mandated open banking vs screen scraping.

Now, all Visa needs to do is combine this deal with the acquisition of a company like Mono in Africa and a few companies across the APAC region and all of a sudden they could really be a player in the open banking game.

📈 Revolut Continues To Grow

Thanks to filing requirements in the UK, we get to see how the UK’s cohort of challenger banks are tracking every year — which is always a fascinating look into the economics of some of the biggest challenger banks in the world.

Last week, saw Revolut disclose their financial accounts for 2020 (which can be found HERE). As usual, there was a lot to glean from their accounts.

On the customer acquisition side of things, Revolut continues to grow at a rapid pace. Interestingly, they’ve seen a significant uptick in their business customer numbers (up 127%). There’s no doubt this will continue to be a high growth segment for them as they expand their offering beyond basic banking accounts (e.g. this clever move into the payment processing segment).

As you’d expect, the company is still operating from a non-adjusted operating loss position which reached £200.6m in 2020. However, on the upside, they’re still growing their top-line numbers. The company reported a 57% increase in adjusted revenue over last year’s number (£261m in revenue in 2020 vs £166m in 2019). Along with the increase in revenue, they’ve also increased gross margin by 61%, and more interestingly, they saw overall customer balances increase by 96%.

As Revolut eyes off a listing in the not too distant future, it’s clear they’re becoming more financially disciplined and, at the same time, are showing signs that the economics of running a challenger banking can work.

🎧 Podcast Recommendations

Get set, ready, go… here are this week’s podcasts for your listening pleasure.

Stephany Kirkpatrick, Founder & CEO of Orum, the 'Amazon of Money Movement' → I’ve written about Orum in previous issues of FR and their money movement products. In this podcast, Orum’s CEO, Stephany Kirkpatrick, discusses the company’s genesis story, and she also delves into the challenges of moving money on ACH rails.

Banking on Fast Money → In this episode of Breaking Banks, Brett King interviews Chris Storbeck from FIS to discuss next-gen payments and, more broadly, the future of payments in the US. This is well worth a listen.

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Correction: In the original posting of this issue, I stated that Mastercard acquired MX when in fact they purchased Finicity. Apologies for the error.

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For comparison, NAB currently has a business banking book of $173b, CBA is $141b, while Westpac is at $125b, and ANZ has a total book of $114b as of the end of April 2021.