The Banking (Revolut)ion

The Banking (Revolut)ion

This week, Nordic banking app Lunar Way announced a €13m round of funding led by SEED Capital, with participation from Greyhound Capital and investors from the financial services industry.

Less than 24 hours later, Starling Bank reported a 75m raise to continue its European expansion. So far customers have opened 460,000 personal current accounts and 30,000 SME accounts, an impressive growth for a 2-year-old startup.

To put this into some context, long-term rival Monzo claims around 1.5 million customers and Revolut claims 3.5 million users.

But that's not all.

In the past year, 86 European banking companies raised over €2.5b from investors like Greyhound, Insight Venture Partners, Valar and dozens more.

Yes, that's billion, with 9 zeros: €2.500.000.000.

Some European banking apps that raised money in the last 12 months

Investors are going crazy over banking. And it makes sense. It's a trillion dollar, heavily regulated industry and with a high barrier to entry, which makes it prime for disruption.

But what does this mean? How will the European market play out?

Is banking a zero-sum game?

There are thousands of banks around the world, and each country usually has dozens of players competing. As an example, France has Société Générale, BNP Paribas, CA, HSBC, Crédit Mutuel and many more.

If multiple players co-exist peacefully and profitably in a single market, then we should be able to conclude it's not a zero-sum game and more players entering the market won't change this.

But can we?

Let's take a look at HSBC. The Hong Kong and Shanghai Banking Corporation opened it' doors in Hong Kong on March 3, 1856, to finance trade between Europe and Asia. For fun, this is how Hong Kong looked at the time.

Hong Kong in 1850 vs. Hong Kong today

It used the proceeds to slowly buy other banks and establish itself as the 7th largest financial institution in the world (and the largest in Europe) with a total market cap of $51.4b, serving 38 million customers worldwide in 66 countries.

Let's take a look at how these new digital banks have been founded (and funded):

  • N26 was founded in 2013 and raised €300m at a €2.7b valuation
  • Monzo was founded in 2015 raised £85m at a £1b valuation
  • Revolut was founded in 2015 and raised $250m at a $1.7b valuation

Raising that much money from investors comes with obligations: eventually, they'll need a liquidation event to return the money.

Assuming a 3x multiple for late-stage funds, the lowest one of these companies could sell to be considered successful would be Monzo for £3b, or $3.84b. To put that into perspective, that's 7% of HSBC entire market cap.

It'll have to show extremely aggressive growth to justify a high valuation, which means it's off to the races. Digital-first banks need to capture as much share as possible in a market where online banking has high penetration.

This means that 100+ players (digital + traditional banks) can't co-exist profitably in one market. Particularly when dozens of new firms focusing on particular niches within banking, such as foreign-currency transfer are popping up every week.

Before, HSBC competed directly against ICBC and a dozen other banks over a single market. Now, Revolut will have to compete across Europe with HSBC for traditional banking, Qonto for business banking, Transferwise for currency transfer, Binance for crypto and so on.

Increased competition, pre-existing penetration, and small profit margins means that even though it's not technically a zero-sum game, the dynamic that will play out over the next 5-10 years is pretty darn close.

Can Uber and Lyft co-exist in one market? In an ideal world, yes. In a venture world where Uber needs to justify a $120b valuation, no. It's a race to the top.

Over the next 5 years, I predict we'll have a lot fewer logos on the image at the top, and a more than a few investment dollars will be lost.