Bursting Fintech's Bubble

Banks' investments are affordable bets with limited risk.

If you can't beat them, buy them. European banks are acquiring mobile-savvy fintech start-ups rather than building their own.

Mobile Growth

The number of mobile banking users worldwide is set to cross the 1 billion mark next year

Source: Bloomberg Intelligence, KPMG/Juniper Research

Given the long history of start-ups that have sold themselves for eye-watering valuations before crashing down to earth (case in point: Yahoo's $1 billion purchase of Tumblr 1 ) you might be forgiven for getting twitchy about where this all might be headed. Especially given the banks' record of value-destroying takeovers. Remember RBS's record takeover of ABN Amro months before the financial crisis of 2008?

Almost ten years and billions in losses later, shareholders are pushing for any surplus cash to be returned to them -- not reinvested.

Recent Deals

European banks are acquiring or partnering with financial technology firms

Sources: Bloomberg Intelligence, company filings

But fintech is a long way from having its own exuberant and ultimately painful Tumblr moment. The balance of power is still in the buyer's favor -- even if valuations turn out to be optimistic.

Here's why.

None of the mobile banks being acquired have really gained traction with consumers in the way that start-ups have in other industries.

When Yahoo! bought Tumblr, the blogging site had 300 million views per month, while online retailer Jet.com -- recently bought by Wal-Mart for $3 billion -- has 3.6 million customers. Contrast that with mobile bank Fidor, acquired by French bank BPCE. It has 120,000 account holders. When BBVA bought Simple for $117 million in 2014 the U.S. app had about 100,000 customers.

The technology might be there, but the pressure to pay a premium for a competitor that could just eliminate your customer base isn't.

That could change if newly-minted banks like Mondo, Atom or Number26 were to hit upon the right strategy or product. In Europe, Fidor is probably the closest to reaching that point after it reached a deal to provide payment services for mobile network Telefonica, which has 43 million customers in Germany.

But vacuuming up deposits remains expensive and lending requires capital.

Branch Power

European banks are cutting back the amount of branches they have, but they're still a big presence

Source: Bloomberg Intelligence

With established rivals benefiting from expansive branch networks, vast customer data and a regulatory head-start, it's harder for a new entrant to gain traction in micro-banking than micro-blogging. Frequently, they've had to partner up with incumbent lenders rather than compete directly against them.

That doesn't mean that recent purchases of mobile banks are wrong-headed -- quite the opposite.

The Fidor deal will allow French lender BPCE to expand its digital operation and bring in experts that it could assign to other ideas and products. Fidor's technology itself can help internally but also be licensed to others. There's growth there.

And, for the banks, the outlay so far looks modest.

At best, European bank shares trade on about five times revenue. Applying that multiple to Fidor produces a valuation of about 130 million euros, based on its net interest income of 26 million euros in 2015. Set against BPCE's net income of 1.7 billion euros in the first half of 2016, it's a small bet.

There's also the likelihood that start-ups are going to get even cheaper.

The IPO market is still lackluster (something my colleague Shira Ovide has noted) and some of the inflated hopes for publicly-traded fintech companies have been punctured. Shares of peer-to-peer darling LendingClub have tumbled since their IPO after the company revealed flaws in its internal controls. Venture-capital funding for fintech fell by 50 percent in the second quarter to $2.5 billion, according to CBInsights.

Fintech Funding

Funding to VC-backed fintech companies has yet to recapture its mid-2015 quarterly peak

Source: CBInsights

If this is the peak of the fintech bubble, that's got to be good news for banks looking for new ideas on the cheap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The 2013 acquisition was later written down by $700 million.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.