Part 6 — It’s All About Growth!

Over the past six years in the US, as the head of fintech sales for IDEMIA, I have had the chance to work with all market leaders including Square, Stripe, Robinhood, Marqeta, SoFi, Galileo, Varo and more than fifty others. Now back to Europe, I want to share in this series of posts my experience living the birth of this wonderful fintech industry.

The specific fintech culture I have described in my previous posts is what fuels their growth, because — of course — US fintechs are all about accelerated growth.

Growth in terms of product offering with smart ways to cross sell their products: Robinhood started with trading, then added a checking account. Cash App (Square) started with person to person money transfers, then added a debit card, stock trading, bitcoin, direct deposits, etc. Square introduced Square Capital, offering small business loans to Square sellers: who is in a better position to provide a loan than Square who manages the register of sellers and therefore knows exactly how they do? Who can better get their loans repaid than Square who — because they manage the register — can directly repay itself? This is cross selling made an art!

Brett King outlined in his last book [1] an interesting vision: banking will become an experience and you will get your banking services from a company with whom you have affinity, not from a bank. We are seeing fintechs starting to implement this although it is still very much about financial institutions. More and more fintechs offer a checking account or something that look very close to one. You are into crypto, you may want to bank with BitPay, Coinbase or crypto.com ; you prefer P2P? What about Cash App or Venmo, etc.

Growth in terms of markets: where traditional banks took decades to expand internationally, yet only a handful of them have actually done so, fintechs have the capacity to expand extremely quickly. In this area, the Europeans Revolut and N26 have excelled, the latter, created in 2015, already present in 22 European countries in 2018 before launching in the United States the following year. Americans are a bit more shy in this area, probably due to the size of the domestic market and lower profitability abroad. If Stripe, founded in 2010 is already available in 43 countries, Square has preferred to favor a handful of countries (US, Canada, Japan, Australia and the UK), as for Robinhood, Varo or Chime, they have yet to announce their expansion plans.

To support this rapid growth, the entire fintech organization is adapted. I have already mentioned the bespoke processes to massively recruit of new employees, but in the same way internal organizations must remain very flexible and an individual contributor must know how to be agile enough to become a manager the next day and a manager’s manager the day after.

One identified limitation on the growth of fintechs is regulation and this is a subject far too broad to be covered here. The American system is very cumbersome in this regard and local fintechs envy the ease that their European colleagues have in obtaining a banking or electronic money license. The first fintech to obtain a banking charter from the OCC (the federal Office of the Comptroller of the Currency that charters and regulates banks) was Varo, and this did not happen before July 2020. Other fintechs have tried other methods such as an Industrial Loan Company or ILC, which is a type financial institution which can be owned by a non-financial institutions and are slowly moving forward. Square recently announced the successful launch of its ILC, despite the strong the lobbying of the traditional actors frightened by these new competition. To summarize in a few words this very complex subject, the regulation of fintechs is a topical subject, highly political (at the federal level, at the state level) and everyone awaits for the policy of the new administration.

The COVID crisis will dramatically accelerate the rise of fintechs

It would be impossible to finish this post on the growth of fintechs, without discussing the COVID crisis: risk or opportunity? Is a crisis of this magnitude a risk for these companies still in their infancy or, on the contrary, are lockdowns promoting a digital boom? It is still early to answer. Some fintechs have announced strongly boosted results since the crisis and taking advantage of the stimuli, for example Square, whose valuation grew by more than 500% since the beginning of the pandemic as the usage of their Cash App soared [2]. Others, in particular the European challenger banks, seem to be more affected in their growth although it is hard to determine precisely the share of COVID in these difficulties.

This deep crisis will be an opportunity for fintechs, because times of crisis have always been favorable for new entrants, wasn’t Square created in 2009 at the height of the financial crisis? I personally think that, just as the horrors of World War II had, as a side effect, a major impact on the development of new technologies (nuclear, aviation, etc.), so the COVID crisis will profoundly transform our societies, the way we live and work, and considerably accelerate the migration to digital which was already well under way.

In conclusion, what is the future for fintechs? What future for traditional banks? This will be the subject of my next post, the last in this series.

— All opinions shared in these posts are my own —

• [-] Chart on Square’s two significant ecosystems, from their Investor Update Call, 24 Mar. 2020
• [1] Bank 4.0: Banking Everywhere, Never at a Bank, Brett King, 2019, Wiley
• [2] Paying during a pandemic: Venmo, PayPal, and other money transfer apps are surging, Fortune, Jeff John Roberts, May 20, 2020